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The Office of the U.S. Trade Representative announced on Monday that it is considering tariffs as high as 100% on up to $2.4 billion worth of French products, following an investigation that concluded France's digital tax "discriminates against U.S. digital companies, such as Google, Apple, Facebook, and Amazon."

Why it matters: The proposal underscores the administration's willingness to expand the scope of President Trump's trade war beyond just China and use tariffs as a weapon to retaliate against other countries. It was announced around the same time that Trump landed in London for a NATO summit, where he will come face to face with French President Emmanuel Macron.

The list of products that could be targeted includes sparkling wine, French cheese, handbags and more. 

The big picture: The announcement also comes the same day that Trump tweeted he will restore steel and aluminum tariffs against Brazil and Argentina due to their currency devaluations. On Fox Business, Commerce Secretary Wilbur Ross said that time is running out for the U.S. and China to agree on a trade deal before Dec. 15, when the U.S. is set to impose an additional 15% tariff on around $156 billion worth of Chinese goods.

“USTR’s decision today sends a clear signal that the United States will take action against digital tax regimes that discriminate or otherwise impose undue burdens on U.S. companies. Indeed, USTR is exploring whether to open Section 301 investigations into the digital services taxes of Austria, Italy, and Turkey. The USTR is focused on countering the growing protectionism of EU member states, which unfairly targets U.S. companies, whether through digital services taxes or other efforts that target leading U.S. digital services companies.” 

U.S. Trade Representative Robert Lighthizer

A 2019 U.S.-China trade war deal is looking unlikely

How to think about Trump's two big trade deals

Trump says he will restore steel and aluminum tariffs against Brazil and Argentina

White House considering tariffs of up to 100% on $2.4B of French goods

It's in response to an investigation that found France's digital tax discriminates against U.S companies.

Photo: Ludovic Marin/AFP via Getty Images

Politics

Trump tariffs

Business

World

Trade war

After a record economic expansion, the coronavirus pandemic sent the U.S. economy into a recession as unemployment soared to staggering heights. The country now faces urgent questions about how much stimulus is needed for reeling consumers and businesses, and what a recovery might look like.

Economy & Business

President Trump tweeted Monday that he will restore steel and aluminum tariffs against Brazil and Argentina due to their currency devaluations.

"Brazil and Argentina have been presiding over a massive devaluation of their currencies. which is not good for our farmers. Therefore, effective immediately, I will restore the Tariffs on all Steel & Aluminum that is shipped into the U.S. from those countries."

The big picture: Trump's tweets show that he is not afraid to open a potential new front in his ongoing global trade war even as the 2020 presidential election approaches — and also touched on his antagonism with the Federal Reserve, which he said should lower rates to prevent similar actions from other countries.

Reality check: Both the Brazilian real and Argentine peso are freely traded and have been for years. The currencies have weakened because of political upheavals and dwindling growth forecasts in the two countries — not government intervention.

In Argentina's case, the weak currency has been one of the biggest pain points for its citizens as its economy attempts to pull out of a lengthy recession. It has helped fuel spiraling inflation and erode buying power, putting one in three people in poverty, the highest level in close to a decade.

What they're saying: "Trump’s tweets suggest a failure to understand how trade flows, exchange rates, or economies function at the most basic level," Karl Schamotta, chief market strategist at Cambridge Global Payments, tells Axios. 

"His actions are completely counterproductive, and will only apply more pressure on both currencies, driving them down against the dollar, while damaging central banks which are doing their best to fight depreciation."

"He is somehow managing to make human suffering worse in these countries — while also making U.S. economic leadership laughable."

Behind the scenes: A source familiar says that Trump is fighting Fed Chair Jerome Powell every day about a strong dollar. The president and Peter Navarro, one of his most hawkish trade advisers, claim that it is seriously "overvalued" and believe countries that are devaluing are trying to game the system.

Trump is preoccupied with getting China to announce a massive purchase of U.S. agricultural goods. The same source says that "the agriculture part of the China deal is driving him mad."

