Posts Tagged ‘protectionist’

Germany Goes More Protectionist to Keep China From Buying Technology Companies — “This is about public order or national security.”

August 7, 2018
Germany plans further foreign investment rules aimed at curbing China’s predatory practices

Threshold to veto deals will be lowered as concern grows over Chinese acquisitions

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Protectionist sentiment has been growing in Germany since the €4.5bn acquisition of Kuka, an industrial robotics company, by Chinese appliance maker Midea in 2016 © Bloomberg

By Guy Chazan in Berlin


Germany is to increase its powers to block foreign investments by significantly lowering the threshold for deals that can be subject to ministerial veto, in a further sign of growing protectionist sentiment towards Chinese acquisitions.
Berlin can veto deals that involve the purchase of at least 25 per cent of the equity of a German company by an entity from outside the EU, and only if they endanger public order or national security. Ministers now want to reduce that threshold to 15 per cent.Peter Altmaier, economics minister, told the newspaper Die Welt that the threshold would be lowered “so that we can check more acquisitions in sensitive sectors of the economy”. Die Welt said the new bill could come into force this year.“We want to be able to take a much closer look at companies in the defence sector and in critical infrastructures, and certain other civilian technologies that are relevant to security, such as IT-security,” Mr Altmaier said.No automatic alt text available.Germany is increasingly intervening to stop Chinese investments, particularly in companies operating in critical infrastructure, amid fears that some of its most advanced technology is ending up in Chinese hands.

Last month, the government directed state development bank KfW to take a 20 per cent stake in 50Hertz, a high-voltage power network operator, to pre-empt the stake’s acquisition by a Chinese state investor.

Last week a Chinese company, Yantai Taihai, withdrew its bid for Leifeld Metal Spinning, a small German machine tool manufacturer that specialises in materials for the aerospace and nuclear industries, after the government moved to block the deal. It would have been the first use of Germany’s foreign investment law to veto a mergers and acquisitions transaction.

Germany’s tougher stance is part of a global backlash against Chinese takeovers. President Donald Trump is expected to sign into law measures to expand the powers of the Committee on Foreign Investment in the US (Cfius), an inter-agency panel that reviews foreign investments for national security threats. Meanwhile the UK recently unveiled a 120-page policy to enhance government powers to prevent foreign purchases of security-sensitive British assets.

China has also hit back. Its recent move to scupper a $44bn bid by chipmaker Qualcomm for a Dutch rival was seen by many experts as retaliation for a string of decisions by Cfius to reject Chinese acquisitions of US companies.

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Protectionist sentiment has been growing in Germany since the €4.5bn acquisition of Kuka, a leading industrial robotics company, by Chinese appliance maker Midea in 2016.

Germany’s wariness about Chinese investment has increased since the emergence of Made in China 2025, President Xi Jinping’s 10-year plan to transform the country from a low-cost manufacturer into a high-tech power dominant in 10 advanced industries.

“They have made clear they will pursue that goal with every means available,” says Mikko Huotari, deputy director of Merics, a think-tank focused on Asia.

Germany’s main business lobby, the BDI, gave a cautious response to the proposed change to the law. “Germany is reliant on its open investment climate,” said Joachim Lang, the group’s managing director.

He said capital was increasingly coming from dynamic emerging markets and “a smart economic policy must take care to ensure that Germany remains attractive for investors”. Nearly 3m workers in Germany are employed at companies that are owned by foreigners, he added.

Mr Lang said the lower threshold must “be focused strictly on protecting national security”.

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This is the second time in little more than a year that Germany has tightened its foreign investment law to expand its ability to block deals deemed to endanger national security.

Last year the law was broadened to apply to all companies operating in “critical infrastructure” such as energy and water supply networks, electronic payments, hospitals and transport systems. It also gave the government longer to investigate takeovers, expanding the timeframe for such probes from two to four months.

The new version of the law will also cover companies involved in the interception of telecoms, cloud-computing services, control systems for power plants and power networks, the provision of drinking water or sewage disposal, systems for cash supply and credit cards and the settlement of securities transactions, among other sectors.

“Of course we want companies to continue to invest in Germany,” Mr Altmaier said. “But we also have a duty to protect the interests of security and public order.”

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West begins to close door on Chinese investment

August 1, 2018

Beijing perceives it is harder to do US deals — and that Europe is also tightening up

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Chinese investment into North America plunged to a seven-year low in the first half of 2018, according to a report this month © FT montage; Dreamstime

By James Kynge in London, Sherry Fei Ju in Beijing, Guy Chazan in Berlin and Shawn Donnan in Washington

Nearly 40 years after China began opening its economy to the west, the US and Europe are taking steps to close their doors to Chinese investors.

Large Chinese state-owned funds and companies are feeling the freeze as the US, the UK and Germany signal a cooler attitude towards Chinese acquisitions of vital corporate assets. Beijing also announced proposals to expand the range of foreign investments covered by China’s national security review process.

So far, Chinese investors perceive the US as much more restrictive than Europe.

“We are concerned about our planned investments in the US because of the trade friction [between Washington and Beijing],” said Tony Dong, senior executive at the China Structural Reform Fund (CSRF), a Rmb350bn ($51bn) private equity fund that reports to the country’s cabinet.

Mr Dong said the fund was negotiating roughly 40 investment deals in the US and Europe, mostly in high-tech sectors. He hoped that about 10 to 12 deals would be successful but was worried that protectionist sentiment in the US could take a toll.

“Investing in Europe seems to make more sense to us now,” he added. “Europe is still an important trade partner of China, and we are concentrating our efforts to drive more win-win investments in Europe.”

The west’s toughening stance on China marks a sea-change in Beijing’s 40-year-old contract with the world. Starting in December 1978, Deng Xiaoping, the then-leader, initiated an era of “reform and opening up” under which Beijing welcomed foreign investment and introduced free market reforms.

The essential corollary was that the west would ensure its markets remained open to China. Now the west’s doors are starting to close.

A report this month by Rhodium Group, a consultancy, found that Chinese investment into North America plunged to a seven-year low in the first half of 2018. Total Chinese investments in the US and Canada reached just $2bn, down 92 per cent from the first half of last year.

Europe, by contrast, absorbed some $12bn in completed Chinese investments — six times the North American inflows. In addition, Europe received $20bn in announced Chinese M&A deals, vastly exceeding the $2.5bn in announced M&A in North America during the first half.

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“The overall trend among Chinese companies does seem to be shifting from the US to Europe, especially if there could be obstacles or too high of a barrier from the US side and if there are better opportunities and lower barriers in Europe,” said Xia Aimin, an executive at LONGI Solar, a Chinese solar panel manufacturer.

But chill winds are also starting to blow in some European capitals. “Things have now become very difficult with US-related deals,” said a Hong Kong-based M&A banker, who declined further identification. “Europe is also showing a recent trend of being tightened up.”

