Trade

POLITICO Pro Morning Trade: Gloomy Geneva — SME proposal — Lighthizer Brigade

GOOD MORNING FROM GENEVA, I am Jakob Hanke and welcome to Morning Trade, covering the Public Forum of the World Trade Organization, and other trade news. Send tips to jhanke@politico.eu and hvdburchard@politico.eu and follow us on Twitter @vonderburchard and @hankevela | View in your browser

**This newsletter is part of POLITICOs premium policy service Pro Trade. From transatlantic trade wars to the U.K.s future trading relationship with the EU and rest of the world, Pro Trade gives you the insight you need to plan your next move. Email pro@politico.eu for a complimentary trial.**

WTO — CLOUDS OVER LAKE GENEVA: The WTOs public forum 2018 kicked off with a dire warning over how bad the trade war could get, before branching into more optimistic territory.

At the opening debate on Tuesday, Jack Ma, Chinese business magnate and co-founder of Alibaba, warned that Americas tariff escalation with Beijing could even trigger a war.“When trade stops, sometimes the war starts,” Ma said. “This thing, when it starts, its going to be difficult to stop.” Read more on POLITICO Pro.

Quite a way to begin! But well ramp up the martial overtones even more later in our story of the day: “Charge of the Lighthizer Brigade.”

Looming above all the discussions in Geneva was Americas blockage of the WTOs highest court. Trade lawyers and negotiators agreed that the U.S. is unlikely to pull back from that blockage. So belt up for a bumpy ride on trade disputes.

— EXPERTS DISCUSS ENVIRONMENTAL PROTECTION AND E-COMMERCE: If nothing else, the discussions showed that despite these looming risks, people can still engage in constructive debate. However, the panels also made clear that we are still miles away from any tangible results. On e-commerce, deliverables will be slim. Attendees said that Americas approach to data flows is incompatible with the EUs approach. While the U.S. has enshrined in its trade agreements clear rules that data flows cannot be stopped at borders, the EU has a carve-out for data privacy reasons. It wont be easy to bridge such divides.

The discussion on environmental protection showed that current WTO rules are insufficient to tackle climate change. Proposals for border taxes on greenhouse gas emissions, in the absence of a global tax, are still treated as outlandish, even though economists agree that they make sense.

Still, global warming is already affecting trade, as WTO Director General Roberto Azevêdo pointed out: “Every single year, over 1,000 new notifications of environmental measures are notified to the WTO, that simply means 1,000 measures that are related somehow to trade, in one way or another.”

French trade secretary Jean-Baptiste Lemoyne, who was supposed to attend the debate, was missing, which caused some attendees to wonder whether this was a subtle message by France that it doesnt care as much about environmental rules in trade agreements as its President Emmanuel Macron pretends. But Morning Trade hears the absence was due to a government meeting in Paris.

— EXCLUSIVE: GERMAN CHAMBERS PAPER ON SMEs: Germanys chambers of commerce DIHK, are calling on governments to make trade easier for small and medium-sized enterprises. In a paper published here exclusively by Morning Trade, the group calls for some concrete steps as well as for a broader change in mentality that should put SMEs first.

Low hanging fruits: DIHK says more transparency would make trade easier for small companies. They propose that WTO members set up “a central website that provides exporters with all the information they need for exporting, free of charge and updated daily.”

Talk to us: The group also calls for “obligations to analyze the impact of new trade legislation on SMEs” and says their representatives should be involved when new trade rules are crafted.

Why is this important? One of the more pernicious problems of the “spaghetti bowl” of bilateral trade deals is that it favors big multinational companies over SMEs.

The multitude and sheer complexity of rules of origin mean that smaller companies often dont make use of trade agreements — experts say this is because paperwork and the work involved in keeping track of agreements is often so arduous that companies prefer to forego the lower tariffs and just export under WTO rules or not export at all.

In this way, trade deals have worked like barriers to entry for SMEs, putting them at a strategic disadvantage compared to bigger enterprises, which export in larger volumes and so can afford to use trade deals.

SMEs are drivers of innovation and create more jobs per euro of turnover than bigger firms. So its crucial to get them to benefit more from trade.

UNITED STATES/CHINA — THE CHARGE OF THE LIGHTHIZER BRIGADE: Robert Lighthizer is leading Americas charge straight into the Chinese cannons.

