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The Trade Guys
Tariffs on Furniture, Pharma, and Films, China at the WTO, and AGOA Expiration
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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 Phil Luck and I'm here with Scott Miller and Bill Reinsch, the CSIS Trade Guys. Thanks for listening to the Trade Guys. Today we're talking about the trade strategy of the United States and China. On the US Side we have tariffs on films, pharma and furniture. On the Chinese side we have them giving up special and differential status@the WTO. So today we'll be discussing what does this tell us about the different strategies of the US And China going forward and what it means for the rules based system. All that and more on the Trade Guys. Welcome back to the Trade Guys. I'm Philip Block, Scholl Chair International Business and Economics Program Director at csis. I'm here with the Trade Guys, Bill and Scott. And today we've got a full docket including more tariffs, WTO concessions, and the end of a preference agreement from the United States for African countries. So we're going to try to frame this also in terms of the big picture, which is what does all this say about both the US and the Chinese strategy in global trade and, and interacting with the rest of the world? Let's start first with tariffs. As always, we have tariffs on furniture, pharma and foreign films. The Trump administration this past week slapped 25 or to 50% tariffs on everything from kitchen cabinets to vanities to upholstered furniture. I'm going to start with you, Bill. What should we make of this and make sense of all this?
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B
Well, it's hard to make sense of it. Basically what Trump has done is decided that kitchen cabinets are a national security threat and he said explicitly that wood is a critical element in I guess what we're now calling the Department of War. I thought we were using mostly steel and aluminum in the war making business, but apparently we're using wood. As Phil pointed out before we began, this is going to complicate making trebuchets, but I don't think that's the primary instrument that we're using these days. I think one way to look at this is this is sort of testing out plan B in case he loses the IPA case in the Supreme Court. It's been clear for some time since he lost the first round of that back in the very end of May that they're looking for what are we going to do if we lose. And what we said on this podcast many times is that if you think you're going to win, even if you win, if you think that's a lifeline that's going to save everybody, you're wrong. Because he'll find another way to impose the tariffs, then he'll be sued again and we'll go through the same thing over and over and over again. But they seem to be testing out different statutes arguing that bathroom vanities, kitchen cabinets and lumber in general are a security threat. I think stretches the meaning of the statute beyond intent. He'll probably for the first time on one of these cases, section 232, he may be sued. I'm skeptical that they'll be able to find a judge that is willing to overrule the President on what will be the only question, which is is this stuff a national security threat or not? And judges are going to be reluctant to say the President's wrong. But I think that people will be prepared to put that case forward. So we're looking at more litigation. One of the interesting factoids of this that we looked into a little bit is whether these tariffs are stackable. One on top of the and it appears that the lumber tariff is. So in the case of Canada, which is the biggest victim of this because I think 90% of their software lumber exports come to the United States. The 10% on lumber is going to be added to the existing anti dumping and countervailing duty tariffs that are already in place on Canadian software lumber. Those total, it varies by company, but together those total around 35%. Which means that the new effective tariff on Canadian lumber is going to be 45%. The tariffs on the furniture apparently are not stackable and they will end up just being what they are. It also appears that in the case of Vietnam and the EU, they'll be 15 UK there'll be 10. They're not big exporters of furniture as far as I know. The biggest one is Vietnam and for them it'll be 25 going up to 50, which will be significant for them. There's already speculation here on the inflationary impact of this and there's some interesting year on year numbers about this. Already they've seen price increases this year compared to last year. Nine and a half percent increases in prices for living room, kitchen and dining room furniture, 4.7% for furniture, other furniture and bedding, 2.8% for household furniture and supplies. And that's before they've gone into effect. This is anticipatory price increases. So this is an area where you're going to see probably more visible price increases than you have elsewhere. We looked into last week separately the question of the effect on home sales and housing prices, because if you look inside your home, you'll see a lot of wood. And we had trouble pinning down the data. Depending on who you listen to, it's either 2% or close to 20% of the price of a house. My guess is it's somewhere in the middle. But with housing prices at historic highs anyway, even a bump up of 10% would be significant. It would probably make the housing problems that we have even worse.
