US China trade

A Turning Point for US Trade Policy

A Turning Point for US Trade Policy

American trade policy has been like the proverbial frog in a pot, slowly simmering under increasing heat.  At a certain point, the frog will not be able to survive, even if it were suddenly rescued.  The US, it appears, has reached this juncture. Were any country other than the United States to have taken this set of steps in a week, Washington would have been aghast.  Instead, it was largely shrugged off as “just another week in DC.”  The fact that the United States could take such actions as escalating tariffs to 25% on potentially $500 billion in goods from China, possibly seal the fate of one of the most important telecommunications firms globally, make national security arguments about the threat level emanating from cars arriving from US allies, and continue to watch the multilateral trade system crumble and then argue that it is “just another week” is especially telling.

301 Continues: The Public Hearings

The much-dreaded trade war between China and the United States over Section 301 has been averted for now as Washington and Beijing concluded talks over the weekend. Both sides announced that a consensus has been reached, agreeing that there is a need to reduce the United States’ trade deficit in goods with China and to create a fair environment for competition between firms. However, if the negotiations break down at any point in the future, the US has completed the necessary second step of the Section 301 process to be able to impose 25% tariffs on Chinese products in the future.  From 15-17 May 2018, USTR convened hearings with Section 301 Committee members and industry players to discuss the pros and cons of the tariff plan. Over the course of 3 days, 105 individuals testified to how the tariffs would affect their companies, industries or the American economy. A prevalent sentiment among the witnesses was that the tariffs would cause “disproportionate harm” to U.S. businesses and consumers across all sectors.  This Talking Trade post unpacks these comments.

The Breakdown of the System: US National Security "Exception" for Steel

Fourth, other countries will start to use “national security” exceptions to block imports of all sorts.  Here is the real danger of Trump’s policy.  Once the major players in the system start to undermine the key norms of behavior, it opens the door for everyone to misbehave. Finally, by imposing such high tariffs on key items in the economy, Trump has successfully raised costs for products across the board inside the United States. This may appear to be a problem only for US consumers and firms.  Given the tight integration of supply chains, however, Trump’s tariffs might actually affect global firms and citizens in completely unrelated places.  Parts and components, for example, may become 25% more expensive with no quick or easy solution for replacement in the short run.  Thus, what at first may seem to be a purely domestic issue—the imposition of tariffs on steel and aluminum against China inside the United States—is going to have global implications.  The world should not view this threat lightly.  The escalation of challenges to the global trade system appears to have begun.

Trump Acts Against China

While USTR officially has a year to make a determination in the pending Section 301 investigation into Chinese intellectual property theft and forced technology transfer, this deadline is likely to be moved up significantly.  USTR will probably rule that American firms have been harmed by Chinese actions and that these injuries require remedies.  Damages could involve significant tariffs, calculated by considering harm caused cumulatively over the past decade.  President Trump’s State of the Union address on January 30, provides the perfect opportunity to highlight the evolving trade agenda and note recent or upcoming actions, particularly vis-à-vis China.