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United States & European Union Agree To Pursue Zero Tariffs

By Gary D. Halbert. Originally published at ValueWalk.

FORECASTS & TRENDS E-LETTER

by Gary D. Halbert

August 7, 2018

  1. US & EU Call Truce & Pledge to Negotiate Zero Tariffs
  2. Renegotiating the North American Free Trade Agreement
  3. Nine More Facts About the US–China Trade Deficit
  4. Recording of Broadmark Real Estate Webinar Now Available

Q2 hedge fund letters, conference, scoops etc

Zero Tariffs
geralt / Pixabay

Overview

Today we begin with a discussion of the importance of the latest agreement between the United States and the European Union to work toward zero tariffs and trade barriers over time. Hopefully, this is a trend that will continue.

From there we’ll look at more reasons why our trade deficit with China is not nearly as bad as President Trump makes it out to be. I’ll present nine additional facts along that line, which I think you’ll find interesting. Let’s get started.

US & EU Call Truce & Pledge to Negotiate Zero Tariffs

On July 25, President Trump met with European Trade Commission President Jean-Claude Juncker in Washington, DC to discuss trade tariffs and barriers, in what many feared would be a colossal failure.  Yet the meeting turned out to be a great success in that both sides agreed to a tariff truce and a plan to negotiate all trade tariffs between the US and the 28-nation European Union to zero just ahead.

Mr. Trump agreed to step back from his threat of 25% tariffs on European car imports, while the two sides pledged to resolve the current US steel and aluminum tariffs and Europe’s retaliatory levies on U.S. goods.

Europe also agreed to buy more soybeans immediately, and much more liquefied natural gas (LNG) from the US in the future as its import capacity expands. US LNG export capacity is expected to nearly triple by 2020 to 9.6 billion cubic feet a day, as more export terminals come online and the fracking boom continues.

Most important, the two sides agreed to negotiate a larger trade deal that Mr. Trump said would have as a goal “zero tariffs, zero non-tariff barriers and zero subsidies on non-auto industrial goods.” This suggests that Europe has taken Mr. Trump up on his offer, floated at the last minute at the G-7 meeting in June, to work toward zero tariffs.

The zero tariff target won’t be easy to reach, however. Europe has a 10% tariff on US-made cars and the US charges only 2.5% on cars made in Europe. But the US charges a 25% tariff on imported trucks, which Europe wants the US to take to zero. That won’t please Ford and other US auto companies that make the bulk of their profits from trucks and SUVs.

The White House boasted that Europe blinked, but it’s more accurate to say both sides are stepping back from mutually assured economic destruction. Mr. Trump also had ample political and economic incentive to call a truce. This is a great development if it indeed works out.

The retaliatory tariffs from China, the EU, Mexico, Canada and Japan are beginning to hurt US farmers and manufacturers. Mr. Trump felt obliged in late July to bail out US farmers by promising up to $12 billion to buy surplus crops that can’t find a foreign market. If the latest agreement pans out, that bailout won’t be necessary.

Harley-Davidson and other US manufacturing firms have been moving plants abroad to avoid higher import costs and duck retaliatory tariffs. All of this in turn is beginning to have political consequences as more Republicans in Congress are finding their voice in favor of free markets. Hopefully, this moving offshore trend will come to an end soon.

The protectionist threat is far from over, however. The talks with Europe could founder on any number of issues, especially European barriers to competition from America’s more efficient service industries or genetically modified foods.

Renegotiating the North American Free Trade Agreement

Next, there’s the fast-approaching deadline for getting a NAFTA deal done during the current US Congress and before the Mexican presidential handoff on December 1. A NAFTA modernization that can pass Republican muster on Capitol Hill would remove a big threat to business investment.

A successful renegotiation of NAFTA just ahead would let Mr. Trump focus on Chinese trade with some allies to back him up. Fighting trade wars on multiple fronts makes little sense and lets China play Western countries against one another. Beijing would have to take seriously a united front of the world’s largest importers.

The US economy has broken out of its Obama doldrums and is growing at a faster than 3% pace for the first time in 12 years. Mr. Trump’s trade policies are the biggest threat to that economic progress. The faster Mr. Trump concludes his new trade deals, the more likely the economic revival will continue.