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C
Yeah, couldn't agree more. No, I think there's two things I want to hit on there. Just to follow up, first point you made about stacking is really important because whether these stack or not has a huge impact on prices. I was speaking with a European official actually this morning and they were saying while there are certain things that are clarified in the Turnberry agreement, they don't actually have clarity on some of these additional 232 investigations whether they will or will not be capped at 50%. So how that shakes out is going to be super important. To your point about the anticipatory price changes, I am curious if we're going to get another what I'll call a washing machine and dryer situation, which was in 2018 there was tariffs on washing machines but not dryers. But manufacturers increased the price of the dryers as well because often sold together and they also sort of price off each other. So we might see some things that are in your kitchen remodel that aren't tariffed. But we do see in price increases even though they're not moving to another case that at least phonetically sounds similar but pharmaceuticals. SCOTT we've also seen this past week an increase in tariffs on pharmaceutical products, although there are several sort of firm level or other ways to have carve outs here. What do we see there? Again one notably here again, this is a case where this is a 232 investigation, meaning it's a national security justification potentially more justified. But how should we think about this?
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A
Scottish well, it's certainly been a long time coming and I think that the political concerns about the absence of pharmaceutical production in the US Arose out of the COVID pandemic and real concern on Capitol Hill at that time, real concern within then the Trump administration and the Biden administration. This is one way to give it some teeth is with the 232 investigation. But that shouldn't be a surprise to anybody. There has been a concern about the degree to which we're dependent on China or other not friendly exporters for pharmaceutical supply and medical supplies. So I'm interested, interested to watch the degree of company by company negotiation and flexibility. But there is a good rationale for US location of this particular activity. Pharmaceutical research, both the invention stage, which is, you know, early on isolating molecules, but also the application stages is ideally suited for a place like the US Lots of the talent that produces particularly applications research is something that the United States is actually pretty good at and we do a lot of it anyway without the pressure of a National Security 232 investigation. However, manufacturers are approaching the administration as this goes forward and saying look, we build facilities in the US all the time but you, you've got a fast timetable here and do you have any idea how long it takes to build a plant to US FDA standards in the us? Probably something like six or seven years if you can get the permits. So I know there is a Johnson Johnson facility, brand new greenfield site in the eastern part of North Carolina that's under construction. It's a major project and will bring a lot of US consumed pharmaceuticals and medical equipment made by JJ will bring them into US production. So it takes longer than many people in the administration might be satisfied with. But I think there's enough flexibility there that the message has been received, there's work underway and it's the kind of work that we ought to do in the United States if you look at our comparative advantages. Now there's the other end of the pharmaceutical debate which has to do with pricing, particularly pricing of prescription pharmaceuticals versus other developed countries in the world. We of course have this odd way of paying for our medical services, mostly through group insurance programs of one sort or another. And because it doesn't compare favorably to single payer pricing is all over the map and not particularly transparent. I think there's a broader issue that the Trump administration in first term took their attention on for a little while but couldn't really focus on. It was total lack of transparency in medical pricing. Anybody who's gotten a hospital bill, it's astonishing what the line items are and how complicated it is and how little the patient knows or even the prescriber or the professionals know about what's in that bill. So I do think the industry's been vulnerable for some time. There was some specific negotiation with Pfizer. I expect that pressure to continue. But it's odd to see both the interest in manufacturing and locating facilities here at the same time. The pressure on pricing we'll see how.
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B
It works out on Pfizer. Just a word here. The Washington Post, for those of you that get that, has an interesting article that they posted today. It'll probably be in the print edition tomorrow that suggested that despite what people may think, what Pfizer agreed to is a pretty good deal for them. The revenue, therefore going with lower prices is about 1% of their revenue. So it's not a big deal. There's a limited number of drugs where they're making this commitment and they're probably going to come out of this fairly well from a revenue standpoint, and they've really set an example as a template. It appears the administration wants to have the same negotiation with as many as 15 other pharmaceutical companies. I mean, we'll see how that rolls out. But the post interesting finding was even with the reductions that Pfizer is making in that handful of drugs, which are significant, you know, it'll be, I think for the most part like 50% from what we're paying now, the end price is still double what other people elsewhere in the world are paying. So healthcare costs are going to continue to be high here.
