By Kenneth Rapoza, CPA Industry Analyst
Katherine Tai inches closer to being confirmed as new US Trade Representative. While she spoke cautiously about the direction tariffs will take on China and some products like solar, she understands their purpose. Here’s an overview of her hearing on Thursday.
After Thursday’s Senate Finance Committee hearing with Katherine Tai, it is safe to say that she is a shoo-in for new US Trade Representative. We like her.
Tai took on old school free traders like Senator Pat Toomey (R-PA) – perhaps the most visibly displeased with her responses on trade – on the question of tariff removal and massive trade deals, and she understands the generational challenge the US faces with the world’s largest non-market competitor: China.
She is in favor of reshoring and remapping critical supply chains, many of which are basically owned by China – such as rare earths and most of the solar industry – and believes tariffs have their place. Just as importantly, while working with allies is part of the Biden administration’s plans to counter China, she knows doing so will not be easy. We need options.
“I like the term ‘reshoring’ as opposed to onshoring because it means we can reindustrialize and it also suggests that we will take another look at our supply chains and the partnerships that we have for other sources of supply,” she said. “I want to accomplish similar goals to (ex-USTR Robert) Lighthizer and will try to be more affective.”
Issues such as reshoring critical supply chains, especially pharmaceuticals, began under former President Trump. This week, President Biden followed along the same path by issuing an Executive Order to review numerous critical supply chains, including the rare earths used to power electric vehicles and navigational equipment used by defense contractors.
Wednesday’s hearing was chaired by Committee chairman Ron Wyden (D-OR) and co-chaired by his ranking member Mike Crapo (R-ID). Both men began the hearing taking swipes at China, with Wyden taking disguised swipes at our allies.
“The US needs a full blockade against countries aimed at knifing our industries,” Wyden said, singling out a digital goods and services tax being discussed in Europe and subsidies to the soft-wood lumber industry in Canada. He also singled out forced labor, without mentioning the obvious example – Xinjiang, China’s Uyghur Muslims.
Crapo, who came off as a free trader in reminding Tai that some 80% of his state’s exporters were small businesses, said “the people of Idaho understand fair trade. We are the home of Micron Technologies. A China state owned company stole their trade secrets in order to gain an economic advantage,” he said, setting the table for a three hour hearing that would tackle everything from Canadian lumber, beef industry rules of origin, solar and steel tariffs and the semiconductor shortage that has GM and Tesla shutting down assembly lines.
On China, Tai recognized the juggling act she faces. “China is a rival, trade partner, and an outsized player whose cooperation will be needed to solve world problems,” she said. “We have to boost our competitiveness in the US. I spent my career fighting for American workers.”
When asked by Senator Bob Menendez (D-NJ) if she believed domestic investment was one way to tackle the challenge, she replied, “Absolutely.”
In regards to fighting for American workers while working with Brussels and Geneva at the same time, she said, “Working with others is hard work. The conversations will be quite difficult.”
Senators tried to get her to commit to jump starting the Trans-Pacific Partnership, a massive trade agreement that was designed to ring fence China and included countries that agreed to certain labor and environmental rules. However, given the massive currency misalignment, it was clear the TPP was a jobs program for southeast Asians in hopes to open markets for some American exports.
Senator Steve Daines (R-MO) said that “given China’s growing economic and political influence, it is essential that we work with allies on this. Do you support re-engaging with TPP…to counter China.” Senator Tom Carper (D-DE) also pressed her on this question. In both responses, she said that TPP made sense when it was first being created in 2015, but “a lot has changed in the world in the last five to six years. And a lot has changed with our awareness in terms of our trade policies and their impacts.”
A lot has indeed changed and she was asked about all of the different tariffs and barriers to trade that have occurred in the Trump years, arguably the world’s trade change agent.
Agriculture states were upset, even though China returned, somewhat sluggishly, to agriculture markets in November. They have yet to make their purchase commitments from the phase one trade deal.
On specific tariffs, she played it close to the vest.
On Section 232 steel and aluminum tariffs:
“The Section 232 program is under the authority of the Commerce Department. Tariffs are a legitimate tool in our trade toolbox. They are a very important part of our fair trade remedies. But with respect to steel and aluminum, we have a global marketplace problem driven by China overcapacity of those materials.”
On Section 301 China tariffs and exclusions:
“I know the 301s have disrupted a lot of peoples lives and livelihoods. The process of exclusions will be very high on my radar, and in making sure the decision making process is transparent.”
On Section 201 solar countervailing duties:
“You have petitioners here in the US that sought that review (by the International Trade Commission) and won the remedy. And here we are where we found ourselves trying to thread the needle of an industry that is trying to stay afloat because China is cornering the market on solar panels. USTR has role to play in Section 201 and I will engage in that in good faith.”
