Thursday, March 15, 2018

The Target of America's Trade Policy Agenda - The Trump Version

While the world was shaken by the announcement of the proposed U.S. tariffs on steel and aluminum, it should have come as no surprise to anyone.  The 2018 version of the President's Trade Policy Agenda published by the Office of the United States Trade Representative, part of the Executive Office of the President, appears to have quite clearly stated what the world can expect from the Trump Administration when it comes to trade.  Let's look at a few highlights, focusing on the chapter which outlines the President's trade policy agenda.  I apologize in advance for the length of this posting but I want to set up 

Let's set up this posting with some background information.  On June 28, 2016, presidential candidate, Donald Trump, gave a speech entitled Declaring America's Economic Independence in Monessen, Pennsylvania which outlined his plan for the American economy.  Let's look at some excerpts:

"Today, I am going to talk about how to Make America Wealthy Again.

We are thirty miles from Steel City. Pittsburgh played a central role in building our nation.

The legacy of Pennsylvania steelworkers lives in the bridges, railways and skyscrapers that make up our great American landscape.

But our workers' loyalty was repaid with betrayal….

Our politicians have aggressively pursued a policy of globalization - moving our jobs, our wealth and our factories to Mexico and overseas.

Globalization has made the financial elite who donate to politicians very wealthy. But it has left millions of our workers with nothing but poverty and heartache.

When subsidized foreign steel is dumped into our markets, threatening our factories, the politicians do nothing.

For years, they watched on the sidelines as our jobs vanished and our communities were plunged into depression-level unemployment….

George Washington said that "the promotion of domestic manufactur[ing] will be among the first consequences to flow from an energetic government.”

Alexander Hamilton spoke frequently of the "expediency of encouraging manufactur[ing] in the United States." The first Republican President, Abraham Lincoln, warned that: "The abandonment of the protective policy by the American government… must produce want and ruin among our people."

Our original Constitution did not even have an income tax. Instead, it had tariffs - emphasizing taxation of foreign, not domestic, production.

Yet today, 240 years after the Revolution, we have turned things completely upside-down.

We tax and regulate and restrict our companies to death, then we allow foreign countries that cheat to export their goods to us tax-free.

As a result, we have become more dependent on foreign countries than ever before.

Ladies and Gentlemen, it’s time to declare our economic independence once again." (my bold)

Let's see how this speech translated itself into the President's Trade Policy Agenda.  You may notice a recurring theme in the Trump Administration's approach to trade.  According to the document, there are five pillars of America's trade policy:

1.) Supporting Our National Security which includes building a stronger America, preserving national sovereignty. responding to economic competitors and recognizing the importance of technology.  In the section under responding to economic competitors, we find the following:

"The National Security Strategy states that “China and Russia challenge American power, influence, and interests, attempting to erode American security and prosperity.” These challenges are not limited to the national security realm but also impact trade policy. Both China and Russia have been unwilling to comply with many of their obligations as members of the WTO.

China has a statist economic model with a large and growing government role. The scope of China’s economy means its economic practices increasingly affect the United States and the overall global economic and trade system. China has now been a member of the WTO for more than sixteen years and has yet to adopt the market economy system expected of all WTO Members. Indeed, if anything, China has appeared to be moving further away from market principles in recent years. Furthermore, as the world’s second largest economy, China has an enormous capacity to distort markets worldwide. China’s policies are contributing to a dramatic misallocation of global resources that leaves everyone – including the Chinese people – poorer than they would be in a world of more efficient markets.

Of course, as a sovereign nation, China is free to pursue whatever trade policy it prefers. But the United States, as a sovereign nation, is free to respond. Under President Trump’s leadership, we will use all available tools to discourage China – or any country that emulates its policies – from undermining true market competition. We will resist efforts by China – or any other country – to hide behind international bureaucracies in an effort to hinder the ability of the United States to take robust actions, when necessary, in response to unfair practices abroad. In short, our trade policy – like our national security policy – will seek to protect U.S. national interests."

In the section under recognizing the importance of technology, we find the following:

"The National Security Strategy states that, “The United States must preserve our lead in research and technology and protect our economy from competitors who unfairly acquire our intellectual property.” Our trade policy will support these efforts. In fact, as discussed in more detail below, we have already launched an investigation pursuant to Section 301 of the Trade Act of 1974 into allegations that China is engaged in unreasonable and discriminatory efforts to obtain U.S. technologies and intellectual property. If necessary, we will take action under Section 301 to prevent China from obtaining the benefit of this type of unfair practice."