A former senior Trump administration official who worked on trade told Axios, "Can understand his frustration, but un-exempting minor metals tariffs isn’t going to do or change anything. It just betrays his emotional reaction and makes the U.S. position look weak."

Brazil is America’s major global competitor to sell soybeans to China. And Argentina inked a deal earlier this year to export soymeal, a livestock feed, to China, per Reuters.

Argentina's Mauricio Macri has the country in a "Macrisis"

"He is somehow managing to make human suffering worse in these countries."

Trump trade war

Latin America and Latinos

President Trump's two most important trade deals — one with China and another with Canada and Mexico — have been hobbled by forces largely outside of the administration's control.

Between the lines ... 1. On USMCA: The passage of USMCA depends on the ability of House Speaker Nancy Pelosi, organized labor and the Mexican government to come to a compromise.

The Mexicans have long said there's no way they're going to let American officials inspect their factories. American labor leaders, meanwhile, have said the only thing they'll accept is a unilateral process to ensure Mexico is meeting its labor standards. 

The question is whether there's a side letter that can satisfy both AFL-CIO president Richard Trumka and Mexico City. So far it hasn't been the case but the Mexicans claim they're close.

Pelosi has to balance the desires of moderate members, who want the deal to pass, against the concerns of more progressive members close to organized labor. And she's doing it all against the backdrop of impeachment, which has overwhelmed the 2019 congressional calendar.

2. On the China deal: A week ago, U.S. sources close to the China talks indicated they were on the precipice of a "Phase One" deal. But that optimism now seems premature, if not misplaced.

Congress sent legislation to Trump's desk that angered Beijing, interrupted the trade talks, and telegraphed support for democracy and human rights in Hong Kong. The new Hong Kong Human Rights and Democracy Act requires the president to impose sanctions on people who violate human rights in Hong Kong.

Trump begrudgingly signed off, as the legislation passed with veto-proof majorities.

Beijing responded with predictable fury and threats, even as Trump took pains to downplay the bill and to flatter President Xi in his signing statement.

Behind the scenes: A source close to Trump's negotiating team told me the China deal was now "stalled because of Hong Kong legislation" and that time is needed "to allow Xi's domestic politics to calm." The "Phase One" deal with China would probably happen "year-end at the earliest," and Trump is expected to hold off on his planned December tariffs to keep the deal alive.

Two other sources close to the China talks said several substantive obstacles remain, including how much of his tariffs Trump will roll back, what mechanisms will enforce the agreement, and how the Chinese will guarantee enormous purchases of U.S. agriculture products that Trump has already said they will make.

There are also logistical complications. The Trump team has bandied around possible locations to sign the deal — ideas have included Iowa and Camp David — but has struggled to find a mutually acceptable venue.

The bottom line: Most of my sources close to both trade negotiations — both Democrats and Republicans — say they expect both deals to ultimately come through. But there are plenty of reasons to remain wary about these predictions.

USMCA and the "Phase One" China trade deal have been hobbled by forces largely outside of Trump's control.

Illustration of a hand picking up a shipping container with USMCA label

John Deere said in its fourth-quarter earnings report on Wednesday that it expects lower earnings in 2020 due to a decline in worldwide equipment sales, Reuters reports.

Why it matters: The world's largest farm equipment manufacturer cited ongoing tensions from the U.S.-China trade war as well as harsh weather in the U.S. as factors that have led farmers and construction companies to decide against large new investments.

"John Deere’s performance reflected continued uncertainties in the agricultural sector. Lingering trade tensions coupled with a year of difficult growing and harvesting conditions have caused many farmers to become cautious about making major investments in new equipment," Deere CEO John May said in the report.

The big picture: Deere said it predicts sales of its agriculture and turf equipment will decline between 5% and 10%, while sales in its construction and forestry division may be down between 10% to 15%.

It also believes agriculture sales in the U.S. and Canada — its largest markets — will slump by 5%, citing decreasing demand.

