24 March 2017
The Trump Administration: Implications for Sino-US Trade Relations
US President Donald Trump has vowed to make significant changes to his country’s trade policy and several developments since his inauguration on 20 January 2017, such as the withdrawal of the US from the Trans-Pacific Partnership (TPP), appear to be consistent with that pledge. Sino-American economic and trade relations could also undergo major changes under a Trump administration. Although the US President has looked increasingly pragmatic, he doesn’t hold back from China bashing and is still expected to fulfil campaign pledges to contain mainland imports. In all likelihood, intensifying trade conflicts between the US and China are unavoidable, but a fully fledged trade war is less probable.
Trump’s Trade Team
The process to confirm the senior officials that will formulate and implement the Trump administration’s new trade and economic policies is still underway, and the make-up of the trade team suggests strained ties with China are likely. Wilbur Ross, a billionaire businessman, has been confirmed to lead the US Department of Commerce (DOC) and take a central role on trade matters. Before joining the Trump administration, Ross spent much time saving crippled American steel, coal and textile firms. He may have bright ideas about rescuing uncompetitive US firms, but will probably make economic and trade ties between the US and China more difficult.
Meanwhile, Robert Lighthizer, a trade lawyer who served as Deputy US Trade Representative in the Reagan administration, has been picked to spearhead the Office of the US Trade Representative (USTR) and lead US efforts in trade negotiations. Lighthizer’s selection is another example of Trump filling his trade team with conservative veterans of US steel interests and outspoken critics of China’s alleged trade restrictions.
Another key development on the trade front is the establishment of the National Trade Council (NTC), which will advise the US President on innovative strategies in trade negotiations, co-ordinate with other agencies to assess US manufacturing capabilities and the defence industrial base, and help match unemployed American workers with new opportunities in the skilled manufacturing sector. Trump’s choice to lead the NTC is Peter Navarro, an economics professor who co-authored with Ross an economic blueprint for Trump. Navarro is expected to work closely with Ross and Lighthizer in the formulation and implementation of US trade policy. As a long-standing critic of China’s economic and trade policies, Navarro is expected to be a firm proponent within the administration of adopting a significantly tougher stance towards the mainland.
On a brighter note, however, Steven Mnuchin, Secretary of the Treasury, and Gary Cohn, Director of the National Economic Council, which assumes an advisory role to Trump on US and global economic policies, are likely to be more moderate. Both were investment bankers and seem more reluctant to threaten the global economic order. What’s more, Terry Branstad, the former Republican Governor of Iowa, has been appointed Ambassador to China. Branstad has extensive China ties and is a long-time friend of Chinese President Xi Jinping. His appointment is expected to help reassure China’s leadership that Trump understands the importance of constructive relations with Beijing, thereby smoothing out some of the ripples in Sino-American economic and trade relations.
The withdrawal of the US from the TPP, the renegotiation of the North American Free Trade Agreement (NAFTA) and other US FTAs currently in force, and the potential negotiation of bilateral trade deals with key allies, are expected to be major components of the Trump administration’s trade policy. In one of his first actions after taking office, Trump signed a presidential memorandum fulfilling his campaign pledge to withdraw the US from the TPP. Trump’s action appears to ensure that the TPP, which was signed in early 2016, will not take effect because US participation is essential to its implementation, although some TPP nations have appealed to the Trump administration to review the terms of the pact in order to bring the US back on board.
It appears that the US withdrawal from the TPP, in tandem with the expected freeze in US trade negotiations with the EU, will afford Beijing a golden opportunity to shape the global roadmap for international trade for many years to come. China is very likely to gain relevance and perhaps even replace the US as the pre-eminent player in global economic and trade affairs if the US assumes a more isolationist and protectionist stance, and if the Regional Comprehensive Economic Partnership (RCEP) that would cover all 10 ASEAN nations as well as Australia, China, India, Japan, South Korea and New Zealand, is successfully negotiated and implemented. While the RCEP is expected to be a narrower, goods-centric agreement, it would nonetheless solidify China’s influence in the Asia-Pacific region to the detriment of the US, and enable Beijing to lay the groundwork for an eventual Free Trade Area of the Asia-Pacific (FTAAP).
Encouragingly, most other TPP signatories are expected to continue to favour a policy of increased trade openness and liberalisation. For example, Mexico has accelerated efforts to revamp its existing FTA with the EU; Peru and India have agreed to launch FTA talks, while Chile hosted the Pacific Rim trade talks in mid-March 2017, with all TPP members except the US restating their support for free trade.
