26 Feb 2015
Sino-US Trade Relations after the US Congress Elections
The November 2014 mid-term election has clearly altered the balance of power in Washington, with the Republican Party taking total congressional control until the end of 2016 at least. Sino-US trade relations, however, are not expected to witness significant changes over the near term, with Republicans generally seen as business-friendly. As such, the US is likely to continue to cultivate a pragmatic and collaborative relationship with Beijing in a bid to advance US trade objectives, while resolving trade and economic matters with China through bilateral channels. Trade enforcement, however, will remain a vital feature of US trade policy, with further trade remedy actions against products from China expected this year.
A Republican-dominated Congress
The Republican Party made substantial gains in the November 2014 mid-term elections, and will control both chambers of Congress until at least the end of 2016. It is likely that the mid-term results will provide a favourable environment for advancing trade liberalisation initiatives. In general, Republicans are friendly to business and trade interests. International trade increasingly appears to be an area where moderate Democrats and Republicans can find common ground.
US President Obama’s most recent remarks on trade indicate that he is preparing to work with Republicans in order to secure agreement with regard to Trade Promotion Authority (TPA). TPA gives the President the authority to negotiate international agreements that Congress can approve or disapprove, but cannot amend. This would allow Obama to conclude the Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP) negotiations. While relations between President Obama and Republican lawmakers remain fragile, co-operation on trade issues is still considered likely.
Overall, Obama is expected to continue to foster a pragmatic and collaborative relationship with China, with a view to moving forward on a range of US trade objectives. These range from market access for American products to enhanced protection of US intellectual property rights (IPRs), as well as several climate change-related matters, such as greenhouse gas emissions and energy efficiency.
Continuation of Economic Dialogues
The Obama administration is expected to continue to rely on bilateral economic dialogues, such as the Joint Commission on Commerce and Trade (JCCT) and the Strategic and Economic Dialogue (S&ED), to amicably resolve trade and economic disagreements with China. The US Department of Commerce has reported that the JCCT December 2014 meeting in Chicago yielded “significant progress” with regard to agricultural market access, IPR protection, innovation policies and competition law enforcement.
A major accomplishment of the meeting included a commitment from China to approve the importation of new biotechnology varieties of US soybeans and corn. China also agreed to pursue a regular dialogue with the US regarding the benefits of the increased use of innovative technologies in agriculture. Accord was also reached on strong intellectual property protection for products that use trademarks or common names, such as “parmesan” or “feta” cheese. China further emphasised that it will treat IPR owned or developed in other countries in the same way as it treats domestically owned or developed IPR.
Bilateral discussions under the JCCT and S&ED mechanisms are expected to yield further moderate progress this year. Issues likely to be discussed include: investment restrictions; IPR enforcement; technology localisation; indigenous innovation; biotechnology product approvals; export restraints; strategic emerging industries; state-owned enterprises; government subsidisation; administrative licensing; government procurement; taxation; standards development; legal services; financial services; telecom services; express delivery services and transparency; and general economic and currency matters.
Sustained Trade Enforcement
Congress and the Obama administration both believe that a vigorous trade remedy regime is a vital component of US trade policy. This is largely because it enables domestic manufacturers to compete more evenly with those foreign goods that are illegally subsidised, sold at less than fair value or both. Accordingly, trade enforcement will undoubtedly remain an important feature of the administration’s trade policy. Additional dispute settlement cases at the World Trade Organization (WTO), as well as a number of antidumping (AD) and countervailing (CV) duty actions against products from China, are also expected this year.
In its December 2014 report to Congress on China’s WTO compliance, the Office of the US Trade Representative (USTR) observed that the US “will continue to hold China accountable for adherence to WTO rules when dialogue does not resolve US concerns, including through the use of the dispute settlement mechanism at the WTO.” Along with the recent case concerning alleged export-contingent subsidies to enterprises in several industrial sectors, the Obama administration has been a fairly active user of the WTO dispute mechanism against China. It has filed nine of the 16 US cases launched since China’s entry to the WTO in 2001.
The US remains a heavy user of trade remedies, and several additional AD/CV duty actions against Chinese products are expected this year. The US initiated six new AD investigations and an equal number of CV proceedings on Chinese products in 2014, compared with seven AD investigations and seven CV proceedings in 2013. There were three AD investigations and two CV proceedings in 2012, five AD investigations and four CV proceedings in 2011, and two AD investigations and two CV proceedings in 2010. Back in 2009, 12 AD investigations and 10 CV proceedings were conducted, with 10 AD investigations and five CV investigations in 2008.