Largest milk producer in U.S. files for bankruptcy

U.S. to distribute $800 million in aid to southern farmers hit by 2018 hurricanes

John Deere expects U.S.-China trade war to hurt its bottom line in 2020

It also cited a string of bad weather for U.S. farmers as a factor.

A John Deere cotton stripper. Photo: Ivan Gubsky/TASS via Getty Images

John Deere

Dollar Tree said acceleration of the trade war with China would up its costs by $19 million in Q4.

Why it matters: Even as the Trump administration says it’s close to a "phase one" trade deal with China, corporations are bearing down and preparing Wall Street for the worst-case scenario.

The administration has been mum on whether or not new tariffs on about $300 billion worth of Chinese imports will take effect on Dec. 15.

What they’re saying: “Obviously, the biggest unknown as we sit here today for us and many other retailers is tariffs and where [that lands] at the end of the day,” Dollar Tree CEO Gary Philbin told analysts after the company, which also owns Family Dollar, reported earnings on Tuesday.

Shares dropped by as much as 15% after the company reported earnings that fell short of estimates and it pared back Wall Street’s profit expectations for the following quarter.

The company blamed “continued uncertainty regarding trade and the related tariffs,” per a release.

The company’s cost of goods sold jumped 4.5% year-over-year.

The bottom line: Dollar Tree, which makes its name on inexpensive products, is taking action to hold the line on prices.

“We are moving some product out of China, we’re sourcing to elsewhere, we are redesigning product,” Philbin told CNBC.

Dollar Tree's misplaced bet on Family Dollar

Cities lead the backlash against dollar stores

Dollar Tree says the U.S.-China trade war will cost it $19 million in Q4

Corporations are preparing Wall Street for the worst-case scenario.

A Dollar Tree store in California. Photo: Frederic J. Brown/AFP via Getty Images

U.S. China trade war

The U.S. pork industry is pushing the Trump administration to focus on increasing access in the Chinese market, worth $24.5 billion over 10 years, during the ongoing trade talks with China, Bloomberg reports.

Why it matters: The Chinese pork market is currently afflicted by the African swine fever that's pushed the cost up by more than 69%— making it the perfect time for American producers to swoop in with its product at a lower cost, per Bloomberg. Other countries, such as Brazil, have been able to cash in on the Chinese demand.

Go deeper: Global pork prices soar as swine fever infects herds in eastern Asia

U.S. pork producers eyeing $25 billion China market amid trade war

The only thing in their way is the U.S.-China trade war.

Axios Finish Line

Big retailers like Bed, Bath and Beyond, Target, and TJX Brands are refusing to accept tariff price increases from their brand suppliers, telling the companies they will have to either eat the tariff costs or find another buyer.

Why it matters: This forces the costs of President Trump's trade war with China down to smaller businesses that can hardly afford them, while the big companies keep the impact of tariffs at bay.

The hard line being taken by the bigger players could be enough to shutter smaller retailers. Without tariff relief or the ability to pass on the 10-25% price increase they face, some small businesses say they will likely have to close within a year or so.

The state of play: After the next round of tariffs — scheduled for Dec. 15 — is implemented, nearly every product traded between the U.S. and China will be affected.

That's sure to put even more pressure on the smaller retailers, as bigger companies continue to leverage their size and influence to dodge price hikes for as long as possible.

What we're hearing: "The material cost is more than 50% of the product, so it’s a significant cost," Dan Digre, president of Misco (Minneapolis Speaker Co.), which his father founded in 1949, tells Axios. "You start taking out 10-15%, and it’s hard to be profitable."

The head of another small retailer that supplies bigger chains — Surell Accessories of Troy, N.H. — tells Axios: "We’re just holding on until we can figure this out." 

"But this certainly isn’t a great situation for us. Another year or two and there’s no way we could survive this thing," says Darryl Meattey, founder and CEO of Surell, which sells fur hats, vests, scarves and mittens.

What we're not hearing: Representatives from Bed, Bath and Beyond, and TJX  — which includes TJMaxx, Marshalls and HomeGoods — didn't return emails from Axios asking for comment.