New Cold War: Morning Trade has talked to some of Lighthizers former colleagues, negotiating counterparts, and economists, who said that the U.S. trade representative, who for decades defended American manufacturers as an anti-dumping lawyer, has rallied a batallion of extemely loyal dragoons, ready to follow him into what they see as a last fight for economic and geostrategic dominance against Beijing.

Risky game: American farmers, who export to China, and U.S. multinationals, which have moved major parts of their production there, fear that the attack is a suicide mission, like that of the British “Light Brigade” which ended up shot into pieces in the Crimean War. As Alfred Lord Tennyson put it: “Theirs not to make reply / Theirs not to reason why / Theirs but to do and die.”

But Lighthizer has been preparing for this battle for decades.

The conflict doesnt only pitch America against China. It also pitches protectionists and steel producers against free-traders and big multinational companies, which have largely profited from trade with China.

“All of steels traditional opponents on these matters, the National Association of Manufacturers, the Chamber, the Business Roundtable, all these organizations that had many, many multinational companies that had real strong interests in China. We constantly ran up against that wall and it became a matter of great frustration,” said Tom Sneeringer, a trade attorney who worked with Lighthizer at New-York based law firm Skadden.

“Im sure Bob must have said to himself, if I am ever able to be in a position of influence or power all this is coming back.” Read the entire article on POLITICO Pro, or pasted below.

UNITED STATES/EUROPE — US ON THE COUNTERATTACK AGAINST EU REGIONAL FOOD NAMES: Washington is fighting back against the onslaught of Brussels protection of food names, which have little by little been conquering the globe through trade deals. POLITICO has reported previously on how the European Commission is swooping into global capitals and imposing its ideas about how to protect traditional gourmet foods tied to a certain region, such as Parmigiano-Reggiano, through trade deals. Certain countries like the U.S. hate this, since it blocks their own producers of (arguably) the same foods from exporting to other markets.

The revised NAFTA deal USMCA, which was just agreed, contains a special side letter on cheeses that lays out a list — including Gouda, Emmental and Pecorino — that Mexico has agreed to allow U.S. producers to continue selling under those names, irrespective of any other agreements. “Mexico confirms that market access of U.S. products in Mexico is not restricted due to the mere use of these individual terms,” the letter said.

It is not yet clear whether this clashes with the EU-Mexico trade deal — agreed in principle in April. That deal protects cheese names such as Gouda, among other European food names called protected under the EUs system of “geographical indications.”

But in any case, Washington is clearly trying to shield its producers and save their market access from any further advancement of European geographical indications.

— Possible workarounds: Brussels geographical indications often carry longer or more elaborate names. For example, the “Gouda” protected as a GI in Europe are actually “Gouda Holland” or “Noord-Hollandse Gouda.” This means that only those products bearing those exact names benefit from full GI protection. This might mean that two agreements do not clash.

— Translations: Still, it isnt clear what level of protection is available under the EU-Mexico agreement. Brussels will often push for the maximum level of protection available, including for controversial “translations.” This means, for example, that the Commission will usually push to make the word “Parmesan” fully protected as a geographical indication, as the English translation of the original “Parmigiano-Reggiano.” This is type of thing trade partners hate.

— European view: The European Commission would not comment on whether it was specifically studying this issue. However, a spokesperson said: “As a matter of principle, the EU considers that dialogue and engagement are the right approach to address trade issues.” Mexican government officials in Brussels did not respond to Morning Agri by the time of publication.

***POLITICO Pro Article***

Charge of the Lighthizer brigade

— By Jakob Hanke

U.S. President Donald Trump may be waging a trade war, but Robert Lighthizer is fighting the new Cold War.

The U.S. trade representative and his crack troop of loyalists have been waiting years for an opportunity to go back to the glory days of Ronald Reagan, when America could swat off the Russians and the Japanese. Cruising beneath the chaos of the rest of the administration, the Lighthizer brigade are the well-oiled team who have a clear but ultra high-risk battle plan to smash China.

Their goal is to restore the U.S. to its position of economic and political dominance, even if that means tearing up the liberal rulebook of global trade to get there and dynamiting the World Trade Organization in the process, according to trade experts, negotiating counterparts and associates who have known Lighthizer and his team for decades.

