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May 11, 2018

Trump, China, Tariffs, and TPP

By Christopher Oerman

With the presidency of Donald Trump, the United States has found itself on the brink of a trade war with China. On President Trump’s first full day in office, he notoriously backed out of TPP, or the Trans Pacific Partnership. The Trans Pacific Partnership was an agreement between 12 countries: the United States, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. It had long been a campaign promise to pull out of the deal and even mirrored the opinion of his counterpart, the Democratic candidate Hillary Clinton. Both cited TPP as an unfair deal where America loses and the rest of the trade members received the majority of the benefit.

In March, President Trump announced a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports. This was met with hostility from trade partners as well as American politicians as a hindrance to trade and essentially a tax on the consumer. The Trump administration argued that the trade agreements in place and current U.S. regulations made it nearly impossible for domestic steel producers to compete with foreign importers.

In addition to the steel and aluminum tariffs, President Trump also recently announced an initial 25 percent tariff on $50 billion of Chinese imports and potentially an additional $100 billion in tariffs on China. Along with these tariffs, the administration also announced a technology investment ban on China, citing national security concerns. The announcement from the Trump administration immediately sparked a retaliatory tariff from China on $50 billion of U.S. exports with a 25 percent tariff on pork and similar products, and a 15 percent tariff on fruit along with 120 other commodities. China currently exports $506 billion worth of products so a $50 billion tariff would represent roughly 10 percent of Chinese exports. However, the United States only exports $130 billion to China, so a $50 billion tariff against the U.S. represents 38 percent of United States exports to China.

President Trump has recently cited that the United States is charged a 25 percent tariff on U.S. vehicles being exported to China, while the United States only charges China 2.5 percent on the other end. Along with a 25 percent automobile tariff on U.S. exports to China, China also requires a “50-50” partnership between foreign car makers who wish to produce and manufacture in China and Chinese companies. President Trump has expressed that these unfair trade practices need to stop and be rewritten in fairer terms.

The recent tariff “stand-off” between the United States and China has sparked the interest of the Trump administration to potentially re-join the Trans Pacific Partnership. Rejoining TPP would put further pressure on China and provide relief to America’s farming community. Initially, withdrawing from TPP has hurt America’s farming community, even before China announced its tariffs on U.S. exports. Net farm income in 2018 is projected to decrease by 6.7 percent, to $59.5 billion. This amount represents the lowest amount seen in more than a decade.

The problem with re-joining TPP is that it may not be an easy task. There are a few scenarios that can play out. It would be considerably easier if the U.S. were to approach the other 11 participating countries and ask them if they could re-enter the agreement under the same terms it had before they had initially exited the agreement. This seems unlikely as the President has expressed that he wants a better deal than the U.S. initially had. It took five years for TPP to be negotiated among the 12 members with the U.S. ultimately abandoning the agreement. An additional year was spent to modify the agreement between the 11 remaining nations. If the U.S. is aggressive in its demands, it may leave a sour taste in the mouths of the other 11 negotiators who have finalized a new deal.

Along with the collaboration issues the United States can expect to face with the other 11 TPP nations, the U.S. also faces another problem. With midterm elections happening in November, the Democrats may take control of the House of Representatives. If this happens, there’s heavy certainty that the Democrats would not want to push through a Trump-endorsed TPP deal. This essentially puts a strict deadline for a deal to get done, or face total uncertainty past November.

In the coming months, we will see if President Trump and his administration can deliver on what he is perhaps best known for, “The art of the deal.”