Many U.S. firms to find lit­tle re­lief in China deal

De­spite ‘phase one’ ac­cord, Trump is likely to main­tain most tar­iffs

The Washington Post - - FRONT PAGE - BY DAVID J. LYNCH

From the Rust Belt to the Pa­cific North­west and from the Gulf Coast to Ni­a­gara Falls, the outlook could not have been brighter for U.S. chem­i­cal com­pa­nies.

Then Pres­i­dent Trump nearly two years ago launched his trade war with China.

On Wed­nes­day, Trump and Chi­nese Vice Premier Liu He are sched­uled to sign a par­tial trade deal, call­ing a truce in a con­flict that has shaken the global econ­omy. Yet as the chem­i­cal in­dus­try’s ex­pe­ri­ence shows, many of the trade war’s ca­su­al­ties have been left on the bat­tle­field.

Even as the White House cel­e­brates the pres­i­dent’s ne­go­ti­at­ing ac­com­plish­ment, the “phase one” deal of­fers lit­tle re­lief for count­less U.S. busi­nesses — in­clud­ing chem­i­cal mak­ers, ap­parel re­tail­ers and auto parts man­u­fac­tur­ers — that will still face the same pun­ish­ing tar­iffs they have con­fronted for some time.

“There was an as­sump­tion that this was a short-term sit­u­a­tion,” said Ed Brzytwa, di­rec­tor for in­ter­na­tional trade at the Amer­i­can Chem­istry Coun­cil, an in­dus­try group. “We’re now at the point where we’re telling our mem­bers they should ex­pect th­ese tar­iffs are go­ing to stay in place for a long time. This has be­come the new sta­tus quo for us.”

In March 2018, when the pres­i­dent be­gan im­pos­ing tar­iffs on Chi­nese goods — in a bid to force Bei­jing to aban­don its dis­crim­i­na­tory trade poli­cies — chem­i­cal com­pa­nies were build­ing dozens of new plants and cre­at­ing tens of thou­sands of good-pay­ing jobs around the coun­try.

Thanks to in­ex­pen­sive shale gas, U.S. chem­i­cal mak­ers fi­nally were poised to shed their high­cost rep­u­ta­tion and be­come the

world’s pre­ferred sup­plier.

But among the tar­gets of the pres­i­dent’s tar­iffs were the Chi­nese raw ma­te­ri­als that U.S. plants use to pro­duce in­dus­trial chem­i­cals and plas­tics. China re­tal­i­ated with its own im­port taxes, clos­ing off the in­dus­try’s fastest-grow­ing ex­port mar­ket.

Chem­i­cal mak­ers such as East­man laid off work­ers or de­layed in­vest­ments. Un­able to find al­ter­na­tives to their Chi­nese sup­pli­ers, oth­ers such as Ce­lanese passed along price in­creases to their cus­tomers in the au­to­mo­tive, agri­cul­tural and con­struc­tion in­dus­tries, as the trade war’s im­pact rip­pled across the econ­omy.

Wed­nes­day’s White House cer­e­mony will mark a po­lit­i­cal tri­umph for the pres­i­dent as he pre­pares for a re­elec­tion fight. His long-sought deal with Bei­jing also could pro­duce a wind­fall for Amer­i­can farm­ers, en­ergy pro­duc­ers and man­u­fac­tur­ers if $200 bil­lion in new Chi­nese pur­chases ma­te­ri­al­izes over the next two years as U.S. of­fi­cials hope.

To se­cure the ini­tial trade deal, Trump agreed to sus­pend a planned De­cem­ber tar­iff on about $162 bil­lion in Chi­nese goods and to cut in half an ex­ist­ing 15 per­cent levy on im­ports worth an ad­di­tional $110 bil­lion.

But the tar­iffs that re­main in place will still cover the same $360 bil­lion in Chi­nese goods that the ad­min­is­tra­tion taxed be­fore the sign­ing. Nearly twothirds of ev­ery­thing Amer­i­cans buy from China will be tar­iffed, com­pared with less than 1 per­cent be­fore Trump be­gan his an­tiChina cam­paign, ac­cord­ing to cal­cu­la­tions by econ­o­mist Chad P. Bown of the Peter­son In­sti­tute for In­ter­na­tional Eco­nomics.

The trade war started March 22, 2018, when Trump or­dered the first round of tar­iffs on Chi­nese prod­ucts. Ac­cus­ing China of “eco­nomic ag­gres­sion,” the pres­i­dent said his aim was to per­suade Bei­jing to stop forc­ing U.S. com­pa­nies to trans­fer ad­vanced tech­nolo­gies to their Chi­nese part­ners and to over­haul its state-di­rected econ­omy.

