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Likely Developments in Sino-US Trade Relations in the Midterm Elections Year: Trump's Trade Arsenal

The Trump administration’s focus in the run-up to the 2018 midterm elections will likely continue to hinge on “fair” trade. In the coming few months, in addition to the conventional trade remedies that are expected to be imposed on mainland China as a result of the Section 201 (global safeguard measures on washers and solar products) and Section 232 (national security investigations on imports of foreign-made steel and aluminium) investigations, other big unknowns rest largely on the Section 301 (investigation into mainland China’s acts, policies and practices related to technology transfer, Intellectual Property and innovation) investigations, the ongoing reform of the Committee on Foreign Investment in US (CFIUS) and efforts to further strengthen US trade enforcement featured prominently in Trump’s proposed budget for FY 2019.

Section 201, 232 and 301 Actions and International Reactions

1. Section 201 Global Safeguard Measures

Under Section 201 of the Trade Act of 1974, if the US International Trade Commission (USITC) determines that an article is being imported into the US in such increased quantities as to be a substantial cause of serious injury or threat of serious injury to a domestic industry producing a like or directly competitive product, it recommends to the President relief that would remedy the injury and facilitate industry adjustment to import competition.

On 22 January 2018, President Trump approved the imposition of safeguard measures in the Section 201 global safeguard investigations on large residential washing machines and solar cells and modules, following the findings of the USITC that increased imports of the subject merchandise are a substantial cause of serious injury to domestic manufacturers.

As a result, effective from 7 February 2018, large residential washers imported into the US are subject to a tariff-rate quota of 1.2 million units for a period of three years (from 7 February 2018 to 7 February 2021), with respective in-quota safeguard tariffs of 20%, 18% and 16% and out-of-quota safeguard tariffs of 50%, 45% and 40%. Crystalline silicone photovoltaic (CSPV) cells and modules face respective safeguard tariffs of 30%, 25%, 20% and 15% for a period of four years ending on 6 February 2022.

The international backlash to these safeguard actions has been significant. As of mid-February 2018, mainland China, South Korea, Singapore, Malaysia, Taiwan and the EU had requested consultations with the US under the WTO Agreement on Safeguards (on one or both of the safeguard actions) and three Canadian solar panel producers had filed a complaint in the US Court of International Trade. Moreover, Mexico has expressed deep frustration and has vowed to use all legal remedies at its disposal to ensure the US complies with its international obligations after the Trump administration decided, against the USITC’s advice, not to exclude Mexican goods from the safeguard measure on washers.

In its 6 February 2018 requests for consultations on the two safeguard measures, mainland China contends that the measures are not consistent with US obligations under Articles I, II, X, XI, XIII and XIX of the General Agreement of Trade Tariffs (GATT) 1994, as well as Articles 2, 3, 4, 5, 7 and 12 of the WTO Agreement on Safeguards. The requests assert that China, as an exporter with a substantial interest in the products concerned, is entitled to have an adequate opportunity for prior consultations before the application of such a measure. Moreover, China has exercised its rights to trade compensation consultations.

While the mainland was by far the largest US supplier of large washing machines (HTSUS subheading 8450.20.00), with a 55% share of total US imports in 2016, its share in US imports of the subject merchandise fell significantly by 27% in 2016 and 80% in 2017, following the initiation of an antidumping (AD) duty investigation and the subsequent imposition of AD duties ranging from 38.43% to 57.37%. By contrast, imports of the subject merchandise from Vietnam surged from zero in 2015 to US$165.9 million in 2016 and US$613.1 million in 2017, while similar notable production shifts were observed for second-ranked Thailand and third-ranked South Korea.

Similar patterns were spotted in the case of CSPV cells and modules classified under HTSUS 8541.40.6020, which account for the bulk of such imports into the US. China, as a leading supplier of the subject merchandise to the US, has seen its import share sliding from 29% in 2015 to less than 11% in 2017 as a result of the two AD duty orders and two CV duty orders currently in place on such products. By contrast, the share of US imports held by Malaysia, for example, rose from 21% in 2015 to 31% in 2017.

These figures generally show that the AD/CV measures adopted by the US to block mainland China and other large suppliers have only resulted in a production shift to other foreign suppliers. But since the ultimate goal of keeping cheap imports out of the US to help the domestic industry did not yield the expected results, the Trump administration may feel the need to impose more comprehensive trade remedies such as the abovementioned ones that can hit many US suppliers.

