U.S. steps up trade pressure in Europe in response to Russia, China

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Jan 10, 2022 View in browser   By Gavin Bade With help from Doug Palmer, Steven Overly, Stuart Lau, Laurens Cerulus and Leonie Cater Quick Fix — Trade tensions are mounting in Europe as U.S. officials warn of dire economic consequences for Russia if it invades Ukraine, and voice support for Lithuania in its economic dispute with China. — American and foreign automakers are warning the Commerce Department not to impose tariffs on neodymium magnets used in electric vehicles, saying it would raise the cost of the new-age cars and a variety of other high-tech goods. — And the steelworkers union wants lawmakers to stop using inflation as an excuse to call for the elimination of steel tariffs, saying the duties predate the recent surge in consumer prices. It's Monday, Jan. 10! Welcome to Morning Trade, where your host is just reentering society after a sneaky one-two punch of Covid symptoms over the holidays kept him cooped up in D.C. If you happen to catch the new variant, do yourself a favor and take it easy for a couple days after you've recovered — the relapse is worse! Send us your news: soverly@politico.com, gbade@politico.com and dpalmer@politico.com. Driving the Day TRADE TENSIONS TICK UP IN EUROPE: Europe is playing the venue for this week's global trade tensions, as commerce remains Washington's preferred cudgel against aggression from its main global rivals Russia and China. The U.S. is threatening financial and technology sanctions as primary responses to any potential Russian invasion of Ukraine, the New York Times reported over the weekend. A U.S. delegation led by Deputy Secretary of State Wendy Sherman arrived in Geneva on Sunday night for talks with the Russians aimed at heading off military confrontation. "We've been clear with Russia about what it will face if it continues on this path, including economic measures that we haven't used before — massive consequences," said Secretary of State Tony Blinken on Friday. Those sanctions could include cutting Russia off from the global financial transactions system known as SWIFT, the Times reported, along with limiting shipments of semiconductors and other electronics to Russia's defense and aerospace industries. Even more aggressive steps have also been considered — like prohibiting Russia from importing any electronics that contain American chips, even if they are from non-U.S. companies. The U.S. imposed a similar ban on Chinese telecom giant Huawei in 2020, severely limiting its global access to critical tech components. But imposing such a ban on an entire economy would be a significant escalation with huge consequences for Russian consumers, who could be cut off from a wide variety of electronics that use American components. A senior administration official did not deny those options are on the table in a call with reporters on Saturday, but shied away from detailing them further in public. "All of these things are on the table, and we're not trying to hide from them," the official said. "But we are also not trying to lay them out in public in detail, because our view is that the path toward the most constructive negotiations is to do that behind closed doors." Tai, Dombrovskis huddle on Lithuania: Russia is only half of the European trade headache for Washington this week. American officials are also keeping a close eye on the EU's ongoing dispute with China over Lithuania's cozying up to Taiwan. Beijing last month imposed a strict embargo against the Baltic nation — boycotting not only its exports but even goods from other EU countries made with Lithuanian components. That came in response to a string of diplomatic tiffs, punctuated in November when Vilinus allowed the Taiwanese government to open a consulate bearing the Taiwanese name, not China's preferred moniker for Chinese Taipei. On Friday, U.S. Trade Representative Katherine Tai spoke with EU trade chief Valdis Dombrovskis to express America's "strong support" for Lithuania in its dispute with Beijing, saying she would work with the EU "to address coercive diplomatic and economic behavior through various avenues, including the U.S.-EU Trade and Technology Council." Now, Taiwan is considering $200 million in investments in Lithuania, which the POLITICO Europe team says could raise the prospect of co-operation on chips. State of play: Taiwan's investment plans in Lithuania are not yet finalized, pending studies to be conducted by a team of Taiwanese experts within the next few months. But in an interview with the Europe team, the top Taiwanese diplomat in Vilnius said nothing was off the table, and that Lithuania could act as an inroad to the rest of the European semiconductor market. Others to follow? "This is the first time for the Taiwanese government to set up such an investment fund," said Eric Huang, head of the Taiwanese Representative Office in Vilnius. "When we study the possibility for semiconductor investment in Lithuania, we will consider the question in the light of the whole European Union market, because then it will be more sustainable, it will be profitable." But don't get too excited: Taiwan's proposed investment is a drop in the ocean compared to what a full-scale plant would require. TSMC's factory in Arizona, which will go into production by 2024, demands an investment of $12 billion, for example. A European Commission official also cast doubt on Lithuania's financial as well as logistical capability to run such facilities, highlighting the needs for cheap electricity and abundant water supply. And Huang acknowledged that it would be difficult for any single EU country to duplicate the Taiwanese model of owning a full supply chain of producing microchips, which the island developed over the past four decades.   STEP INSIDE THE WEST WING: What's really happening in West Wing offices? Find out who's up, who's down, and who really has the president's ear in our West Wing Playbook newsletter, the insider's guide to the Biden White House and Cabinet. For buzzy nuggets and details that you won't find anywhere else, subscribe today.     