The world is now at a decisive moment. The Lighthizer brigade have charged past the point of no return and, in the coming months, it will become clear whether their gameplan is brilliant (for Americans), or suicidal folly.

Much of America sees the trade war as madness. Farmers and multinationals complain that they are the ones who will be shot to pieces by Washingtons desire to rescue moribund industries like steel. Even Lighthizer himself warns that Americas economic growth could take a short-term knock if Washington wants to deliver a long-term knock-out blow against Beijing.

Then, there are the dangers of how the Chinese will react. Beijing is already warning ominously that it is out to defend its “national dignity,” not just its economy. This is bigger than a trade war.

Experts reckon that it is very unlikely that Beijing will limit its retaliation to tariffs and the realm of trade. Watch out for China to switch its offensive to asymmetrical warfare in the South China Sea and on the Korean peninsula in a broader battle for dominance with Washington.

“This fight is not just about who runs the world economy; its about who runs the world,” said Alicia García-Herrero, a China-based senior fellow at the Bruegel think-tank and chief economist at the French bank NATIXIS.

Chinese business magnate Jack Ma also sounded the alarm. “Its easy to launch a war but its difficult to stop the war,” Ma said at the WTO Public Forum.”When trade stops, sometimes the war starts … This thing, when it starts, its going to be difficult to stop.”

Many observers note that the Lighthizer Brigade have wrestled to focus Trump squarely on China rather than an all-out tariff offensive against almost every major trading partner. Americas WTO Deputy Director Alan Wolff, appointed shortly after Lighthizer took up his post, publicly noted that Trump was a wildcard, who is alone among world leaders in saying “that all prior trade agreements are bad, and that he is unconcerned by the prospect of a trade war.”

War on two fronts

Lighthizers war to Make America Great Again will be fought on two fronts.

The first line of attack is to punch China right in the face. America has now imposed tariffs on an eye-watering $250 billion worth of Chinese goods, almost half of all U.S. imports from China. In addition, three people working with U.S. business said that the administration is telling them to reduce their manufacturing footprint in the Middle Kingdom.

The basic message is clear: America wants its companies to bring production back home and get out of the firing line. Many of the goods being hit with tariffs are made by U.S. producers who moved to China. The increasingly high tariffs are offsetting the advantage of lower labor costs. Lighthizer has made sure to signal markets that the tariffs will stay on for a while.

For Beijing, this is a terrifying scenario. Squeezing the export-led economy could threaten the far flimsier domestic financial economy, propped up by murky networks of shadow banking.

García-Herrero stressed that the U.S. was looking to unleash a one-two punch. First, urge American businesses to move home, then hit the Chinese economy.

“The $200 billion tariff package is all about reshoring. Its all about reshoring to the U.S., or reshoring somewhere else, but not China. They first need to delink their businesses from China to get real about economic war.”

The second front of Lighthizers war is broader and is tied to his obsession with Americas yawning deficit. The goal here is to revive the strong-arm tactics he used as deputy USTR against Japan in the 1980s to get allies such as Mexico, Canada, Japan and the EU to impose restrictions on their own exports.

The overriding Lighthizer mantra is that the U.S.s massive $800 billion deficit is a problem. “If you dont accept that, then everything were doing doesnt make sense,” he told a Senate hearing in July.

Changing the paradigm

The phrase that Lighthizer repeatedly uses to describe his plan is “changing the paradigm.”

This means exploding liberal economic orthodoxy, as defended by the WTO. In editorials over the past few years, he has argued that conservatives should not be scared of trade defense. His argument goes that bona fide conservatives under Reagan won the battle against the rising Asian superpower of its day: Japan. Lighthizer would know: he was the deputy USTR who took on Tokyo.

Back in 2011, Lighthizer saw Trump as the potential maverick who could give him an opportunity to challenge conventional thinking. Early on, he leapt to the defense of the presidential hopeful when he was accused of protectionism for wanting to hit back against China.

“The icon of modern conservatism, Ronald Reagan, imposed quotas on imported steel, protected Harley-Davidson from Japanese competition, restrained import of semiconductors and automobiles, and took myriad similar steps to keep American industry strong,” Lighthizer wrote in a Washington Times editorial.