Nine More Facts About the US-China Trade Deficit

I have argued in recent weeks that our large trade deficit with China is not nearly as troubling as President Trump would have us believe. I have even suggested that this big deficit is normal. What follows is even more evidence supporting this view.

As a reminder, last year China exported goods and services worth roughly $500 billion to the US, and America sent back exports worth $130 billion. The president calls that $370 billion deficit thievery, but most economists don’t see its harm to America. Despite what the president says, trade between our nations is voluntary, and the following nine points explain why it’s not nearly the problem the president says it is.

1. Although China has higher tariffs on US goods than America does on Chinese goods, its tariffs are still lower than those of many other developing countries. Since China’s accession to the World Trade Organization (WTO) in 2001, it has consistently lowered its trade barriers. China has been the fastest growing market for US exports, and US exporters are not stupid.  They know a good deal when they see it. Last year, 56% of US soybeans, 26% of Boeing airplanes and 17% of American-made automobiles were sold in China.

2. As for goods coming into the US, American importers are not stupid either. No one is forcing them to buy Chinese goods. Inexpensive Chinese imports have helped the US middle class, which has experienced slow income growth for years, to buy more with the same income.

3. It isn’t Chinese barriers but US export controls that limit our economic exchange. China’s trade advantage lies in its cheaper labor costs, and the United States’ advantage lies in attracting capital. China exports labor-intensive products to the US, and America exports primarily technology and agricultural products to China.

However, US export policy is stricter than Europe’s and Japan’s, determining what and how much can be exported. Without export prohibitions (mainly for national security reasons) on 20 high-tech products such as aircraft, aircraft engines, navigation systems, lasers and fiber optics, the US-China trade deficit would decrease.

4. China’s trade deficit numbers can be deceiving. Take the Apple iPhone. When they arrive in the US from China where they are assembled, their high cost adds significantly to the trade imbalance in China’s favor. But Chinese workers and factories only receive 5% of the value of an iPhone (mainly labor costs), while Apple’s design, brand and marketing account for nearly 60% of its value.

China doesn’t even manufacture parts for the iPhone; those come from the global supply chain and the benefit goes to the suppliers, not to China. By one calculation, an iPhone’s estimated “factory cost” — $240 — exaggerates the value of China’s exports to the US because the Chinese keep less than $9 per phone.

5. When American protectionists talk about the trade deficit with China, they deliberately ignore the U.S. surplus in “service trade” — such sectors as travel, education, banking, insurance and royalty payments. In 2017, the US services surplus with China was $54.1 billion, and it has risen steeply for a decade.

6. Another thing protectionists deliberately ignore is that sales of US companies in China have surpassed $500 billion. These firms are making huge profits from the fast-growing Chinese market, and their success adds to the export of US components and intellectual property rights to China.

7. As for intellectual property, Trump constantly accuses China of stealing US technology and knocking off its products. While it’s true that China established intellectual property protections late — in the 1990s — those laws are increasingly working. In 2017, China’s external payment of intellectual property fees reached $28.6 billion, 15 times more than when it joined the WTO in 2001. US intellectual property owners are the biggest beneficiaries.

8. Accusing Chinese firms of forced technology transfers is another outdated charge. No laws or regulations compel such transfers; joint ventures are based on deal-by-deal negotiations; and some US companies are willing to transfer technology for Chinese market access. General Motors’ and Ford’s joint ventures, for example, have made them two of the largest automobile manufacturers in China.

9. China’s trade practices are generally in compliance with World Trade Organization rules. Like the US, China is subject to a biennial WTO review. Since 2001, China has been accused 40 times and the US 80 times in WTO disputes. When judgments go against China, it usually corrects its course. The United States has obeyed the WTO much less often.

China doesn’t want to fight Trump’s escalating trade war, but it will defend itself. At the same time, it is reaching out to other foreign investors to counter-balance US actions. America may lose investment opportunities if the Trump administration persists in trade sanctions against China. President Trump needs to understand this.

Recording of Broadmark Real Estate Webinar Now Available

Finally, a recording of our latest webinar with Broadmark Capital is now available if you were unable to attend the live event. Click here to watch it and learn more about Broadmark’s very successful real estate lending funds. I highly recommend them!

All the best,

Gary D. Halbert

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