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The Trade Guys
New Trade Deals and Framework Agreements, Poison Pill Clauses, and Thanksgiving Dinner
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- [00:01]
A
I'm Scott.
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B
I'm Bill and we're the Trade Guys.
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C
You're listening to the Trade Guys, a podcast produced by CSIS where we talk about trade in terms that everyone can understand. I'm Alex Kisling, and I'm here with Scott Miller and Bill Reinsch, the CSIS Trade Guys.
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D
Thanks for listening to the Trade Guys. On today's episode, Bill and Scott dive into the details around recent framework agreements between the United States and several countries in Latin America and Southeast Asia, as well as the recent trade deal between the United States and Switzerland. And then Scott gives us all the trade angles around your Thanksgiving meal. All that and more on today's Trade Guys. All right, Trade Guys, it's our big Thanksgiving episode. Later on, Scott will make sure we're prepped for the political debates around the dinner table by giving us all the trade facts behind your holiday meal. But before we get there, we're going to take a tour around the world to catch up on several developments from the past few weeks, starting in Latin America. Bill And Scott, on November 13, the White House rolled out a series of framework deals with Argentina, Ecuador, El Salvador, and Guatemala. What stands out about these agreements and what do they tell us, if anything, about the broader US Trade strategy at this point?
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B
Well, first, I just want to note for the record that Alex promised us all pumpkin spice lattes for this episode, since it's a Thanksgiving episode and he has not delivered.
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D
Bill, I understand you've never had a pumpkin spice latte. It's a club I'm happy to be a part of with you.
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B
Well, I don't miss it, but I couldn't resist pointing out that here I had these great expectations which are not been delivered.
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D
I'm in episode two and I've already failed you.
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A
Just another disappointment in Bill's life.
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B
So there will be opportunities to redeem yourself later on when we get closer to Christmas and we can talk about Christmas alcohol or peppermint ice cream or something like that. Anyway, the agreements, there's a bunch of them. Scott's going to talk about Switzerland and Liechtenstein. I'm going to say a few words about the Latin American ones, which are Argentina, Ecuador, Guatemala, and El Salvador. But a general comment about all these is that they have several common features. Mostly what they are not. They are not finished. They are often not entirely public. They appear not always to be on paper, they are not enforceable, and they are not legally binding. So that's a lot of things that they are not. What they are are framework agreements that leave a good Bit to the imagination. I got an interesting inquiry today from a reporter, an Asian reporter, noting that the Chinese view of what was agreed to in that meeting between Trump and Chinese Xi Jinping appears to be different from the American version of what was agreed to. And she wanted to know if that was unusual. And my answer was no. Happens all the time. And it's happened in most of the agreements that we're talking about. Uk, eu, Vietnam, Indonesia, Japan, Korea, are all cases where the two governments did not have the same version of events. Sometimes that's just the product of what happens when leaders meet, because leaders don't always get into detail and then they leave it to other people to flesh them out, and then the fleshing ends up being different. In the case of the Latin American agreements, we've got framework agreements, again, rather than actual texts. At least from what I've seen, each one is a little bit different because they're tailored to specific circumstances. In general, they all seem set the American tariff at 10%, which is about as generous as Trump gets these days. And they also involve commitments by each of the countries to take various actions that could best be described as a market opening, and those vary depending on the country. They all agreed to remove barriers. Countries that had not signed up to various international agreements agreed to sign up to them countries. They agreed not to impose digital taxes, which is something that the administration has been building into most of its agreements. They agreed, interestingly, not necessarily to eliminate all tariffs on all items, but they agreed to eliminate or reduce some tariffs on some items. In the case of Argentina, it was cattle, poultry and dairy products, but with respect to beef and pork, they just agreed to simplify registration for them. There's El Salvador in Guatemala talked about accepting US Auto standards and streamlining regulatory approvals for pharmaceuticals and medical devices. Most of them agreed to enhance foreign intellectual property protection, which varied from case to case. So the wording is not the same in every case. So it's a mixed mix bag. The interesting thing about all of them, and the interesting thing about, in addition, the Malaysian and Cambodian agreements, is that they all contain variations of what is considered a poison pill agreement and the poison pill agreement language. In the case of Malaysia, the language is if Malaysia enters into an. I mean, there's several clauses, but in the relevant one, if Malaysia enters into a new bilateral free trade agreement or preferential economic agreement with a country that jeopardizes essential U.S. interests, the United States may, if consultation with Malaysia fails to resolve its concerns, terminate the agreement and reimpose the applicable reciprocal Tariff rates set forth in the executive order last April.