The UK unveiled a 120-page policy this month to enhance government powers to prevent foreign purchases of security-sensitive British assets. Although “China” is only mentioned once in the document, UK officials confirmed that it was largely focused on Beijing’s dealmaking.

In Germany, the government last week directed KFW, a state development bank, to take a 20 per cent stake in 50 Hertz, a high-voltage power network operator so as to pre-empt the company’s acquisition by a Chinese state investor.

This week, Berlin is expected to block a Chinese takeover of Leifeld Metal Spinning, a small machine tool manufacturer that specialises in materials for the aerospace and nuclear industries. It is unprecedented for German ministers to intervene in such a way.

Protectionist sentiment has been growing in Germany ever since the €4.5bn acquisition of Kuka, a leading industrial robotics company, by Chinese appliance maker Midea in 2016.

The government subsequently toughened up Germany’s foreign investment law, expanding its scope to cover all “critical industries”. Ministers can now block any deal that “endangers public order or security” when 25 per cent or more of a German company is for sale.

In the US, Donald Trump is expected soon to sign into law measures to expand the powers of the Committee on Foreign Investment in the US, the secretive inter-agency panel that reviews foreign investments for national security threats.

The legislation is a product of a bipartisan consensus in Washington that China’s state-driven strategy to buy up technology and US companies represents a profound threat to the US economy.

Such proposals could represent a hammer blow to China’s ambitions, particularly because its “Made in China 2025” blueprint — an industrial initiative that has unnerved policymakers in both the US and Europe — requires overseas acquisitions to catapult the county to the forefront of global technological prowess.

“We simply can’t let China erode our national security advantage by circumventing our laws and exploiting investment opportunities for nefarious purposes,” John Cornyn, a Republican senator from Texas who led the push for the new legislation, said last week. “The backdoor transfer of technology, know-how, and industrial capabilities has gone unchecked for too long.”

The investment efforts are part of a bigger fight by the Trump administration against Beijing’s efforts to lead the world in technologies such as artificial intelligence and robotics.

Mr Trump’s trade war against Beijing, and his threats to impose tariffs on all $500bn of goods the US imports from China each year, are aimed at changing Beijing’s intellectual property practices and responding to what the US claims has been theft on a grand scale of US intellectual property by China in recent decades.

But Pang Zhongying at the Ocean University in Qingdao added that the Chinese government “should not over-react” to the tougher stance by US and Europe.

“Countries have a sovereign right to conduct [national security] investigations,” he said. “If China takes revenge by imposing stricter inspections on foreign investments, it will destroy previous efforts to open up and attract overseas capital.”

https://www.ft.com/content/2003d460-94bf-11e8-b747-fb1e803ee64e

 

China’s Role in the World Trade Organization

July 28, 2018

When the World Opened the Gates of China

Was it a mistake for the U.S. to allow China to join the World Trade Organization? Assessments of the 2001 deal often determine positions in today’s bitter trade debate.

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With a congressional vote looming in the spring of 2000, President Bill Clinton mustered his best arguments for why lawmakers should approve his proposed deal for China to join the World Trade Organization.

Adding China would link Beijing to Western economies and reduce the government’s ability to control its vast population, he said in a speech that March at Johns Hopkins’s School of Advanced International Studies. “By joining the WTO, China is not simply agreeing to import more of our products, it is agreeing to import one of democracy’s most cherished values, economic freedom,” Mr. Clinton said. “When individuals have the power not just to dream, but to realize their dreams, they will demand a greater say.”

Mr. Clinton’s idealistic rhetoric played well among most of Washington’s elites, but a trade lawyer often dismissed as a protectionist, Robert Lighthizer, was skeptical. As he had warned in a New York Times op-ed a few years earlier, if admitted to the WTO, mercantilist China would become a “dominant” trading nation. “Virtually no manufacturing job in [the U.S.] will be safe,” he wrote.

Mr. Lighthizer is now the U.S. Trade Representative, President Donald Trump’s chief negotiator on global trade. In the administration’s view, allowing China to enter the WTO in 2001 was a historic mistake that cost the U.S. millions of jobs and trillions of dollars in accumulated trade deficits. The U.S. is now bypassing WTO rules and threatening Beijing with tariffs on up to $500 billion of imported goods.

The moves against China are part of Mr. Trump’s wider effort to upend longstanding U.S. policy on trade and also the international institutions and agreements that govern trade. Whether the administration’s shift is a much-needed corrective or a disastrous reversal depends in large part on how one views the original decision to bring China into the international trade regime.

Left, Chinese Premier Zhu Rongji and President Bill Clinton conferred in April 1999, with trade a key topic.
Left, Chinese Premier Zhu Rongji and President Bill Clinton conferred in April 1999, with trade a key topic. PHOTO:GETTY IMAGES

Given China’s enormous presence in the world economy today, it’s difficult to remember how economically backward the country was in the early 1990s. Inflation hit 24% in 1994. Nearly 60% of the population lived on less than $1.90 a day. Bicycles jammed the streets, not cars.

Chinese reformers saw their country’s entry into the WTO as a way to modernize. To join, China would have to reduce sky-high trade barriers and allow a greater role for foreign firms. State-owned firms would finally face competition, and private enterprise, they hoped, would soar. “WTO membership works like a wrecking ball, smashing whatever is left in the old edifice of the planned economy,” said Jin Liqun, China’s vice minister of finance at the time.

The WTO is a membership organization. To get in, China had to cut deals with all the members but most importantly with the U.S., the world’s dominant economy. U.S. officials thought they were driving a hard bargain. The deal forced Beijing to slash tariffs, permit foreign investment in Chinese industries and give foreign banks more freedom to do business. For a dozen years, Beijing also agreed, the U.S. could block Chinese imports that threatened specific American industries.

In exchange for the Chinese concessions, the U.S. just had to surrender its annual rite of deciding whether to grant China “most favored nation” status as a trading partner, ensuring full access to the American market. China’s allies in Congress had succeeded each year in getting the measure through anyway, but by allowing China into the WTO, the annual reviews would end.

Mr. Clinton also linked China’s WTO accession to the democratic vision of President Woodrow Wilson, who dreamed, he said, of “a world full of free markets, free elections and free peoples working together.” The growth of the internet, in particular, would undermine Beijing’s control and make China more like the U.S., Mr. Clinton argued. (He declined to comment for this article.)

Many shared this hopeful view, pointing to the examples of South Korea and Taiwan, which had shaken off dictatorships as they became more prosperous. Henry Rowen, chairman of the Reagan administration’s National Intelligence Council, forecast in 1999 that China would “join the club of nations well along the road to democracy” in 2015, when he expected its per capita GDP to reach $7,000. As it turned out, China hit that mark two years sooner than he had predicted, but even now, it is far from being a democracy.

