US ready to squeeze China partners with ‘poison pill’ trade deals

Commerce Secretary Wilbur Ross says veto clause in deal with Canada and Mexico is ‘logical’ and could be added to future agreements

PUBLISHED : Saturday, 06 October, 2018, 12:48pm
UPDATED : Saturday, 06 October, 2018, 11:35pm

The United States is ready to add a “poison pill” to future trade agreements, aimed at exerting pressure on China, US Commerce Secretary Wilbur Ross said on Friday.

Ross said the “poison pill” provision in the recently completed pact with Canada and Mexico could be replicated with additional trading partners to pressure China to open its markets.

Under the provision in the United States-Mexico-Canada Agreement (USMCA), if any of the three countries enters a trade deal with a “non-market country” – as China has been described – the other two are free to quit in six months and form their own bilateral deal.

The effect is to give Washington a veto over Canada and Mexico’s other free-trade partners to ensure they are governed by market principles and lack the state dominance that is at the core of President Donald Trump’s tariff war against China.

“It’s logical, it’s a kind of a poison pill,” Ross said.

The US is now in the early stages of talks with Japan and the European Union to lower tariff and regulatory barriers and try to reduce its large trade deficits in autos and other goods.

If the EU and Japan signed on to provisions similar to the one in USMCA, it would signal they are fully aligned with Washington in trying to increase pressure on China, the world’s second-largest economy, for major economic policy changes.

Ross said the provision was “another move to try to close loopholes” in trade deals that had served to “legitimise” China’s trade, intellectual property and industrial subsidy practices.

Asked if the provision would be repeated in future trade deals, he said: “We shall see. It certainly helps that we got it with Mexico and with Canada, independently of whether we get it with anyone else.”

With a precedent set, it would be easier for the provision to be added to other trade deals, he said.

“People can come to understand that this is one of your prerequisites to make a deal.”

USMCA trade pact: For Canada and Mexico, throwing China under bus was a no-brainer

Huo Jianguo, a former head of research at China’s commerce ministry, said if the provision was repeated, China could face problems when negotiating trade deals with Japan and the EU.

But in the absence of a clear definition of a non-market economy, it would continue to pursue such agreements, he said.

“If we continue with our reforms, that means we are opening up our markets and should be seen as a market economy,” he said.

A European diplomatic source said that the US was sending mixed signals as to how it regards free trade, by pulling out of the Trans-Pacific Partnership and then pressing for ambitious deals elsewhere.

However, it would not be easy for the EU to enter into a new agreement with the US because of the complexities of the ongoing trade war.

Hanging over Washington’s talks with the EU and Japan is the threat of a 25 per cent US tariff on imported cars and car parts as the US commerce department pursues a study on whether such imports pose a national security threat.

The US cited national security concerns when it announced tariffs on imported steel and aluminium from a number of countries in early March.

Ross declined to discuss the timing for the release of a similar investigation into the car industry, but said Trump had said he would not impose car tariffs while the EU and Japan talks were under way.

Donald Trump’s trade wars: is Japan the next ally in the US president’s sights?

But in a signal that the probe could take longer, Ross said the commerce department was now incorporating details on car trade from the USMCA deal, including new provisions that will effectively require more automotive content to be made in the US.

Ross said Canada and Mexico were effectively “really not in a position to object to [the national security tariffs] any more because they’ve signed an agreement that says if we put them in we’ll exempt the first 2.6 million” vehicle imports from each country.

He also said Japan should take steps to “move manufacturing into the US” to cut its US$40 billion car trade surplus with the US. He declined to say if the Trump administration would seek a voluntary car export cap from Japan.

“The methodology that we’ll use will be determined by the negotiations. There are plenty of ways you can solve things,” Ross said. “We want more production of everything in the United States. That’s our theme song with everybody.”

Ross said he did not expect much movement on China trade talks until after the November 6 US congressional elections, adding that Chinese officials did not appear in a mood to talk at the moment.

Te view among some Chinese officials that Trump would be weakened by Democratic Party gains in Congress was a miscalculation, he said, because “the real farmers, the real ranchers are hanging in there” and were not likely to turn away from Trump and Republicans in Congress.

The November elections are being closely watched to see if the Democrats can wrest control of the Senate or the House of Representatives. Some of the key races are in farming dominated states and congressional districts which voted for Trump in 2016.

Ross also trumpeted the commerce department’s June settlement with ZTE Corporation, China’s second-largest telecommunications equipment maker, saying it brought an unprecedented level of change and scrutiny to the company that could be used in other cases.

ZTE will be monitored by US compliance officer for two extra years for breaking probation, judge orders

The commerce department virtually put ZTE out of business in April when it banned US companies from supplying it with components for its smartphones and networking gear for failing to comply with a deal to settle violations of US sanctions on Iran.

Under the settlement deal that allowed ZTE to resume shipments, the company replaced its board and senior management, allowing a commerce department monitor access to the company for 10 years, in addition to agreeing to a US$1 billion penalty and a US$400 million escrow payment.

“We’ve set the pattern that a huge, publicly owned company … changed its management, changed its board and permitted extreme intrusion by a foreign government regulatory agency,” Ross said. “I don’t think you’ll find anything comparable to that anywhere in the world.”

He also highlighted the current labour contract talks between US steel companies and the United Steelworkers union, saying wage increases were a likely outcome and would be a bellwether for the broader US labour market.

United States Steel Corporation and ArcelorMittal USA have been negotiating new labour contracts for about 31,000 workers represented by the union since July. A deal, however, remains elusive as workers are demanding a share in the profits from soaring steel prices.