2. Section 232 National Security Investigations

Section 232 of the Trade Expansion Act of 1962 authorises the US President to impose import restrictions to protect US national security. Under the law, the US Department of Commerce (DOC) has up to 270 days to conclude a Section 232 investigation and submit its report and recommendations to the President. However, in separate memoranda issued in April 2017 President Trump directed the DOC to “proceed expeditiously” in conducting these investigations.

Section 232 investigations include consideration of factors such as the amount of domestic production needed for projected national defence requirements and whether imports impair the domestic industry’s ability to meet those needs, the effect of foreign competition on the domestic industry, and any detrimental impacts from the displacement of domestic products by excessive imports. The DOC examines global overcapacity, dumping and illegal subsidies, as well as various other factors, to determine if the subject merchandise threatens US national security.

While the term “national security” is not defined, the DOC has indicated in past Section 232 investigations that a threat to US national security for purposes of these investigations includes the general security and welfare of certain industries critical to minimum operations of the economy and government beyond those necessary to satisfy national defence requirements. The DOC also recognised the close relation of economic welfare to national security; the impact of foreign competition on the economic welfare of individual domestic industries; and any substantial unemployment, decrease in government revenues, loss of skills or other serious effects resulting from the displacement of any domestic products by excessive imports.

On 16 February 2018, the DOC issued the much-anticipated reports on its self-initiated Section 232 investigations to determine whether increasing imports of foreign-made steel and aluminium threaten American economic security and military preparedness. The DOC found that the US is the world’s largest importer of steel, with imports nearly four times its exports. These imports “have adversely affected the steel industry”, causing 10 furnaces (basic oxygen and electric) to close since 2000 and domestic steel industry employment to drop by 35% since 1997. For some types of steel, such as electrical transformers, only one US producer remains. In the meantime, world steelmaking capacity has increased 127% since 2000 and global excess capacity has now reached 700 million tonnes, almost seven times the annual total of US steel consumption.

As for aluminium, the DOC states that imports and global production overcapacity, caused in part by foreign government subsidies (particularly in mainland China), have had a substantial negative effect on the economic welfare and production capacity of the US primary aluminium industry. Import penetration has risen from 66% to 90% since 2012, while domestic aluminium industry employment has fallen by 58% and six smelters have shut down. Only two of the remaining five smelters are operating at full capacity and only one of these produces high-purity aluminium required for critical infrastructure and defence aerospace applications, including types of high-performance armour plate and aircraft-grade aluminium products.

Given the findings, the DOC has recommended the imposition of tariffs and/or quotas on imports of steel mill products and wrought and unwrought aluminium after determining that the quantities and circumstances of such imports are threatening to impair US national security. For both steel and aluminium, any tariffs (e.g. 24% or 53% on steel imports and 7.7 or 23.6% on aluminium imports) and/or quotas would be in addition to any duties (e.g. the 169 AD and CV duty orders in place against steel imports and the two AD and CV duty orders in place against aluminium imports) already in place. However, the report recommends implementing a process to allow the DOC to grant requests from US companies to exclude specific products if the US lacks sufficient domestic capacity or for national security considerations. Any exclusions granted could result in changed tariffs or quotas for the remaining products to maintain the overall effect. In addition, the President could exempt specific countries from any remedies imposed.

On 8 March 2018, Trump formally signed separate presidential proclamations imposing additional tariffs of 25% and 10% on steel and aluminium imports, respectively. These are to be effective for goods entered or withdrawn from warehousing on or after 23 March 2018. At present imports from Canada and Mexico are to be exempt from these additional tariffs in the anticipation that a “fair” NAFTA deal will be renegotiated. Other countries with which the US has a security relationship may petition to find alternative ways to address the threatened impairment of US national security caused by their exports. If the US and the petitioning country arrive at an accommodation, the president may then modify the application of the tariff with respect to that country.

Prior to 18 March, the DOC will announce the required procedures for a product to be exempted from the additional tariffs subject to a non-availability determination [1]. With additional tariffs becoming effective on 23 March, it is possible that the exemptions, if any, will be retroactive.