According to the Wall Street Journal: "Days before new tariffs went into force Sept. 1, Target sent a letter to suppliers saying that it 'will not accept any new cost increases related to tariffs on goods imported from China.'"

Target CEO Brian Cornell told CNBC this week: “We’ve made sure we have worked with our vendors to try to offset some of those [tariff] costs.”

Smaller suppliers tell Axios that Bed, Bath and Beyond and TJX have been refusing the tariff costs too.

The intrigue: Small business owners who spoke to Axios say business is strong — they've got lots of orders to fill and clients to serve, so they can't reduce their workforce or cut costs to offset the tariff expenses. They are simply treading water.

Instead, they're putting off investments in technology, marketing and machinery and, in some cases, eating into cash reserves.

Where it stands: So far, the strong economy has helped buffer small businesses against the blunt impact of tariffs: The National Federation of Independent Business's monthly "Optimism Index," a bellwether of small business sentiment, rose in October, with 25% of respondents saying that finding qualified labor was their top complaint — more than those who cited taxes or regulations.

The bottom line: Despite mounting pressure from tit-for-tat tariffs, small retailers have managed to stay afloat. But questions linger over how long that can continue if tariffs persist — and there's no off-ramp for the trade war in sight.

Editor's note: This story was corrected to remove a reference to Burlington, which isn't a subsidiary of TJX.

Big retailers are pushing tariff costs on to smaller merchants

They're refusing to accept tariff price increases from their brand suppliers.

Illustration of man struggling under the weight of a large quarter

Tariffs

Axios Pro: Deals

The Department of Agriculture will distribute the second round of aid payments for 2019 aimed at buffering the impact of President Trump's trade war with China starting next week, according to a USDA statement.

The state of play: The administration already paid farmers $6.7 billion for production in this year and $8.6 billion last year, per Politico. The earlier payment in 2019 covered half of the farmers' eligible production, and the latest round will cover an additional quarter.

Producers will be able to apply for the aid through Dec. 6, per the statement.

The Trump administration could provide additional aid in January if deemed necessary, Politico writes.  

What they're saying: The relief "will give farmers, who have had a tough year due to unfair trade retaliation and natural disasters, much needed funds in time for Thanksgiving,” Agriculture Secretary Sonny Perdue said in the statement. 

China hacked key manufacturing group during Trump's trade talks

Tariff revenue spiked to a record $7 billion in September

Trump administration to offer additional relief to farmers amid trade war

This is the third round of aid between 2018 and 2019 offered to stem the impact of the trade war.

Photo: Ricky Carioti/The Washington Post via Getty Images

Adapted from CivicScience; Chart: Axios Visuals

The trade war is starting to hit home for more Americans, affecting their buying habits and expectations about the economy, data from research firm CivicScience shows.

Why it matters: Tariffs imposed on Chinese goods have largely avoided items purchased directly by consumers so far, but as the trade war has dragged on, more firms are having to pass costs on to customers. This could increase inflation or cause a pullback in consumer spending, which has been the driving force behind the U.S. economy's strength this year

European leaders increasingly look to China as global partner over U.S.

Trump's puzzling tariff exclusion process

More Americans say they're feeling the cost of tariffs

The trade war is affecting Americans' buying habits and expectations about the economy.

The U.S. amassed $7 billion in import tariffs in September, a 9% jump from figures in August and a 59% year-over-year increase due to new taxes on consumer goods, figures compiled by the Commerce Department show, per the Wall Street Journal.

Why it matters: President Trump has falsely said China is paying for the tariffs. Business executives and economists generally recognize the revenue as a growing burden on American importers and U.S. customers.

Why now: The revenue increase can be attributed to a 15% levy on about $110 billion worth of Chinese imports that took affect on Sept. 1. 

More than $5 billion of the total collected last month came from tariffs collected on imports from China, while tariffs assessed to the rest of the world reaped another $2 billion, the WSJ notes.

By the numbers: In a 12-month period ending in September, the U.S. accrued more than $70 billion in tariffs, almost double what was collected before the trade war, according to the WSJ. 

