Although the 2020 Presidential election may seem far off at the moment, it is already having an impact on the Congressional schedule for legislation, including trade agreements. Just one month ago, President Trump told lawmakers that he is intent on trying to get a new trade agreement between the United States, Mexico, and Canada implemented before the end of 2019. This was one of his key campaign pledges in the 2016 cycle, and he may view fulfilling that promise as essential to re-election.
Estimates of the number of Democratic votes required to pass such a bill in the House range from 30 – 100, a tall order in today’s charged political climate. Not to mention the enormous task of getting it to the House floor for a vote. The Administration may need to apply additional pressure to get that support, which has already come in the form of special tariffs on Mexican and Canadian steel and aluminum, the threat of quotas, and consideration and reconsideration of numerous anti-dumping measures. What other incentives might the President create to get Congress, and his Mexican and Canadian counterparts, to enact the USMCA yet this year? The next couple of months could be very active ones for the international trade community. Stay tuned.
Last Friday President Donald Trump and Japanese Prime Minister Shinzo Abe met at the White House to discuss the upcoming G-20 summit, as well as trade, China and North Korea.
William Hagerty, the American ambassador to Japan, painted an optimistic picture before the talks saying: “The relationship between the United States and Japan has never been stronger. We’re at the precipice of new challenges. The alliance is critical.”
On the other hand, some Japanese officials say Prime Minister Abe has not had multiple meetings with President Trump multiple times, he has had one meeting multiple times, reflecting frustration with a lack of progress in talks with the U.S.
Prime Minister Abe then travelled to Ottawa on Saturday, hours after playing a round of golf with the President at his Virginia course.
Shortly after Prime Minister Abe’s departure from Canada, Prime Minister Justin Trudeau announced that Toyota will make a $1B+ investment in one of its auto plants there to build a crossover vehicle for the U.S. market.
The automaker will produce the Lexus NX crossover, in gasoline and hybrid versions, beginning in 2022 at the plant in Cambridge, Ontario, Fred Volf, president of Toyota Motor Manufacturing Canada Inc., said Monday.
“Toyota’s operations in Canada are here to stay,” said Volf, flanked by Trudeau at the plant located about 100 km (62 miles) west of Toronto.
Toyota already builds the Lexus RX SUV in Canada, as well as the best-selling RAV4 crossover and the Corolla sedan. Toyota has said previously it plans to move production of the Corolla from Cambridge to a new plant under construction in Alabama, which it will run jointly with Mazda Motor Corp. The two companies plan to start output at that new factory in 2021.
Before the meeting, President Trump urged Japan to drop its tariffs on U.S. agricultural products, saying “We’ll be discussing very strongly agriculture because as the prime minister knows Japan puts very massive tariffs on agriculture, our agriculture, for many years, going into Japan, and we want to get rid of those tariffs,” The President said during an Oval Office meeting with Abe.
Abe's apparent personal bond with the U.S. President has blossomed even though Japan, like Canada, is suffering under punitive tariffs on steel and aluminum imports and facing the threat of more tariffs on its automobiles. The United States has abandoned the sweeping 2016 Trans-Pacific Partnership trade agreement and wants a broader bilateral free trade agreement with Japan in light of its roughly $70 billion annual trade surplus with the U.S.
The Japanese favor a limited agreement that would open their market to more American exports — particularly beef and other agricultural products — if the Trump Administration drops its threat to impose by May a 25% tariff on the 1.7 million cars and auto parts such as engines and transmissions that Japan exports to America each year.
The political stakes for Prime Minister Abe are significant. He is facing elections this summer, possibly for both houses of the Diet, Japan’s parliament, and is eager to demonstrate his stature on the word stage in hopes of winning the vote that will bolster his two-party coalition. A successful G-20 summit can bolster his position at home, and abroad.
Last month the U.S. International Trade Commission released its highly anticipated report on USMCA and found that the new deal will provide modest gains to the U.S. economy and labor market.
The 375-page report’s topline numbers show the new pact would increase the U.S. GDP by $68.2 billion, or 0.35 percent, by its sixth year. USMCA would also create 176,000 U.S jobs, increasing domestic employment by 0.12 percent, the independent panel found.
Democratic lawmakers noted that the renegotiated deal does not go much further than its predecessor.
House Ways and Means Chairman Richard Neal, who holds significant influence over whether USMCA will be approved, said nothing in the report alleviates concerns over the pact’s labor, environment, intellectual property and enforcement provisions. Neal remains “concerned that these portions of the renegotiated deal are not yet acceptable,” he said.