A coalition of labor, environmental and human-rights groups opposed China’s admission to the WTO.

A coalition of labor, environmental and human-rights groups opposed China’s admission to the WTO. Robert Scott, an economist at the Economic Policy Institute, a labor-backed research group, cranked out alarming numbers. In 2000, he forecast that nearly a million U.S. manufacturing jobs would be lost to Chinese competition.

Donald Trump was absent from the debate. In 2000, he toyed with a run for president and wrote a campaign book, “The America We Deserve,” which called China the U.S.’s “biggest long-term challenge.” But he didn’t mention the WTO decision. He did say he would appoint himself U.S. Trade Representative and negotiate better deals.

Truck carriers at the Port of Long Beach, Calif., loading and offloading cargo containers from China and other countries last March.
Truck carriers at the Port of Long Beach, Calif., loading and offloading cargo containers from China and other countries last March. PHOTO: BOB RIHA, JR./GETTY IMAGES

After the deal, foreign investment in Beijing mushroomed from $47 billion in 2001 to $124 billion a decade later. The lower investment and import restrictions required of China as part of its WTO entry also encouraged multinationals to rush in, as did the prospect of serving the vast Chinese market. China became the world’s manufacturing floor, and Chinese imports to the U.S. soared.

Looking back now, whose expectations for the wider impact of the deal proved most accurate? On the issue of U.S. manufacturing jobs, critics made the right call. A study by the MIT economist David Autor and colleagues calculated that Chinese competition cost the U.S. some 2.4 million jobs between 1999 and 2011, battering factory towns that made labor-intensive goods.

That result haunts one of Mr. Clinton’s senior China negotiators, Robert B. Cassidy, who believes that his work only helped big businesses, not ordinary workers. “When you retire you like to think that you accomplished a lot,” he says now, at age 73. “What kind of benefit did I produce from working around the clock? I was incredibly disappointed.”

Nor did China open up politically, as many WTO advocates had hoped. Beijing tamed the internet by limiting its use to commerce, technology and social media. It blocked political organizing by threatening and sometimes jailing those who posted critical comments. More recently, it has turned the internet itself into an instrument of the state by using it to identify and track dissidents. “It’s Orwellian,” says Jerome Cohen, a New York University law professor and China specialist.

Here’s How China Can Escalate a Trade War With the U.S.

China has pledged to retaliate against U.S. tariffs in “equal scale and equal strength.” In addition to tariffs, here are three ways Beijing could hit back at Washington. Photo: Getty Images

Greater economic growth led to greater political control, said Mark Wu, a professor at Harvard Law School whose research focuses on China and the WTO. China’s leaders believed that they needed unchallenged authority to carry out economic reform in the face of opposition from entrenched interests. According to Mr. Wu, the point of freer markets, in their view, was to encourage competition and prevent the system from becoming sclerotic, not to bolster individual rights.

As for President Clinton and his allies in the WTO debate, they can point to real gains from integrating China into the global economy. According to the World Bank, some 400 million Chinese have been lifted from extreme poverty—that is, from living on less than $1.90 a day—since 1999. And during the global recession of 2008 and 2009, China was able to go on a spending spree that supported global demand. Chinese building projects sucked in iron ore, coal, oil and other commodities, boosting other developing nations.

Today, technology companies tap the Chinese market to boost profits and defray research costs. Last year, about 20% of Apple Computer Inc.’s sales came from China, up from about 12% in 2011. The low inflation associated with cheap imports, together with Chinese purchases of U.S. government bonds, has also helped to hold down interest rates, making it cheaper for Americans to buy not only clothes and electronics but also homes and cars.

Economic reform has waxed and waned in China. The WTO deal was supposed to curb the power of China’s state-owned enterprises, which Beijing pledged would operate on commercial terms only. By some measures, that has occurred. Nicholas Lardy, a China expert at the Peterson Institute for International Economics, estimates that state-owned firms now account for just 20% of China’s industrial output, down from double that share in 2001.

But there has been a reversal in the past few years, according to Mr. Lardy. State investment in the economy is growing as much as three times faster than private investment, he says. State firms have once again become the heart of Chinese economic policy-making.

Mr. Trump touching a wheel loader made by Caterpillar while touring a Made in America product showcase with Vice President Mike Pence on the South Lawn of the White House in July 2017.
Mr. Trump touching a wheel loader made by Caterpillar while touring a Made in America product showcase with Vice President Mike Pence on the South Lawn of the White House in July 2017. PHOTO: CHIP SOMODEVILLA/GETTY IMAGES

Beijing is counting on such firms to become global leaders in semiconductors, electric vehicles, robotics and other high-technology sectors and is funding them through subsidies and financing from state banks. These initiatives have raised protests from U.S. companies that now find themselves competing with the Chinese state. In solar and wind power, for example, state investment created a glut that drove many foreign companies out of business.

China never fully followed through on its WTO pledge to allow foreign banks to operate in its local currency. It also pledged not to force foreign firms to transfer their technology, but today about one in five companies—many in aerospace and chemical industries—say that they’ve been pressured to do just that in order to do business in China, according to a July survey by the American Chamber of Commerce in Shanghai.

At a WTO session this month, China’s vice minister of commerce, Wang Shouwen, denied that China twists arms to gain technology. Arrangements on technology are “absolutely contractual behavior based on voluntary business deals,” Mr. Wang said in July, according to a Geneva trade official.

China has also maneuvered to its advantage within the WTO. In one case it blocked exports of scarce raw materials needed by high-tech industries, hurting foreign firms. When the WTO ruled against Beijing on one set of restrictions, it removed the barriers—but then blocked another set of raw materials. “The core issue isn’t whether China lived up to the vast number of obligations, but whether it lived up to the spirit” of the deal, says Prof. Wu.

Other Chinese efforts to win an advantage in trade have happened outside the WTO’s purview. For years after joining the international trade regime, Beijing kept its currency undervalued by 30%, boosting Chinese exports by making them cheaper abroad, says Brad Setser, a currency expert at the Council on Foreign Relations. Former U.S. officials say that China and other WTO members wouldn’t have agreed to a provision punishing countries for such measures.

Charlene Barshefsky, who was Mr. Clinton’s U.S. Trade Representative, says that her successors could have used the WTO to sue China to live up to its agreements. She points in particular to provisions that protected U.S. industries from escalating Chinese imports. President George W. Bush turned down all import-surge cases brought by American companies, and President Barack Obama approved just one. Neither brought any cases on their own.

A former senior Bush administration official said that “the national interest was not served by raising protectionist barriers.” Growth in imports, the former official says, doesn’t mean that China has acted improperly. Obama officials made similar arguments.

Mr. Lighthizer, who is now helping to call the shots on U.S. trade policy, says that if the WTO deal had failed in Congress, “uncertainty would have kept the trade deficit from growing and probably would have saved millions of manufacturing jobs.”