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D
That wouldn't be aimed at China by any chance, would it?
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B
Lucky guess. You're exactly right. Nobody's named. But also North Korea, but we don't. That's not really a concern. It really is aimed about China. Interestingly, the Cambodia language is a little bit different. That it says the United States may terminate the agreement if the Cambodians do that. The Latin American agreements all have the same clause which says, in this case, I'll read the El Salvador one. But it's the same for all of them. El Salvador has committed to address potential distortionary actions of state owned enterprises and to address industrial subsidies that may have an impact on the bilateral trading relationship. So who does state owned enterprises? Who has distortionary actions and industrial subsidies? Alex got it right. China. So the interesting thing about this clause is that it really doesn't have a lot of meaning. The US can withdraw from these agreements anyway at any time for any reason. And if it did withdraw, Trump has already demonstrated his willingness to ignore certainly WTO rules, and in the case of these countries, Guatemala and El Salvador in particular, who are part of cafta, he's ignoring those rules and prior US Commitments and just imposing these tariffs. So there's really nothing stopping him from doing what the clause explicitly says he can do. Which means these are all kind of redundant. But it is, you know, a reminder to these countries that the United States is expecting them to follow our lead on a variety of issues. And the general interpretation of these agreements in this area has been that what we are trying to do is create by force rather than persuasion. And that's the difference with Biden. Create a network of countries that are committed to not accept Chinese economic coercion and not to accept Chinese bullying and not to accept Chinese subsidies or Chinese below market rate, non market treatment. So it's an effort to create kind of a giant united front. And we've discussed this in the past because I've made the point on other occasions that overcapacity, which is what a lot of this is about, is becoming a thing that affects a lot of economies besides ours. And so you've got a number of countries, not just the ones that I'm talking about, but India, the eu, Canada, Mexico, Turkey, Indonesia and others either taking or contemplating taking adverse tariff actions against China because of the subsidies that it's employing and the dumping of its products in their countries. This new language here is kind of an elaboration of that and an effort to enlarge what Trump is trying to do here, which is try to create kind of a wall around Chinese economic activity. I think it's too soon to say how that's going to go. Some of this language is squishy. The Cambodian one, for example, has a phrase that says consistent with national sovereignty, which is a loophole you can drive a truck through. And a lot of these all leave open the question of implementation. The even if the government says it will do something at our request, that in our experience shows that they don't always do it. It takes a while to find out they'll say they're doing it. So I'm not sure this is going to have immediate dramatic impact. But the fact that they put it in suggests that the administration is actually focused on China and is trying in its own way to try to build a wall there.
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D
Well, Scott, Bill seems a little uncertain about whether or not this will be effective or not. What's your view here?
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A
Well, look, I think that there are ways to improve the effectiveness. Something that U.S. trade Representative's office does with great rigor and at a very high quality is what they call the legal scrub. And this usually happens when a trade agreement is implemented where a US Official will go through line by line on the implementing regulation or legislation in the partner country and ensure that the commitments that were made are reflected in the text of the regulation or in the text of the law. They do it really well. It's very thorough, time consuming process. But it's one that I don't know if we're still doing these things. We have the photo op and then it's unclear what happens next. But that legal scrub is a critical element to making sure that these commitments get nailed down. And they're often quite different country to country. So I think there's real work ahead for our friends at the Trade Representative's office to make this happen.
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B
The interesting thing there is they are more nailed down with Malaysia and Cambodia where where there is actually a text, but even in the text there's squishiness consistent with national sovereignty and things like that.
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A
These countries come from very different starting positions. I mean, Guatemala and El Salvador both have free trade agreements with the United States. They were quite comprehensive. So this is layer upon layer. And so, you know, I wish them luck. But I was thinking about this from the partner countries standpoint. What is it they want?