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C
Yeah, so that's a really good point, Bill, that just, you know, this administration seems to really want to do a sort of not only bilateral across countries, but sort of bilateral within firms as well. Scott, I want to follow up really quickly on this. So I mean, you know, of course, the impetus of this or the sort of state of justification against national security, and you noted that, you know, coming out of COVID there was a greater appreciation for sort of the risks of sort of concentrated supply chains. My understanding, though, is that this is not touching an area where there is a real sort of potential risk, which is the generic industry.
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A
Right.
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C
So, I mean, I think one of the big concerns that folks on the Hill have, Senator Young and others, is the concentration of APIs in China. Correct me if I'm wrong, but I'm just not seeing anything in these tariffs that tries to or has any prayer of solving that underlying problem.
- [11:17]
A
Well, it certainly doesn't affect generics in general. And most of us American consumers who are on medication of one sort or another, we take a lot of generics. It's the nature of the industry. That said, I do think that having facilities in the United States is the key national security issue. And I think that it's a practical matter. They focused on what they could a lot of precursor chemicals and fine chemistry is done all around the world. Fine chemistry is a global industry. It's hard to separate pharmaceutical ingredients from other kinds of fine chemistry. So the technology exists, it's mobile, it's implemented worldwide. So I think what they tried to do is use the place where there's a little bit of pricing power and a little bit of American unique capabilities, which is in the research based end of the chain, to focus their attention on that with the effect of having a pharmaceutical industry manufacturing footprint that is larger than it was before. So you can't do everything.
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B
Scott, do you buy the argument from the pharma industry they've made for years that if they have to lower their prices, they're going to cut back on R and D in the United States?
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A
No, I think they're on entirely different tracks. But I do think domestic production is what the administration was most interested in securing, and that seems to be working in terms of the incentives and the disincentives that are in place for the 232. But you're right, Phil, the pharmaceuticals industry relies on generics. We as patients rely on generics, and they're made globally. That's just the nature of that part of the business.
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C
Well onto our third phonetic F of the day, foreign films. So in addition to tariffs on furniture and pharmaceuticals, we now have also foreign films. Bill, you're going to have to explain to me what this is and more importantly, how.
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B
Well, I'm going to defer to Scott in a minute. I've learned from Trump in Trump 1.0 never to pay much attention until he says something three times. And he's said this twice now. So I'm getting to the point where I'm going to take it seriously. It doesn't make any sense from the how standpoint. What is an American movie as opposed to a foreign movie? The example I used in a conversation I had with a reporter was, look at the Mission Impossible movies. Are they American? They're made in every one of them, seven or eight different locations. They have American actors, they have foreign actors, they have foreign crews, they have American crews. I have no idea where the editing and the cutting is done or where the production is done. As I told one reporter, trying to figure that out would be mission impossible. In addition to that, since these things are streamed mostly and exported over the Internet these days, it turns out we don't even have a tariff classification for this. Trump is not a Weeds guy, you know, he's not a detail person. And he just said, well, we'll put tariffs on movies. Even the how of doing that turns out to be very complicated. Scott?