But other WTO opponents believe that congressional rejection wouldn’t have made much of a difference for the U.S. With its vast supply of industrious, low-wage workers, China would have continued to rise as an export powerhouse, they say. Indeed, in the 15 years before its WTO entry, U.S. imports from China grew at a faster rate than in the 15 years after, albeit from a much lower base.

Keeping China out of the WTO might have delayed by a few years the damage to U.S. communities from low-cost imports, though it’s not clear that the extra time would have helped. In the 17 years since China’s entry, the U.S. has poured few resources into worker retraining programs or other social safety net programs for laid-off workers. The programs in which it did invest had mixed results.

“I don’t know that [a defeat for the Clinton WTO deal] would have made a difference,” says David Bonior, a former Democratic House Minority Whip, who led the congressional fight against it.

Ms. Barshefsky still believes in a multilateral approach to China. She would revive the Trans-Pacific Partnership, a free-trade pact between the U.S. and 11 Pacific Rim nations, which Mr. Trump discarded on his first working day in office, and extend it to other Asian nations and Europe. The members could negotiate new rules of trade, cutting tariffs and covering state-owned enterprises, import surges, subsidies and other issues relevant to China. “Then China would need to make a decision,” she says. “It can come on board, or it can decide it doesn’t want full access to 60% of the global economy.”

Mr. Lighthizer has a different view. The U.S. should go it alone and threaten China with heavy tariffs, he says, largely leaving the WTO out of the mix as an adjudicator of U.S. grievances.

“The notion that our problems with China can be solved by bringing more cases at the WTO alone is naive at best and at worst distracts policy makers from facing the gravity of the challenge,” his agency said in a January 2018 report. Instead, the USTR said, the U.S. must rely on its own economic muscle.

“Ultimately, that’s all you have anyway,” Mr. Lighthizer says.

Appeared in the July 28, 2018, print edition as ‘When the World Opened The Gates of China.’

World Economy Feels the Bite From Trade War

July 25, 2018

Protectionism is slowly starting to weigh on the global economy.

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From demand at factories to company profits and prices consumers are paying, the tit-for-tat trade battle U.S. President Donald Trump started with China and the European Union is starting to show up in numbers. And it’s still early days, with Trump saying Tuesday that “tariffs are the greatest,” a warning that he may not let up until he gets what he wants.

The latest signs of the fallout came in activity reports from Japan, Europe and the U.S., as well as anxious words from companies facing an additional uncertainty and having to decide between taking a hit to their profit margins or jacking up prices. Many manufacturers are also facing higher raw-material costs, another squeeze on earnings.

Harley-Davidson Inc. on Tuesday cut its profit margin forecast, citing tariffs. The iconic motorcycle maker was caught in the crossfire of the trade war last month when it announced plans to shift some U.S. production overseas, prompting attacks from Trump.

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Dutch electronics firm Royal Philips NV Chief Executive Frans van Houten says an escalation of tariffs may mean it has to pass on costs to customers, and Whirlpool Corp. said rising raw material costs hurt results in some of its markets in the second quarter.

For the global economy, which was enjoying its best spell in years, there’s a sense that the period of synchronized global growth is at an end. The U.S. has got a temporary shot in the arm from tax cuts, but growth is cooling in China, a number of emerging markets are dealing with a currency sell-off, and Europe has been slow to recover from a winter-battered start to the year.

According to Abby Joseph Cohen, advisory director at Goldman Sachs, global growth will continue into 2019, but it’s moving into a slower phase. A trade war on top of that would be a further weight.

‘Very Uncomfortable’

“What is so hard to quantify is the impact not just on demand but on costs and on supply-chain disruption,” she said on Bloomberg Television. “What we have now are anecdotes more than anything but this is what we need to be watching. Clearly if there were an all-out trade war, it would be very difficult for investors to focus very directly just on the fundamentals, the geopolitical environment would be very uncomfortable.”

In the 19-nation euro area, IHS Markit’s monthly survey showed growth softened in July on weaker new orders and deteriorating confidence. Factory activity in Japan grew at the weakest pace since 2016 and, in the U.K., where Brexit is another complication, manufacturing output expectations weakened, as have investment intentions.

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Cars ready for export but going nowhere….

The Markit reports come just days after central bankers and finance ministers from the Group of 20 economies said that trade tensions are threatening global growth, echoing multiple warnings from around the world.

In China, concern has reached such a level that authorities on Monday unveiled a package of policies to boost domestic demand to cushion the economy from the fallout from the trade dispute.

Read More:

  • Is EU Friend, Foe or Both? We’ll See When Juncker Meets Trump
  • China Unveils New Measures to Aid Growth Amid Trade Uncertainty
  • It’s Getting Harder for Companies to Escape Trump’s China Duties

The euro-area composite Purchasing Managers Index for manufacturing and services fell to 54.3 from 54.9 in June, a sharper drop than economists had forecast. A measure of expectations fell to a 20-month low.

“Given the waning growth of new business and further slide in business optimism, the outlook has also deteriorated,” said Chris Williamson, chief business economist at Markit. For manufacturers, the survey saw trade worries “intensify markedly,” he said.

The pressure on the economy may only be beginning, and EU Commission President Jean-Claude Juncker is traveling to Washington this week in an effort to ease tensions. He won’t come unarmed. The EU has vowed to retaliate against any import duties, and China has also said it will match American sanctions on its exports.

Related Story: Inflation Expectations Rise at Factories Along U.S. East Coast

In the U.S., the PMI report showed continued growth in private-sector activity, but a second straight drop in goods export orders. There was also a record surge in prices charged and more supply-chain delays.

“Trade frictions have clearly become a major cause of concern, especially among manufacturers,” Williamson said. “Firms have become increasingly worried about the impact of tariff and trade wars on demand, prices and supply chains.

— With assistance by Mark Evans, Harumi Ichikura, Tom Keene, and Francine Lacqua

https://www.bloomberg.com/news/articles/2018-07-24/it-s-getting-real-euro-area-growth-slows-as-trade-fears-mount

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Whirlpool loved Trump’s tariffs. Now it’s struggling

“The global steel costs have risen substantially, and in particular, in the US, they have reached unexplainable levels,” Bitzer told analysts. “Uncertainty” around additional tariffs and global trade has disrupted Whirlpool’s supply chain and heightened pricing pressure.

Whirlpool and rivals, such as LG and Samsung, have increased prices on washing machines since the tariffs went into effect. That led some people to pass up a new purchase. Washing machine prices in June were up close to 20% from a year prior, according to the Labor Department.

https://money.cnn.com/2018/07/24/news/companies/whirlpool-washing-machines-trump-tariffs/index.html

Draghi Warns Risks From Trade War May Be Understated

June 29, 2018

European Central Bank President Mario Draghi warned European Union leaders that an escalating trade war between the U.S. and the world’s biggest economies may have a larger impact than policy makers and investors currently expect.

