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Trade war

Trump barrels ahead with 'America first' trade

US shifts attention to China after deal with Mexico and Canada

The revamped U.S. trade deal with Canada and Mexico came about thanks to tariffs, President Donald Trump told supporters on Monday.   © Reuters

WASHINGTON/NEW YORK -- With a renegotiated North American Free Trade Agreement under his belt, U.S. President Donald Trump is turning his attention to trade with China, Japan and Europe, looking to advance American interests even at the risk of violating international trade rules.

Describing the new United States-Mexico-Canada Agreement as "the largest deal ever made, so far, in trade," Trump told reporters at the White House on Tuesday that he soon expected to top it with a deal with China or the European Union.

"As you know, now we're working on China. We're working on Japan. We're working on EU. But these are great deals for our nation and great deals for our workers," Trump said.

The president will have the opportunity to meet with Chinese President Xi Jinping on the sidelines of the G-20 meeting in Buenos Aires in December, according to top White House economic adviser Larry Kudlow. Trade issues are all but certain to dominate any potential discussion between the two leaders.

Kudlow told reporters separately on Tuesday that the USMCA, as the new agreement is known, "sends a signal to China" that the North American continent "stands united" against China's unfair trading practices. He also suggested that the U.S. working out trade differences with the Europeans and Japanese would help in confronting the challenges posed by China.

"EU, Japan, U.S.; we're going to send a signal to the Chinese," Kudlow said. "We're not doing this alone."

"There is a trade coalition of the willing" that looks to fix broken areas of international trade, Kudlow said. "That coalition will stand up to China and their unfair trading practices, their barriers, their IP theft, their forced technology transfers."

Trump on Monday credited his tariffs on steel and aluminum, as well as the threat of hefty auto duties, with pushing Canada and Mexico to the negotiating table for what he hailed as a "historic" agreement.

"Without tariffs, we wouldn't be talking about a deal," he said.

The USMCA reached on Sunday raises the share of North American parts that vehicles must include to qualify for exemption from tariffs, a provision that works to U.S. automakers' advantage. It also expands American access to Canada's dairy market.

The deal came about a week after Trump signed a revised free trade agreement with South Korea. Trade talks are underway with the European Union, and Washington and Tokyo reached an agreement last week to begin negotiations toward a trade agreement on goods. In each case, the U.S. has brought its economic might to bear to put pressure on its negotiating partners.

In particular, Washington has made frequent use of quotas. U.S. Trade Representative Robert Lighthizer employed similar tactics during his tenure as deputy trade representative during the 1980s, when America essentially forced Japan to accept voluntary restrictions on steel exports.

The trade deal with South Korea limits the country's annual steel exports to the U.S. to 70% of the average between 2015 and 2017. Side letters to the USMCA state that Canada and Mexico can each ship 2.6 million vehicles to the U.S. tariff-free if Washington imposes additional duties -- essentially a quota, albeit one well above each country's current export levels.

Quantitative restrictions like quotas are a powerful tool. World Trade Organization rules ban such measures except in limited circumstances because they do more than tariffs to protect domestic industry and distort trade. Even if a strong dollar leaves American manufacturers at a disadvantage, or foreign companies work to make themselves more competitive, quotas limit their ability to make further inroads in the U.S. market.

American authorities enjoy significant discretion in this area. If trade deficits fail to narrow, the U.S. can go to the countries in question and demand that quotas be lowered, a Washington lobbyist said.

Once trade talks with Japan begin, Lighthizer will likely demand that Tokyo accept some sort of quantitative restriction on auto imports, a particularly sensitive issue for the U.S.

The U.S. logged a deficit of more than $50 billion in auto-related trade alone with Japan last year -- equivalent to nearly three-quarters of its overall $68.9 billion trade deficit in goods. The American auto industry is a major presence in the Midwest, a region that went for Trump in the 2016 presidential election, making Japanese imports an issue he cannot ignore as he seeks to ensure his re-election in 2020.

The U.S. is also pushing partners hard on currency issues. The USMCA, at Washington's insistence, included a provision calling for each country to "refrain from competitive devaluation."

This will also be on the agenda in U.S.-Japan talks, a senior White House official said. American automakers worry about Japanese rivals taking advantage of a weak yen. Any trade deal must include "strong and enforceable provisions that prevent Japan from manipulating its currency," the American Automotive Policy Council said in a statement last week.

The joint statement issued Sept. 26 by Trump and Japanese Prime Minister Shinzo Abe after their summit states that "for the United States, market access outcomes in the motor vehicle sector will be designed to increase production and jobs in the United States." This seems to leave room for Washington to impose additional tariffs.

Lighthizer has won Trump's trust with his hard-line stance on trade. But negotiations that go too far in putting America first risk harming both the free trade system and the U.S.-Japan relationship.

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