A

I'm Scott.

B

I'm Bill and we're the Trade Guys.

C

You're listening to the Trade Guys, a podcast produced by CSIS where we talk about trade in terms that everyone can understand. I'm Alex Kisling and I'm here with Scott Miller and Bill Reinsch, the CSIS Trade Guys. Thanks for listening to the Trade Guys. On today's episode, we take a look at recent Chinese export restrictions on U.S. companies, examine the U.S. trade Representatives visits to India and Uzbekistan, and dig into a newly announced US Probe of German pharmaceutical pricing. All that and more on today's episode of the Trade Guys. Trade Guys. I want to start this week with an update on a Supreme Court case that we discussed a few weeks ago. And this is a case that just had a ruling come down a few days ago, the Alien Tort stands statute. And Bill, I know you've been tracking this, so before we get into our other topics, I wanted to turn to you for a readout of what the court said.

B

Yes, just a short note and we can put it in because there's no customs refund update this week. And so we're going to have a court update instead. This was a case that has followed many in the Alien Tort statute, which we did talk about before. It's called Cisco v. Doe. And the allegation concerned whether or not Cisco had aided and abetted the Chinese in setting up a surveillance system that, among other things, persecuted the Falun Gong. The court never addressed the merits of that particular allegation. What the court did, though, was, and they had this phrase in their opinion, they closed the door on the utilization of the Alien Tort statute for this kind of lawsuit. And what the court said was that it was an elaboration of what the court had said in some earlier decisions, that the Alien Tort statute, which is just like One sentence from 1789, is a jurisdictional statute that says these law lawsuits belong in federal court, they don't belong in state courts, which was a big issue in 1789. But the sentence does not create a cause of action that if you want to have a cause of action for your lawsuit, Congress has to do that. And actually Congress did that with respect to torture in a separate statute, the Torture of Victims Protection Act. But what the courts have steadily done over the years is narrow. The applicability of this statute and the recent applicable ruling before this one was in a case called Sosa v. Alvarez Bechain. And in the Sosa case, the court ruled that it was a jurisdictional statute and they couldn't find a cause of action in that case, but they left the door open to the possibility that there might be one. And in this case, the Cisco case, what the court basically did is to shut the door and say there is no cause of action created by this statute. It's a null set. And therefore, I think the implication is for companies, well, for American companies, it's an American statute that it's going to be much more difficult for them to be sued for alleged violations of human rights. In particular, the court, I think, did imply that the original three causes of action that were talked about in 1789, which was violations of safe passage guarantees, attacks on ambassadors and piracy, were still there, but that they didn't think that the statute added on its own anymore. I mean, that is a degree of certainty for companies. It may lead in the long term to pressure from Congress to create more causes of action and to consider legislation that would make human rights violations or aiding and abetting human rights violations a cause of action pursuant to some other law. So we'll see about that. I don't think that's anything that's going to happen soon, but if I were a human rights activist where I would turn, turn after this decision is to go to Congress and say, you know, you need to pass legislation that tackles some of these things because the previous door has now been shut.

C

Okay, thanks for that update. It was an important case and thanks for briefing us on it. But let's turn to our first big topic of today's episode. And on June 22, China added several US companies to its export control list, blocking shipments of dual use items to those firms. This is viewed as a retaliation for the Pentagon blacklisting Chinese companies tied to their military earlier this month. And notably, two major rare earth producers were on China's list with rare earth materials, of course, being a major point of contention between the US And China. So, Bill, what is China doing here and how impactful will it be?