Since then, the two coun­tries have traded tar­iff salvos and en­gaged in on-again, off-again ne­go­ti­a­tions. In De­cem­ber, af­ter sev­eral false dawns, the pres­i­dent said he had reached a lim­ited ac­cord that would re­quire China to halt its co­er­cive tech­nol­ogy-trans­fer scheme, buy huge amounts of U.S. farm and en­ergy prod­ucts, and open its fi­nan­cial ser­vices mar­ket to for­eign com­pa­nies.

The deal eases — but does not elim­i­nate — the trade-re­lated un­cer­tainty that Fed­eral Re­serve Chair Jerome H. Pow­ell has blamed for weak busi­ness in­vest­ment and a man­u­fac­tur­ing slump.

“We are now get­ting a de­gree of cer­tainty in the China eco­nomic re­la­tion­ship that we haven’t had since mid-2017,” said Phil Levy, chief econ­o­mist for Fl­ex­port, a freight for­warder. “Of course, ‘cer­tainty’ is rel­a­tive. Ev­ery­thing can be re­voked with a tweet.”

In­deed, the pres­i­dent said last week that talks aimed at a sec­ond deal that would ad­dress China’s in­dus­trial sub­si­dies and other eco­nomic poli­cies might not bear fruit un­til af­ter the Novem­ber elec­tion.

“We’re keep­ing the tar­iffs on be­cause we’ll use that for an­other one,” the pres­i­dent said at a Thurs­day rally in Toledo, sug­gest­ing they could be ad­justed as ne­go­ti­at­ing lever­age.

As a con­se­quence, the tar­iffs that have re­shaped nearly $700 bil­lion in U.S.- China trade are hard­en­ing into an en­dur­ing fea­ture of the eco­nomic land­scape.

De­spite the pause in com­mer­cial hos­til­i­ties, busi­ness ex­ec­u­tives said the outlook re­mains un­set­tled. Some tar­iffs could be rolled back if re­la­tions im­prove, or new tar­iffs could be im­posed if China fails to abide by the ac­cord, said busi­ness lead­ers who have fol­lowed the talks.

Robert E. Lighthizer, the pres­i­dent’s chief trade ne­go­tia­tor, said last month that Chi­nese of­fi­cials want U.S. tar­iffs to be elim­i­nated grad­u­ally as spe­cific el­e­ments of the phase one deal are im­ple­mented. But he stopped short of say­ing that the ad­min­is­tra­tion had agreed to that phased re­duc­tion.

“They want to get the tar­iffs down, and we want to get the bar­ri­ers down and the prob­lems re­solved,” Lighthizer told reporters.

The un­cer­tainty com­pli­cates in­vest­ment and hir­ing de­ci­sions, ac­cord­ing to Ann Wil­son, se­nior vice pres­i­dent for govern­ment af­fairs with the Mo­tor and Equip­ment Man­u­fac­tur­ers As­so­ci­a­tion.

“Most of our mem­bers are plan­ning for a longer-term tar­iff struc­ture of some kind while they ne­go­ti­ate phase two,” she said. “We’re find­ing our larger mem­bers are de­lay­ing some in­vest­ment de­ci­sions they have to make be­cause of that un­cer­tainty.”

Busi­ness groups also fear that even if the trade war’s China front re­mains quiet, the ad­min­is­tra­tion could im­pose new tar­iffs in a loom­ing con­fronta­tion with the Euro­pean Union.

The pres­i­dent re­peat­edly says that China is pay­ing the cost of the tar­iffs, a claim that is con­tra­dicted by sev­eral stud­ies and most economists.

Al­ready, Trump’s tar­iffs have been a net drag on the econ­omy and failed to achieve his stated goal of boost­ing do­mes­tic man­u­fac­tur­ing, ac­cord­ing to a new study by two Fed­eral Re­serve Board economists, Aaron Flaaen and Justin Pierce.

Any jobs saved or cre­ated in U.S. in­dus­tries pro­tected by tar­iffs are more than off­set by jobs lost in com­pa­nies that suf­fer higher in­put costs or lose ex­port sales be­cause of re­tal­ia­tory tar­iffs, con­cluded the study, which was re­leased last month.

“The tar­iffs have not boosted man­u­fac­tur­ing em­ploy­ment or out­put, even as they in­creased pro­ducer prices,” the study found.

Years of ram­pant piracy, trade secrets theft and dis­crim­i­na­tory treat­ment left many Amer­i­can ex­ec­u­tives ea­ger for a con­fronta­tion with Bei­jing. Many wel­come the deal that will be un­veiled Wed­nes­day with White House fan­fare. But the per­sis­tence of the pres­i­dent’s fa­vorite ne­go­ti­at­ing tool means any ap­plause will prob­a­bly be muted.

“There is an ex­pec­ta­tion that tar­iffs are go­ing to be with us for a while. No­body’s happy with that ex­pec­ta­tion,” said Stephen La­mar, pres­i­dent of the Amer­i­can Ap­parel and Footwear As­so­ci­a­tion. “In fact, they’re quite up­set.”

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