The Trump administration, for its part, has also announced its intention to renegotiate NAFTA as soon as possible. There is speculation that a future renegotiation of this agreement might cover issues such as tariff rates on goods, rules of origin, elimination of investor-state dispute-settlement provisions, modifications to the general dispute-settlement system, immigration and border security, and co-operation on migration from Central America, drug trafficking as well as the illegal flow of arms and money. In this regard, the administration has raised the possibility of imposing a 20 percent tariff on imports from Mexico as a way to pay for a wall that Trump has pledged to build along the US-Mexico border.
Nevertheless, it should be noted that any changes to the agreement are limited to that of an update. If the negotiations become more of an overhaul of NAFTA, the US Congress will have to approve or disapprove the new agreement. Furthermore, if – as Trump has suggested is a possibility – the US throws out NAFTA and starts again, the President would need to have trade negotiating authority from Congress to initiate new talks. Congress, therefore, maintains some control over the possible changes to NAFTA.
In any event, the renegotiation of NAFTA and the building of a US-Mexico border wall, aggravated by the threat of punishing US automobile companies that move production to Mexico with an import tariff of as much as 35 percent, may serve to encourage Mexico to look for markets further afield, especially China and other parts of Asia. This may in turn give a boost to Sino-Mexican and Hong Kong-Mexican trade.
Lastly, the Trump administration appears willing to negotiate trade deals with certain countries, notably the UK and Japan, to focus on expanding free and fair trade. The administration, in general, is expected to favour bilateral over multilateral or regional deals. In all likelihood, such bilateral deals will not only create trade diversion and shift imports from the most efficient global supply sources, such as the Chinese mainland and Hong Kong, but will also complicate the trading environment by creating a web of incoherent rules that may erode the integrity of the global trade system.
While trade enforcement has been a key element of the US trade-policy agenda for many years, the Trump administration could potentially take enforcement to a new level by levying remedies against economies that are seen as engaging in unfair trade or otherwise failing to play by the rules, including by manipulating their currencies, and/or providing illegal subsidies to their manufacturers and/or exporters.
During his election campaign, in particular, Trump vowed to pursue strong enforcement against China, including by imposing unilateral import duties as high as 45 percent. He said he would direct the USTR to bring trade cases against China and use every lawful presidential power at his disposal to remedy trade disputes, including the application of tariffs consistent with various US statutes, if China did not cease its allegedly illegal activities, such as the theft of US commercial secrets. The administration has further mentioned the possibility of adopting a 5-10 percent tariff on imports from all sources and/or a tariff on goods imported by companies that outsource US production and employment.
To be sure, there is a wide variety of US laws that could give Trump the authority to impose emergency import tariffs based on vaguely defined concepts of national security, a large and serious balance of payments (BOP) deficit, and unjustifiable restrictive practices. For instance, under the Trade Expansion Act of 1962, if the President finds there is an adverse impact on national security from imports, he can impose tariffs or quotas as needed to offset the adverse impact. Under the Trade Act of 1974, if there were a large and serious US BOP deficit, the President can impose tariffs of up to 15%, quantitative restrictions, or both for up to 150 days against one or more countries with large BOP surpluses. If foreign countries deny benefits to the US under trade agreements or carry out practices that are unjustifiable, unreasonable or discriminatory, the US can also take retaliatory actions at the discretion of the President, including increasing tariffs or imposing quotas.
In addition, the number of anti-dumping (AD) and countervailing (CV) duty investigations involving goods from China and other sources is likely to remain substantial and may even increase in the coming years. In this regard, the DOC has the authority to self-initiate AD/CV proceedings, and Trump could potentially direct the department to pursue cases against a range of products from specific countries. In addition, the DOC could step up the number of anti-circumvention inquiries involving Chinese products.
Meanwhile, the administration is expected to resist any efforts to grant market-economy status to China within the context of AD and CV duty investigations. A provision in China’s protocol of accession to the World Trade Organization (WTO) allows members of that organisation to use calculations in AD proceedings that are not based on the actual costs of Chinese producers if the producers cannot demonstrate that market economy conditions prevail in their industry. The US and others have used that provision to automatically assign non-market economy (NME) status to goods imported from China, which typically results in higher AD duties than would otherwise be the case. However, the protocol of accession provided for the expiration of such provision on 11 December 2016.
Beijing contends that as of this date, WTO members were required to stop using NME-type methodologies altogether with respect to Chinese goods. However, the US and others maintain that they are still allowed to do so if the petitioners can clearly show, on a case-by-case basis, that market-economy conditions do not prevail in the industry at issue. Even if Beijing were to file a WTO complaint against the US and others on this matter, the Trump administration and Congress are likely to remain unified in their defence of the US NME methodology. What’s more, it is uncertain whether the Trump administration would abide by an eventual adverse decision by the multilateral body because of the sensitivity of this issue.