But trade-related expenses have also increased, including roughly $28 billion in farm aid in 2019.

What they're saying: Dan Anthony, vice president of the Trade Partnership, told the WSJ, “This is very much the low-end estimate of costs, because there’s also costs associated with shifting suppliers, shifting to higher-cost sources, that aren’t going to show up in the data."

China trade war could give foreign farmers long-term edge over U.S.

It may be time to get bullish about the U.S-China trade war

WSJ: Tariff revenue spiked to a record $7 billion in September

“This is very much the low-end estimate of costs."

A truck passes by China Shipping containers at the Port of Los Angeles.

A truck passes by China shipping containers at the Port of Los Angeles. Photo: Mark Ralston/AFP via Getty Images

Lost amid headlines about the coronavirus pandemic and the seemingly unstoppable stock market rally, has been the monthslong escalation of tensions in the U.S.-China trade war —  and it's likely here to stay.

Why it matters: The tariffs continue to impress a sizable tax on U.S. companies and consumers, adding additional costs and red tape for small businesses, farmers, manufacturers and households trying to stay afloat amid the pandemic.

"The trade war has been quietly intensifying," Stephen Gallagher, chief economist at Société Générale, tells Axios.

Driving the news: White House chief of staff Mark Meadows said late Wednesday that administration officials are "looking at the national security risk as it relates to TikTok, WeChat and other apps" from China and could announce bans in the coming weeks.

That followed remarks from President Trump on Tuesday that he had no plans for "phase two" trade deal negotiations and was "not interested right now in talking to China.”

What's happening: The "phase one" deal was cheered by investors as a positive first step, because it stopped a tit-for-tat tariff escalation that was poised to add a tax to nearly every product traded between the U.S. and China.

However, it did nothing about tariffs on hundreds of billions of dollars of Chinese imports already in place that are paid by U.S. companies.

Why you'll hear about this again: With the U.S. ratcheting up the pressure, there is a decreasing likelihood China lives up to its "phase one" agreement.

That means a diminished outlook for industries that were counting on the $200 billion in increased purchases of U.S. agriculture, energy and manufacturing after a brutal 2019.

Remember: The primary cost of tariffs isn't the tariffs themselves, but the deadweight loss of consumers buying more expensive, or less efficient, products.

The trade war also is a major factor pushing businesses to pull supply chains and production out of China, increasing costs and uprooting longstanding relationships.

For big companies, this will weigh on margins; for small companies, it could mean going out of business.

Don't sleep: Deutsche Bank’s global head of tech strategy Apjit Walia warns that the demand disruption, supply chain upheaval and bifurcated tech standards from a "Tech Cold War" between the U.S. and China could cost the sector more than $3.5 trillion over the next five years.

What's next: Even if Trump loses in November, investors don't expect a significant change in the U.S. approach to China given Joe Biden's recent rhetoric and bipartisan legislation condemning China for its treatment of Uighur Muslims and restrictions on public companies.

The U.S.-China trade war quietly escalates

Photo Illustration: Sarah Grillo/Axios. Photos: Alex Wong/Getty Images and Lintao Zhang/Getty Images

Technology

China

China is becoming the most formidable rival America has faced, and the risk of confrontation with Russia, North Korea or Iran still looms. Authoritarians are rising, the chaotic Afghanistan exit revealed the limits of U.S. power, and the pandemic, climate change and other critical challenges continue to pose grave threats.

President Biden has made the COVID-19 crisis and a post-Trump return to national unity and traditional democratic ideals his top priorities. From vaccinations to stimulus to schools, Biden is seeking bipartisan compromise while showing a willingness to use executive authority and bare Democratic majorities in the U.S. House and Senate to implement his policies. Republican leaders are navigating deep party divisions over if and how to move beyond former President Trump.

Politics & Policy

From the Valley to D.C., Big Tech players like Facebook, Google and Amazon are under more scrutiny than ever as new technology develops and privacy and antitrust concerns grow in lockstep with companies’ ambitions.

Axios Pro Rata

Protectionism is poised to play an elevated role in global dealmaking, particularly as countries grapple with the economic fallout of COVID-19.

