The usual disarray precedes Donald Trump’s tariff Liberation Day

Welcome to Trade Secrets. Wednesday next week is apparently “Liberation Day”, when Donald Trump’s piecemeal approach of a steel and aluminium (aluminum, whatever) tariff here and a fentanyl duty there gives way to a glorious unified policy of “reciprocity”. (Disappointingly, they’ve gone for the second of the month rather than April Fools’ Day itself.)

There was some chatter and media stories about this from various administration types last week, which solidified my default view that the “reciprocal” description is totally bogus and they’ll do whatever they feel like doing. Accordingly, I’ve relegated the issue to the second piece in today’s newsletter, the first one being what eager-beaver subsidy-busters in Brussels are going to do to a carefully constructed policy towards Chinese electric vehicles. The Charted Waters section, which looks at the data behind world trade, is on the Canadian dollar.

EV come, EV go

My ace Brussels colleagues bring the news that the European Commission is conducting a review under the EU’s newish foreign subsidies regulation (FSR). The target is the Chinese car company BYD’s electric vehicle plant in Hungary, and the suspicion is that it receives distorting handouts from the Chinese state. The FSR gives investigators a lot of powers to seize information (including, it seems, examine the email inboxes of company employees held on servers outside the EU) and punish wrongdoers by forcing them to divest or repay subsidies. You could see this dust-up over Chinese subsidies and EVs coming from a mile away (specifically from May 9 last year, for Trade Secrets readers) and it’s juicy stuff. Here’s why.

The EU’s dealings with China over EVs (and green tech more generally) are a tricky balancing act. On the one hand are EU governments such as France, who want antisubsidy duties to protect carmakers from cheap Chinese imports. On the other are those German carmakers who don’t want to lose access to China’s market, whatever that’s worth for them these days. On the third hand are consumers and environmentalists who would actually quite like affordable electric cars if that’s not too much trouble. The fourth hand belongs to member state governments, who are less concerned about who builds car factories in their economies than that they get built.

The compromise involves carefully calibrated, company-by-company antisubsidy duties to slow but not stop imports of Chinese EVs. The duties also give an incentive to Chinese manufacturers to set up in the EU (via joint ventures or otherwise) and hopefully bring transferable technology (oh, the historical irony) and value-added production, rather than just final-assembly plants.

Now enters the fifth hand, in the form of the FSR investigation. Finding that BYD has benefited from government subsidies could upset that delicate balance, deterring Chinese carmakers from setting up in the EU by requiring them to repay subsidies or divest. One of the first targets for the FSR last year was the Chinese security-scanner company Nuctech. As with EVs, the EU initially imposed antidumping duties on Nuctech’s exports to Europe, which caused the company to “tariff-jump” and set up production inside the bloc. 

There’s always a tendency to think events like these are part of some cunning geopolitical game, particularly since the BYD plant is in Hungary, whose prime minister Viktor Orbán is a lot matier with Beijing (and Moscow and now also Washington) than most other EU states would like. But at its heart the FSR starts off as a technocratic process, in this case conducted by the fiercely independent competition directorate (COMP to its friends and its many enemies). COMP has had no problem in the past with very seriously annoying even the EU’s biggest member states in other areas such as state aid. See, for example, the Siemens-Alstom merger.

That said, the FSR investigation could be made to pull in the same direction as the trade instruments rather than against it. If the probe proceeds to a later stage, the commission will have to apply a “balancing test” to assess whether the benefits to the internal market outweigh the distortions from the subsidy. Those benefits can include environmental protection and promoting R&D. Now, let’s say they decide that BYD bringing a lot of value-added production and technical knowhow to the EU makes Europe green and productive. Ta-da! That could get it off the subsidy penalties. The circle is squared. Is this how it’s going to work? Dunno. It’s what I’d do, though.

Trump draws up his trade bucket list

Writing about so-called reciprocal tariffs I do pause wearily to consider the words of the former Arizona congressman Mo Udall, who observed during a tedious debate in the House of Representatives that everything that could possibly be said had already been said, but that not everyone had yet had a chance to say it.

Anyway, there are a few crumbs worth sweeping up and consuming from last week as Liberation Day draws nearer. So let’s dig in. Readers may remember my view that to do reciprocity properly — product by product and tariff line by tariff line — would be hugely complex and expose certain sensitive US sectors (cane sugar, dairy) to competition from cheap imports — and so was unlikely to happen.

It’s not happening. Instead the extent of debate within the administration, to judge by last week’s stories, is whether every trading partner gets its own special bespoke tariff — “each country will receive a number”, as Treasury secretary Scott Bessent put it in an uninspiring appearance on Fox Business — or whether they would be put in one of several “buckets”, where they would have to share a number with others. Oh, and as of yesterday, the Wall Street Journal was reporting that cars and microchips, among other products, might be excluded entirely for the moment.

The country that put a man on the moon is wondering whether it’s got the computational ability to create a number for each of its couple of hundred trading partners, or whether they have to share one among fifty.

Little of this makes sense. What happens if you reduce your own tariffs just enough to escape the bucket you’re in? Do you automatically go into the next bucket down, even though there might be countries in that bucket with much lower tariffs than you? Why doesn’t each country in any given bucket immediately raise their tariffs to the level of the country in that bucket with the highest tariffs? Are you told the actual formula used to compute your number, in which case you can game it like crazy? Or do they go Kafka-style and just tell you what it is without explanation? If so, how are you supposed to bring it down except with trial and error?

When they are calculating, say, the Chinese tariff number, do they compare it with their own existing tariffs on imports from China? Because those are a lot higher than the standard most-favoured-nation tariff. And if they’re complaining about the value added tax in other countries, which they bafflingly regard as a discriminatory trade measure, do they take into account US state-level sales taxes?

Surely at the least the administration has decided whether these tariffs are on top of other tariffs, such as the existing steel and aluminium duties? Apparently not. Bessent last week looked startled at the question (11 mins 30 secs here) and punted it to the commerce department and US trade representative.

The original so-called reciprocal trade act, wrong-headed and destructive though it was, at least had some coherent meaning and structure. Like all US trade policy these days, it’s being put through the administration blender and coming out as a kind of pulpy sludge that can be fashioned into any shape Trump likes. And it will probably fall apart before too long.

Charted waters

If Trump is heading for a Mar-a-Lago Accord that will strengthen the Canadian dollar against the US dollar, the markets don’t believe it. The exchange rate has gone the other way over the past year and has been basically unchanged since his inauguration.

Trade links

• A paper from the European Council on Foreign Relations looks at the EU’s capacity to retaliate against tariffs and other aggression from the US.

• As happened during Trump’s first term, his administration is looking at the possibility of a bailout for American farmers caught in his trade war.

• The controversy over Elon Musk has put negotiations about a secure communications system between Italy and Starlink on hold, that country’s defence minister said. (I wrote last week about Europe trying to build alternatives to Starlink.)

• Bloomberg reports that China’s imports of commodities and cars from the US are collapsing.

• New Zealand and India are relaunching trade talks, with the Kiwis hopeful they can get a deal that opens up India’s dairy markets. Bless. Meanwhile, the EU’s recent surge of enthusiasm for its own bilateral deal with India didn’t last long.

Trade Secrets is edited by Harvey Nriapia