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After the Midterms: Expect More Trade Disruption, With Added Scrutiny

While Democrats took control of the U.S. House of Representatives in Tuesday’s midterm elections, the direction of U.S. trade policy isn’t likely to change much, although greater scrutiny of methods and intent can be expected.

That was the sentiment expressed by panelists during Wednesday’s Apparel Importers Trade & Transportation Conference in New York City, citing the generally bipartisan agreement over the need to convince China to reform its trade regime, the pending U.S.-Mexico-Canada Agreement (USMCA) and Trump administration proposals to negotiate free trade pacts with the European Union (EU), Japan and the U.K.

“Last November we talked about how the president had been all talk and no action on taking protectionist measures,” said David Spooner, Washington counsel for the U.S. Fashion Industry Association, which organized Wednesday’s conference. “The dam has since burst since January.”

Spooner, a former Commerce Department official who also served in the U.S. Trade Representative Office, said it was important to note the next chairman of the House Ways & Means Committee will be Richard Neal, D-Mass., who is considered a moderate Democrat and “tends to be fairly good on tax and trade issues. So in terms of a committee we deal with regularly, we’ll be dealing with a friendly face.”

As far as the 10 percent China tariffs that have been imposed by the White House and the additional 25 percent threatened to be added in January, Spooner said, “It’s highly unlikely that the House will move to rein in the president’s tariff-making authority or to repeal the 301 tariffs. But the House will make the president’s life miserable. We’re almost sure to see hearings on the product exclusion process and how it’s not working and have hearings on how and why the White House decided to impose tariffs on steel and aluminum.”

Spooner, who is also a partner at Barnes & Thornberg, said the budget for the Commerce Department and the Department of Homeland Security’s Customs & Border Protection (CPB) agency runs out on Dec. 7, and he predicted a budget for the next fiscal year will not be passed with a Democratic majority in the House and continued political animus with President Trump.

Also speaking on the panel, dubbed “What Comes next: Washington Perspectives on China, the Midterms and Trade Disruption,” Erin Ennis, senior vice president of the U.S.-China Business Council, noted that at the moment there are tariffs on roughly $260 billion worth of Chinese goods entering the U.S. and, in response, China has put tariffs on about $127 billion on U.S. exports.

“China’s justification for going tit for tat on this is that they at least equal the rough percentage of trade that the U.S. had put tariffs on,” Ennis said.

She noted the tariffs were primarily triggered by China’s transgressions in policing intellectual property rights and technology transfer policies, “issues that the business community and our trading partners have generally agreed work needs to be done.” However, she added, “There is not a lot of agreement on whether tariffs are the right way to address those problems, certainly not among our trading partners. As a consequence, among those companies that have been effected by the retaliatory tariffs, many of them are losing market share to the European, Japanese or Korean competitors. We think that will likely continue as long as the tariffs are in place.”

Ennis said if the next tranche of tariffs goes into effect, there won’t be many more in goods from the U.S. that China can tax, so it will likely turn to other retaliatory means.

“China has indicated that it will pursue both quantitative retaliation, as well as qualitative,” she said. “That is the kind of threat that makes companies concerned.”

For example, she noted it has always been difficult to obtain a business license for a foreign firm in China, and if Beijing chooses to pick out U.S. firms for delays without actually saying it, that’s problematic.

“Part of the problem with the situation we’re facing right now is the lack of trust between both sides,” Ennis said. “From China’s perspective, they feel they have gone into negotiations in good faith where they have gotten at least a handshake agreement from their United States counterpart only to then have that agreement undermined or ended by the president.”

She and Spooner noted the potential for some kind of resolution could occur on Dec. 1, when Trump is scheduled to meet with Chinese President Xi Jinping in Buenos Aires. However, Ennis said, “It’s a long shot. So as companies, you should probably hope for the best, but plan for the worst.”

John Pellegrini, customs counsel for the United States Fashion Industry Association (USFIA) and an attorney at McGuireWoods, warned if the next round of tariffs goes into effect and includes apparel, many Chinese producers will attempt to transship goods to the U.S., but the CBP will be monitoring that closely. What will also happen is importers seeking to share the burden of the added cost with its customers.

Ennis agreed that in the short term, if tariffs are put in place on apparel from China, companies will seek to share the added costs with their customers. If it looks like the tariff wars are going to be long term, she feels companies are going to shift their sourcing plans to avoid the added costs.

“I share everyone’s pessimism about the tariffs going away, partly because there’s this dynamic in place about the Chinese are very concerned about losing face, and the administration has put the Chinese in a position of making it very hard to offer compromises without appearing that they lost face,” Spooner said. “But I wouldn’t discount the fact that the president could meet with the Chinese at any time and declare victory and the tariffs will go away. The Chinese could offer modest concessions and the White House could say what a great deal it is.”

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