Sen. Ron Wyden, the top Democrat on the Senate Finance Committee, said the report confirms USMCA “represents at best a minor update to NAFTA.”
Senate Finance Committee Chairman Chuck Grassley (R-Iowa) released a statement saying “I’m glad to see the report recognized USMCA’s new economic benefits.”
Chairman Grassley has previously expressed his frustration over the steel and aluminum tariffs on Mexico and Canada. The duties imposed under Section 232 have led to costly retaliation against U.S. farmers, including corn and soy farmers from his home state. Grassley again warned that the future of USMCA hangs in the balance with the tariffs still in place. “You’re never going to get anything done this year if we don’t get those tariffs off and get it done in Canada before June when they adjourn for their election.”
Based on the ITC numbers, USMCA would have a minimal effect on the $20 trillion U.S. economy. But compared with other free trade agreements, it would generate a higher growth rate. The ITC estimated the U.S.-Korea Free Trade Agreement would result in U.S. GDP growing by 0.10 percent once fully implemented. It also forecast that the Trans-Pacific Partnership would have increased U.S. GDP by 0.15 percent over 15 years.
U.S. Trade Representative Robert Lighthizer noted that the ITC’s forecast for U.S. GDP growth under USMCA is more than double what the independent panel projected for TPP. “These findings validate President Trump’s action to withdraw from TPP and renegotiate the disastrous NAFTA,” Lighthizer said in a statement.
The ITC report said the agreement’s stricter rules of origin would boost auto sector employment by 28,000 jobs over the next five years, while also raising prices paid by consumers. However, USTR also released its own analysis projecting 76,000 job gains due to an anticipated $34 billion in new investments.
Former North Dakota Sen. Heidi Heitkamp will help lead the Trade Works for America campaign to get USMCA passed in Congress. The Democrat will co-lead the bipartisan effort with Phil Cox, former executive director of the Republican Governors Association. The campaign is one of a number the business and agriculture sectors are organizing to help push the deal through Congress this year.
President Trump told Republican lawmakers he wants to move on USMCA passage before the summer, a schedule that will be hard to keep without the support of Chairman Grassley or House Speaker Nancy Pelosi.
Administration officials recognize that three things need to happen before a vote on USMCA: Mexico must pass labor reforms, ongoing talks with China need to be resolved and the administration has to come up with implementing legislation that addresses Democrats’ concerns. That would require a tremendous amount of movement on trade in just the next few months.
White House Chief of Staff Mick Mulvaney earlier this week showed doubts about whether House Speaker Nancy Pelosi would bring it to a vote.
“She controls the floor and if it doesn’t come up for a vote, it won’t see the light of day,” the White House chief of staff said.
The Trump administration should know more about whether it will sign a key trade deal with China within two weeks, White House chief of staff Mick Mulvaney said on Tuesday.
When asked about Treasury Secretary Steven Mnuchin’s suggestion that the White House could announce an agreement with Beijing in the next two weeks, the top Presidential advisor said, “I think that’s fair.”
The US and China are due to begin a fresh round of talks in Beijing on Tuesday as they edge closer to resolving their damaging trade dispute.
The discussions will be led directly by US Trade Representative Robert Lighthizer and Chinese Vice Premier Liu He.
Talks have dragged on for months, with both sides struggling to agree on key issues. A strengthening U.S. economy reduces pressure on the Administration to make concessions, and questions of President Trump’s ability to persevere in the Presidential election next year may make China hesitant to sign any substantial agreement before November 2020.
The trade war has hurt the economies of both countries and challenged the multilateral system that has governed world trade for decades.
There had been cautious optimism surrounding the talks in recent months but also a sense that both sides remain divided on key points.
“Someone asked me how long is the negotiation going to go on and I don’t have a specific answer to that,” Chief of Staff Mulvaney said at the Milken Institute Global Conference. “It won’t go on forever. I think at some point in any negotiation you realize: ‘OK: we’re close to getting something done so we’re going to keep going.’ On the other hand, at some point you just throw your hands up and say ‘you know this is never going to get anywhere.’”
The White House has pushed for a deal to revamp its trade relationship with China and address concerns about trade deficits, intellectual property theft and forced technology transfers. While the Trump administration has shown optimism about striking an agreement and ending a potentially devastating trade conflict between the world’s two largest economies, final sticking points have tripped up talks. Investors have watched the negotiations closely, as success or failure in reaching a deal could affect a wide range of companies.
Mulvaney stressed the U.S. would not accept an agreement with China unless it was a great deal. The two sides have appeared to disagree not only on whether the U.S. would lift its $250 billion in tariffs on Chinese goods as part of an agreement, but also on how to enforce provisions to crack down on what The President has called Beijing’s trade abuses.