Want to receive this newsletter every weekday? Subscribe to POLITICO Pro. You'll also receive daily policy news and other intelligence you need to act on the day's biggest stories. AUTOMAKERS WARN AGAINST TARIFFS ON NEODYMIUM MAGNETS: U.S. and foreign brand automakers are urging the Commerce Department not to impose tariffs on neodymium magnets used in electric vehicles, as well as defense applications like fighter aircraft, naval ships and missile systems. The increasingly essential magnets are also components in wind turbines, computer hard drives, audio equipment and magnetic resonance imaging equipment. Acting on a recommendation in the White House's 100-day supply chain review, Commerce Secretary Gina Raimondo formally launched a Section 232 investigation in late September into whether the United States should impose tariffs or other import restrictions on the magnets to safeguard national security. The Bureau of Industry and Security has 270 days ending on June 18 to conduct a probe. Once Raimondo gives her recommendations to President Joe Biden, he will have 90 days to decide what action to take. General Motors , in comments filed with the department, warned that imposing tariffs on neodymium magnets and component materials would increase the cost of producing electric vehicles within the United States and "could well benefit non-U.S. EV manufacturers and incentivize assembling drive units outside the U.S." Both the American Automotive Policy Council, which represents GM, Ford and Stellantis, and Autos Drive America, which represents foreign brand manufacturers, expressed similar concerns about the impact of tariffs. EU, Canada, Japan, Australia also weigh in: The European Union warned that imposing new duties on the magnets did not seem to be allowed under the list of national security exceptions to World Trade Organization rules and would strain the transatlantic relationship. Canada said it should be carved out of any restrictions because of its close national security ties with the United States. Both Japan and Australia made similar arguments. FOREIGN AUTOMAKERS BACK MEXICO IN USMCA DISPUTE: The lobbying group for foreign automakers in the United States said Friday it is supporting Mexico in its dispute with the U.S. over automotive rules of origin in North America. Mexico City said last week it would initiate a dispute settlement panel under the U.S-Mexico-Canada agreement about the rules, which it says the U.S. is interpreting too strictly. On Friday, the head of Autos Drive America, which represents companies like Toyota, Honda and Volkswagen, said her members share Mexico's concerns. The companies "urge an expeditious and fair resolution to the United States-Mexico-Canada Agreement (USMCA) rules of origin interpretation to enable the U.S. market – and the entire North American trading block – to reap the full benefits of the agreement," Jennifer Safavian, President & CEO of Autos Drive America, said in a statement. "We support a resolution that recognizes the text, negotiating history, and intent of the agreement to ensure the future competitiveness of auto manufacturing in the North American region." Canada is expected to join Mexico's side in the dispute, which will set up a panel of independent experts will review the arguments and render a ruling. The U.S. won the first dispute under the updated NAFTA deal last week, notching a victory in its fight with Canada over dairy tariffs. STEELWORKERS SEND WARNING TO CONGRESS OVER TARIFFS : United Steelworkers told lawmakers late last week to stop using inflation as an excuse to call for rolling back Trump-era tariffs, which the influential labor union contends are protecting U.S. industries that have suffered from unfair trade practices perpetuated by China and other countries. Trump's Section 301 and Section 232 tariffs predate the current increase in consumer prices and industry-driven efforts to connect the two are disingenuous, the labor union wrote in a letter sent to all House and Senate offices . It warns: Lawmakers should not carry their water. "Efforts to undermine enforcement actions under the guise of addressing inflationary pressures or to give importers increased access to foreign supplies, which are all-too-often unfairly traded, are an insult to workers and their employers in the impacted sectors who work hard, play by the rules, and simply expect their elected leaders to stand by their sides," the letter states. War with retailers : The letter takes specific aim at retailers who have argued that tariffs contribute to rising prices because companies pass the increased expense on to their consumers. USW notes that profits at major U.S. companies have been on the rise and dwarf the amount of duties the government collects each year. USW suggests lawmakers should target corporations and their wealthy executives, as Democrats like Sen. Elizabeth Warren (D-Mass.) have called for, rather than eliminate trade measures intended to protect U.S. producers. "If prices are the problem, corporate profits should be the first target for action, not undermining the job prospects for hard-working Americans," the letter states. The political picture : The battle over Trump-era duties has raged since they were first implemented, and inflation is just the latest argument tariff critics are using to push for their removal. But it's a particularly sensitive one heading into the 2022 midterm elections as vulnerable Democrats are already under attack from Republicans eager to blame them for inflation and supply chain issues. Members of the New Democrats Coalition have pressed U.S. Trade Representative Katherine Tai and Commerce Secretary Gina Raimondo to eliminate steel and aluminum tariffs on U.S. allies. Doing so would "help the U.S. compete and ease inflationary pressures," the lawmakers wrote in a Dec. 21 letter.   DON'T MISS CONGRESS MINUTES: Need to follow the action on Capitol Hill blow-by-blow? Check out Minutes, POLITICO's new platform that delivers the latest exclusives, twists and much more in real time. Get it on your desktop or download the POLITICO mobile app for iOS or Android. CHECK OUT CONGRESS MINUTES HERE.     International Overnight — Your Morning Trade host went on the POLITICO Dispatch podcast to talk about America's new experiment with industrial policy. — Supply chain issues are leaving new homes without gutters and garage doors in the U.S., The Wall Street Journal reports. — The Norwegian military is enduring an underwear shortage due to Covid-related supply chain disruptions, the Washington Post reports. — Supply chain disruptions are unlikely to completely alleviate in 2022, experts tell the Financial Times. — A Belt and Road deal with Morocco could give China a commercial gateway to the Mediterranean, the South China Morning Post reports. — Israel-China trade is increasing tensions with the U.S., the Middle East Eye reports. THAT'S ALL FOR MORNING TRADE! See you again soon! In the meantime, drop the team a line: dpalmer@politico.com; gbade@politico.com; soverly@politico.com; gmott@politico.com and pjoshi@politico.com. Follow us @POLITICOPro and @Morning_Trade.   Follow us on Twitter Pradnya Joshi @pjoshidc John Yearwood @john_yearwood Doug Palmer @tradereporter Gavin Bade @GavinBade Steven Overly @StevenOverly   Follow us

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