IOG Economic Intelligence Report (Vol. 4 No. 1)

The latest regulatory developments on economic security & geoeconomics

By Paul Nadeau, Visiting Research
Fellow, Institute of Geoeconomics (IOG)

Trump Returns to the White House: Donald Trump was inaugurated as U.S. president on January 20. His actions on his first day in office included the “America First Trade Policy”, an executive order directing the Commerce and Treasury Departments and Office of the U.S. Trade Representative to investigate trade deficits, how the U.S.-Canada-Mexico Agreement (USMCA) has impacted American workers, enforcement of the 2019 “Phase One” deal with China, and whether trade policy could help respond to the inflow of fentanyl, which are due to be delivered April 1, 2025. It is unclear which tariffs could be triggered as a result of the investigations. The order also called upon Secretary of the Treasury, in consultation with the Secretary of Commerce and the Secretary of Homeland Security to look into the creation of an “External Revenue Service” which would be responsible for collecting tariffs, duties, and other trade-related revenue.

Trump also announced that he will “probably” impose tariffs of 25 percent on Canada and Mexico on February 1, and that universal tariffs will arrive at a later date after Trump said “we’re not ready for that just yet”. The announcement is a deferral of his campaign promise to impose tariffs on “day one” of his presidency and may reflect an internal administration debate on the timing and extent of tariffs. At the time of writing, it’s not clear under what authority tariffs will be imposed. Canada’s outgoing Prime Minister Justin Trudeau has said “Canada will respond, and everything is on the table”.

Nippon Steel Blocked: U.S. President Joe Biden formally blocked Nippon Steel’s attempted purchase of U.S. Steel on January 2, citing there was “credible evidence” that Nippon Steel, through its acquisition of U.S. Steel, “might take action that threatens to impair the national security of the United States”. Nippon Steel and U.S. Steel have sued the Biden administration asking to overturn the decision, alleging undue political interference in the review process and will also sue U.S. Steel’s rival bidder, Cleveland-Cliffs and the United Steelworkers “for their illegal and coordinated actions” aimed at preventing the deal”. Some analysists also believe it’s possible that the Trump administration may overturn the decision following a negotiated settlement given Donald Trump’s interest in attracting foreign investment to the United States.

Biden Takes Parting Shot at China’s AI Development…: The U.S. Commerce Department announced a sweeping rule to govern the sale of chips used in artificial intelligence (AI) applications on January 13. The rule would overhaul the U.S. export control system by creating a global licensing regime that implements a tiered system of restrictions that will allow U.S. allies to access chips with limited restrictions, effectively block U.S. adversaries from accessing advanced chips, and implement new curbs for most countries to access such chips.

…And Legacy Semiconductors from China: On December 23, the Biden administration launched a Section 301 investigation into legacy or foundational chips from China. Section 301 investigations allow the Office of the U.S. Trade Representative to impose unilateral retaliatory measures against countries that are using unfair trade practices against the United States. Because the initial investigation can take several months or a year, it will be up to the Trump administration whether to continue, expand, or cancel the investigation. The announcement represents an escalation is U.S. efforts to contain China’s semiconductor industry – so far efforts have been directed against China’s most advanced chips with applications for the military and the most advanced technologies, while legacy chips are used in more consumer applications such as automobiles, appliances, and more.

China Opens Investigation into U.S. Semiconductor Industry: China announced on January 16 that it would investigate U.S.-made chips for being dumped at below-market prices and for unfairly subsidizing its chipmakers, specifically through the U.S. CHIPS Act which allocated $39 billion to expand chip-producing capacity in the United States. Possible punishments for companies violating antidumping or antitrust regulations could include fines, higher tariffs, or company-specific tariffs.

U.S. Targets Russia’s Shadow Fleet: The U.S. Department of the Treasury announced on January 10 that it will sanction roughly 180 vessels, dozens of traders, two major oil companies and some senior Russian oil executives in an effort to curb Russia’s evasion of sanctions against its energy exports.

BIS Considers Rules to Secure Drone Supply Chain: On January 2, the U.S. Commerce Department’s Bureau of Information and Security requested comments on a potential rule that attempt to secure the U.S. drone technology supply chain and crack down on the ability of foreign adversaries to access sensitive information. The deadline for comments is March 4, so the decision on how to proceed will be left to the Trump administration.