China was not the only problem from which Committee members sought answers and reprieve. Despite signing the USMCA, Canada and US agriculture is still a trade problem, said Senator Chuck Grassley (R-IA).
“The US Canada dairy tensions feel like issues that date back to the beginning of time,” Tai responded. “I know Lighthizer initiated a dispute settlement mechanism with Canada on this issue and I will dig in on this issue. I will use all the tools we have in the (USMCA) agreement to solve the problem,” she said, adding that stakeholders needed to be engaged.
Senator John Thune (R-SD) brought up country of origin labeling (COOL) for beef. That labeling request by the US had been axed years ago. “That’s an impact on our beef producers,” he said. “We have a country of origin labeling on clothes, but not on the things we eat.”
The US has been fighting this with Canada and Mexico since 2014.
The World Trade Organization compliance panel ruled against the United States and its amended COOL rules in October 2014 because the WTO panel found that the US regulations, which require meat labels to specify where an animal was born, raised and slaughtered, violate global trade rules. The WTO said that COOL treated Canada and Mexican livestock “less favorably” so now a Cancun cow is the same as one from Texas.
Tai noted that one of her first cases in an earlier stint at USTR, back in 2007, was to take on a long standing case between the US and EU, which had banned US beef imports for phytosanitary measures. “I was raised on American beef and am a happy consumer of it. The WTO’s COOL ruling is not popular here. This is something where the USTR has a lot of work to do,” she said. “We need a country of origin labeling that will survive the WTO.”
Like her new boss Biden, she is fine with working within the confines of the WTO and hopefully reforming it from there. When Bob Menendez hinted that he wanted her to do what she could to remove the EUs retaliatory tariffs on certain food items imported by New Jersey restaurant owners, she said that those tariffs were part of the long Airbus-Boeing dispute.
“This is how the WTO system works. You inflict pain on other stakeholders to get the dispute partners to come to a resolution,” she said.
Tai is a first generation American and touted the fact that a person born to immigrant parents could rise so quickly in the country’s halls of power. Prior to her pick to be the next USTR, she worked as the chief trade counsel on the House Ways and Means Committee.
One of the more passionate exchanges during the hearing came from Elizabeth Warren (D-MA). She pointed out that the TPP’s advisory committee was made up of big business interests and not labor, which was surely to be misdirected by Washington and eventually replaced by southeast Asian factory workers.
“If the Biden administration won’t assure the interest of American families is a priority in trade deals then we will always be on the losing side,” Warren said. She advocated for trade agreements to be posted publicly before a president can sign off on them, and for labor and other special interest groups to be allowed to weigh in on advisory committees. Tai said that there was a statute that governs this area of advisory committees and she would review it if she was given the job.
“Regular workers have felt that their livelihoods were being traded away,” Tai responded. “That is a pattern we are trying to break out of.”
Many of the Senators touted their interest in opening markets for US goods without mathematical awareness that the US domestic market, which we cede to imports, is far bigger than foreign markets. The US is the most open market in the world, but countries like China are largely closed to US goods. And our main allies, like Europe, have higher tariffs for our products than we have with them.
Debbie Stabenow (D-MI) was right when she said, “We want to export our products, but we don’t want to export our jobs.”
Stabenow and others brought up the importance of building more semiconductor capacity in the US, though no one mentioned the key word – foundries. The US has supply constraints not because we can’t design chips, or make the machines that produce them. It is because the main manufacturers of those designs are all in Asia. We need more foundries here. Sadly, the Senate did not specify that. They need to be made aware that the main bottleneck is from the foundries.
Still, we think that despite the Senate Finance Committee being free trader friendly, Chairman Wyden gets it. “If you can grow it at home and make it at home and add value to it at home, which so often boosts wages that are hugely important in America, then you can expand the winner’s circle,” he said.
Trade deals are not predicted to be part of Biden’s first two years in office. Tai said she does not have any indication from the Biden camp that she will be sitting on the sidelines. She also said that trade deals have changed after Trump.
“After going through four years of Trump policies and then previous years trying to negotiate TPP with allies, and then a year of a global pandemic, I think what we have learned is that trade has to be more nuanced,” she told Toomey from Pennsylvania, long known as being against the trade war tariffs. “For some, it’s frustrating. The most intellectually honest answer on creating a trade agreement with zero barriers all depends on the specific trade partner. I want to focus my efforts…to center US trade policy in terms of thinking how it affects American workers across different sectors of the economy. I want to focus on making trade policy that expands, as Senator Wyden says, ‘the winner’s circle’.”