China, NAFTA and What is Next from Trump on Trade

By Omar Nashashibi, founding partner
The Franklin Partnership, LLP

By all accounts, and despite the impeachment trial, President Trump had some major victories on trade in January that already have begun to reshape the landscape.  On January 1, the Phase I deal with Japan took effect. Two weeks later – January 15 – the US and China secured a Phase I deal, de-escalating tensions between the world’s two largest economies. The president pulled off his complete hat trick on January 29 by signing into law the new NAFTA (USMCA – United States-Mexico-Canada Agreement).

Sources in Washington indicate that the Trump administration now is shifting its attention to talks with the European Union, India, Vietnam, South Africa and Kenya. We expect a Phase I deal with India in the first part of the year, but the president’s main focus is Europe and in applying maximum pressure to bring those countries to the table.

The president feels emboldened by his January successes and believes that his strategy of tariffs, tariffs and more tariffs is working: It brought Japan to the table, China made concessions, and Canada and Mexico agreed to a new NAFTA, all of which he can tout on the campaign trail. Manufacturers are asking what this all means to them, and more importantly, is Phase I followed by Phase II?

The US-China Phase I agreement does not impact the victory the American Mold Builders Association (AMBA) and its members secured in December 2019 when the president agreed to reinstate 25% tariffs on imported plastic injection molds from China. The US Trade Representative has not indicated an intent to revisit the reinstatement of the tariffs to protect the US industry. AMBA helped coordinate the filing of more than 150 comments by American companies calling for Washington not to extend an exclusion granted for the molds at the request of importers seeking cheaper Chinese molds.

The agreement with China maintains the 25% tariffs on Lists 1, 2 and 3, including the plastic injection mold tariffs, but did reduce the List 4A rate from 15% to 7.5%, mostly impacting consumer goods. The agreement allows both sides to raise tariff margins or take additional steps if they feel the other party is not fully complying with the terms in Phase I.

The top priority for the president in the talks remained increasing purchases of US goods by China. The agreement calls for an additional $200 billion of American exports over the next two years, with manufacturing accounting for $77.7 billion, agriculture $32 billion, energy $52.4 billion and services $37.9 billion. In another AMBA victory, the list also identifies Harmonized Tariff Schedule code 8480, which includes “molding boxes for metal foundry; mold bases; molding patterns; molds for bases (other than ingot molds), metal carbides, glass, mineral materials, rubber or plastics.”

While the government has not made public the exact amounts in this category China will purchase from US manufacturers, this is an important recognition of AMBA’s efforts in Washington to raise the profile for mold builders to the highest levels of government.

The Chinese, in addition to the purchase of American goods, have agreed to begin making the structural changes that many in manufacturing have long called for but which have been resisted by Beijing’s politburo. China will agree to destroy counterfeit goods, set up a civil court system for intellectual property theft and reduce tariff barriers. The US agreed to remove China from the list of illegal currency manipulators, a key source of contention.

In the movie business, Hollywood rarely makes a sequel worth watching, and few in Washington have high hopes for a comprehensive Phase II deal in the coming months. If fact, quite the contrary: Should the president publicly engage in the next round of discussions, he may set himself up for failure and erase any perceived victory by his voters over the January 15 Phase I deal.

Most longtime China watchers believe the Chinese government recognizes it must make the needed structural changes to the economy to comply with the country’s World Trade Organization obligations, but will likely do so on its own timeline. As with any negotiation, the two parties typically keep the most complicated points of contention for the later rounds. In the case of Phase II, the most complicated topics remain the elimination of state-owned enterprises, illegal subsidies and forced technology transfer. Such actions by China require a significant overhaul of its industrial strategy of the past 20 years.

Could the president secure those commitments from Beijing and verify enforcement prior to the November elections? Possible, but unlikely. While manufacturers need China to make those changes to further level the playing field, securing a Phase I deal that maintains the mold tariffs and increases purchases of US goods is an important victory – but yes, just a first step to long-term change.

The new NAFTA signed on January 29 also is a major victory for President Trump in this election year. In their January vote, 89 US senators voted in support of the bill. Bipartisan votes remain rare in Washington and those on trade are even rarer. Staunch opponents of trade agreements – such as Ohio Democrat Sen. Sherrod Brown – voted yes, and the country’s largest union endorsed its first trade measure after decades of decrying the old NAFTA.

The US and Mexico now have passed their NAFTA bills, with Canada expected to do so in March. While some had hoped for a full implementation of the new NAFTA rules by July 1, most observers expect a full entry into force date closer to the end of the year. Prior to replacing the old NAFTA, the three parties must each verify to one another that they have taken the steps, passed the legislation and written new regulations to comply with the updated trade agreement. Especially in Mexico, at which many of the labor and wage provisions are directed, it will take time to not only implement the changes but also for the US and Canada to verify completion.

The 2020 elections remain nine months away, and a lot can happen between now and November 3rd, especially in Donald Trump’s Washington. Many a fool has sought to predict what this president will do next, but one thing is for certain: He will work every day to keep trade and his January victories on the minds of voters.

Omar Nashashibi is a founding partner at The Franklin Partnership, LLC, a bipartisan government relations and lobbying firm retained by the American Mold Builders Association in Washington, D.C. He lobbies the federal government on behalf of manufacturing trade associations and advises clients on formulating business strategies to minimize risk and maximize opportunities resulting from decisions made in Washington.