B

This has been an interesting game going on. We may be restarting one of these rounds of escalation, retaliation, counter retaliation, and continuing escalation. We've seen several of these over the last couple years. One country does something that the other one doesn't like, the other one retaliates, then the first one counter retaliates and you kind of go back and forth with little mini escalations and eventually there's a leader meeting and they reset everything back to zero and start over again, sort of rinse and repeat. And that has not happened for A while. It happened last fall when Trump and Xi met in Asia and they reset everything. And I was kind of expecting it to start over again and we would have to do another reset when Trump was in China in May. And that really didn't happen. Both sides tried to keep things calm, with some success this time around. One of my colleagues thinks that what happened was that the Pentagon added several companies. They're major Chinese companies. There were a number of them, but the big ones, they added Alibaba, Baidu and BYD, the auto company, to the Pentagon's 1260H list, which is basically, it's a list of Chinese companies that provide services to the Chinese military. And the consequence of the list, I mean, in the Chinese case, it's kind of symbolic because we don't buy much from them anyway in terms of military equipment. But the Pentagon, Canada, is banned from buying anything from them, and in the more interesting twist, is also banned from connecting with lobbyists who represent 1260H companies. It's designed to kind of break any kind of relationship between the Pentagon and these companies. These companies, for the most part, don't provide a lot of goods and services to the Pentagon. So I'm not sure it matters. And I think the Pentagon may have just been acting on its own, or they may have calculated that this was a small, largely symbolic step that wouldn't irritate the Chinese. If that was the case, they miscalculated, and I think most China observers would tell them they were going to miscalculate. The Chinese always retaliate. Sometimes it takes them a while, but they do, and they calibrate it to the degree of the offense that they think they've suffered. So they've now retaliated by adding export controls on rare earth mineral exports to a number of companies, including the company that owns the Mountain Pass mine in California, which I think is currently the only operating rare earth mine in the United States. It doesn't buy anything from China anyway. So the Chinese move is equally symbolic, but it raises the stakes, you know, and since that's just a couple days old now, we'll see what Trump will do. Will he kind of bite his tongue and not further escalate, or will he just come back and do something else and start the cycle all over again? Most of us have felt that both sides wanted to keep the relationship calm. The deal that was negotiated last year in Asia expires shortly after the U.S. election. It expires November 10th. And I think that was chosen in order to avoid some kind of pre election hiccup that would make the markets very nervous. And we've all been thinking that nobody really wants to just derail the relationship between now and the election. Then this comes along. It'll be interesting to see what Trump does. Xi Jinping is, I think, tentatively scheduled to come here for a reciprocal state Visit. I think September 4th was the date that's been mentioned. I don't know that that's been confirmed. So there's an opportunity to, you know, reset again, if that's necessary. So we'll wait and see. In the short run, though, it's a reminder, kind of a gentle one, but a pointed reminder from China that they have leverage. They control these minerals, and more importantly, they control more 95% of the processing of these minerals. And if they want to put the squeeze on us, they can do that. And in this particular case, it's a small step, just as our step was a small step. But what has happened in the past is if each side keeps upping the ante, it turns into big steps. And then you have to have the leaders go back and start everything over again.

C

Yeah. So, Scott, with that in mind, what's Trump's play here?

A

Well, the obvious one is the one that I guess takes too long or is too hard, which is we ought to mine this and process these materials ourselves. I'm thinking back in recent American history. For the past hundred years, one of the most impressive and decisive actions that the United States took in World War II was to become the arsenal of democracy, of really expanding the productive capacity of the United States to make war materials, to make machines and equipment and everything else. So you had their great stories about this, about ford building the B29 bomber. B29s were basically made piece by piece. They're built like ships. And Ford applied an assembly line style process to ramp up production. The factory where they built these things is still standing in Willow Run, Michigan. It turns out that the state of Indiana produced magnets in World War II. There's a lot of war materials that were produced. And as I look at it, just roughly speaking, the United States landmass is roughly the same share of the Earth's crust as China. We've had a US Geological Survey since 1890 where we probably figured out where all this stuff is, at least if we wanted to start mining it, we know at least where the richer areas are. And about 40% of the surface area of the United States is public land, either state or federal, mostly federal. And it's like why are we even bothering to need a supplier? And why did we get so distracted as to allow China to become 98% of the production of much of anything? So lots of talk, lots of announcements that we might do something about it. But for me, that's the one thing that is fairly obvious beyond the action and reaction that will probably always take place in the belly bumping of the US China relationship. But this is this one. If it really matters, we ought to be taking the steps to produce our own and ensuring a supply for real critical defense materials. So I don't know why we don't do that. I know there have been announcements to that effect, repurposing of existing agencies and good initiatives that have been announced, but we haven't gotten enough there yet to do anything serious.