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D
How is it playing domestically?
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A
It's rough domestically in places like Malaysia where there's still a fairly large cohort of one of the key political parties, I think the not in power it's very dedicated to import substitution and, you know, Malaysia first policies. Essentially. They've got some work to do to sell these things. I mean, clearly you want to have a good relationship with the United States. You'd want to not tread on any really tough issues at home that split the coalition. You don't want to go against technology, which they sometimes do, and you also don't want to have a setback in terms of your terms of trade versus your neighbor's terms of trade.
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B
That's a very important point, that last one.
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A
I think they've done a really good job to make sure everyone is essentially, this flat universal tariff makes for an inexpensive dollar in the United States and a modestly more expensive dollar outside. That's the net effect of it. And as long as they all get the same rates into the U.S. then we preserved competitive balance among the traders outside.
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B
Yeah, this has turned out to be really important in Asia, where the issue is not, you know, oh, it's at 15, you know, that's terrible. The real question is, if I'm Korea, am I better off or worse off than Japan? And in Southeast Asia, they're all around 2019, 2021. And that's very important because it means that in terms of their regional competitors, the playing field is level. It's not as good a playing field as it was when the average tariff was two and a half percent. But each of them is not disadvantaged vis a vis the people they compete with directly.
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A
Yeah. In terms of what's called the poison bill. Hey, look, boys and girls, China and the US Are getting a divorce. They occasionally keep it amicable and make sure that China can come in and get the furniture it needs for the new house. When the US Spouse is not there, they're trying to make things okay, less tense than they would be. But we're getting a divorce. You know, that's the way it's playing out. This is just one more emblem of it. And so that will have to deal with. But for me, overall, I'm glad that they're getting these agreements wrapped up and kind of showing some progress. But let's nail down what we've committed to. There's no bill in Congress that has to change a U.S. law in any of these. But we ought to render to writing what we think we got and what they think they gave and make sure it stays.
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B
Two things. First, can you extend your metaphor to include the children of this divorce, or do we not want to go there?
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A
That's always the hard part to talk about.
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B
Bill yeah, I think we'll skip that one. The other point, this goes back to where we began when I said these things are not legally binding and they're not enforceable. And one of the reasons why is because they've not been approved by Congress and they're not going to go to Congress for approval. And that creates a vulnerability in them. I mean, it cuts both ways. It means the administration is free to come back for another bite, which is going to happen, I think, in a number of these. But it also means that if the other country chooses not to do something that the agreement obligates them to do, we're kind of on weak ground going back to them because we don't really have a strong legal basis for insisting that they do something that they comply.
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D
Well, these are all subject to the Supreme Court's IEPA case, right?
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B
Well, the tariffs are the agreements are not before the court, just the tariffs. There's been a lot of speculation about what will happen to the agreements if the tariffs are ruled unconstitutional. Some people think that if that happens, the other countries will just tear these up and say, well, if you can't impose these tariffs on us, we're not going to pay any attention to what we committed. I think it's not going to be that simple. The other countries are going to wait and see what happens. We've already talked about this in the past that I think it's pretty clear that if the president loses, he'll go to Plan B and then Plan C and find another way to impose these tariffs. So this is not immediate relief for other countries. This week's gossip, by the way, which changes from week to week, is they're Looking at section 232 National Security Investigations as a means of Plan B, if you will. That's cumbersome, but, you know, we'll see. But I think what will happen if the tariffs are dumped is a lot of countries are going to wait and see what Trump does next before they react. But it certainly, I think, will slow down future negotiations. Why agree to something if the United States is not going to be in a position to do what it's threatening to do? Right.
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D
Well, let's shift gears to Europe now. And after getting hit with 39% US tariffs over the summer, Switzerland now has a deal to bring those tariffs down to 15% in exchange for a $200 billion investment pledge in American industries like pharma, aerospace and medical devices. The deal comes just as Switzerland reported a sharper than expected economic contraction. Scott, take the lead on this one. How big of a win is this for Switzerland? And was it worth a $200 billion pledge?
