This week marked yet another busy trade week for the Administration, with the successful confirmation and swearing-in of Howard Lutnick as Secretary of Commerce (Jamieson Greer will be confirmed as USTR this coming week), the President moving to defend U.S. companies and innovators from overseas policies it deems discriminatory and exploitive (e.g., DSTs, fines, practices, policies), and issuance of a National Security Presidential Memorandum (NSPM) aimed at promoting foreign investment while protecting America’s national security interests, particularly from threats posed by foreign adversaries like the People’s Republic of China.
Directive to Prevent Unfair Exploitation of American Innovation
At its core, the directive is yet another point of leverage for the President in his quest to equalize global trading imbalances. The Administration is taking the position that it will utilize tariffs to penalize foreign countries that institute digital service taxes (DSTs), fines, practices, and other polices that negatively impact U.S. firms.
Under the order, the USTR is to renew DST investigations under Section 301. Relevant agencies will also review whether the European Union (EU) or United Kingdom (UK) governments are undermining free speech through censorship of U.S companies. And, foreign governments will face punitive actions should the Administration find them liable for coercing U.S. businesses to hand over intellectual property.
NSPM, re: Foreign Investment and Protecting America’s National Security Interests
The memorandum creates a “fast-track” process to facilitate greater investment in the U.S. from specified allies and partners, while establishing guardrails to prevent investors from partnering with foreign adversaries in corresponding areas. Specifically, the Administration will expedite environmental review for any investment totaling more than $1 billion.
In terms of guardrails, the memorandum requires that Committee on Foreign Investment in the U.S. (CFIUS) be used to restrict Chinese investments in strategic U.S. sectors like technology, critical infrastructure, healthcare, agriculture, energy, raw materials, and more. Further, the memo establishes new rules to curb the exploitation of U.S. capital, technology, and knowledge by foreign adversaries such as China. This should be viewed as the Trump Administration’s first response (and step) in the years-long congressional effort to curb outbound U.S. investment (as well as the Biden Administration’s outbound EO and rulemaking).
As a reminder, the following upcoming trade deadlines are approaching:
- February 4: 10 percent additional tariff on all Chinese goods
- March 4: Canada and Mexico 25 percent tariff review period ends
- March 12: 25 percent Steel and Aluminum global tariffs go into effect (no exemptions/exclusion process)
- April 1: America First Trade Policy reports due
- April 2: Fair and Reciprocal Plan
- April 2: 25 percent tariff threat on sector-specific imports*
With respect to Canada and Mexico, both countries took immediate actions to address the flow of illegal immigration and fentanyl across the northern and southern U.S. borders, respectively, prompting Trump’s decision to pause implementation of the tariffs. Underlying the President’s initial threat, however, is his frustration with the U.S. trade imbalance with each country, as well as the circumvention of tariffs through both countries. Thus, whether the 25 percent tariffs go into place on March 4 should not solely be viewed through the lens of border security, but also unresolved economic issues. Hence, President Trump has indicated a desire for an “economic deal” with each country. To date, progress has been made with Mexico, but less so with Canada.
On the China front, the President already has moved in several ways by placing additional 10 percent tariffs on imports, as well as taking action this week to curb both Chinese investment into the U.S. as well as U.S. investment into China. Remaining issues on the table include China’s implementation of the Trump 1.0 Phase I deal (i.e., upholding purchasing agreements, sale of TikTok, repeal of PNTR, de minimus imports, nuclear weapons, and others). Treasury Secretary Bessent began talks this week with his Chinese counterparts.
Still in the crosshairs is the European Union. Signaling his displeasure with punitive EU policies like DSTs, VATs, censorship, and forced technology transfers, President Trump officially put the EU on notice that they may be next in his expanding trade war. To confront the threat, the EU dispatched its Trade Commissioner to Washington this week to begin talks. Expect these negotiations to include specific sectors, particularly autos, EU purchasing commitments (e.g., LNG imports), and defense spending (i.e., NATO, Ukraine).
*Note that the 25 percent threat for sector specific industries is rhetorical at this point, with no formal action yet being taken. Instead, President Trump indicated that the 25 percent would be levied on autos, semiconductors/chips, and pharmaceuticals. While these industries have been top of mind for the President for some time, his goal here appears to be onshoring. Thus, a phased-in approach towards these sectors may be required to help entice companies to bring manufacturing back to the U.S. without disrupting critical supply chains. Other sectors that Trump and his Administration have opined on for targeting include: copper, energy inputs like batteries and critical minerals, iron, and lumber/wood products.
Japan remains an active point of discussion, as well, with its trade imbalance and Nippon Steel a focus of the discussions. President Trump stated this week that Nippon would make a minority investment in U.S. Steel, though both companies seemed to be unaware of the deal. Meanwhile, Japan’s Foreign Minister has asked the Administration for an exemption from its upcoming steel and aluminum tariffs, as well as its reciprocal tariffs.
Finally, the President and his Administration continue to raise other issues of ire, particularly currency manipulation and penalties for BRIC countries developing their own currency.
OUTLOOK/ANALYSIS. What will be important to watch is the interplay between trade policy and congressional reconciliation efforts. Having passed its “skinny budget” on Thursday, the Senate will now watch to see whether the House can move its “one big beautiful” budget resolution this coming week (currently scheduled for the floor on Tuesday).
The President’s top economic advisor, Kevin Hassett, said this week at a White House press briefing that the 10 percent tariff on Chinese goods alone could bring in $500 billion to $1 trillion in revenue. Outside observers and influencers, including the influential “All In” podcast, have suggested that a skinny bill may allow for the Administration to better evaluate the effects of tariff policy on both the economy and federal revenues. Given that the annual budget deficit is driven in large part by interest on the ballooning national debt, there is some thought that tariff revenue, as well as shifting Treasury strategy on the issuance of both short- and long-term debt, could have a positive impact on the budget baseline, thus relieving some pressure from deficit hawks (particularly in the House) to make severe cuts to entitlement programs like Medicaid and SNAP that the new working class base of the Republican Party relies on.
In any case, we expect the House to pass its budget resolution this week, bringing to a head the dueling proposals between the two chambers.
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