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, although the Trump administration would be unable to directly influence the volume or outcome of these cases because they are administered by the independent, quasi-judicial United States International Trade Commission (USITC). 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.
On currency issues, Trump has vowed to designate China as a currency manipulator, noting that any country that devalues its currency in order to take unfair advantage of the US will be dealt with sharply, including the use of tariffs and taxes. When he formally announced his presidential candidacy and declared to bring back US jobs from China, Mexico, Japan and many other places, Trump stated that China had devalued its currency to a level that makes it impossible for US companies to compete.
US Treasury Secretary Mnuchin has made a commitment to use the reporting and monitoring functions of the Treasury and the legislative processes established by Congress to combat currency manipulation, but did not say whether he thought Beijing was manipulating its currency. Rather, he indicated that the Treasury would follow all relevant procedures in analysing and potentially designating an economy as a currency manipulator, and would recommend changes to those procedures whenever necessary. Several lawmakers have expressed concern that Trump could issue an executive order compelling the new Treasury Secretary to designate China as a currency manipulator regardless of whether such a designation complies with statutory requirements.
The Trade Facilitation and Trade Enforcement Act of 2015 (TFTEA) established a process to determine whether an economy may be pursuing foreign-exchange policies that could give it an unfair competitive advantage against the US, engage economies that may be pursuing such policies, and impose penalties on those that fail to adopt appropriate policies. Such penalties may include prohibition of new financing from the US’ Overseas Private Investment Corporation, a ban on US government procurement, a request for increased International Monetary Fund surveillance of the concerned country’s exchange-rate policies, as well as the reconsideration of ongoing trade talks with the concerned country.
The TFTEA requires the Treasury to undertake an enhanced analysis of exchange rates and externally oriented policies for each major trading partner that has a significant bilateral trade surplus with the US (which the Treasury has set at greater than US$20 billion), a material current-account surplus (i.e., larger than 3% of that economy’s GDP), and has engaged in persistent one-sided intervention in the foreign-exchange market (i.e., conducted repeated net purchases of foreign currency that amount to more than 2% of its GDP over the year).
Evidently, China meets only one of these three criteria, namely a large bilateral surplus with the US. There is no evidence of a material current-account surplus or persistent one-sided intervention in the foreign-exchange market. In fact, China has sold large amounts of US dollars from its foreign-exchange reserves to prop up the RMB in order to stem capital outflows. Therefore, it is difficult to see how Mnuchin could stray from the specific parameters of the TFTEA to issue a finding of currency manipulation by China.
The Trump administration could also push for a legislative change to require the DOC to initiate a CV duty investigation or review to determine whether currency undervaluation by the government of, or any public entity within, a foreign country is providing a countervailable subsidy directly or indirectly to its exporters or products. In this regard, some lawmakers have urged the President to support legislation to treat manipulated exchange rates as export subsidies in CV duty proceedings. The lawmakers contend that by seeking a legislative change rather than an administrative fix, the next administration would not be able to revoke this policy. The Navarro-led NTC is currently considering possible options on this front.
Comprehensive Tax Reform
Congress is seriously considering legislation to comprehensively overhaul the US tax code. As part of an effort to encourage domestic manufacturing, such legislation may include a border adjustment tax (BAT). While the precise structure, operation and impact of a BAT are still being debated, this mechanism would generally disallow the existing tax deduction for the cost of goods sold if those costs are associated with imported articles or inputs, while exempting export revenue from corporate income tax calculations.
Under the BAT, it is likely that large US firms will pay low or even no corporate taxes as they focus on exporting their products to overseas markets, whereas US firms selling essentials to their consumers are required to pay high taxes as many of these staple goods will need to be imported. Rising costs of staple goods such as clothing will not only hurt US consumers, but also force many retailers to downsize their business, which may in turn exert a negative impact on related sectors such as distribution and logistics.
Furthermore, the BAT could be challenged at the WTO on a number of grounds, which could lead to foreign countries levying an unprecedented amount of retaliatory duties on US exports. In all, this corporate tax reform effort could have a greater impact on China than on many other US suppliers, given the importance of the US market to mainland exports.
The widely perceived lack of effective protection and enforcement of IPR in China is expected to remain a key issue in Sino-American trade relations, with the Trump administration possibly adopting a more confrontational approach. The USTR noted in the latest Special 301 Report that China continues to present a complex and contradictory environment for protection and enforcement of IPR. The agency said that progress towards effective protection and enforcement of IPR on the mainland is undermined by unchecked theft of trade secrets, market access obstacles to information and communications-technology products, measures favouring domestically owned intellectual property, rampant piracy and counterfeiting in China’s massive online and physical markets, extensive use of unlicensed software, and the supply of counterfeit goods to foreign markets.