B

I can answer two of those questions. There are two partial reasons why we let it get away from us. One is it's dirty and environmentally messy. And for a long time the US thought if other countries want to do all the dirty work, that's fine, we'll just buy the stuff from them without really thinking about the consequences. The other reason is that the Chinese and I was just on a call this morning with a European think tank where they're experiencing the same thing, the Chinese tactic. When they're faced with the competitors in this area, it's a classic monopolist tactic. They come in and lower their prices and they lower their prices. And they can afford to do that because they have state backing.

A

Sure.

B

They lower their prices so much that they force the foreign company out of business. The Mountain Pass mine, I think, has gone bankrupt twice before. And it's a classic monopolist tactic. You know, you force the competitor is out of business and then you raise prices. We've had trouble finding tools to deal with that. But the Chinese are adept at employing that tactic, which is fairly sophisticated and you have to have deep pockets to do it. But they do that. I think we are waking up. I mean, Scott makes a good point. Trump administration to its credit, and actually the Biden administration, via the CHIPS act and the Infrastructure act, all have been trying to restart this process inside the United States. The main problem now is it takes time. These things don't happen. And the one thing that would speed it up, which is permitting reform, hasn't gotten past the finish line yet. Everybody says they're for it, but they haven't been able to agree on a specific piece of legislation that would actually do it. And I think I made the point before. In the United States, the History of this stuff is that the average time between the discovery of an ore deposit and commercial production is 16 and a half years.

C

Years. It's crazy.

A

It's long. But we know how to shorten it. And you know, the United States government buys a lot of junk that we never use. Maybe we could create a strategic reserve for the key materials and buy them from us sourcing and essentially create a backstop against the monopolist tactic that you mentioned. I mean, all these things, what they take is determination. We have to want to do it. We talk about wanting to do it, but other than that, I'm not sure we do.

B

Yeah, we do maintain reserves of a lot of critical minerals, I think not the particular ones we're talking about here so much. But over the years, you know, the United States has stockpiled other things. We also went through a phase after the end of the Cold War. There was a movement in Congress to sell off a lot of it, right. On the assumption that it wouldn't be needed. And that may end up being a mistake, but that's what we did.

C

All right, I want to move on to our next topic here, and that is focusing on The Travels of U.S. trade Representative Greer, who has been on the road over the past week, including trips to India and Uzbekistan. I want to start with his trip to India where Greer met earlier this week with his counterpart there, Bill. What was on the agenda?

B

The Indian and Uzbekistan goals, I think were different in some important respects. I mean, it's convenient to stop at both because they're not exactly next to each other, but nearby. The Indian effort is to try to wrap up a long standing agreement that the Indians have been, I would say, slow rolling. It was on track until the Supreme Court decision on tariffs, when the Indians said, well, now we have to go back and reevaluate everything because of that decision. And they've been reevaluating. Our team of negotiators were there, I think, earlier this month or in May and announced they'd made a lot of progress. And Ambassador Greer went this past week, earlier this week and has now left and gone to Uzbekistan, but announced that they've continued to make progress without really being too clear about what the progress is and notably not providing an end date for when this is going to be concluded. So everybody's making happy noises.

C

Why is India slow ruling this at this point? Are they just trying to extract more concessions or what's the grand strategy there?