Forged in the steel mills

The roots of Lighthizers desire to defend U.S. business run deep. The 70-year-old from Ohio and his team were molded by their careers as anti-dumping lawyers at New-York based law firm Skadden, where they represented U.S. steel companies and other manufacturers against bargain-basement Chinese competitors.

“They watched many of their steel clients go bankrupt. At the same time they saw the withering of manufacturing of the steel companies customers,” said Alan Price, a Washington trade attorney who has known Lighthizer for more than two decades.

Lighthizer has filled the most senior positions in Americas trade department with former employees and colleagues from that time. “Jeff Gerrish, his deputy trade representative, USTR General Counsel Stephen Vaughn, and Jamieson Greer, his chief of staff, worked with Bob for more than a decade at Skadden,” Price said.

That allows Lighthizer to run a well-oiled team, Price continued, “almost uniquely in this administration. … There isnt infighting or second-guessing. They have faith in Bob leading them in the right direction.”

Many economists are critical about Trumps obsession with the deficit and argue that it is a product of market forces, such as a strong dollar, high consumption and low savings rate. But Lighthizer and his team have experienced first hand that Chinas massive state-led economic model can distort those market forces.

Terry Stewart, another trade attorney, who has known him since the 1980s, said Lighthizer believed Beijing was unfairly widening the U.S. deficit, killing off businesses that may otherwise have been profitable.

“My understanding [of] where Bob has come from on these issues over time has been that there is a misnomer that there is free trade, that you have various levels of liberalization and various levels of distortions … and government actors who have got their hand on the scale,” said Stewart.

High stakes game of poker

Lighthizer has made clear that hes in it for the long haul and that he expects the fight to be painful, even accepting that the U.S. economy may take a short-term hit in resetting the balance with Beijing.

“On the specific question of China, the reality is its going to take time,” he told senators in July. “There clearly is pain associated with what were doing.”

Stewart admitted the risks but stressed the U.S. had little choice left. “Its a high stakes game of poker,” said Stewart. “Lots of lower-risk games of poker have been played for decades and we keep falling behind, the problems we have identified were not being addressed.”

Price, the other Washington trade attorney, said: “At this point you are seeing the U.S. basically say we are going to push back on China, and guess what, its gonna be complicated to do, because our supply chains are fragile, our technology is increasingly fragile … but this is the last chance we have to do it.'” He added: “Bob can play that game very well.”

Tom Sneeringer, a trade attorney who worked with him at Skadden, said Lighthizer was used to opposition from businesses that have benefitted from cheaper Chinese imports.

“All of steels traditional opponents on these matters, the National Association of Manufacturers, the Chamber, the Business Roundtable, all these organizations that had many, many multinational companies that had real strong interests in China. We constantly ran up against that wall and it became a matter of great frustration,” Sneeringer said. “Im sure Bob must have said to himself, if I am ever able to be in a position of influence or power all this is coming back.”

Tough tactics

A European Commission trade official said Europe feared Lighthizers deficit fixation was leading to muscular tactics beyond China. Buoyed by his success forcing Japan to cap its own exports in the 1980s, he has also managed to impose the same kind of “voluntary” export restrictions on Mexico and Canada in NAFTA talks over the past few weeks. The fear is now that he will attempt the same in Europe.

“This is what Lighthizer likes,” the official said.

At the same time, the official said Lighthizer was an experienced negotiator, who was imposing a coherent plan while Washington was plunged into mayhem.

“Though we may not like his positions, its a guy who knows the trade world better than [Commerce Secretary] Wilbur Ross, for example. Hes been working on many anti-dumping cases, on trade defense, on negotiations. He knows what the WTO is.”

Another Commission official said that while Brussels opposed his confrontational methods, the EU still hoped that Lighthizer would be successful in getting China to commit to real reform.

Its still far from clear, however, who will win the Washington-Beijing encounter. U.S. mid-term elections are due in November and Lighthizer is under no illusions about the pain that may be coming Americas way.

In a rare Fox News interview in June, Lighthizer admitted that the new tariffs would cut into economic growth. “Hopefully we can minimize that, but one thing I can tell you for sure … If we lose our technology, our innovation edge, were gonna have a serious problem longterm and midterm with our economy.”

Adam Behsudi contributed to this report.

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