Las Vegas Sun

October 15, 2018

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Q+A: Geoffrey Gertz:

Expert: Nobody’s winning on tariffs

Sept. 18 turned out to be an opportune day to speak with Geoffrey Gertz.

Gertz, who studies the global economy and development at the Brookings Institution, was visiting UNLV that day and was watching as President Donald Trump announced $200 million in new tariffs on Chinese imports and China retaliated with $60 million in new tariffs on U.S. goods.

Gertz, a University of Oxford graduate whose policy work has been featured in such publications as The Washington Post and Vox, sat down with the Sun to discuss the tariffs, the North American Free Trade Agreement and other issues related to trade and economics. Edited excerpts of the conversation follow

Who’s winning in this back-and-forth on tariffs?

I don’t see a lot of winners. Taking a step back, the bigger question is: How is the U.S. -China relationship going to play out? There’s actually been pretty widespread agreement that the U.S. needs a new approach. Over the past 20 to 30 years, the kind of underlying philosophy on U.S. economic policy toward China is that we’re going to welcome them into the World Trade Organization, we’re going to bring them into the global economy, and through this long process, they’re going to liberalize and become more of a market-based capitalist society. Maybe, hopefully, they’ll even politically liberalize. But generally, we’d bring them into the community of nations and they’d start to act like everybody else. And what we’ve seen in D.C. over the past year or two is quite a dramatic change in that philosophy, which says it no longer seems like China is on a trajectory to become a more market-based economy. If anything, the state’s playing a bigger and bigger role in directing the Chinese economy. So the underlying paradigm of “let’s bring China into the system and get them to act like us,” that just isn’t working. So that raises the question of what we should do next. And I don’t think anybody has a good answer to that.

Do you agree with that?

There’s certainly a need for re-evaluating the strategy. If you went back 30 years ago, it wasn’t the wrong decision to welcome China into the global community. But right now, it’s not working out. China is not becoming the liberal market-based economy we wanted them to become. But there’s very much not consensus on what Trump’s doing about it. So the tariffs in general aren’t very popular. They’re sort of unlikely to get us to a more sustainable U.S. -China relationship. It’s not clear what the endgame is. In particular, what Trump seems to want to get back from China is a commitment to buy a certain amount of, say, agricultural products from the U.S. , or some transactional on-off approach, whereas really what we need is bigger thinking about how we are going to recalibrate this relationship. Trump sees it in his political interests to constantly be in the news as saying, “We’re fighting for American farmers and workers and everybody else. ” He’s playing the politics of continual negotiation, continual escalation, then announce a deal, then more escalation, then announce a new deal, and so on. That’s likely to persist.

Have other approaches been suggested and are there any you find more viable than others?

The short answer is no. This shift in the consensus is quite recent. In the past year, we’ve seen a rapid shift, so we’re in the early stages of where do we go from here. We’ve been premised on the idea of ever-closer engagement, where we want to encourage more and more interaction between the U.S. and Chinese economies. But what would strategic disengagement look like?Maybe there are some reasons where if it’s incompatible to have the U.S. and Chinese economic models working so closely together, then how can we have that relationship become less intertwined?So where we go from there is a big question. The one area where there is a lot of support is on investment screening. The Committee on Foreign Investment in the United States screens incoming foreign investment for national security reasons. Historically, this has been things like, let’s say you want to buy a wind generator that happens to sit next to a U.S. Army base. If you’re a Chinese group wanting to buy it, CFIUS will say that’s a national security liability, and we don’t want you having high technology next to a military base. What we’re doing now is expanding what national security means. We’re thinking of how economic security fits into national security, and taking a broader long-term strategic view of what national security means. Where we see this most clearly is in Silicon Valley and in high-tech. There are lots of worries about how Chinese investors are buying up high-tech companies, which in 20 years becomes a strategic liability to the U.S. that this technology is in Chinese hands. Congress just passed a bill to strengthen this investment screening process, which is going to kick in next year. But that’s one areas where we’re starting to put up some walls, some frictions, between the U.S. and Chinese economies and saying it’s more in the United States’ interests to keep some distance between the two.

What’s your assessment of the argument that the tariffs will lead to more manufacturing in the U.S. ?

So many of our goods, particularly our consumer goods, come through China that it won’t be easy to produce those goods in the U.S. in the short term. What’s happened in Asia is you have these regional production chains. For your TV, your iPad, whatever, some parts come from South Korea, some parts come from Vietnam and so forth, and the final assembly is often done in China and then the product is shipped here. So you have these integrated production chains, and it’s hard to pull one stage out of the middle of it. Longer term, it’s an interesting question. It kind of gets back to the broader strategic questions of how much the U.S. is going to be an economic power in Asia. How much can the U.S. balance against China in its own neighborhood?This is what the Trans-Pacific Partnership was trying to do: to get the U.S. fully integrated into that region. Realistically, we’re never going to equal China in its own neighborhood. It’s too big a power and will have too much pull. If we want to source from Vietnam instead of China, potentially that could happen. But you have to think from Vietnam’s point of view: How are they weighing their relationship with the U.S. versus its relationship with China, and what are the dynamics of that?There are some interesting dynamics there, where a lot of these countries welcome a strong U.S. presence and want to use the U.S. to balance against China, but at the same time, they need to maintain their relationship with China as well. So cutting China out of this altogether isn’t really going to work.