B

Well, that's a good question. I think in the beginning, after the course decision they thought, well, maybe there's a loophole here. We can get out of this. The terrorists have been ruled illegally. The United States is going to have to fall back. Then they went into waiting mode to see what we would do. And it's becoming clear that I think the US Plan is to come up with substitute tariffs. The initial ones were 10%, which for the Indians is a deal, because the agreement with India says it's 18. And so right now it's 10. And I think it's tempting for them to wait and see what happens after July 24th. The forced labor tariff for them, I think, would be 12 and a half. That's still better than 18. So, you know, it might be in their interest just to drag this on simply to get a marginally better deal. And if you've ever negotiated with the Indians, you know, it's very difficult. They're tenacious and things take a long time. They have a lot to say. And it's just one of those things where I think they've decided that this is not going to be, for them an equal deal. It's not politically popular in India. It's not particularly popular with some important political elements in India, beginning with the farmers and the Agriculture Committee community, which is afraid that they're going to have to accept more American crops. And they're a potent political force. If you remember a couple years ago, they had tractors blocking major highways in the New Delhi area for months, actually. And ultimately this is over a domestic program, but ultimately forcing the Indian government to back down. I mean, Indian internal politics are complicated. And in this particular case, they don't work in an agreement's favor. They work against the agreement. So the government doesn't have a lot of domestic incentives to bring this to a conclusion. The Uzbekistan case is different in that it's not as far along as these other agreements. And it's part of a, I think, a fairly concerted effort by the Trump administration to develop closer relationships with all of the Stans, Kyrgyz Republic, Tajikistan, Uzbekistan, Kazakhstan, and probably to a lesser degree, Turkmenistan. And in a way, this is a means of sort of trying to offset both Russian and Chinese influence. And this is part of the area where the British sort of called the Great Game. I mean, they were mostly referring to Afghanistan, but this has been an area of Russian influence forever. These countries were part of the Soviet Union, right, right. Until 1991. And most of the people, in addition to their native language, speak Russian. There's still substantial Russian influence. Them, including Uzbekistan, have a lot of Their citizens living in Russia, sending remittances back. The Chinese are making a major play to provide more. I don't know. I don't want to say gifts, because the Chinese don't do gifts. But to increase their influence in the region. This is the Silk Road. There's a lot of Silk Road initiative projects going on in all of those countries. The Chinese are well established there, particularly the ones on their border, Tajikistan and the Kyrgyz Republic and Kazakhstan. And there's a contest going on and the US Wants to get in on it. Ambassador Greer actually has now finished his visit there, and they just announced this afternoon we're doing this. On Thursday, June 25, they announced an early harvest trade agreement, which is apparently a precursor to a final agreement which is yet to be negotiated. It's not clear at this point what the details are, but it sounds like the usual suspects agreed to lower their tariffs on our stuff and we agreed to consider giving them favorable treatment on their exports to the United States. Without a lot of details as to what that means. I think for Uzbekistan, a big piece of this is going to be investment. You know, they want foreign investment, they want US Investment in their country. A previous negotiation, I think it was last year, set up a U.S. uzbekistan business and Investment Council, which has been charged with figuring out investment targets for U.S. investors. And they're trying to beef that up and turn it into something real and basically do what the Chinese are doing, provide some cash and increase our influence in the region. So I think it was a good meeting. It sounded like they made some progress, but nothing final and nothing released in detail yet.

C

Scott, what stands out to you from both of these?

A

We have some of that investment may wind up in the minerals that we were speaking of in the previous segment. So that is, you know, as I was reading up on this visit, I was thinking to myself, well, it's 25 or 26 years into the 21st century. How many American cabinet officers have actually visited Uzbekistan this century? And probably you caught them on one hand. I couldn't think of any prior in person visits. So I don't know if Ambassador Greer is unique here or it was trying to get certain combat stripe or something like that for making this visit. I think the minerals part of this and the investment program is where the interest would lie for at least this administration in the near term when it comes to India. Bill's absolutely right. Look, the good news is India is a peaceful market, multi party, multi ethnic democracy. The bad news is they're a peaceful, multiethnic Multi party democracy and doing things is really quite difficult and particularly getting agreement and things that create internal economic pressures on domestic interests. So it's always a challenge. I agree that with Bill's original comment is they've been shopping for a US policy that they think is in their advantage. Since the Supreme Court's decision on ipa they figured tariffs weren't going to go away. But we've showed several different ways to collect revenue at different levels and what's an opportunity to shop. So see what's best for us and try it on and then start the negotiation which they always seem to have plenty of time to not complete.