Next week, the U.S. will withdraw from an antidumping suspension agreement that now covers almost all imports of fresh tomatoes from Mexico. Then the Commerce Department will resume an anti-dumping investigation started decades ago.
Mexican tomato companies increased their U.S. market share from 32% to 54% between 1996 and 2017 — the period of time the suspension agreement has been in place — while the market share for U.S. tomato producers declined from 65% to 40% percent during the same period, according to the Florida Tomato Exchange.
“The Tomato Suspension Agreement has always had the right intentions, but it simply hasn’t worked,” the Florida Tomato Exchange said. “Over the last 22 years, three different agreements have had to be negotiated because the (exchange) consistently challenged the effectiveness of each agreement. These repeated failures have left the U.S. tomato industry with no choice but to ask the Commerce Department to terminate the agreement.
According to Dante Galeazzi, president and CEO of the Texas International Produce Association, the bridges of Progreso, Pharr, and Roma, Texas import almost $1 billion worth of tomatoes each year.
The suspension of the agreement means anti dumping deposits will be required beginning next week without a new agreement “So, that immediately means that nearly 20 percent needs to be paid to the U.S. Government before the tomatoes come in." Galeazzi said.
Look for higher tomato costs in just a week unless trade issues between the U.S. and Mexico are resolved.
The Commerce Department says the U.S. economy picked up steam in the first three months of the year, after a rocky finish to 2018. The US economy grew 2.6% on an annualized basis in the last quarter of 2018, slowing from the third quarter’s brisk 3.4%.
Gross domestic product (GDP) grew at an annual rate of 3.2% in the first quarter, up from 2.2% at the end of last year. That's a significant turnaround from six weeks ago, when many analysts expected a slump in GDP growth to just 2% or less.
A pickup in consumer spending contributed to the improved outlook. Retailers enjoyed strong sales gains in March after a lackluster February.
"I think there's a sign of relief," said Jack Kleinhenz, chief economist for the National Retail Federation. "Not only retailers but the overall view of the economy."
Earlier in the year, shoppers seemed worried about the stock market slump, the government shutdown and trade tensions with China. But by the end of the first quarter, they seemed ready to put those fears aside and resume spending.
"The American consumer is key to the U.S. economy," said Mark Zandi, chief economist for Moody's Analytics. "We consume everything we produce and a lot of what everyone else produces across the globe. So if the American consumer is hanging tough, that's good for our economy but also good for the global economy."
There are still some yellow caution flags. The first-quarter GDP figure was boosted by temporary factors such as a boost in inventories and a slowdown in imports. Once those wear off, many forecasters expect GDP growth to cool to around 2%.
"Last year, growth was boosted by fiscal stimulus," said Ben Herzon, an economist at IHS Market. "We had pretty big tax cuts, and we had pretty big increases in federal spending. But the contribution to growth from fiscal stimulus is peaking and will begin to wear off this year."
Many independent forecasters share that view. But the Trump administration continues to project confidence that last year's 3% growth rate can be sustained.
"I know I may be at loggerheads with some of the forecasters and maybe even the consensus," White House economic adviser Larry Kudlow told reporters at the National Press Club on Tuesday. "But I really think this is going to turn out to be a pretty strong first half and a pretty strong year."
"In the early part of the recovery, it was certainly people at the very top that recovered the fastest," Boushey said. "We're now seeing indications that those income gains are more widely spread."
Last year, workers at the bottom of the income ladder saw some of the fastest wage gains, thanks to a strong job market as well as increases in state and local minimum wages.
Although the 2020 Presidential election may seem far off at the moment, it is already having an impact on the Congressional schedule for legislation, including trade agreements. Just one month ago, President Trump told lawmakers that he is intent on trying to get a new trade agreement between the United States, Mexico, and Canada implemented before the end of 2019. This was one of his key campaign pledges in the 2016 cycle, and he may view fulfilling that promise as essential to re-election.
Estimates of the number of Democratic votes required to pass such a bill in the House range from 30 – 100, a tall order in today’s charged political climate. Not to mention the enormous task of getting it to the House floor for a vote. The Administration may need to apply additional pressure to get that support, which has already come in the form of special tariffs on Mexican and Canadian steel and aluminum, the threat of quotas, and consideration and reconsideration of numerous anti-dumping measures. What other incentives might the President create to get Congress, and his Mexican and Canadian counterparts, to enact the USMCA yet this year? The next couple of months could be very active ones for the international trade community. Stay tuned.