Many of the tariffs have already been walked back. What are some of the more significant examples you’ve seen?

In general, what we’ve seen during the Trump presidency is a huge mismatch between the rhetoric and the actual policy implementation. So we see that there are constantly big announcements — there are big new tariffs coming, and this is dramatically different from anything that’s happened in the past. And then slowly, in the weeks or months after, things get walked back and we sort of exempt some countries. It comes back to what I see as Trump’s goal here, which is constant turmoil — this constant churn on trade policy. The steel and aluminum tariffs are where we saw this the clearest. There were rumors in the news and leaks for a long time that these tariffs were coming, then eventually it was announced that we were going to impose these tariffs on all countries. Then, they say we’re actually going to grant exemptions for the European Union, NAFTA partners, Australia and Korea — the set of countries that account for roughly 80 percent of U.S. steel and aluminum imports. Then over time, we’re renegotiating these exemptions, and sometimes you hit people with new tariffs and sometimes you take them off. It’s a constant back-and-forth, and it makes it difficult to follow. There’s so much action up here in the rhetoric, then far less action on the ground.

Let’s shift away from Asia. Where do we stand with Canada?

This is a key period for NAFTA. The three partners have a deadline at the end of this month. Where that comes from is the Mexican president’s last day in office is the end of November, and probably for Mexican domestic political reasons, they want the outgoing president to sign a new agreement rather than the incoming president. So that means we want to sign by Dec. 1, and working back from the U.S. congressional calendar, we need to have a released full text at least 60 days before a signature. So that means the end of September is when we need a full text. There’s a U.S. -Mexico deal in principle, and there are ongoing U.S. -Canada talks and trilateral talks. It’s really a tossup as to whether a deal gets announced or not. But I’d say that even if a deal is announced by the end of this month, there are still huge obstacles to it actually coming into play. In the U.S. , it will be the next Congress that will have to ratify this deal. I don’t see either congressional Republicans or Democrats being highly incentivized to vote for it.

Why not?

For Republicans, trade is the one issue where they’ve often had a lot of distance with Trump. And interestingly, some of the (anticipated) changes in the new NAFTA are kind of closer to traditional Democratic preferences on trade. Having said that, Democrats voting for what seems like a victory for Trump seems unlikely. The U.S. trade rep has gone into these negotiations saying he wants to upend the politics of trade and thinks he can sign a new trade deal that both Republicans and Democrats can sign onto. In a sense he’s right, in that traditionally you’ve had Republicans vote for free trade and Democrats be more skeptical. He has sort of changed the politics a bit to give more weight to traditional Democratic concerns.

Trump has faced a lot of blowback from Republican lawmakers from farm states on trade. Where else is it coming from?

In general, the chamber of commerce Republicans, the business lobby groups, are opposed to it. One particular issue is on the investor state dispute settlement rules, which let companies sue foreign governments. The new NAFTA looks likely to substantially scale back those investment rules. It seems likely that the rules on autos are going to lead to less auto trade overall. Again, it’s hard to know without the text, but it generally moves away from freer trade and toward more kind of managed trade.

There seems to be a parlor game in the media where we ask experts when they think the next recession will happen. I’m going to play it. What do you think?

I don’t think predicting recessions is a good game to play. (Laughs.) What we can say is we’ve now had a very long recovery period — a slow one, but a long, sustained economy. So there’s probably a recession coming at some point. Trying to predict when that will be and what will cause it is almost impossible.

Speaking of the media, are there areas where you think the media are not paying enough attention to global economics and trade? Do you ever think, “Why is everybody looking this direction, when we should be looking over here?

”A little bit. I was talking before about the mismatch between the administration’s rhetoric versus the policy, and I think that’s an area where the media has really struggled. Not unreasonably, the media is used to the idea that when you have a big policy announcement, something big is happening on the ground. But that isn’t true in this administration. My favorite example of this was a few months ago when at a Cabinet meeting, there was an off the cuff remark where Trump said he’d directed Wilbur Ross to look at the U.S. rejoining the TPP. And this was literally on the front page of the New York Times and Washington Post the next day, saying this was huge. To me, it was obvious that this was nothing and wasn’t going to happen. There was no reason to take it seriously; it was just sort of made up.

Why was it so obvious?

If you look at the history of how Trump has acted in office, it was obvious. I think his first week he announced he was going to impose a 20 percent tax on Mexican imports to pay for the wall, for instance, and a week later we forgot about that. Then he announced that we were going to withdraw from NAFTA, and a week later we forgot about that. So it’s constantly, “I want to make headlines on policy, but I don’t really care what happens down the line. ”So I think the media has been too quick to follow every zig and zag of trade policy, missing the underlying continuity. That makes it really tough. You have this major announcement, but at that time nothing really happens. But over time some of it does get implemented. It makes it very hard to track what’s happening on the ground. But figuring out that disconnect between the rhetoric and the actual policy is kind of where I’d press the media.