Mario Draghi Photographer: Jasper Juinen/Bloomberg

Rising tensions could erode confidence to an extent that is difficult to gauge, Draghi told the 27 heads of government from the bloc at a summit in Brussels on Friday. The complexity of intertwined global supply chains could magnify the impact on the world economy, he said, according to a person familiar with the discussion, who asked not to be named as the debate wasn’t public.

Draghi’s latest comments come days after U.S. president Donald Trump threatened to deal what could be a damaging blow to the German economy by imposing a 20 percent tariff on car imports from Europe. The risk prompted the EU to react with a joint statement on Friday, vowing an unwavering response “to all actions of a clear protectionist nature.”

The ECB has repeatedly warned about the threat protectionism poses to growth, but Draghi’s assessment contrasts with a relatively sanguine approach by some financial-market participants. Citigroup special economic adviser Willem Buiter said in an interview with Bloomberg Television on Friday that fears of a trade war are overblown and the economy could be in for a boost within months as those concerns fade.

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Europe already faces challenges including populism and divisions between member states in areas such as migration and the deepening of euro-area integration. Draghi told leaders that uncertainty and lower confidence are having a negative, visible impact on private investment already, and urged them to complete institutional overhauls of the currency bloc, including a joint financial backstop for the resolution of ailing banks.

“Make sure that it works and that it works soon,” Draghi said.

https://www.bloomberg.com/news/articles/2018-06-29/draghi-is-said-to-warn-risks-from-trade-war-may-be-understated

Peter Navarro’s radical transformation — From Free Trade to Trade War — Alarmist or Realist on China?

June 25, 2018

People think of Peter Navarro, the top White House trade adviser, as President Trump’s mind-meld on tariffs — the most hardline protectionist in the White House. But Navarro used to preach very different ideas in his early career as an economist.

The bottom line: In his 1984 book, “The Policy Game: How Special Interests and Ideologues are Stealing America,” that’s no longer in print — Axios got a copy from a university library — Navarro sounds a lot like the very administration officials he’s sparred with on trade policy. And he argues that tariffs will inevitably send the global economy into crisis.

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We asked Navarro what prompted the radical change in his views, and he explained how he went from a free trader to an economic nationalist. In response to “The Policy Game,” specifically, Navarro told Axios:

It borders on the comical that Axios would spend so much time on a book written 34 years ago and completely ignore the insights of my later works like the 2006 Coming China Wars, the 2011 Death By China, and the 2015 Crouching Tiger.  Together, these books explain at length why the globalist Ricardian free trade model is broken and urgently needs fixing in the name of both the economic and national security of the United States.
— Peter Navarro
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From the book…

“The clear danger of this trend [protectionism] is an all-out global trade war; for when one country excludes others from its markets, the other countries inevitably retaliate with their own trade barriers. And as history has painfully taught, once protectionist wars begin, the likely result is a deadly and well-nigh unstoppable downward spiral by the entire world economy.
If the world is, in fact, sucked into this spiral, enormous gains from trade will be sacrificed. While such a sacrifice might save some jobs in sheltered domestic industries, it will destroy as many or more in other home industries, particularly those that rely heavily on export trade. At the same time, consumers will pay tens of billions of dollars more in higher prices for a much more limited selection of goods. Sacrificed, too, on the altar of protectionism will be the very heart of an international world order that since World War II has successfully changed the aggressive struggle among nations for world resources and markets into a peaceful economic competition rather than a confrontational political or military one.”
— “The Policy Game,” pg. 55

There are multiple passages in “Policy Game” that directly argue against Navarro’s current positions. Navarro’s go-to argument defending the White House’s trade moves has been national security. In a June New York Times op-ed, he wrote:

“President Trump reserves the right to defend those industries critical to our own national security. To do this, the United States has imposed tariffs on aluminum and steel imports. While critics may question how these metal tariffs can be imposed in the name of national security on allies and neighbors like Canada, they miss the fundamental point: These tariffs are not aimed at any one country. They are a defensive measure to ensure the domestic viability of two of the most important industries necessary for United States military and civilian production at times of crisis so that the United States can defend itself as well as its allies.”

But Navarro’s own book topples that argument as well:

“On the benefit side, protectionism within certain basic industries like autos, steel, and electronics helps to create and sustain an industrial base that, in times of war or national peril, can be shifted to defense purposes, However, this national security argument — and the existence of any benefits resulting from protecting these industries — can be legitimately called into question for several reasons.
First, the existence of any sizable benefits rests on the assumption that import competition in our defense-related industries would not only reduce the size of these industries but also shrink them to the point where they would be too small to support our defense needs. The threshold of danger is a matter of some dispute. How big, after all, do our auto, steel, or electronics industries have to be to keep our borders safe? In spite of this uncertainty, few analysts would argue that import competition is likely to push a nation with as large and mature an industrial base as ours anywhere close to that threshold.
Second, it is highly possible that our defense capability might actually be enhanced — not damaged — by import competition. Without the umbrella of protectionism, our defense-related industries would be forced to operate at lowest cost, engage in more research and development, aggressively innovate to stay one step ahead of the competition, and modernize their plants at a faster pace. Thus, while import competition might shrink these industries, they would be leaner, tougher, more efficient, and more modern and in all likelihood outperform a bigger and inefficient (protected) version of those same industries.
On the national security cost side, the major effect of protectionism is to threaten the stability of the international economic order through a global trade war…”
— “The Policy Game,” pg. 82

Navarro lauded the impact of tariffs on saving American jobs in a May op-ed in USA Today, writing:

“There can be no better way to make America — and American manufacturing — great again than to start to rebuild those communities of America most harmed by the forces of globalization. These new facilities will stand as shining testimony to the success of tough trade actions, smart tax policies and targeted worker-training programs.”

But he warned against the harmful longer-run effects of tariffs on jobs in his 1984 book:

“American protectionism threatens employment and profits in the export-dependent nexus because it invites retaliation from our trading partners …
From these direct and indirect effects, it is clear that over time, the major benefits of protectionism — more jobs and higher profits — are largely and perhaps completely offset by a reduction in jobs and profits in export and linkage industries and in those industries vulnerable to the ‘end run.’ Therefore, the argument that protectionism serves as a jobs and income assistance program must be discounted.”
— “The Policy Game,” pg. 79-80

And Navarro has emphasized that tariffs won’t hurt American consumers, saying on CBS’ “Face the Nation” in March that the Trump administration’s moves’ effect on the prices of consumer goods will be “negligible to nothing.”

