THREE BIG ONES: Until just a few years ago, China was easily the largest U.S. trading partner, at least where individual countries were concerned. But it’s fallen to third place behind Mexico and Canada, as the result of the increased trade friction that began in the Trump administration and prompted companies to diversify their supply chains. The 27 nations of the European Union can also collectively stake a claim to being the largest U.S. trading partner, with Germany the fourth largest just by itself. So it’s fair to say that U.S. officials are dealing with some of the biggest trade relationships this week. YELLEN’S MESSAGE: The Biden administration’s top economic official will attempt to persuade her Chinese counterparts that U.S. efforts to deny China access to certain cutting edge technologies are only intended to protect national security and address human rights concerns, rather than gain an economic advantage. Not a particularly easy sell. But Yellen will also stress the need for the two countries to work together to address global issues such as climate change and developing country debt, and try to tamp down concerns about the potential for a complete severing of U.S.-China trade and economic ties. “We seek a healthy economic relationship with China … that fosters growth and innovation in both countries,” a senior Treasury Department official told reporters. “We do not seek to decouple our economies – a full cessation of trade and investment would be destabilizing for both of our countries and the global economy.” Meeting with the ambassador: Yellen warmed up for the trip Monday by meeting with China’s new ambassador to the United States, Xie Feng. “The frank and productive discussion supported ongoing efforts to maintain open lines of communication and responsibly manage the U.S.-China bilateral relationship, in line with Secretary Yellen’s upcoming trip to Beijing,” Treasury said in a readout. New trade data tomorrow: Shortly after Yellen arrives in Beijing for meetings Thursday, the Commerce Department will release trade data for May, which is expected to show a continuing slowdown in trade with China this year. While U.S. exports to China were up slightly at nearly $52 billion during the first four months of 2023, U.S. imports from China were down sharply at $132 billion, compared to $179 billion in the same period last year. 301 tariff tally: Out of curiosity, we checked Customs and Border Patrol’s website for the latest tally of how much the agency has collected from importers because of the tariffs that former President Donald Trump imposed on Chinese goods under Section 301 of the 1974 Trade Act. The current answer is $182.91 billion. CHINA’S RAW MATERIALS WARNING SHOT AMID TECH WAR: China announced just ahead of Yellen’s visit that it is imposing export controls on two metals — gallium and germanium — used in all kinds of goods key to the digital and green transition, like semiconductors, 5G base stations and solar panels. The decision landed right after a Dutch decision to curb the sale of chips-printing equipment and EU leaders agreed on a de-risking strategy toward China. Read more here. DOMBROVSKIS’ BUSY SCHEDULE: The EU trade chief will also meet with White House national security adviser Jake Sullivan and Commerce Secretary Gina Raimondo as both sides continue talks on a proposed pact that is intended to encourage trade in steel and aluminum products that are made with lower carbon emissions. The current deadline for that deal is October, but the two sides appear to still be far apart. Tai and Dombrovskis have pledged to meet every month in an effort to close the gaps. Dombrovskis will also discuss the status of a proposed critical minerals agreement with the United States that is intended to help EU battery companies qualify for some of the consumer tax credits provided by the Inflation Reduction Act. Biden and European Commission President Ursula von der Leyen agreed to launch talks on a critical minerals pact more than three months ago. But in order to secure a binding agreement, the European Commission — the EU’s executive branch — needs a negotiating mandate from EU countries, which is a time-consuming process Brussels had hoped to avoid. Another big topic for Dombrovskis’ visit is the agenda for the fifth meeting of the bilateral Trade and Technology Council, which the United States is hosting near the end of this year. EU officials said they expect the focus of that upcoming meeting will be on deeper cooperation on conformity assessment and trade facilitation for clean tech goods. USMCA AT THREE: Having dispensed with China and the EU, we can now focus on the best U.S. trade relationship of all, with North America. (Just kidding. Morning Trade loves all trade negotiations and disputes equally. I mean, how could you choose?) Some folks will remember that Trump’s primary objective for renegotiating NAFTA was to reduce the trade deficits with Canada and Mexico. So far, that doesn’t seem to have worked. In fact, the deficits with both countries are much higher than when Trump threatened to withdraw from NAFTA in 2017, despite the tougher rules of origin contained in the USMCA. Disputes pile up: This week’s meeting of the USMCA Free Trade Commission between Tai, Canadian Trade Minister Mary Ng and Mexican Economy Minister Raquel Buenrostro is a chance for the three to check in on the agreement, and to discuss a growing list of disputes. Those include U.S. and Canadian concerns over Mexican energy and biotech policies, U.S. concerns over Canadian dairy barriers and Canadian concerns over U.S. softwood lumber duties, to name a few of the more prominent concerns. Car talk: Canada and Mexico challenged how the Trump administration implemented the USMCA’s new auto rules of origin regulations, arguing the U.S. interpretation of those provisions was more onerous than the three countries negotiated. The challengers won that case in December, but six months later the Biden administration still has not changed the methodology, despite the threat that Canada and Mexico could retaliate. It seems unlikely that this week’s Free Trade Commission meeting is going to produce major progress on that front, even if industry officials remain hopeful a deal can be struck. Despite Trump’s hope of reducing the auto trade deficit with both countries, the opposite has actually occurred. The deficit in that broad category — which includes auto parts, passenger cars, trucks, buses and specialty vehicles — totaled nearly $100 billion in 2022, compared to the 2017 level of $83 billion before Trump tinkered with the pact. The USMCA does appear to have helped reduce the U.S. trade deficit in passenger cars from $55 billion in 2017 to $41 billion last year. But that decline was more than offset by an increased deficit in the two other areas, auto parts and big vehicles. Halfway to the six-year review: One novel feature of the USMCA is that it expires after 16 years, unless Canada, Mexico and the United States agree to extend it for 16 more. But that process actually begins in Year Six of the pact, or 2026, when each country can either confirm its desire to extend the agreement or raise concerns that it wants addressed. In the latter scenario, the three countries will continue the review every year until either the concerns are resolved or the pact is terminated in Year 16.
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