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A
We'll see how the numbers work out. Look, the Swiss are a very interesting country. My ancestors were Swiss, but we were kicked out of there so long ago, don't have any connections left, and we were disowned on the way out. So it's all good. But it's a fascinating country from a governance standpoint, which is that it really doesn't do trade agreements on a national basis, although, well, there's a referendum system that's sort of canton by canton. I noted that they have a very close relationship with Europe. Obviously they sit right in the middle of Europe. It turns out that There are about 400,000 commuters who live in Europe and work in Switzerland, or work. Live in Switzerland and work in Europe. So it's an amazing network. But they don't have a single trade agreement with Europe. They have about 120 separate agreements covering separate issues. So getting a comprehensive agreement with Switzerland has always been kind of the white whale that comprehensive FTA people are in search of. And I recall back in the Bush administration was 2006, there was actually a formal proposal for a US Switzerland trade and Investment Forum, which was supposed to lead to a US Switzerland Free Trade Agreement. And it in fact led nowhere because nobody could get the Swiss farmers to open their markets. I think the most beneficial part of that free trade agreement was our friends at the Peterson Institute produced a doorstop size volume, just a magisterial text full of tables about the wonders of a US Swiss Free Trade Agreement. And it's probably a collector's item at this point. Maybe you could pick up a copy on ebay. But that's the kind of the one material consequence of that project. And that was 2006. So almost 20 years, nothing happened. So, look, the new agreement is good for the pharmaceuticals. It gets what the President wanted, which was an investment commitment. There's already massive investment, about a half a billion dollars in stocks between the US and Switzerland. So US born direct investment in Switzerland, roughly $200 billion, and Swiss investment in the United States, roughly $300 billion. So it's a massive capital stock that already exists. Their pharmaceutical industry is world class. And in fact, in some ways it's our pharmaceutical industry. There's massive cross investment that exists in that industry, and that's an important one for the national security reviews that the administration's been conducting. So I think that's all good. The commitments to additional investment ought to be in the Swiss government's and the Swiss industry's interest. So I think it will be good for both sides, but it's a deal. This is the practical part of Trump trade agenda that he almost never gets credit for is do you want to stick with comprehensive FTAs that go nowhere? Or how about you cut a deal where you could cut a deal, you get some benefit from it and go back again if he didn't get enough. To my mind, hats off to Team Trump for getting something done with Switzerland.
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B
Well, I think Scott's analysis of the history is very good. When I was at the nftc, were involved in trying to get the Free Trade Agreement across the finish line unsuccessfully, and it actually came up twice. It was an issue in the George W. Bush administration and things fell apart because the United States not quickly, but eventually discovered the Swiss were not prepared to make any concessions on agriculture. And then it came back in the Obama administration at the Swiss initiative. They brought it up, they approached the United States about it, and actually they approached the NFTC about it because we had been involved the first time. And my question was, well, is anything different now than it was the last time? They said yes, but they meant no. Yeah, they meant no and nothing ever came of it. So I think this time I give Trump some credit. It appears they did make some agriculture concessions, not across the board, but on some things. And of course, there's the investment commitment as well. And don't forget, Liechtenstein is part of this as well. And so that's not a major player in U.S. trade relationship. But not irrelevant by any means. They are one of the largest world exporters of false teeth, as it happens. Not that I have any of theirs.
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A
Well, aren't you glad you listened to the trade guys? We'd have never known that.
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B
No factoid. Number one is they have a very competitive fake tooth, fake teeth, dentures industry.
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A
But it's also, it's a country with a very sophisticated banking system. A lot of wealth is there and so a lot of investment originates in Liechtenstein, which is of great interest to the Trump administration and to Americans.
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D
Well, I think everybody's going to need their fake teeth as we head into Thanksgiving this week. And this is what I've been looking forward to all week, to hear from Scott on all the trade angles around Thanksgiving. Scott, it's an all American holiday, but tell us what's actually on the dinner table this year. I have a sense you're going to tell us it's more global than many of us would otherwise expect.