Driving the news: Governments are creating new regulations and incentives to maintain local ownership of homegrown companies.

France’s Finance Ministry on Friday formed a fund to invest in domestic tech companies if they receive unsolicited takeover offers from foreign suitors. It begins with €150 million, managed via state-backed lender Bpifrance, but could expand to €500 million next year.

Australia has proposed a series of changes related to foreign takeover offers in all sorts of industries, regardless of deal size, including one that would let the country's treasurer force divestitures on the basis of national security.

Poland, Hungary and the Czech Republic are in various stages of implementing new restrictions of foreign direct investments, with the goal of restricting takeovers by non-EU companies.

Germany also strengthened its screening of foreign direct investments, initially aimed at health care, but it's expected to expand to other "sensitive" industries like artificial intelligence.

Sweden today got into the act, with top government officials introducing a series of proposals to better screen foreign direct investments.

India last month said that companies from its seven neighboring nations, including China, must receive government approval for takeovers of Indian businesses. It also applies to other changes to beneficial ownership.

The U.S. doesn't appear likely to enact similar restrictions, regardless of White House saber-rattling toward China, although there was that proposal from some congressional Democrats in April to put an overall moratorium on large M&A until the pandemic subsides.

By the numbers: Global cross-border merger activity is down 40% year-to-date, compared to an overall 43% drop in total M&A, per Refintiv. Cross-border deals for European targets, however, are down 5% versus an overall 12% increase in European dealmaking.

The bottom line: The world may be flat, but political policy is marked by peaks and valleys.

Governments turn to protectionism in pandemic fallout

Global cross-border merger activity is down 40% year-to-date.

Protectionism

Data: U.S. Dept. of Commerce; Chart: Chris Canipe/Axios


President Trump's trade war has led to even bigger trade deficits with China, even though it was intended to improve the trade balance. But it's not just China — the deficit has increased with most of our other major trade partners, too.

Why it matters: While economists agree that trade deficits aren't a good way to measure   a trade relationship, they are the metric Trump fixates on, made campaign promises about and uses to evaluate relationships with other countries. 

Throughout his campaign, Trump vowed that he would wipe away the U.S.'s trade deficits: "You will see a drop [in the trade deficit] like you’ve never seen before.” 

Reality check: Among the U.S.'s 15 biggest trading partners, the trade balance has moved in the wrong direction for Trump in 10 of those countries between 2016 and 2018, while the aggregate trade deficit has jumped from $503 billion to $628B.

While Trump can explain the deficit spike with China as a short-term sacrifice for long-term benefit, it doesn't account for the wider trend.

The latest: The U.S. trade deficit in the first 6 months of 2019 is even bigger than in the last two years.

What's going on: Trump's tax cuts are as much to blame for the increase in the trade deficit as anything else, writes Axios Markets editor Dion Rabouin:

More money in Americans' pockets leads to more consumption, often of Chinese-made goods.

The tax cut helped boost the value of the dollar, which makes imports to the U.S. relatively cheaper.

The big picture: Trade deficits mean we buy more from a country than they buy from us, but that doesn’t necessarily mean the relationship is unfair, writes Axios business editor Dan Primack. 

For example, you have a “trade deficit” with your local grocery: you give them money and get food in return. 

Between the lines: Despite the dubious merit of the trade deficit as a useful barometer of the health of a trade relationship, Trump's obsession with the number has led to strained relations with key allies.

As Axios' Jonathan Swan reported in 2017, the trade deficit is one of the items he always wants to be briefed on before meeting with a foreign leader.

Trump picked a fight with Justin Trudeau over the trade balance, later acknowledging that he made up numbers in arguing that the U.S. has a trade deficit with Canada. It has a surplus.

Coupled with immigration, the trade deficit has been a major source of Trump's animus toward Mexico.

It led Trump to threaten auto tariffs on Europe. 

Despite promises, Trump's trade deficits are only growing

Under Trump, the U.S. trade deficit has increased by $125 billion.

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