In 1984, Navarro held a very different view:

“The biggest losers in the protectionist policy game are consumers. Even here. however, ‘consumers’ do not constitute a monolith, for there are several different consumer categories.
Bearing the greatest burden of protectionism are American retail shoppers who pay over $70 billion annually in higher prices (and reduced consumption) for products ranging from autos, bicycles, and color TVs to shoes, shirts, and cutlery.”
— “The Policy Game,” pg. 65

Go deeper: Navarro explains his journey from globalist to protectionist — in his own words.

Source:https://www.axios.com/peter-navarro-free-trade-globalist-the-policy-game-book-7e2739be-104b-41cf-a5b6-986ac66f213a.html

Related:

Trump Tariffs Are Just a Blip in the March of Free Trade — In The Longer Run, China is The Greatest Risk

June 8, 2018

Is the age of free trade coming to an end? It sure feels that way, with the U.S. levying tariffs against its allies, the Chinese not budging from their mercantilist system, Brexit on track, and authoritarian governments on the rise. The good news, however, lies outside the realm of politics: The long-run trend is one of greater interconnectedness, at least for traditional goods and services.

Dawn will come again.

Photographer: SeongJoon Cho/Bloomberg

Here’s why I am still (mostly) an optimist about the future of trade.

First, the changing nature and greater complexity of international supply chains makes effective protectionism hard to pull off. To cite a simple example, foreign steel is an input into many American products sold abroad, such as cars. If tariffs or quotas restrict the importation of foreign steel, American automakers will face higher costs, and they will find it harder to export. Policy makers might like to think that tariffs can target foreign interests with precision, but that has never been less the case than now.

Second, we have been down this protectionist road before, in the 1980s under President Ronald Reagan, who imposed limitations on Japanese auto imports and tariffs on Japanese computers and televisions. In 2002, President George W. Bush imposed tariffs on steel imports. Whatever you think of those policies, they did not reverse the longer-run trend toward more cross-border trade. Over time, the economics proved more potent than the politics, and those restrictions were removed.

Third, and perhaps most important, human beings around the world are tied together more closely than ever before. In particular, migrants from emerging economies now live in many different countries in unprecedented numbers.

Why does this matter? Well, the numbers on international trade suggest that distance is usually a greater barrier to trade than are tariffs, a result from “the gravity model.” To put it concretely, the U.S. trades far more with Canada than with Australia, even though those two countries have broadly the same economic profile. The reason isn’t mainly about the costs of transportation (water transport is pretty cheap), but rather the U.S. has better networks with Canada than with Australia. Canadians are more likely to have school experience, business contacts or friends in the U.S., and vice versa, because of proximity. That encourages subsequent business ties and trade.

A lot of the recent cross-border migration is planting a hugely positive, pro-trade legacy that will yield dividends for decades to come. The Chinese, Indians, Nigerians and many other groups around the world will continue to build economic connections, even when the countries involved aren’t always so geographically close. I expect the positive trade gains from these connections and personal networks will outweigh the downside from some higher tariffs in the meantime. Ultimately the opportunities are there, and the biggest problem is the lack of human talent to execute on them.

I do think there is a major threat to free trade today, but hardly anyone is talking about it, at least not in the U.S.

I am not so much an optimist about free trade in China. The Chinese government may make marginal concessions to limit the scope of a trade war, but I don’t think it will let in the major American tech companies anytime soon. Their government obsesses over controlling the flow of information, and if only for national security reasons it won’t liberalize technology or communications. More than ever before, information flows and trade flows are inseparable.

The internet shows some signs of breaking down into separate networks, connected only imperfectly. The Chinese “Great Firewall” has proved robust, and recently the European Union has moved toward creating its own set of stringent privacy and data protection laws, such as the new General Data Protection Regulation standards. Sitting here in Norway for a conference, I find I am unable to access many American websites, such as the Chicago Tribune, which are not (yet?) GDPR-compliant. There is thus a danger that the internet will become carved into three or more separate systems, to the detriment of trade, data flows and eventually personal  connections.

Even on this issue, I am relatively optimistic because I think markets will find ways to connect the various balkanized networks, more or less seamlessly, perhaps using more advanced versions of today’s VPN or blockchain technologies. Still, for all the talk about President Donald Trump endangering the international economic order, in the longer run the combination of China and the internet is the greater risk. It won’t help much to have China – slated to become the world’s largest economy – firmly committed to censorship and tech restrictions.

The internet as an open, well-governed commons, is one of today’s most significant public goods, but exactly who or what is going to keep it that way? In the broader sweep of world history, we’re probably not going to remember this era for its temporary uptick in steel tariffs.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Tyler Cowen at tcowen2@bloomberg.net

To contact the editor responsible for this story:
Stacey Shick at sshick@bloomberg.net

https://www.bloomberg.com/view/articles/2018-06-08/for-sale-u-s-rule-of-law-china-s-zte-the-first-customer

Another Sad Day For U.S. Trade, Relations With The World

June 1, 2018
I analyze export-import data, connecting it to trade policy, life  Opinions expressed by Forbes Contributors are their own.

President Trump pumps his fist to the crowd as he arrives at Ellington Field Joint Reserve Base in Houston, Texas on Thursday. (Photo by JIM WATSON/AFP/Getty Images)

Forbes

The good news is that people are talking about trade. It makes a guy like me a little more topical at dinner parties.

The bad news is, we are talking about trade for all the wrong reasons.

The most recent affront is President Trump’s indefensible decision Thursday to impose steel and aluminum tariffs on national security grounds against countries previously treated like allies, countries that have largely fought on our side in the last two world wars as well as a several countries that didn’t but that have been among our most loyal friends for more than half a century.

Let’s remember where this started: China was “dumping” too much steel and aluminum on world markets, depressing prices.

There have been other poorly reasoned moves, and I will get to some of those, but let me start by saying that I have tried to give President Trump the benefit of the doubt since he took office. Every president deserves that.

So, I tried. When I could, anyway.

It didn’t start well. On his first full weekday as president, Trump withdrew the United States from the Trans-Pacific Partnership and I just couldn’t find anything good to say. To date, that remains  the worst, most consequential policy decision he has made.

Some of his critics will argue that pulling out of the essentially voluntary Paris climate accords was worse, leaving the United States as the world’s only country not part of it, while still others will point to the more recent decision to walk away from the Iran peace accords, even though Iran was in compliance. A few might nominate the decision to move the U.S. embassy from Tel Aviv to Jerusalem.

Trust me, it’s the T.P.P. decision. That was an important free trade agreement seven years in the making, one that sought to dilute rising Chinese influence. All the other nations that were part of the negotiations have subsequently signed it.

But there have been instances where I have been able to give the president the benefit of the doubt, even as fellow proponents of increased trade have not.

