In Brief: Tax, Tariffs & Regulations with George W. Russell (Mar 15)

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U.S. action leads to China reaction

Amid increasing speculation over what the United States might do to reduce the trade deficit with China, tit-for-tat tariffs could escalate dangerously if negotiations between Beijing and Washington break down.

Analysts are concerned that U.S. President Donald Trump is seeking to impose tariffs on up to US$60 billion (HK$471 billion) of Chinese imports, targeting the technology and telecommunications sectors.

“Recent trade actions and political development point to an increasingly hawkish U.S. trade policy stance, particularly regarding China,” UBS chief economist, Wang Tao, wrote in a recent commentary.

“Chinese reactions to any product-specific tariffs will likely remain restrained and proportional to avoid escalation,” he added, warning that more serious U.S. trade actions could spark Chinese retaliation against major U.S. exports including aircraft, agricultural products and cars.

The two nations’ trade relations may hinge on an intellectual property investigation by the U.S. Trade Representative’s office. The so-called Section 301 investigation is reportedly complete and USTR could issue its recommendations as early as April.

“Trade actions against China will be product specific and have limited macroeconomic impact,” Wang forecasts, but adds that the risk of the U.S. imposing tariffs or other import restrictions on a broad set of Chinese exports and restricting Chinese investment in the U.S. has risen.

One problem is that the U.S.-China trade deficit isn’t self-correcting. “We see no effective way of correcting the two countries’ trade imbalance in the short term,” says Chen Xingdong, chief China economist at BNP Paribas Global Markets. “Indeed, China’s economic model is moving further from U.S. wishes.”

TPP: Measured by its absence

How beneficial is the Trans-Pacific Partnership (TPP) given that the U.S. isn’t part of it? On March 8, the 11 remaining members of the trade pact signed a revised free trade agreement (FTA).

An analysis by the Peterson Institute for International Economics (PIIE) estimates the new “CPTPP” will generate real income gains of US$157 billion for the 11 member countries, compared with US$465 billion from the original TPP that included the U.S.

The lost trade opportunities will be felt most in Vietnam, Malaysia and Japan, says the PIIE analysis, because these countries stood to gain the most from greater access to the U.S. market.

Another analysis by Moody’s suggests that if the CPTPP expands its membership to include the other large Asian economies that have expressed interest in joining – Indonesia, South Korea, Philippines, Taiwan and Thailand – real income gains would be higher than the original TPP pact.

The Stormy effect: Reform under the radar

The possible rollback of some provisions of the Wall Street Reform and Consumer Protection Act of 2010, known as Dodd-Frank, has been quietly advancing through the legislative process.

Under a Senate bill passed on March 14, banks with less than US$250 billion in assets would be exempted from tougher Federal Reserve oversight, a level set at US$50 billion under Dodd-Frank.

Proponents say the proposed Economic Growth, Regulatory Relief, and Consumer Protection Act seeks to help business owners raise capital by easing securities laws and free community banks and credit unions from unnecessary regulations. Critics say the bill would effectively deregulate 25 of the 38 largest U.S. banks, setting the stage for a future bailout that would dwarf the 2008 financial crisis.

But will anyone notice? In a recent video, Sen. Bernie Sanders (I-Vt.) lamented that Dodd-Frank had been relegated down the news agenda by President Trump’s alleged relationship with Stephanie Clifford, the pornographic video actress known as “Stormy Daniels.”

Now, as real progress is made in revamping banking rules, departed secretary of state Rex Tillerson and Mr. Trump’s proposed meeting with North Korean leader Kim Jong Un are dominating the headlines. Will Dodd-Frank depart unlamented and unrecognized?