B

Well, I'm not in the cabinet. I have been to Uzbekistan and I was there during the previous president who was an old line Soviet leader and maintained really a highly controlled Soviet economy. The current administration I think is trying to open the place up and promote growth, which is the smart thing for them to do. When we were there, I was in the China Commission trip and we were studying the Silk Road and we got a long lecture from the U. S Back government about why it was important that the Chinese Belt and Road Initiative run through Uzbekistan. And we sort of wanted to explain that. If you look at the map, you don't go anywhere at the western end of Uzbekistan. You know, you run into the Aral Sea and you run into Turbanistan and sooner or later the only way around it is to go through Iran, which is not an attractive path for Western investors. But they didn't see that. I mean that's the way the silk Road ran 1,000 years ago. But it's not exactly the path of success these days. The thing I noticed that amused me immensely is that everybody there was driving Chevrolets because years earlier GM had bought an old Daewoo, now a Nissan plant, and they really had cornered the market on cars. They were not the kind that are Chevys that are sold here and not SUVs or trucks, sedans and things. But they were all over the place. There's an American presence there and I think that American investment will be welcome. And Scott's right about the minerals. It's a region where there's a lot of them. We were also in Kazakhstan and one of the things that the Kazakhs told us was they have deposits of every element in the periodic table except the ones that are laboratory created.

C

Interesting, interesting.

B

And that's a lot. I assume some of it has snuck over the border into Uzbekistan too. Or they could be lying, you know, never know.

A

It's a good story. Either way. So that is a good story.

C

All right, let's move on to our final topic. Earlier this month, the Trump administration announced that it was launching a Section 301 probe of Germany over its pharmaceutical spending practices. And according to the ustr, the investigation will, quote, seek to determine whether persistent underpayment for innovative pharmaceutical products by Germany is unreasonable or discriminatory and burdens or restricts U.S. commerce. Scott, what is going on here?

A

I think this is a wonderful illustration of why Bill and I, I think both believe the Trump administration will embrace section 301 for the remainder of their time managing trade policy. And it's also a great illustration of why our trading partners really hate 301 because of the latitude that it gives the administration to take on unfair practices. Now, in this case, it's not really a trade issue at all. In fact, this is pure domestic regulation for the most part. But it's domestic regulation that happens in a way that is to be expected by single payer health plans. So if you look at how medicine gets paid for in single payer plans, which is the bulk of health plans sponsored by government outside the United States is basically the tools for cost control are basically price controls or rationing. Okay. And the price controls tend to apply to key purchases like pharmaceuticals. There's sort of the access to the formulary for, for pharmaceutical companies is dependent on their negotiations with the government on pricing. Now, of course, the United States, nobody can figure out how things get paid for here. We have, it's not a criticism of the hospital or physician system here. We have marvelous health care, by and large. But anybody who could understand their bills is a savant. We have the strangest possible way of paying for things here. That said, one of the initiatives of the Trump administration has been to lower pharmaceutical prices as part of their affordability campaign. And they've done a reasonably good job of it using Medicare and the volume pricing that the federal programs have to do similar things in terms of what any single payer system will do on a day to day basis. But what they have done in this particular case is because Germany's been fairly aggressive with pushing for lower pharmaceutical prices with specific firms on a specific schedule. They've used this as a cause to qualify for Section 301 investigation despite it being domestic regulation. It is, it can be characterized and has been by the USTR as an unfair practice. And so this will be pretty bitter. And the pharmaceutical companies are, have been unhappy with the Germans. They'll probably be unhappy with us before this is over. But there was no way to hide this particular investigation because it is a single member of the European Communities. So it's not an action against the trade policy of the member states or the entire block.

C

Yeah.

A

Which negotiates as a customs union in Geneva. We've dispensed with all that and gone about after a domestic practice of a single member.

C

Yeah.

A

So we'll see how it goes. But it's an uncomfortable position for both the companies who are engaged in the negotiations with governments here and in Germany, and it's uncomfortable with the governments.

C

Bill, how does this compare to the arrangement with the UK that we covered earlier this spring? Is this similar or different in any way?

B

Well, I think the administration is going to want to get to that.

C

Or in terms of the approach, are they taking the same game plan here or is it different?

B

No. With the UK as part of the trade agreement negotiation, they can't do that in this case because in this case, the negotiations with the eu, it wasn't with the Germans.