When Trump said he wanted to renegotiate the North America Free Trade Agreement, after calling NAFTA the worst treaty ever during the campaign and subsequently vowing to walk away from it on numerous occasions, the approach was and remains un-presidential but I didn’t think it was a terrible idea to take another look at a treaty that had been in place for a quarter century. A lot has changed since the first President Bush negotiated the treaty and his successor, President Clinton, pushed it across the finish line with the help of Republicans in Congress. So, I reasoned, why not update it?

Today, as the NAFTA negotiations appear stalled due largely to one or two largely unpalatable U.S. positions, Trump announced that tariffs on steel and aluminum go in place against Canada and Mexico.

On China, when he complained about intellectual property issues and the nation’s continued reliance on the “developing nation” crutch, I had no objections. Reasonable complaints, I thought. Yesterday, the White House announced, as previously threatened, that it will be placing 25% tariffs on at least $50 billion in Chinese imports. The stated purpose is to reduce the U.S. trade deficit, rather than push toward protecting intellectual property rights.

When he got into a verbal scuffle with Canada’s president, Justin Trudeau, over whether the United States had a trade deficit with Canada or not, I took Trump’s side even though he somewhat inexplicably chose to admit he didn’t really know. Although the slings and arrows directed northward have been more benign than to most U.S. allies, Trump included Canada in the steel and aluminium tariffs. I don’t see that helping in the NAFTA negotiations.

When he questioned why automobile tariffs between the United States and Germany are not equal, I thought it a reasonable question (though wondered if the answer is more complex). Germany, our No. 3 market for auto exports thanks to Mercedes manufacturing in Alabama and BMW manufacturing in South Carolina, is now subject to the steel and aluminum tariffs as are the rest of the European Union nations. Those cars, as they rely on foreign steel but made by American workers, will now be more expensive.

Egged on by a trade triumvirate that is as decidedly opposed to trade as any in the post-World War II era, Commerce Secretary Wilbur Ross, U.S. Trade Representative Robert Lighthizer and Director of Trade Policy Robert Navarro, Trump is now lighting a match to the world order that has, while imperfect, done more to improve the human condition more rapidly, than at any time in history. Remember, the first two are long-time advocates of defending the U.S. steel industry from foreign competition through government intervention while the latter is an avowed and unapologetic China basher.

One of the president’s few cordial relationships with a head of state to date has been with Japanese Prime Minister Shinzo Abe. The steel and aluminum tariffs against Japan went into effect today.

W e are increasingly isolated as a nation by a president who came to politics as a builder and developer and now does little more than demolish. He has no plans to build. He talked of being opposed to multilateral deals and preferring bilateral treaties but there are no negotiations underway. Think I’m too harsh? Quick, name the United States’ strongest ally. Sure, Israel’s Benjamin Netanyahu is often in agreement with the president but the roster gets pretty thin from there.

If this isn’t a trade war, it’s pretty close to one. And if it is, there’s no one on our side. I wish I could be more optimistic.

https://www.forbes.com/sites/kenroberts/2018/05/31/another-sad-day-for-u-s-trade-relations-with-the-world/#7b47b04b501c

Agree? Disagree? Email me. Or follow me here or on LinkedIn or Twitter, or watch my “Trade Matters” series on WorldCity’s YouTube channel

Trump’s Steel Destruction

June 1, 2018

He starts a needless trade war with America’s best friends.

Canadian Prime Minister Justin Trudeau speaks during a news conference in Ottawa, Ontario, May 31. He said: “These tariffs are totally unacceptable.”
Canadian Prime Minister Justin Trudeau speaks during a news conference in Ottawa, Ontario, May 31. He said: “These tariffs are totally unacceptable.” PHOTO: PATRICK DOYLE/ASSOCIATED PRESS

So much for Donald Trump as genius deal-maker. We are supposed to believe his tariff threats are a clever negotiation strategy, but on Thursday he revealed he’s merely an old-fashioned protectionist. His decision to slap tariffs on steel and aluminum imports from Europe, Canada and Mexico will hurt the U.S. economy, his own foreign policy and perhaps Republicans in November.

In March Commerce Secretary Wilbur Ross dangled temporary exemptions to 25% steel and 10% aluminum tariffs to extort trade concessions from U.S. allies. Mr. Ross withdrew the exemptions on Thursday, saying the U.S. “was unable to reach satisfactory arrangements” with Canada, Mexico and the European Union. He means they didn’t unilaterally surrender.

Mr. Ross announced the tariffs under Section 232 of the 1962 Trade Expansion Act ostensibly to circumvent the World Trade Organization. WTO rules let countries adopt tariffs to protect national security, but Canada, Mexico and Europe are hardly a threat.

Canadian steel and aluminum are actually integral to U.S. national defense, as Commerce’s Section 232 reports acknowledge. Mr. Trump complained that Lockheed ’s F-35s cost too much, but now he’s going to make U.S. fighter jets and other weapons more expensive, which could give Russia an advantage in international arms sales. Brilliant. Another irony is that Mr. Trump has denounced China for using national security as a pretext to promote domestic industries like semiconductors. He’s essentially doing the same.

American businesses rely on complex cross-border supply chains that take time and money to change. Most will have to internalize the tariff costs, which will mean raising prices or hiring fewer workers and paying lower wages. The tariffs also create uncertainty as businesses petition Commerce for product exemptions while delaying investment. Note to Mr. Trump: Regulatory uncertainty was a big reason growth was so slow during the Obama years.

Taxing steel and aluminum imports will make U.S. manufacturers less competitive. Prior to Thursday’s announcement, U.S. steel prices were up 40% this year and nearly 50% over the European benchmark. How does punishing American manufacturers square with Mr. Trump’s goal of making more cars in America?

Mr. Ross has dismissed the impact on consumers, but a 25% increase in input costs is nothing to sniff at. Companies use imported steel and aluminum in everything from cars to beer cans to Hershey’s kisses wrappers. The Federal Reserve in April reported that a maker of tractor trailers said that it “can’t raise prices as fast as material costs.” A toy manufacturer in the Northeast that uses a thin-gauge aluminum foil said the tariffs had raised its prices three-fold.

Then there’s the larger trade fallout, not least to Nafta. Canada provides 43% of U.S. aluminum imports—more than twice as much as China and Russia combined. Mexico and Canada together account for about a fifth of U.S. steel imports compared to China’s 2% and Russia’s 9%. As Nebraska Senator Ben Sasse tweeted, “You don’t treat allies the same way you treat opponents.” On trade Mr. Trump treats them worse.

Nafta is already in jeopardy due to excessive U.S. demands that include a wage mandate on autos and a five-year sunset. Canadian Prime Minister Justin Trudeau said Thursday that he recently offered to visit the White House to close a Nafta deal. But Vice President Mike Pence told him he’d have to accept a five-year Nafta sunset. Mr. Trudeau rightly said no Canadian leader would agree to such a self-defeating provision.