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A
Yeah, no, I think There is a technology change issue that's going on behind the scenes. Certainly movie production in the 30s and 40s was a Hollywood thing. As I understand it. Hollywood got its start because it was as far away from Thomas Edison in Rochester, NY as you could get. And Edison apparently was really quite protective of his patent rights. So the best way to innovate was to get far away from Edison where he could figure out what you were doing and get you into a patent court somewhere. Now, that may be lore, but Southern California had a long history of movie production that is still there today. There's still a film industry in Southern California and in the United States, but there has been probably 30 years worth of alternatives developed that wind up being lower cost for one reason or another, including the southeast United States, the Sun Belt here, North Carolina has a vibrant film industry, as do many Southern states. And they offer cost advantages versus the high costs of urban markets in the north, or in this case in California. But that's not new, and that's been going on for long enough. But it's also changing rapidly. The technology of production is changing. You no longer require extras and things like that. The technology for distribution is changing most radically. And here's where streaming versus actually films presented in theaters is almost an entirely different product for a different set of consumers. It's just basically digital transmission, classified as E Commerce, basically tariff free, because E commerce is terror free. And what do you do about that? I'm still not sure how this all works because that is clearly the direction that entertainment production as a general matter is moving. And it'll keep changing technologically.
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C
Yeah. So there's a few threads I want to pull on there. First, to both Bill and Scott's points, I mean, this is, you know, it's industry protection. Hollywood's having a tough time, both because of Georgia and other places, but also Toronto and other markets. So this is pretty classic protection of an industry, though the industry itself is not the classic industry to protect. But the other point, to Bill's point, entertainment is services. More and more, these are being traded digitally. That sounds like a digital services tax to me. Does that complicate administration's other priorities here?
- [16:28]
B
That's a clever way to look at it. I think it's. Yes, it's going to complicate it. It's also going to be interesting to see what statute he intends to use for this. I don't think he said. And one of the little interesting factoids for the wonks who are listening is that if he tries to use iipa, which I think you'll have to wait for the Supreme Court decision to see if he wants to do that again. But AIPA actually has a provision called the Bourbon Amendment, named after Howard Berman, who was the congressman who represented Hollywood for years from California. And he put in to IPA a provision that prohibits limiting the trade in media and information, including film. And so I don't think they can use AIPA for this provision. It'll be interesting to see if they want to argue national security for films. I mean, we've used films for propaganda in the past, but I'm not sure that other people's films are a security threat to us. But in a way, you're right. I hadn't thought about it that way, Phil, but I think you're right. It does amount to kind of a digital services tax. There's an irony there.
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C
All right, well, having spent enough time on US Strategy, we can call it that, and trade space, let's move over to China. So recently China basically announced that they'll no longer be availing themselves of the WTO developing countries status. That status provides them certain abilities that they won't be now taking advantage of. How should we think about this? Is the PRC trying to respond to the us? Are they trying to respond to broader pressures from, say, the eu? Are they simply trying to show themselves as a good steward of the multilateral system in comparison to other parties? How should we think about this?
- [18:06]
B
Well, the thing to remember about the Chinese is they never do anything gratuitously. They are better than anybody I've ever negotiated with at figuring out what's in their interest and then pursuing it relentlessly. And this is a good example of that. There's actually two issues and they split them. If you are a developing country, which is a self declared item under WTO rules, you get to decide for yourself. If you're one of those, there are benefits, the big one being what's called special and differential treatment, which generally means you don't have to adhere to a lot of the rules that everybody else has signed up for. And when you do have to adhere, you get a longer period of time in order to come into compliance. So lower levels of compliance, as in the trade Facilitation Agreement, longer periods to come into compliance. If you're a developing country. China has been the subject of a good bit of criticism over the years because they've claimed that status. And under the WTO rules, the country gets to decide for itself. Nobody can come in and say you're no, you're not. Even though that's what they may be thinking in this case, what China said, China did not say we're no longer a developing country. China continues to claim developing country status. What they said was they would not take advantage of the special and differential treatment benefits that the WTO provides. That's significant because it does two things. One, it allows them to be the good guy and by implication paint Trump as the bad guy, for which there's a lot of good reasons anyway. They don't have to paint very hard, but it allows them to tell the rest of the world that has been resentful of them claiming this status, that they're not going to take advantage of, of being a developed country. They're not going to use special and differential treatment, try to get an edge over other people and say, you know, we're the good guys, we're the people who believe in the system. At the same time, it frees them from some obligations that developed countries agreed to undertake. The most recent one is commitment from the developed countries in the WTO to commit annually to a $100 billion climate fund that helps developing countries create their own climate programs. If China remains a developing country, it doesn't have to kick into that. So they save themselves a small pile of money. At the same time, they're telling the rest of the world, we are going to be the good guys, we're going to sacrifice and not take our advantage. So you get to decide if you believe them or not. It's a good thing. I mean, they've been unreasonable in taking that advantage. Historically, they are not really a developing country in the normal sense of the term. So they get points for doing this. But to assume that it's entirely a wholehearted, gratuitous objective or action would be a mistake.