Analysis: Trump’s Collision Course with Asia?

Donald Trump returned to the White House on January 20 and the flood of executive orders began almost immediately. Most U.S. partners will be relieved to have seen that there were no “day one” tariffs as promised on the campaign trail, but any reprieve will be brief – plenty of the investigations order under the “America First Trade Policy” will likely result in tariffs of some sort and tariffs on Canada, Mexico, and possibly others were floated by Trump. But while the general theme of Trump’s first day was to mark a definitive break with the Biden administration, his direction on international economics faces the same perils as his predecessor’s despite the difference.

The Trump administration is about to embrace a form of creative destruction of the international economy. As Evan Feigenbaum of the Carnegie Endowment for International Peace writes, “longstanding assumptions and presumptions about American power, purpose, policy, and strategy in the world’s most economically dynamic region are about to go out the window.” Trump’s economic strategy is making an economy-sized bet that his administration can square the circle of seemingly contrary goals: closing the trade balance, raising the value of the dollar, and keeping Wall Street strong. The tools to achieve these goals are contradictory as well: raising tariffs will reduce imports which reduces revenue, a high dollar will hurt U.S. exports and Wall Street, and so on. In terms of the Trump administration’s relationship with international partners, it’s likely that rather than taking time to form a multilateral coalition, it’s more likely that the Trump administration will act first and then expect partners to catch up. It’s a significant shift from the status quo and draws doubt from economists and anxiety from partners but is a realignment that they believe is essential to improving the trajectory of the U.S. economy.

Central to this economic realignment is the U.S. economic relationship with China. Most in the Trump administration view the relationship with China as a generational challenge and blame past U.S. administrations for inadvertently strengthening China’s economy at the expense of that of the United States. To them, the Biden administration’s efforts (which themselves built off of the efforts of the first Trump administration) may have been positive but need a much more comprehensive and assertive response to what the incoming administration sees as China’s deliberately abusive economic practices.

This might create more friction with the Trump administration’s partners in Asia than many expect. It might be paradoxical, but the countries in Asia which are more exposed to risks from China are also far less interested in containing China than the China hawks in Washington, DC. It’s not that the region trusts China, it’s just that China’s money clinks like everyone else’s and can buy things. High U.S. tariffs on goods from China won’t only impact China’s bilateral trade with the United States, but anyone whose supply chains pass through China – in other words, most every advanced economy, especially those in the Indo-Pacific. Japanese firms have operations in China, Mexico, and Vietnam, all of which are likely targets of Trump’s tariffs and would certainly impact how Japanese firms do business if implemented. For Trump, this might be part of the point if it gets economies to realign their supply chains away from China and to “friendlier” locations.

But it would also reinforce the perception among many in the region are beginning to see the United States is as much of a threat to the system as China. Countries in the region will by necessity need to weigh their exposure to China as well as their exposure to Washington. Asian economies have already begun to hedge against U.S. risks and will continue to do so. Efforts to link economic benefits to security contributions will cause both diplomatic strain and force governments to make difficult, if not impossible choices about how to use their limited political capital. It’s also not clear what’s in it for the region – toward the end of the Biden administration there was a growing frustration that key countries had mostly done what had been asked of them regarding export controls and sanctions but hadn’t seen much reciprocity from the Biden administration on the region’s other priorities like market access. Unless that changes under the Trump administration, it will be increasingly difficult to secure buy-in from regional capitals on some of the key priorities, increasing the region’s frustration with the United States and undermining U.S. goals.

Strangely for an administration that seems so determined to break with its predecessor, the Trump administration seems ready to continue the Biden administration’s framework of coercion without inducements, apparently believing that simply investing in the United States is tempting enough that firms will tolerate almost anything for access. The region’s continued investment in China shows that it doesn’t mind doing business even with difficult partners, preferring opportunities to barriers. Hopefully that dynamic isn’t ignored as the Trump administration’s trade policy takes shape.

Disclaimer: The views expressed in this IOG Economic Intelligence Report do not necessarily reflect
those of the API, the Institute of Geoeconomics (IOG) or any other organizations to which the author belongs.

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