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A
Well, Having been an advocate for open markets for a long time, I always look for ways to point out to people how trade makes your very own life better. And trade improves a lot of things. It raises incomes almost everywhere you practice it. It spreads innovation. There's some real benefits for free exchange with other parties, people from somewhere else in the world. But there's a lot of things, even on a uniquely American celebration like American Thanksgiving, where the best known products on the Thanksgiving table, like the turkey and the cranberry, are definitely North American or American originated products, trade makes things better. First, it makes it taste better. Most spices are imported, so something like allspice, which is used in a lot of Thanksgiving recipes, turkey rubs and pumpkin pies and lots of different things use. Allspice doesn't grow in the United States. It requires a sort of equatorial climate. And it's grown now in Central America. Nutmeg comes from Indonesia. There's a number of the ingredients that just make the food taste a lot better. It'll be pretty bland without those spices. But also, don't forget the specialty products that make for a really special presentation. Coffee, tea, wines and spirits, cocoa, those kinds of things. The other difference that trade makes versus my youth is freshness. I mean, I remember Thanksgiving, and of course, I grew up in the 1950s and 60s in the Midwest when canned food was just what you ate, you know, that's what you had.
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D
Well, it still kind of is in the Midwest.
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A
Yes, the store. Strawberries in the grocery store in May, and otherwise it was in the canned food section. And of course, a lot of recipes are prominently made from traditional canned goods. Not to criticize that, I love some green bean casserole with Campbell's cream of mushroom soup. It's the wonderful binder that sticks everything together on Thanksgiving. And it's about as American as you could get.
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D
It's a staple at our house in Ohio over Thanksgiving.
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B
And fried onions scattered on top. Don't forget those.
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D
Oh, they're delicious.
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A
Ooh, you got that. The Dirky fried onions. And of course, don't forget Jell O Salad, which confused my children to no extent. But with all that said, it's the fresh fruits and vegetables that make an amazing experience. Look at a photo of any produce section of any grocery store in America versus 50 years ago. And the bounty that is available every day to Americans only exists because of trade, because there's not much in season in November in North America. There just isn't. And so that's one of the wonders. It turns out that a lot of these American products also have supply constraints. And so we import a lot of pecans this time of year. Now, pecans are grown in America. Of course they are. Pecan pie is my favorite. But in order to beat the demand, a lot of imports come into the United States to make sure everybody can have their slice of peon pie. So in a very American holiday, it's my favorite holiday because it's the fewest expectations outside of showing up and having a great meal. But that meal, in my mind, is better because of trade. And like a lot of things in our life that we seldom think about.
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B
Now, what is noteworthy this time around is the administration, I think eight months late, has figured out that maybe tariffs on stuff that we don't grow here is a bad idea. Trump has spent the last nine months referring to Federal Reserve Board Chairman Powell as too late Powell. This is a better example of too late. Why they didn't remove tariffs on coffee, bananas, the spices you referred to mangoes last April baffles me.
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A
Yeah, they've always been MFN0 duty because they had no US source.
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B
Right. And putting the tariffs on did not create a US Industry. We still don't grow coffee here because we can't. So they should have done this in April. It's nice that they're doing it in November. It will make people's Thanksgiving holidays maybe a little bit cheaper. There seems to be competing evidence about whether overall Thanksgiving dinner prices are up or down. I've seen analyses on both sides of that question, but getting rid of the tariffs will certainly help. But too late. Here we are.
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D
It's encouraging to hear that Bill's pumpkin spice latte may be a little cheaper next week when he's with his family.
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A
That's right. We hope all our listeners do have a lovely Thanksgiving weekend. Enjoy the holiday and every once in a while think about how trade makes your life better.
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B
And we'll be back afterwards because trade problems are not going to miraculously go away because of Thanksgiving dinner.
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D
Everybody have a safe and joyous holiday. And I want to give a special thanks to Bill and Scott for being such great collaborators on this show, but also to the people behind Trade Guys, our producer Gina Kim, Evan Brown, and so many others from the CSIS economics team role, so appreciative of their hard work every week. And we look forward to seeing everybody in December on the other side. So take care and travel safely.
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C
You've been listening to the tray guys, a csis podcast. For more audio content, visit csis.org podcast.
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D
Thanks for tuning in.