2.) Strengthening the U.S. Economy which includes reducing business tax rates and individual tax cuts, repatriating offshore income, reforms to protect the U.S. tax base and reducing regulatory burdens.  

3.) Negotiating Better Trade Deals which includes renegotiating NAFTA, renegotiating KORUS (the trade deal between the United States and South Korea), expanding trade and investment with the United Kingdom, seeking bilateral market access for U.S. agricultural products, pursuing a better deal with the signatories of the Trans-Pacific Partnership from outside its confines, 

4.) Aggressive Enforcement of U.S. Trade Laws which includes using Section 301 of the Trade Act of 1974 to address unfair trade practices by foreign nations, Section 201 of the Trade Act of 1974 which allows domestic producers to request the U.S. International Trade Commission to investigate the impact of increased imports on the U.S. market (this section was used to impose tariffs on residential washing machines and solar cells), antidumping and countervailing duties and defending U.S. trade remedy laws at the World Trade Organization.

In the section under the use of Section 301, we find the following:

"The acts, policies, and practices of the government of China directed at the transfer of U.S. and other foreign technologies and intellectual property are an important element of China’s strategy to become a leader in a number of industries, including advanced technology industries, as reflected in China’s “Made in China 2025” industrial plan, and other similar industrial policy initiatives. The Chinese government’s acts, policies, and practices take many forms. The investigation initially will consider the following specific types of conduct:

First, the Chinese government reportedly uses a variety of tools, including opaque and discretionary administrative approval processes, joint venture requirements, foreign equity limitations, procurements, and other mechanisms to regulate or intervene in U.S. companies’ operations in China, in order to require or pressure the transfer of technologies and intellectual property to Chinese companies…. 

Second, the Chinese government’s acts, policies, and practices reportedly deprive U.S. companies of the ability to set market based terms in licensing and other technology related negotiations with Chinese companies and undermine U.S. companies’ control over their technology in China. For example, the Regulations on Technology Import and Export Administration mandate particular terms for indemnities and ownership of technology improvements for imported technology, and other measures also impose non- market terms in licensing and technology contracts.

Third, the Chinese government reportedly directs or unfairly facilitates the systematic investment in, or acquisition of, U.S. companies and assets by Chinese companies to obtain cutting edge technologies and intellectual property and generate large scale technology transfer in industries deemed important by Chinese government industrial plans.

Fourth, the investigation will consider whether the Chinese government is conducting or supporting unauthorized intrusions into U.S. commercial computer networks or cyber enabled theft of intellectual property, trade secrets, or confidential business information, and whether this conduct harms U.S. companies or provides competitive advantages to Chinese companies or commercial sectors."

In the section under the use of Section 201, we find the following:

"The situation with crystalline silicon photovoltaic (“CSPV”) solar cells and modules followed a pattern similar to washers, with the added dimension of trade distorting effects from Chinese state industrial planning that targeted the solar industry. Over the last ten years, China has used state incentives, subsidies, and tariffs to dominate the global solar supply chain. Its’ share of global cell production skyrocketed from 7 percent in 2005 to 61 percent in 2012. It now produces 60 percent of the world’s solar cells, and 71 percent of solar modules"

In the section under defending U.S. trade remedy laws at the WTO, we find the following:

"For instance, in an ongoing dispute,4 China is challenging the ability of the United States to reject and replace non-market prices or costs in the context of anti-dumping investigations involving Chinese producers and exporters. China asserts that WTO Members agreed in China’s Accession Protocol to set a time period after which market economy conditions would automatically be deemed to exist in China (or a Chinese industry or sector), no matter what the actual facts in China revealed...

And the facts demonstrate that China, over 16 years after it joined the WTO, still has not transitioned to an economy that operates based on market economy principles. China’s government continues to intervene heavily in the market and significantly distort prices and costs to the advantage of domestic industries. This is leading to severe stresses in the international trading system, including significantly distorted prices and severe excess capacity and overproduction, with the resulting surplus product dumped all over the world. China does not have the right to engage in government interference and intervention in market mechanisms, distorting market outcomes and undermining WTO rules, without consequence." 

5.) Reforming the Multilateral Trading System

Do you note a recurring theme in the introductory section of the 2018 edition of the President's Trade Policy Agenda? That's right, it's the current administration's focus on China.  The nation of China is mentioned 63 times in the introductory section alone (compared to only twice for Russia) as though it is pretty much responsible for all of America's current economic woes.