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C
Yeah, I think I couldn't agree more on that. And that's a really good point about the development fund. We'll have to see if they sort of also pay into that as well. This sort of idea of not relinquishing the status but saying you're going to relinquish the benefits. Other countries have done this as well. Interestingly, Singapore fits into that exact same category. Singapore, for reasons of wanting to remain in solidarity with ASEAN countries, they still have that status, but they say they will not take on any of those advantages. So there is some precedent for that. But really good point, Bill, about that. The last thing I'll say is I was actually speaking with a Chinese scholar a few days ago and they noted in conversations with Mofcom so the Commerce Ministry, despite how we may interpret it, they are viewing this as a relatively large concession. So I think there is probably some interest or hope that the US Administration may see it as well. Scott, do you have any thoughts on how the Trump administration might view this? Are they going to be as jaundiced as Bill and this?
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A
I don't think they'll care at all. But it is interesting to watch these sort of maneuverings in the absence of negotiations. China made really important market opening concessions when they joined the wto. And you could make the case that they were the most open, large developing nation at the time of their accession to the wto. They know how to make concessions when it is in their interest. And the market opening that took place at the beginning was very helpful to their growth and helpful to world trade. But it led to a period of time, long period, almost 20 years, where you had this major traitor, China, that didn't really need anything from the other members of the organization. I think that probably did more than anything else to drag the momentum out of the Doha development agenda. But for whatever reason, they're choosing to take this point, but they always managed to find a way to position themselves well in it. But given the Trump administration's low regard for the rules based system and the Geneva operations in particular, I don't think it'll matter to them.
- [22:39]
B
Yeah, the thing to remember always is they don't do anybody any favors. They do what's good for them. If they can let you do something that's good for you at the same time, as long as they get what they want, it's okay. I mean, a distinction from Trump, whose world is a zero sum, I win, you lose world. The Chinese can accept win win outcomes as long as they're one of the winners.
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C
Okay, great. Well, now let's go to our third continent of the day and we can think about again back to sort of how the US Is engaging with the rest of the world. While China has free trade agreements with bas, all African countries, at this point, the largest preferential trade agreement the United States has, the African Growth and Opportunity act or agoa, has expired. Expired at the same time as our government shut down. So this was a large trade agreement which basically allowed for tariff free access to several African countries. It wasn't reciprocal in that sense. It only allowed access to the US Market and only in certain goods. But its end is a little auspicious in the sense that this is another way in which the United States seems to be sort of moving away from its openness to rest of the world. I should note the Trump administration has said it supports a one year extension, but as of today, it has lapsed. Scott, what should we think about agoa? Is this a big missed opportunity? What does this say about the US Strategy?