The following products are covered by these proclamations:

  • steel articles classified under HTSUS subheadings 7206.10 through 7216.50, 7216.99 through 7301.10, 7302.10, 7302.40 through 7302.90, and 7304.10 through 7306.90, including any subsequent revisions to these HTSUS classifications
  • the following aluminium articles: (a) unwrought aluminium (heading 7601); (b) aluminium bars, rods, and profiles (heading 7604); (c) aluminium wire (heading 7605); (d) aluminium plate, sheet, strip, and foil (flat rolled products) (headings 7606 and 7607); (e) aluminium tubes and pipes and tube and pipe fitting (headings 7608 and 7609); and (f) aluminium castings and forgings (HTSUS 7616.99.5160 and 7616.99.5170), including any subsequent revisions to these HTSUS classifications

While the mainland is often blamed for the woes of the US steel and aluminium sectors, its shipments to the US have dropped significantly (30% in metric tonnes in the case of steel between 2011 and 2017) in recent years due in part to the numerous AD and CV duty orders already in place on mainland Chinese steel and aluminium products – 29 against steel products and two against aluminium products. In 2017, China was only the eleventh largest US supplier of steel products and fourth largest US supplier of aluminium products, accounting for 2.2% and 9.5% of the US’s total imports of the respective products.

The European Commission is reportedly considering potential “WTO-compatible countermeasures” should steep tariffs or quantitative restraints be imposed against European steel and/or aluminium shipments, while US business groups have also reacted negatively to the DOC’s recommendations. For example, the National Foreign Trade Council has urged the President to reject the proposed measures, while the American Institute for International Steel has described the recommendations as “excessive and unnecessary” and warned that they would “have a significant negative impact on the US’s economic growth”.

In a related development, the DOC received a petition in January 2018 requesting an expedited Section 232 investigation of uranium products. The petition asserts that “excessive levels of imports” of such products, particularly from mainland China, Kazakhstan, Russia and Uzbekistan, are threatening US national security by destroying the domestic uranium mining industry. It is also worth mentioning that the President’s budget proposal for fiscal year 2019 states that the Bureau of Industry and Security expects a steady flow of additional defence industrial base assessment requests and new Section 232 investigations, as the President’s National Security Strategy “calls for systematic evaluation of the US defence industrial base and the related supply chain essential to national security.”

3. Section 301 Investigation into Mainland China’s Acts, Policies and Practices

The term "Section 301" is commonly used to include Sections 301-309 of the Trade Act of 1974. This tool is arguably the most potent weapon in the US trade remedy arsenal. Section 301 requires the US Trade Representative (USTR) to attempt to open foreign markets to US exports. There are two ways to commence a Section 301 action: (i) under Section 301(a) any enterprise, trade association, union, group of workers or person with a significant economic stake that is affected by a foreign government’s act, policy or practice may petition the USTR to investigate that government’s measure; and (ii) under Section 301(b) USTR or the President may self-initiate an investigation after first having consulted with the appropriate advisory committees.

On 18 August 2017, the USTR self-initiated a Section 301 investigation pursuant to Section 302(b)(1)(A) of the Trade Act of 1974 into mainland China’s acts, policies and practices related to technology transfer, intellectual property and innovation. While the practices examined relate to specific intellectual property transfers and related issues, any eventual relief would almost certainly be imposed on a broader basis and affect a range of mainland Chinese products.

Interested parties were given until 28 September 2017 to submit comments and until 20 October 2017 to submit rebuttal or final comments in connection with this investigation. This input focused on the specific practices in mainland China that are purportedly negatively impacting US companies. If relief is determined to be appropriate, and if this investigation follows normal procedures, a second set of comments would be sought with respect to the type of relief to be granted.

Should USTR issue a final affirmative determination in this case [2], any proposed remedies would normally have to be implemented within 30 days of such determination. Implementation may be delayed by up to 180 days if such a delay is requested by a majority of the representatives of the domestic industry that would benefit from the action, or if USTR determines substantial progress is being made or that a delay is necessary or desirable to obtain US rights or a satisfactory solution with respect to the targeted acts, policies or practices.

Relief under Section 301 is broad in nature and may not be limited to the specific industry against which the action is brought. Rather, it typically includes other related sectors as a means of pressuring the targeted industry. For example, in the US-EU beef hormone dispute, the US obtained relief from European restrictions on imports of beef containing certain hormones by imposing retaliatory duties on chocolate, water, tomatoes, certain cheeses and similar products. Relief will often be imposed on tangentially related products in sectors successfully targeted by US manufacturers.

Specific types of retaliatory action under Section 301 include (i) suspension or withdrawal of trade agreement concessions, (ii) imposition of duties or other import restrictions, (iii) imposition of fees or restrictions concerning services, and (iv) entry into agreements with the subject country to eliminate the unacceptable practice or provide compensatory benefits for the US. The USTR is authorised to take action against any goods or economic sector without regard to whether such goods or economic sector were involved in the targeted act, policy or practice. The agency must give preference to the imposition of duties over other import restrictions and, if an import restriction is imposed, it must consider substituting on an incremental basis an equivalent duty for such other import restriction.

