29 March 2018
Plans to Impose Additional 25 Percent Tariff on Range of Mainland Chinese Products Unveiled
President Trump announced plans on 22 March to impose additional tariffs of 25 percent on an undisclosed number of mainland Chinese products (press reports state the tariffs could target as many as 1,500 tariff lines) worth an estimated US$50 to US$60 billion “that are supported by China’s unfair industrial policy.” According to a fact sheet issued by the Office of the U.S. Trade Representative, sectors subject to the proposed tariffs will include aerospace, machinery, and information and communication technology. While it is still unclear whether any textile, apparel, footwear or other key consumer goods will be targeted, USTR Robert Lighthizer indicated in testimony to Congress that the administration considered products that the United States can or does source from other countries so that the effect on consumers of any tariff on such products from mainland China would be minimised. This could broaden the tariff list to include other sectors, such as apparel or footwear.
USTR will publish a proposed list of products no later than 6 April, although the agency has vowed to release the list “within the next few days.” USTR will also announce a date for a public hearing and interested parties will be given 30 days to submit comments on the proposed list. Once the 30-day comment period lapses, USTR will review and analyse the comments with the assistance of the inter-agency Section 301 Committee and, when that process is completed, a final list of products and tariff increases will be published in the Federal Register and that action should normally enter into force 30 days from the date of publication.
In addition to the aforementioned tariffs, the president has instructed USTR to pursue a dispute settlement action at the World Trade Organisation to address mainland China’s discriminatory technology licencing practices. The case was formally launched on 23 March with a request for consultations that claims Beijing appears to be breaking WTO rules by denying foreign patent holders, including U.S. companies, basic patent rights to stop a mainland Chinese entity from using the technology after a licencing contract ends. The United States further contends that mainland China imposes mandatory adverse contract terms that discriminate against and are less favourable for imported foreign technology. USTR adds that these mainland Chinese policies hurt innovators in the United States and world-wide by interfering with the ability of foreign technology holders to set market-based terms in licencing and other technology-related contracts.
Moreover, President Trump has directed Treasury Secretary Steve Mnuchin to address concerns about investment in the United States directed or facilitated by mainland China in industries or technologies deemed important to the United States. Secretary Mnuchin will prepare recommendations to the president on action to address the investment issues within 60 days (on or about 21 May).
These actions represent the outcome of a seven-month Section 301 investigation into mainland China’s acts, policies and practices related to technology transfer, intellectual property and innovation. According to a USTR press release, the Section 301 report supports the following conclusions.
- Mainland China uses foreign ownership restrictions, including joint venture requirements, equity limitations and other investment restrictions, to require or pressure technology transfer from U.S. companies to mainland Chinese entities. Mainland China also uses administrative review and licencing procedures to require or pressure technology transfer, which undermines the value of U.S. investments and technology and weakens the global competitiveness of U.S. firms.
- Mainland China imposes substantial restrictions on, and intervenes in, U.S. firms’ investments and activities, including through restrictions on technology licencing terms. These restrictions deprive U.S. technology owners of the ability to bargain and set market-based terms for technology transfer. As a result, U.S. companies seeking to licence technologies must do so on terms that unfairly favour mainland Chinese recipients.
- Mainland China directs and facilitates the systematic investment in, and acquisition of, U.S. companies and assets by mainland Chinese companies to obtain cutting-edge technologies and intellectual property and to generate large-scale technology transfer in industries deemed important by mainland Chinese government industrial plans.
- Mainland China conducts and supports unauthorised intrusions into, and theft from, the computer networks of U.S. companies. These actions provide the mainland Chinese government with unauthorised access to intellectual property, trade secrets or confidential business information, including technical data, negotiating positions, and sensitive and proprietary internal business communications, and they also support mainland China’s strategic development goals, including its science and technology advancement, military modernisation and economic development.
Senate Finance Committee Chairman Orrin Hatch (Republican-Utah) welcomed the effort to hold mainland China accountable for its forced transfer of U.S. technology and intellectual property but questioned whether imposing tariffs on billions of dollars of mainland Chinese goods “runs the risk of putting a bigger dent in the pocketbooks of American families across the country.” House Ways and Means Committee Chairman Kevin Brady (Republican-Texas) echoed Sen. Hatch’s concerns, stating that while “President Trump is right to take a hardline against China’s dishonest trade practices” the challenge remains “how to punish China without harming our families, businesses, and farmers.” Brady said the next 30 days of input “are crucial to make sure we don’t punish American workers and families for China’s misbehavior.”
Several U.S. industry interests share a similar viewpoint: while they welcome tough action against mainland China’s alleged theft of U.S. intellectual property, they are wary of the increased costs the additional tariffs will impose on U.S. manufacturers and consumers and fear the risk of provoking Beijing into taking strong retaliatory action. According to the National Association of Manufacturers, the administration should consider a “strategic approach that uses both carrots and sticks to accelerate changes to Chinese policies, which should include efforts to forge a fair, binding and enforceable trade agreement with China that requires them to end these practices once and for all.”
The American Soybean Association, on the other hand, expressed strong opposition to President Trump’s announcement because Beijing is widely expected to retaliate against U.S. soybean exports to the mainland. Indeed, mainland China’s Ministry of Commerce has reportedly been exploring the possibility of pursuing trade measures against this key crop since January. Mainland China imported a massive US$13.9 billion worth of U.S. soybeans last year but an eventual trade remedy action would put that lucrative business in jeopardy, with Brazil, Argentina and other large foreign suppliers poised to fill the gap. The American Soybean Association has described trade as “an existential issue” for soybean farmers and believes tough action against mainland China “will lead to retaliation that will cost many farmers their livelihoods.”
Mainland China’s Embassy in the United States issued a statement on 23 March expressing strong disappointment and firm opposition to the Section 301 measures. The statement asserts that while mainland China “does not want a trade war with anyone” it is “not afraid of and will not recoil from a trade war.” The Embassy warned that “if a trade war were initiated by the U.S., China would fight to the end to defend its own legitimate interests with all necessary measures.” As a first step, Beijing unveiled on 23 March a proposed list of 128 U.S. products with a combined import value of about US$3 billion that could face higher duties in retaliation for the additional tariffs that the United States recently imposed on steel and aluminium imports. Comments on this list may be submitted by 31 March.
Under mainland China’s proposed steel/aluminium retaliation, a first tranche of products that would face a 15 percent tariff tentatively includes seven categories and 120 tariff lines involving US$977 million in U.S. exports to the mainland last year, including wine, fresh fruit, dried fruit and nut products, ginseng, seamless steel pipe and modified ethanol. A second tranche of products that would face a 25 percent tariff tentatively includes eight tariff lines involving some US$2 billion in U.S. exports to the mainland, including pork and processed products and recycled aluminium. Beijing will impose additional duties on the first tranche of products if it fails to reach a trade compensation agreement with Washington and will also levy additional duties on the second tranche after further evaluating the impact of the U.S. measures on mainland China. Beijing has vowed to pursue this process in accordance with WTO rules.
Potential high-impact retaliatory actions that Beijing could pursue in the coming months in response to the Section 301 tariffs include, among others, placing restrictions on imports of U.S. beef by adopting more stringent health and safety standards for these products (which could effectively reverse a 2017 decision to allow the importation of U.S. beef and beef products for the first time since 2003), targeting imports of U.S. civilian aircraft by reducing purchases of Boeing aircraft while increasing those of Airbus aircraft, targeting other U.S. agricultural products or even semiconductors, and/or persuading mainland Chinese tourists not to visit the United States.