THE FUTURE OF TRADE
A New Congress, But What Will It Mean On Trade?
Sorini, Samet & Associates LLC
February 5, 2019
In an ongoing series, Kaleidoscope is partnering with Sorini, Samet & Associates to explore the value that a strong brand plays in weathering storms and creating a clear vision for future product development in a politically divided landscape where hotly contested tariffs are being slapped on many products being sourced in China.
With 40 new Democrats joining the House of Representatives on January 3rd, all eyes in Washington are looking to see how the new majority will challenge President Trump. Will he be able to work across a politically divided government to accomplish anything new before the end of his first term? Trade policy – an area where there may be general agreement between the now-Democratic House, Republican Senate, and the Administration – will be at center stage. With trade remaining one of the President’s favorite topics for speeches and tweets, it is almost certain that trade will be a major focus for the Trump Administration in 2019.
WHAT DOES THE DEMOCRATIC CONTROL OF THE HOUSE MEAN?
Although the next race for the White House does not officially begin until the Iowa Caucus and the New Hampshire primary in 2020, make no mistake: campaigning began the moment the 116th Congress entered office. President Trump will be aggressively pursuing some signature wins to help secure a second term.
There are significant existing differences between the President and the new House of Representatives. The House Democratic majority will look to score political points against the President and his Administration through oversight, public hearings, and legislative action.
But this White House is not a typical Republican Administration on trade. President Trump has repeatedly criticized free trade agreements, views trade surpluses as good and trade deficits as bad, and is hyper-critical of Chinese industrial policy. In short, President Trump could be confused for a Democrat!
The vast majority of Democrats in the House are rarely supportive of trade, even under ideal circumstances. House Democrats do not use their formal whip system – which applies pressure to members to vote the party line – on trade votes. This means that pro-trade Democrats create an ad-hoc whip operation, usually through the New Democrats Caucus. In 2015, the last time Congress considered a significant trade bill, a mere 28 Democrats voted to give President Obama – a President of their own party – Trade Promotion Authority (TPA), which authorizes Presidents to negotiate trade agreements with the promise of a vote to approve the agreement with a simple majority.
DEMOCRATS ON CHINA
I would not recommend placing your hopes on the new House of Representatives to start criticizing President Trump on China. Most Democrats agree that China is a huge problem that requires immediate action. In many ways, the incoming Democratic House of Representatives will be closer to President Trump on China policy than many rank-and-file Republicans! Democrats may not like the President’s strategy for confronting China, but they agree that something must change. During the George W. Bush Administration, Democrats on the Ways and Means Committee repeatedly attempted to push that Administration to begin investigating China, citing the same law President Trump is now using to enact tariffs – Section 301 of the Trade Act of 1974. In more recent years, while Democrats generally refrained from pressing President Obama on China trade issues, do not expect most (or any) Democrats to publicly argue for the end of tariffs under Section 301 without significant changes from China.
China now has until the end of February to offer concessions relating to market access, forced technology transfers from U.S. companies, and enforcement of intellectual property rights. If such an offer fails to materialize, the Trump Administration will raise tariffs from 10 percent to 25 percent on $200 billion in imports currently affected – and will likely impose tariffs on all remaining imports from China as well, including apparel and footwear. This outcome would be disastrous for the outdoor industry.
THERE WILL BE A VOTE ON USMCA, BECAUSE NAFTA IS LEAVING
President Trump’s disdain for NAFTA was a central theme of his 2016 campaign. Since his inauguration he has been steadfast in his approach: renegotiation or withdrawal. I must admit, as a lifelong Republican and a chief negotiator of the original NAFTA deal, it was surprising to learn I had negotiated the worst deal in history!
As President Trump reiterated in December, he will not allow the United States to remain part of the NAFTA I helped negotiate. With our now-divided Congress, the President will use his ability to withdraw from the existing agreement to pressure Congress to pass the new U.S.-Mexico-Canada Agreement (USMCA) – quickly. Faced with this reality, I hope and believe that Congress will look to pass the agreement in the first half of 2019.
The Trump Administration is well aware that incoming Speaker of the House Nancy Pelosi (D-CA) held up three prior FTAs with South Korea, Panama, and Colombia for years to extract concessions from the Obama administration on labor and the environment. The Trump Administration will use the six-month waiting period required by withdrawal to ensure a similar delay does not befall the USMCA.
WHAT TO EXPECT IN 2019
- Hedge your dependence on China: If China is the only current source of any essential products for your company, start discussions now internally and with vendors about shifting production to other options. Your sourcing team should be actively looking for new opportunities, including with U.S. FTA partners and, if the product qualifies, with countries in preference programs such as the Generalized System of Preferences (GSP).
- Take the President at his word – at least on trade: While the President’s statements on Twitter are well documented but often erratic, it is clear that he has been remarkably consistent on trade. This means it’s almost certain he will withdraw the U.S. from NAFTA and he will continue to take a hard line on China.
- Plan for relations to get worse with China: The President and his Administration are clearly frustrated with the lackluster response from China. While Chinese President Xi did just enough to stall a planned increase in duties on Chinese imports during the December 1 leader’s dinner, that will only last until March 1. Failure to provide concrete changes in key areas – including forced technology transfer, forced licensing of technology to Chinese firms, government sponsored investment in U.S. technology firms, and cyber espionage – will result in an increase on the duties currently in place and a likely expansion of duties to cover all remaining products. I believe it is at best 50-50 that a further agreement can be reached.
- New trade deals are coming: The President has already alerted Congress that he will seek to negotiate trade deals with Japan, the EU, and the United Kingdom. The Philippines appears to also be very close to a similar announcement. These trade deals will open new outdoor markets and also provide new sourcing opportunities. The Philippines, for example, has long manufactured backpacks and other outdoor products.