Not surprisingly, China remains the US supplier with the highest number of AD and CV duty orders in place against its products. As of January 2015, there were 95 AD orders and 27 CV orders. This number has remained relatively stable over the past two years, as several measures have been revoked. While sunset reviews of existing measures usually result in their renewal, the US actually revoked the CV duty order on certain tow-behind lawn groomers and their parts in September 2014, and the AD duty order on 1-hydroxyethylidene-1, 1-diphosphonic in June 2014. This was because no domestic parties participated in the sunset reviews of these orders. In addition, the AD and CV duty orders on drill pipes and collars were recently revoked under a remand ordered by the US Court of International Trade.
US producers are also expected to continue to file Section 337 investigations against a range of imports from the Chinese mainland, Hong Kong and other suppliers. Most Section 337 cases involve allegations of copyright, patent or registered trademark infringement, although the vast majority of cases filed in recent years have involved patent infringement allegations. Approximately 60% of the current exclusion orders involve products such as integrated circuits, computer components, consumer electronics products and chemical compositions that infringe US patents.
Lingering Currency Issues
Many US lawmakers remain concerned with regard to the alleged undervaluation of the RMB, which has depreciated against the US dollar by more than 3% since January 2014. The likelihood of tough congressional action, however, may have diminished with the Republicans now controlling the House and Senate. Republican and Democratic leaders have called on the Obama administration to take meaningful steps to address China’s barriers to US trade and investment, and to encourage ongoing efforts to rebalance the Chinese economy. In general, US lawmakers believe that China should allow its currency level to be set by market forces as soon as possible, while accelerating reforms in the financial sector and other areas of the mainland economy. Legislative action aimed at addressing the alleged undervaluation of the RMB, however, is unlikely to be initiated this year.
As expected, the US Treasury Department has again declined to designate China as a currency manipulator in its semi-annual report to Congress on foreign exchange rate policies. Released in October 2014, the report reviews the exchange rate policies of 10 economies, together accounting for 71% of US foreign trade. It found that the gradual appreciation of the RMB in July and August 2014, in conjunction with low apparent levels of intervention, indicates “some renewed willingness by the authorities to allow a stronger domestic currency and to reduce intervention in line with Strategic & Economic Dialogue commitments”.
Overall, the US Treasury acknowledges that Beijing has made significant progress in this area. Despite this, it still considers China’s exchange rate adjustment to be incomplete, with the RMB yet to reach its equilibrium level. To US Treasury officials, an obvious sign of this lingering misalignment is that China continues to generate sizeable current account surpluses and to attract large net inflows of foreign direct investment (FDI). China’s current account surplus (plus inward FDI) account for some 4% of its GDP. In addition, China has continued to see rapid productivity growth. This suggests that continuing appreciation is necessary over time to prevent the exchange rate from becoming further undervalued.
Accordingly, the US Treasury has advised Beijing to refrain from intervening in the exchange rate band and from adjusting the reference rate if market pressures push the exchange rate to the edges of the band. It believes China should also build on the apparent recent reduction in foreign exchange intervention and durably curb its activities in the foreign exchange market. Finally, in line with the practice of most other G-20 nations, the US Treasury believes China should disclose foreign exchange market intervention on a regular basis in order to increase the credibility of its monetary policy framework and promote exchange rate and financial market transparency.
Engagement in Bilateral and Plurilateral Efforts
Facilitated by a Republican-dominated Congress, the US is expected to actively engage in a number of key bilateral and plurilateral trade efforts throughout 2015. Perhaps the most pressing priority for the administration is to successfully conclude negotiations on the TPP deal, an initiative seen as Obama’s major effort to pivot the US towards Asia. In essence, the TPP is a proposed regional trade agreement. It currently includes Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US and Vietnam, but excludes the mainland and Hong Kong. The TPP discussions are in their final stages, and will require leaders to make tough political decisions on sensitive issues in order to be finalised in the first half of 2015.
On the bilateral front, the Obama administration is looking to advance the ongoing negotiations on the TTIP with the EU. The aim is to wrap up the talks this year, but the complexity and breadth of the agreement, in conjunction with political and social sensitivities particularly on the European side, mean that the discussions are likely to drag into 2016.