Additional challenges arise in the form of obstacles that restrict the ability of foreign firms to fully participate in standards setting, the unnecessary introduction of inapposite competition concepts into intellectual-property laws, and the difficulties faced in trying to protect and incentivise the creation of pharmaceutical inventions and test data. According to the USTR, surveys continue to show that the uncertain intellectual-property environment is a leading concern for businesses operating in China. Intellectual-property infringements are difficult to prevent and remediate and may cause businesses to choose not to invest on the mainland or offer their technology, goods or services there. Trump administration officials are expected to continue to actively target these and other concerns.
It is uncertain whether Trump will be as tough on China as he suggested he would be since formally announcing his candidacy, or whether cooler heads will prevail in the months ahead. While China-bashing is popular in presidential campaigns and successful candidates have invariably turned down their rhetoric after they have been sworn into office, Trump is an unconventional president, and his administration is also expected to adopt policies that are different from the past.
In line with the protectionist stance of the new trade team, the Trump administration intends to pursue an “America First” trade policy that defends US sovereignty, enforces US trade laws, uses leverage to open foreign markets, and negotiates new trade agreements that are fairer and more effective for both the US and the world trading system, according to the annual trade policy agenda the White House submitted to Congress in early March 2017. This agenda, though a little short on specifics, does reiterate the administration’s commitment to pursue a new approach that focuses on expanding trade in a way that is freer and fairer for all Americans.
As efforts to ramp up trade enforcement are most likely to increase under Trump, it is anticipated that any attempts to designate China as a currency manipulator, albeit likely to be more symbolic than practical, and/or impose punitive tariffs on Beijing, would have a significantly negative impact on Sino-US economic and trade relations. The imposition of a punitive tariff on US imports from China would almost certainly elicit a retaliatory response from Beijing, and could potentially cause heightened trade tensions between the two economic giants, leading to negative consequences for Hong Kong businesses.
It is held that Congress and the US business community may jointly exert a moderating influence on Trump, including in the area of trade, and there are already signs of pushback to some of the President’s policies. What’s more, the judicial and legislative branches are expected to check any attempts by the executive branch to overstep its constitutional authority. It appears that the judicial branch, in particular, may play a particularly important role in checking the powers of the President, as evidenced by recent court decisions to suspend the ban on travellers from certain predominantly Muslim nations.
It is expected that any unilateral increase in US import duties, especially an across-the-board hike, would be challenged at the WTO and potentially in US courts. Yet the US courts, as well as Congress, may have difficulty in preventing any action by Trump if he enacts relevant provisions under the existing laws. Any efforts to block the President would have to be undertaken in congressional or court challenges that may take significant time. The resulting lengthy legal battle would do little to resolve the issue in the short term, while the challenged tariffs remain in place. Worse still, Trump may even ignore any WTO rulings under the dispute-settlement process.
The trade-policy agenda for this year criticises the WTO dispute-settlement system, ostensibly opening the door for the US not to implement adverse rulings under the WTO dispute-settlement process. The agenda further states that when the WTO adopts interpretations of agreements that undermine the ability of the US and other WTO members to respond effectively to unfair trade practices with remedies expressly allowed under WTO rules, those interpretations undermine confidence in the trading system. In a nutshell, the agenda contrasts sharply with the approach of the past 20 years or so, which focused on trade policies that emphasised multilateral and other agreements designed to promote global trade, plus deference to international dispute-settlement mechanisms.
To get some relief, it is possible that the Republican-controlled Congress could find legislative solutions to perceived economic and international trade ills that Trump would be willing, and even eager, to sign into law, which could help diffuse any serious attempt to tear up the WTO rulebook on international trade. If anything, there may be obvious internal disagreements with Trump within the Republican Party that is traditionally pro-business and pro-trade, with inherent support for a free market.
There are indeed signs that Trump has become more pragmatic. Despite his overall protectionist impulses and continued China-bashing rhetoric, Trump has not adopted an overly antagonistic stance towards trade with the mainland. While he has made good on some of his campaign pledges, no major China-targeted trade policies or sanctions have been implemented so far. Indicative of his pragmatism, Trump made a phone call to Xi in February 2017 to express hope for a constructive relationship with China, and a scheduled summit between the two Presidents in April 2017 should bode well for bilateral ties in the context of the existing strong inter-dependence between China and the US across many aspects of international co-operation.
To some extent, however, Trump will still be under pressure to fulfil his promises to get tough with China on trade in order to help bolster the US industrial base and boost employment in manufacturing. Against this background, although chances of a full-blown trade war are slim, increasing trade conflicts between the US and China are likely to be inescapable. Accordingly, Hong Kong companies should monitor developments closely, consider carefully how any proposed actions could impact their operations, and hammer out contingency plans as appropriate.