7 March 2018
Likely Developments in Sino-US Trade Relations in the Midterm Elections Year: Investigations and Altercations
Trade tensions are heightening between the US and many of its largest trade partners. While this extends to its almost traditional sparring with mainland China, it has also embroiled a number of nations normally seen as allies, including Canada, Mexico and the EU. Overall, the persistent adoption of provocative tactics and the use of confrontational language on the part of the Trump administration – together with the recent punitive tariffs introduced for imported washing machines and solar energy equipment, as well as the similar action being taken against overseas-produced steel and aluminium products – has triggered international concerns over growing US protectionism.
A number of other issues have also added to worries that the US might be looking to export all of its economic woes to other nations. Most notably, this has been spurred by the recent and wide-ranging overhaul of US tax legislation, as well as moves to widen the remit of the Committee on Foreign Investment in the United States (CFIUS), the body responsible for reviewing any mergers, acquisitions or takeovers likely to result in a US business coming under overseas control.
The Bulging Trade Deficit
There is seemingly a consensus among government officials, lobbyists and the US business community that Sino-US trade relations will be, at best, “choppy” in 2018. Inevitably, the tensions between the US and any country that contributes to its ballooning trade deficit are always heightened during an election year. In 2018, this will be particularly true as the midterm elections will take on an enhanced significance, not just with regard to the future of the Trump presidency, but also with regard to the American trade landscape for many years to come.
Ever since 1975, the US has maintained a significant overall trade deficit, despite having had a positive services trade balance since 1970. The most disturbing aspect of this has been the fact that the goods-related trade gap has continued to grow, ballooning to US$810 billion in 2017, the fourth-highest figure in US history. Particularly politically-sensitive is the trade deficit with mainland China, the US’s largest single creditor. With this shortfall standing at US$375.2 billion in 2017, China’s share of the US’s overall trade deficit in goods soared to 46%, compared to 32% back in 2007.
With growth of the US economy showing no signs of letting up, a strong 2018 performance is likely to further fuel the country’s import-driven trade deficit. Inevitably, solid business investment will only foster import growth, while the US$1.5 trillion tax cut package – effective since January 2018 – will only act to exacerbate the problem.
To date, President Trump’s trade regime has focused on policy enforcement and the “levelling of the playing field”. This has seen it keen to seek out new ways of reducing the trade deficit, while calling for greater reciprocal market access. According to a 31 March 2017 executive order, which directed the federal authorities to examine US trade deficits around the world, the deficit is down to the (apparent) fact that “the US has not obtained the full scope of benefits anticipated under a number of international trade agreements or from participating in the World Trade Organization (WTO)”.
China Bears the Brunt
Echoing the aforesaid trade regime is a new national security strategy that seeks to promote US prosperity by, among other things, encouraging free, fair and reciprocal trade relationships. Proponents of this strategy see mainland China and Russia as particularly problematic in terms of US interests and regard them as attempting to erode US security and prosperity. Such proponents do not regard these issues as “passing trends or momentary problems”, but instead believe the US needs to rethink its policy “that engagement with rivals and their inclusion in international institutions (such as the WTO) and global commerce would turn them into benign actors and trustworthy partners”.
According to a statement from the White House, back in January 2018, President Trump told Xi Jinping, the Chinese President, that the US trade deficit with his country was unsustainable, further highlighting the central importance of deficit reduction to Trump’s trade and economic strategy. On a separate note, Trump recently declared that “during the coming months” he will reveal plans to impose a “reciprocal tax” (loosely described as a levy on imports from other countries at the same rate those countries impose on US products) on imports from countries that impose high tariffs on US exports.
According to Trump, this “reciprocal tax” would either see the US collect the same sum from the affected countries as they collect from the US or the countries in question would rescind their US-related tariffs. Whatever the outcome, should the US persist in this policy of unilaterally imposing tariffs on specific countries without due review or justification, it would be considered a violation of the US’s WTO commitments. Inevitably such a move would be challenged, while retaliatory measures on the part of countries affected would be all but certain.
The early days of the Trump administration were characterised by positive gestures by both the US and Chinese governments, including the launch of a 100-day trade plan and the decision by the US Treasury Department to not officially deem China a currency manipulator. This honeymoon period has, however, been replaced by a far more contentious relationship.
The Worst May Be Yet to Come
In a recent report on mainland China’s compliance with its WTO commitments, the Office of the US Trade Representative (USTR) committed to “take all steps necessary to rein in the harmful state-led, mercantilist policies and practices pursued by China, even when they do not fall squarely within WTO disciplines.” This has been seen as a clear signal that the US is willing to take action well outside of the WTO’s dispute settlement mechanism. Furthermore, while acknowledging that China has used its WTO membership to become a dominant player in international trade, the USTR indicated that it had been a mistake for the US to support China’s WTO candidature. Inevitably, this sparked immediate condemnation from a number of Chinese officials.
In general, any country adversely affected by restrictions imposed by the Trump administration is certain to respond in some way. While some may opt for the established WTO consultation channels, others may adopt carefully-crafted retaliatory measures against a range of US products. This will be in the hope of inflicting serious damage on key US sectors, particularly those politically-sensitive industries that are sure to lobby for strong anti-protectionist measures to be reinstated.
In the coming months, a number of conventional trade remedies are expected to be exercised on China by the US as a consequence of its Section 201 (a review of the potential threat increased import levels represent to domestic businesses) and Section 232 investigations (a review of the potential national security issues relating to cheap imported steel).
In the latter case, Trump’s announcement of a 25% tariff on imported steel and a 10% tariff on imported aluminium has already triggered alarm, with Canada, the largest single steel exporter to the US, branding the tariffs as “wholly unacceptable”. A similar response has been given by South Korea, Mexico, the EU and China, all of which are said to be considering retaliatory tariffs. Neither has the tariff been greeted with unanimous approval on the domestic front, with many US construction companies and car manufacturers warning that higher steel costs will result in lost jobs.
Despite anger from manufacturers and business partners in virtually every country the US trades with, on 8 March Trump formally signed separate presidential proclamations that formally imposed the tariffs on or after 23 March 2018. At present, imports from Canada and Mexico are exempt from these additional tariffs in the expectation that a “fair” NAFTA deal could be renegotiated. In the case of those other countries, they may petition for a modification of the tariffs on an individual basis.
Prior to 18 March, the US Department of Commerce (DOC) will announce the required procedures for a product to be exempted from the additional tariffs subject to a non-availability determination . With additional tariffs becoming effective on 23 March, it is possible that the exemptions, if any, will be retroactive. It is, however, unclear how long the tariffs will remain in force, though Trump has previously promised steel and aluminium industry executives that they would receive “protection for a long time”, while indicating that further actions could follow, including reciprocal taxes on imports from countries that charge higher duties on US goods than the US charges on theirs.
Still waiting in the wings, however, is the outcome of the Section 301 investigation, which is considering whether China has acted unreasonably with regard to US-related technology transfer and intellectual property. Should the investigation find against China, the US has a wide range of penalties that it could theoretically impose, almost inevitably triggering another round of retaliations.
In a similar vein, while developments on the legislative agenda are not normally expected during an election year, the proposed reform of the Treasury-chaired CIFIUS could well prove an exception. With the most likely outcome seen as an expanded definition of what actually constitutes “national security”, many proposed mergers, acquisitions and takeovers that could result in overseas control of a US business may find official approval far more difficult to secure.
 If, after petition and consultation with other government agencies, it is determined that a particular steel or aluminium product is not produced in the US in a sufficient and reasonably available amount or of a satisfactory quality, the Secretary of Commerce may issue a Federal Register notice amending the tariff treatment of that product.