Donald Trump's fixation with the international trade from one nation is not a new thing.  Here's Donald Trump weighing in on international trade with one nation back in 1988 on the Oprah Winfrey 

Here's the key quote:

"We're a debtor nation. Something is going to happen over the next number of years with this country because you can't keep on losing $200 billion (deficit at the time). And yet we let Japan come in and dump everything into our markets. It's not free trade. If you ever go to Japan right now and try to sell something, forget about it. Just forget about it. It's almost impossible. They don't have laws against it, they just make it impossible.

They come over here, they sell their cars, their VCRs, they knock the hell out of our companies. And, hey, I have tremendous respect for the Japanese people. I mean, you can respect somebody that's beating the hell out of you, but they are beating the hell out of this country."

And then there was this from the New York Times, Washington Post and Boston Globe in 1987:

Incidentally, this foray into the public eye cost Mr. Trump $94,801, more than three times the median household income in 1987.

As you can see from this posting, the recent moves by the Trump Administration to exert control over trade with the United States should have come as no surprise to anyone.  You do have to hand Donald Trump one thing; he sticks to his agenda.

Wednesday, March 14, 2018

The First Steps Back from the Nuclear Precipice

A recent development in the ongoing United States - Russia brouhaha received absolutely no attention from the U.S. mainstream media.  With the sudden departure of Rex Tillerson from the State Department, only time will tell whether Mike Pompeo, the Trump Administration's second attempt at imposing a Secretary of State on the world will take action on this key issue.

On March 8, 2018, a group of three Democratic and one Independent Senators, Jeff Merkley (Oregon), Dianne Feinstein (California) and Edward Market (Massachusetts) wrote the following letter to then Secretary of State Rex Tillerson:

"March 08, 2018

The Honorable Rex W. Tillerson
Secretary of State
U. S. Department of State
Washington, DC

Dear Secretary Tillerson:

We write to urge the State Department to convene the next U.S.-Russia Strategic Dialogue as soon as possible.

A U.S.-Russia Strategic Dialogue is more urgent following President Putin’s public address on March 1st when he referred to several new nuclear weapons Russia is reportedly developing including a cruise missile and a nuclear underwater drone, which are not currently limited by the New START treaty, and would be destabilizing if deployed.   There is no doubt we have significant disagreements with Russia, including Russia’s brazen interference in the 2016 U.S. elections; continued violation of the Intermediate Range Nuclear Forces Treaty (INF); invasion of Ukraine and illegal annexation of Crimea; and destabilizing actions in Syria.  However, it is due to these policy rifts, not in spite of them, that the United States should urgently engage with Russia to avoid miscalculation and reduce the likelihood of conflict.  

First, we encourage the administration to propose alternative solutions to address Russia’s violation of the Intermediate-Range Nuclear Forces Treaty (INF).  Russian Deputy Foreign Minister Sergei Ryabkov admitted to the existence of this ground launched cruise missile (GLCM), but contended that the system was INF Treaty compliant.  Senior officials from the United States and Russia have said that the INF Treaty plays an “important role in the existing system of international security.”  As such, we urge the State Department to resolve Russia’s violation through existing INF Treaty provisions or new mutually acceptable means.

Second, we urge the United States to extend the New Strategic Arms Reduction Treaty (New START).  The Trump administration’s own 2018 Nuclear Posture Review (NPR) references Russia’s robust nuclear modernization program as a main justification behind the U.S. need to recapitalize its three legs of the nuclear triad.  An extension of New START would verifiably lock-in the Treaty’s Central Limits – and with it – the reductions in strategic forces Russia has made. 

The New START Treaty, which entered into force in 2011, provides transparency and predictability into the size and location of Russia’s strategic nuclear delivery systems, warheads, and facilities.  New START’s robust verification architecture involves thousands of data exchanges and regular on-site inspections. The United States confirmed in February that Russia met New START’s Central Treaty Limits and it stated that “implementation of the New START Treaty enhances the safety and security of the United States.”  These same Central Treaty Limits could also govern two of the new types of nuclear weapons referenced by President Putin on March 1st – a case the United States can argue through the Treaty’s Biannual Consultative Commission (BCC). 