The imposition of remedies in this case appears increasingly likely in light of the recent US safeguard actions against washers and solar products and the imminent threat of strong action against steel and aluminium. However, the mainland Chinese government’s vow to use “all means necessary” to defend the mainland and mainland Chinese companies from the current Section 301 probe and any eventual remedies would almost certainly elicit a strong response from Beijing.

Committee of Foreign Investment in the US (CFIUS) Reform

The CFIUS has often been in the news over the past year, most recently for its role in ending the bid of an affiliate of Alibaba Group to acquire a US financial services firm. Efforts to reform the CFIUS, the Treasury-chaired inter-agency committee that conducts national security reviews of mergers, acquisitions or takeovers that could result in foreign control of a US business, appear to be gaining steam, as House Financial Services Subcommittee Chairman, Andy Barr (Republican-Kentucky), vows to send a CFIUS reform bill to the president’s desk by August 2018 and Senate Majority Whip John Cornyn, (Republican-Texas) is pushing bi-partisan legislation (the Foreign Investment Risk Review Modernization Act, or FIRRMA).

The proposed FIRRMA would modernise the CFIUS review and approval process (which was last updated 10 years ago) through, among other things, expanding the CFIUS jurisdiction to include certain joint ventures and minority position investments, updating the definition of “critical technologies” to include emerging technologies, allowing foreign investors to submit “light filings” to CFIUS for certain types of transactions, adding new national security factors for CFIUS to consider in its analyses and authorising CFIUS to exempt certain covered transactions.

Under the proposed legislation, future decisions to block inward or outward foreign direct investment might not require the government to carry the same burden of proof as currently. While addressing the transfer of US critical technology to mainland China and other adversarial nations is a priority for the White House and many in Congress, CFIUS reform is a complex issue and it is uncertain whether legislation on this matter – be it FIRRMA or a modified version – will be approved this year.

Other Relevant Trade Issues

Efforts to further strengthen US trade enforcement are expected to continue to feature prominently in the Trump administration’s agenda this year. On 28 November 2017, the administration used a rarely invoked statutory authority to expand its efforts to enforce US trade remedy laws by self-initiating AD and CV duty investigations on mainland Chinese common alloy aluminium sheet. AD/CV investigations are generally initiated based on petitions from affected industries, but the DOC may also self-initiate if it believes a formal investigation is warranted. Additional products may be targeted for self-initiated investigations this year.

Congress is also focusing on expanding the use of AD/CV duty actions. On 14 February 2018, Senators Richard Burr (Republican-North Carolina) and Gary Peters (Democrat-Michigan) joined forces to introduce a bill that would create a task force within the DOC to help small- and medium-sized businesses fight unfair trade practices. The task force would be responsible for identifying and investigating unfair trade practices and recommending potential self-initiations of AD/CV duty investigations.

At the same time, US Customs and Border Protection (CBP) is considering a number of options for further action to ensure the collection of AD/CV duties on imported goods. Last year President Trump issued an executive order directing federal authorities to step up AD/CV duty collections, which an August 2016 Government Accountability Report said had fallen US$2.3 billion short over the preceding 15 years. Among other things, using authority provided under the Trade Facilitation and Trade Enforcement Act to adjust bonds based on risk, CBP has been discussing the concept of a supplemental AD/CV bond. These discussions will serve as the basis of a pilot initiative that will test the outputs of statistical risk models currently under development. Based on the lessons learned from that pilot, CBP will work toward its ultimate goal of more accurately assessing bond amounts based on a statistically valid analysis.

Without doubt, efforts to further strengthen US trade enforcement remain prominent in Trump’s proposed FY 2019 budget, where he is requesting US$440 million for the International Trade Administration (ITA) to strengthen trade enforcement and compliance by forming a new team dedicated to enforcement and administration of Section 232 cases and US$3.6 million in new resources to self-initiate AD and CV duty cases. A little over US$90 million would be allocated to the ITA’s Enforcement and Compliance unit to expand and enhance efforts such as investigating trade violations and advocating for US businesses facing tariff and non-tariff barriers abroad.

Moreover, BIS’ budget would rise from US$111.7 million to US$120.6 million and 17 new export administration positions would be created to, among other things, enable BIS to handle the increased workload associated with foreign investment reviews as well as investigations of the impact imports may have on US national security. Specifically, four of the 17 new BIS positions would be created to deal with the increased workload associated with CFIUS. The remaining 13 positions would be created to address the increased workload associated with Section 232 investigations.


[1] 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.

[2] USTR's findings are officially due by August 2018.


Content provided by Picture: Louis Chan
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