In the meantime, the US will continue to pursue negotiations with China on a Bilateral Investment Treaty (BIT). These negotiations intensified after Beijing committed, at the July 2013 S&ED meeting, to negotiating a high-standard BIT that will embrace the principles of openness, non-discrimination and transparency; provide national treatment at all phases of investment, including market access; and employ a “negative list” approach in identifying exceptions (meaning that all investments are permitted except for those explicitly excluded). At the 2014 S&ED meeting, China built on this commitment by agreeing to provide its first negative list by early 2015.
On the plurilateral front, key initiatives include on-going talks to update the WTO Information Technology Agreement (ITA), as well as separate efforts to free up trade in environmental goods and services. In November 2014, the Obama administration announced a deal with China that will ostensibly allow negotiations to update the ITA and allow it to move forward. Beijing, however, is still resisting calls by South Korea and others to commit to tariff cuts on certain additional electronic products.
It is likely that the products set to benefit from a tariff reduction under an expanded ITA will include: next generation semiconductors; magnetic resonance imaging machines; computer tomography scanners; global positioning system devices; printed matter/cards to download software and games; printer ink cartridges; static converters and inductors; loudspeakers; software media such as solid state drives; and video game consoles. An expanded ITA would also eliminate import duties on a range of additional technology products, such as high-tech medical devices, video cameras, and various high-tech ICT testing instruments.
In July 2014, representatives from Australia, Canada, China, Costa Rica, the EU, Hong Kong, Japan, New Zealand, Norway, Singapore, South Korea, Switzerland, Taiwan and the US also launched plurilateral negotiations to liberalise the trade in environmental goods. The negotiations will build on a list of 54 environmental goods on which APEC leaders agreed to reduce tariffs to 5% or less by the end of 2015, while exploring a range of additional products.
The APEC list includes a broad array of environmental technologies used in a number of environmental applications. These include: renewable and clean energy generation (such as solar panels and gas and wind turbines); wastewater treatment (such as filters and ultraviolet disinfection equipment); air pollution controls (such as soot removers and catalytic converters); solid and hazardous waste treatment (such as waste incinerators and crushing and sorting machinery); and environmental monitoring and assessment (such as air and water quality monitors). The negotiating parties are looking to develop a complete product list by April 2015.
Finally, launched in 2013, the Trade in Services Agreement (TiSA) is envisioned as a state-of-the-art declaration aimed at promoting fair and open trade across the full spectrum of service sectors, from telecoms and technology to distribution and delivery services. Overall, 23 economies - representing 75% of the world’s US$44 trillion services market – had participated in the TiSA negotiations as of January 2015. These were Australia, Canada, Chile, Colombia, Costa Rica, the EU, Hong Kong, Iceland, Israel, Japan, South Korea, Lichtenstein, Mexico, New Zealand, Norway, Pakistan, Panama, Paraguay, Peru, Switzerland, Taiwan, Turkey and the US. Recently, Uruguay was also invited to participate in the discussions. China has applied to join the TiSA. While it has the support of the EU, the US is yet to approve China’s inclusion.
The Way Ahead
The Republican Party will control both chambers of Congress until at least the end of 2016.Sino-US trade relations, however, may witness some changes next year in the run-up to November’s American presidential election, with the typical “China-bashing” rhetoric coming into play. Up until then, Washington is generally expected to continue to work bilaterally with Beijing on resolving outstanding economic and trade issues and encouraging continued growth in US exports to the mainland. With regard to this, a number of established dialogue mechanisms, such as the JCCT and the S&ED, will be used to achieve additional progress.
In any event, US trade enforcement efforts will remain vigorous. The number of AD and CV duty orders on Chinese products will likely grow this year as there are a significant number of proceedings that will be concluded in the coming months. If the outstanding issues cannot be resolved through talks, the Obama administration will continue to use the WTO dispute settlement mechanism, as exemplified by the latest claims against China’s export subsidies to several industrial sectors. The alleged undervaluation of the RMB will also remain a concern. The possibility of daunting congressional action on the currency issue, however, will likely recede with the Republicans controlling the House and Senate.
In the meantime, the US is expected to further increase its influence in Asia and, hence, act as a counterbalance to China in the region by working to conclude an ambitious TPP agreement that excludes China. At the same time, the Obama administration will continue to pursue negotiations with China on the BIT. Congress, however, is not expected to pass broad-ranging China-related legislation this year. If anything, the administration will seek to advance talks on those plurilateral trade agreements that have a direct bearing on China. An expanded ITA, designed to further liberalise trade in IT products, and separate efforts to liberalise trade in environmental goods are the prime examples here.