C

Right, right. Yeah, yeah, yeah.

B

So I don't know that this is an issue that's unique to Germany, but the investigation is. It's unique to Germany right now because the German government is pursuing the domestic program that Scott talked about to try to force down prices. And if you talk to the pharmaceutical companies, not all of them, this is not a one size fits all issue, but a lot of them are more concerned about the German program and what it might do to their profits and sales than they are about the tariffs. A number of already have US Production facilities in the United States, and so they're not exporting pharmaceuticals from Germany to the US they're manufacturing them here, which is pretty much what Trump wants, but probably wants everybody to do that. But in this case, he hasn't got everybody yet. But the ones that are already here, I think, are more worried about what the German government is doing than what about what the United States government is doing. Where we want to get, though, in the end, is where we ended up with the UK in which basically they agree to charge more, to equalize prices,

A

charge their citizens more.

B

Yeah, yeah. I mean, the USGR argument and get off the boat at some point on this, but the USGR argument is basically that we are subsidizing everybody else's pharmaceuticals because we're doing all the R and D, which is expensive and we're paying for it. And the result of that is everybody else is getting the fruits of that R and D and can afford to keep their drug prices low so that we are, in essence subsidizing them. They're not entirely wrong about that. But it's a difficult problem to fix. The US Approach has tended to be with the UK is if you will charge more, that will enable our companies to charge less in the United States and that'll drive US Drug prices down. That may or may not be true. Prices tend to be sticky upwards. And if I were a drug executive, I was going to say, well, if I'm going to make more money in the uk, that's fine, and I'll just keep on making more money in the US too. My shareholders will be fat and happy. So I'm not sure that it follows that a price increase in Europe necessarily leads to a price decrease here. But that's the theory. And the alternative is to try to, by law here, force down U.S. prices and force the U.S. companies to make less money. And they've mounted a very effective lobbying campaign against that over the years by arguing, I think with some accuracy, that that will cause major reductions in their R and D investment budget and slow down the production of new drugs.

A

Yeah, but this is burden sharing. And the Trump administration, a lot of its initiatives are about unfair sharing of burdens. So if you look at the arguments, for instance, on defense spending in Europe, they're mostly cloaked in the notion that the American taxpayer should not be shouldering the entire burden for the defense of Europe. European taxpayers need to pick up that as well. So it's a very similar kind of argument, which is why the logic in the UK is at least would be a draft solution for what might resolve this issue in Germany.

B

Okay, Yeah, a very short sighted argument in my point of view, particularly on the defense side, because it totally ignores the benefits that we receive from defending Europe. The pharmaceutical case is more complicated. I think you could probably make a humanitarian argument because it's not just about Europe, it's about the rest of the world. What all these cases are really doing is they're moving in a direction of the United States is dealing with the fact that other countries don't organize their economies the same way we do. And we don't like that. We want them to do it our way. And we have taken to this tactic of anything they do must be a subsidy if it's better than what we do. And I think that gets ultimately into dangerous territory because it's one thing to talk about tariffs and sort of things like that that are kind of, they're about numbers. And I say 10, you say 20. We can find a number to agree on when you start telling countries how they need to reorganize their domestic economy to accommodate us. That's a much more difficult discussion. And it takes a long time. And I don't think it's going to produce the results the administration wants. And I've said this about other administrations. This is not the first time we've gone down this road.

C

Well, we're going to continue to track it and we're going to leave it there for today. But I realize that this is the last episode that will air before the July 4th holiday. So to all of our listeners out there, hope you have a safe and wonderful holiday. Bill Scott and I will be sitting on the front lawn somewhere with some sparklers and enjoying a Budweiser. And that's how we'll celebrate America at

A

250, celebrating the independence of our nation. That's right.

C

That's right.

B

Life, liberty and the pursuit of good beer. Yes.

C

That's right. That's right. All right, guys, well, thanks so much. Thanks as always to our audience for joining us. And we'll catch you next week. Take care. Until then, You've been listening to the tray guys, a csis podcast. For more audio content, visit csis podcasts. Thanks for tuning in.