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A
Well, AGOA had a strong political coalition behind it. It was one of the few trade agreements that had sort of excellent bipartisan support for its original creation and its renewal over the years. The problem was it never really did much for either side. And I happen to think that it was an agreement that was from another era. At one point, our preference programs were based on access to the US Apparel market, most importantly, and that access was very valuable at the time of apparel quotas, where people forget about this. But 60 years ago, clothing was actually quite expensive as a part of a household budget. It was carefully controlled by both tariffs and quotas. And the quota system then was phased out in 1990s. And the preference programs that were designed to help countries improve their export performance by giving them credits against that quota system worked pretty well. But when the quota system went away, even the tariffs were not enough to make the programs as effective as they were imagined to be. And I think that's the case with agoa. First of all, sub Saharan Africa is much closer to European markets than to the United States. So the gravity model always say gravity is not just the law, it's a good idea. And the gravity model in trade still works. Distance from your export market is still a factor in your competitiveness. And so AGOA never really provided enough edge versus the globally competitive producers of apparel and other articles that were world class. And still Indonesia and Southeast Asian exporters face a 9 or 10% tariff into the US market and still outperform many preference countries. So it's an odd business and it never really worked. It was not part of what Africa was doing. And so it's sort of flatlined over the years. It was really hard, as politically appealing as it was to people on Capitol Hill, to have something that was good for Africa. It was very hard to demonstrate it was really all that good or was making that big a difference. So I have mixed feelings about the whole thing.
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C
Yeah, couldn't agree more. In a lot of ways it was a missed opportunity in many ways. One thing I'm very curious about, we may never know. The answer is there's a question as to what the impact would it have been if it had not just been a sort of time limited preference program, but sort of in the more traditional sense, a Free Trade Agreement that sort of wouldn't expire. The evidence we see from when China finally got permanent pntr, or Most Favored Nation status, that had a really big impact, even though the tariff rates didn't change. Just the fact that Congress had to re up it every year created enough uncertainty that there wasn't a lot of investment going in. So that's a question that if we do ever get to a revised agoa, I think there'll be a lot of thinking, or hopefully will be a lot of thinking about how to actually make it more impactful next time.
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B
Well, it's really been more about investment than about trade. It's been an advantage for some African countries. Lesotho is the best example of really created an apparel industry there, which is tidy, you know, compared to the American market. But it's a big deal in Lesotho, which is a tiny country, and it keeps a lot of otherwise very poor women employed. And that's the kind of thing that's going to get shut off, because without agoa, they're not going to be competitive. But from the American point of view, it really was a signal that Africa is a good place to invest, that the United States government is interested in. It wants it to grow and prosperity, and we're going to try to stabilize the trading relationship. So you know that it's a smart place to go. The problem with that, I mean, for the Trump people, and Bob Lighthizer was explicit about this when he was the US Trade Representative, although he talked about it more in the USMCA context, but he was explicit. We don't want foreign investment. We want you to invest here. So creating uncertainty about foreign parties is fine with the Trump people, because they believe that if you're scared to invest in Africa, the consequence is you're going to keep your money in the United States, and that would be better. One big problem with that is that what's going on right now in Africa really is a contest for, in a way, global leadership, and China's killing us. They're all over the place. They're everywhere. Their investments there are not always welcome. As I said, they're not gratuitous. They only happen if they're to the Chinese benefit. But we're functionally barely there. And if you ask Africans how they see the future, where they're looking, they're looking in the direction of China. So this has foreign policy implications that I don't think the administration is considering. There's also the joke about Africa is that it's been the next big thing for the last 40 years. There will come a time when it really is the next big thing that's coming. Now they have the fastest growing youngest population in the world. Developed countries are getting old, populations are declining. The factoid I remember, the average age in Germany I think is in the high 40s. The average age in the United States is now 39. The average age in Africa is 19. It's obvious where the future lies here and we're walking away from that.
- [29:05]
C
Yeah, couldn't agree more. The stats that always blow my mind is basically the next 75 years, one out of every two people on this earth that are born will be born in Africa. Sub Saharan Africa is going to see enormous growth. By the end of the century, Nigeria will be roughly the same population as China. And to your point about investment, it's in all of our interest to have some investment in Africa because again, if you're going to have that amount of population growth, it behooves us all to have some capital along with the labor to make it productive. So on that note, we're seeing two different strategies. I would say they're hopefully both self serving, but we'll see on the US Side, China sort of trying to maybe lean into the multilateral system. The U.S. certainly not, and not renewing this preference agreement. So we'll have to see how these strategies evolve. Thanks so much guys.
- [29:51]
A
See you next week.
- [29:56]
C
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