Instead, other countries are retaliating. Europe has teed up tariffs of up to 50% on $3.3 billion of U.S. products including bourbon, motorboats, cranberries and playing cards. Canada plans to hit up to $12.8 billion in products including U.S. steel, yogurt, hair lacquers, beer kegs and sailboats. Mexico announced tariffs on U.S. steel, lamps, pork, apples, grapes and cheese. Many items on the tariff lists overlap because they target states that Mr. Trump won and House districts where Republicans have competitive races.

All of which means that President Trump’s gambit could backfire politically. Mexico is America’s biggest apple export market. Washington Rep. Dave Reichert says apple and pear exports to Mexico increased by 70% after Nafta. Wisconsin produces more than half of the nation’s cranberries whose biggest export markets are the Netherlands and Canada.

Democrats have bought billboards in California’s Central Valley denouncing the impact of Mr. Trump’s trade policies on farmers. Even steel manufacturers will take a hit since Canada buys about half of U.S. steel exports while Mexico imports about 40%. The steelworkers union supported an exemption for Canada.

Mr. Trump has been establishing a solid economic record with tax cuts and deregulation, but his escalating trade war puts that at risk. He aspires to be Ronald Reagan but his tariff folly echoes of Herbert Hoover.

Trump Shows How Not to Be a Protectionist

May 30, 2018

Tariffs are better than quotas and other lessons in how to do protectionism well

President Trump promised this week to restrict Chinese investment and imports over intellectual-property violations, but his record raises doubts about whether he will follow through.
President Trump promised this week to restrict Chinese investment and imports over intellectual-property violations, but his record raises doubts about whether he will follow through. PHOTO: EVAN VUCCI/ASSOCIATED PRESS
.

Free trade, for all its virtues, isn’t an easy sell. Every country applies some level of protectionism out of economic or political necessity.

But protectionism can be done well or done badly. Done well, it minimizes costs to taxpayers and consumers, maximizes benefits to domestic industry, and discourages bad behavior by trade partners. President Donald Trump routinely does protectionism badly, using the wrong tools on the wrong behavior and the wrong countries.

On Tuesday, he actually suggested hitting the right target the right way, when he promised to restrict Chinese investment and imports over intellectual-property violations. But his record raises doubts about whether he will actually follow through.

Here are some lessons in how to do protectionism well:

Lesson one: tariffs are better than quotas. Tariffs, which are a tax on imports, are more predictable and transparent than non-tariff barriers such as quotas, which are a quantitative limit on imports.

Protected But Still ShrinkingU.S. steel has enjoyed varying levels of   since the 1990s but total employment has still shrunk.Percentage of steel imports covered    : Chad Bown, Peterson Institute forInternational

Yet Mr. Trump is negotiating quotas on imported steel in lieu of tariffs. Quotas, by restricting supply, raise prices, just as tariffs would. But whereas tariff revenue goes to taxpayers, the higher prices on imports caused by quotas benefit foreign companies.

Quotas have unpredictable effects. If demand for steel softens, imports will fall, the quota will no longer bind, and domestic industry will lose protection at its most vulnerable time.

Allocating the quota also invites lobbying, favor trading and opaque gamesmanship, yielding odd results. Argentina’s steel quota is 35% larger than recent exports, enabling it to take market share from competitors such as South Korea whose quota is 30% smaller.

Lesson two: threatening tariffs is worse than actual tariffs. For months Mr. Trump threatened to impose tariffs without actually enacting them. That prompted steel buyers in the U.S. to stock up, an important reason the volume of imports is up 2% year to date. The Alliance for American Manufacturing, which backs the tariffs, complains the influx of imports during the administration’s drawn-out investigation into whether steel and aluminum imports threaten national security cost 13,500 jobs last year. Yet because demand for steel is strong thanks to a healthy U.S. economy, prices are up nearly 40% this year—as if a tariff were already in place. That means the foreign suppliers of those imports are enjoying a windfall.

Mr. Trump thinks threats are a useful lever in broader negotiations. But domestic manufacturers can’t be sure if the tariff will ever take effect or if it does, will stay. The gamesmanship thus reduces their incentive to invest in new capacity or jobs.

Lesson three: punish bad actors, not good. Presidents typically save their harshest treatment for the most egregious rule breakers in hopes of changing their ways.

Mr. Trump has done the opposite: he has picked fights with Western Europe, Japan, South Korea, Canada and Mexico, all U.S. allies or neighbors that more or less play by the rules. He has thus far been relatively easy on China, which even free traders agree is a serial violator of the rules of free trade and the ultimate cause of global overcapacity in steel and aluminum. He promised tariffs on $150 billion worth of imports then suspended them, announced devastating penalties against telecommunications company ZTE Corp. for violating sanctions on Iran and North Korea then softened them.

On Tuesday, he reiterated a threat to hit $50 billion of imports containing “industrially significant technology” with a 25% tariff, but it might be another negotiating tactic that China doesn’t take seriously.

Mr. Trump sees trade as governed by power and leverage, not rules. Because Japan, South Korea, Canada, Mexico and most of Western Europe depend on the U.S. military, market or both, he counts on them rolling over without retaliating. China, which is a strategic and economic rival, hasn’t hesitated to exercise all the leverage at its disposal, from its sway over North Korea to its agricultural imports from key Republican states.

This calculus may yield short-run wins but at the expense of long-term cooperation. “With friends like that who needs enemies,” European Council President Donald Tusk recently tweeted in response to Mr. Trump’s tariffs on European Union steel and aluminum. “But frankly, EU should be grateful. Thanks to him we got rid of all illusions. We realize that if you need a helping hand, you will find one at the end of your arm.”

Lesson four: have a post-protection plan. China’s protectionism is future-focused, seeking to become globally competitive in industries such as aerospace, renewable energy and robotics. Mr. Trump, by contrast, seems obsessed with the past, when American coal, cars and steel ruled the world.

But protection cannot make an industry grow that is fundamentally in decline: tariffs and quotas didn’t prevent the long-term decline of U.S. clothing manufacturers as production shifted to countries with cheaper labor.

Chad Bown of the Peterson Institute for International Economics notes steel has been protected to varying degrees from European, Japanese, South Korean and other Asian competitors since the 1990s. At the end of 2017, 60% of U.S. steel imports were subject to protection, compared with 4% of all imports in 2016, Mr. Bown has found. In that time, import penetration didn’t change much, but U.S. steel employment fell by half as productivity rose and the relative importance of steel to economic output declined.

Even if several thousand manufacturing workers see their jobs brought back by protection, many thousands who aren’t so fortunate will need skills in growing industries where the U.S. has an advantage. On this, Mr. Trump hasn’t had much to offer.

Write to Greg Ip at greg.ip@wsj.com

https://www.wsj.com/articles/trump-shows-how-not-to-be-a-protectionist-1527692912