Lastly, as the 2018 Nuclear Posture Review notes, Russia maintains a numerical advantage to the United States in the number of non-strategic nuclear weapons. The Senate, in its Resolution of Ratification on New START in 2010, took stock of this imbalance and called upon the United States to commence negotiations that would “secure and reduce tactical nuclear weapons in a verifiable manner.” Attempts by the Obama administration to negotiate an agreement on this class of weapons met resistance from Russia.  However, even absent the political space for a formal agreement or binding treaty with Russia, we urge the State Department to discuss ways to enhance transparency on non-strategic nuclear weapons.

Extending New START, resolving Russia’s INF violation, and enhancing transparency measures relating to non-strategic nuclear weapons will also help quiet growing calls from many countries that the United States is not upholding its Nuclear Non-Proliferation Treaty (NPT) obligations.  The Treaty’s three mutually reinforcing pillars: non-proliferation, peaceful uses of the atom, and disarmament can only be advanced through U.S. leadership on all three.

There is no guarantee that we can make progress with Russia on these issues.  However, even at the height of Cold War tensions, the United States and the Soviet Union were able to engage on matters of strategic stability.  Leaders from both countries believed, as we should today, that the incredible destructive force of nuclear weapons is reason enough to make any and all efforts to lessen the chance that they can never be used again.   


Other than the finger pointing about Ukraine and election meddling in the first paragraph, this letter is an obvious departure from the "blame Russia for everything" mantra that has echoed through the sacred halls of Washington since mid-2016.  With Russia's recent announcement of new its new nuclear weapons in his March 1, 2018 Address to the Federal Assembly and the United States recent announcement in its 2018 Nuclear Posture Review that it is looking to expand and modernize its nuclear triad and increase its focus on low yield weapons, the threat of a potential nuclear war has not been higher since the end of the Cold War.

Let's look at the current nuclear weapons stockpiles of both nations from Arms Control Association:

Here is a detailed table showing Russia's nuclear forces as of 2017 from the Bulletin of the Atomic Scientists:

According to the Bulletin, Russia had about 4300 stockpiled warheads of which 1950 strategic warheads are deployed on ballistic missiles and at heavy bomber bases, 500 are in storage and 1850 are nonstrategic warheads.  In addition, there are roughly 2700 retired warheads which are largely intact awaiting dismantlement.

Russia's nuclear doctrine states that Russia: 

"...shall reserve for itself the right to employ nuclear weapons in response to the use against it and/or its allies of nuclear and other kinds of weapons of mass destruction, as well as in the case of aggression against the Russian Federation with use of conventional weapons when the state’s very existence has been threatened."

Here is a detailed table showing America's nuclear forces as of 2018 from the Bulletin of the Atomic Scientists:

Here's what has happened to America's nuclear weapons stockpile since 1962:

According to the Bulletin, the United States had a total of about 400 warheads of which 1650 warheads are currently deployed on ballistic missiles and at bomber bases in the United States along with 150 tactical bombs that are deployed in Europe.  The remaining 2200 weapons are kept in storage as a hedge against technical or geopolitical surprise.  An additional 2200 retire but still intact warheads are stored under the custody of the Energy Department while they await dismantlement.  

The United States doctrine which outlines its nuclear strategy is as follows:

"The United States would only consider the employment of nuclear weapons in extreme circumstances to defend the vital interests of the United States, its allies, and partners. Nevertheless, if deterrence fails, the United States will strive to end any conflict at the lowest level of damage possible and on the best achievable terms for the United States, allies, and partners. U.S. nuclear policy for decades has consistently included this objective of limiting damage if deterrence fails."

The lack of attention paid by the mainstream media to the letter suggests that this move is not playing into the all encompassing anti-Russia rhetoric that the U.S. media is largely responsible for.  Unfortunately, the civilian populations of both Russia and the United States appear to matter little to those in control of the world's deadly arsenal of nuclear weapons.

It will be interesting to watch how the newly minted U.S. Secretary of State handles the "Russia file" and responds to the letter from the four aforementioned Senators, however, I am not hopeful given this quote from July 2017:

"I am confident that the Russians meddled in this election, as is the entire intelligence community…I hope I didn't stop at 2008 [for when he says Russian began interfering in U.S. elections]. You can go back to the 70s. My point was simply this: This threat is real. The U.S. government, including the Central Intelligence Agency, has to figure out a way to fight back against it and defeat it. And we're intent upon doing that."

Imagine that, negotiating with the dreaded Russians, the source of all that is evil in the world.  What a novel concept.