AMERICA’S president claims to view China as a friend. But the friendship is going through a rocky patch, to say the least. America’s trade deficit with China, “the largest deficit in the history of our world”, is “out of control”, Donald Trump groused on March 22nd. “A tremendous intellectual-property theft situation” also irks him. And so, after laying out his concerns, he announced plans for some tough love. Litigation against China at the World Trade Organisation (WTO), investment restrictions and tariffs are all on the cards.
The announcement early in March of tariffs on steel and aluminium imports to America was chaotic, even prompting the resignation of Gary Cohn, the head of Mr Trump’s National Economic Council. The latest targeting of China, by contrast, is the culmination of months of planning and commands broader support. It was masterminded by Robert Lighthizer, the United States Trade Representative (USTR) and a seasoned trade lawyer. As a deputy USTR under Ronald Reagan in the 1980s, he used Section 301 of the Trade Act of 1974 to bully Japan into limiting exports to America. This time, using the same law, his department has penned a 200-page report outlining damage to America of “at least $50bn per year” arising from China’s unfair trade practices. In his telling, America is seeking no more than the compensation it is due.
The first of Mr Trump’s three measures lies squarely within the multilateral system created in 1995 to resolve trade disputes. On March 23rd the American administration lodged an official complaint at the WTO, claiming that China has been breaking the rules on intellectual property. Mr Lighthizer reckons that by pressing American companies to hand over their technology when they form partnerships with Chinese ones (this is often a condition of operating in China), and by making it hard to enforce intellectual-property rights once a technology-related contract ends, the Chinese state has rigged the system against American companies.
The case will now wend through the WTO’s legal procedures, which could take years. If America wins, China might respond by changing its ways. Its record of complying with rulings against it is no worse than those of America and the European Union. Or the two sides might negotiate a settlement. If that fails, then a victorious America could impose tariffs allowed by the WTO. This would be unusual. Such tariffs have been approved fewer than 15 times in the WTO’s history and, even then, WTO members have sometimes chosen not to impose them.
But the WTO dispute is just one part of the strategy. Mr Lighthizer’s team thinks some of China’s practices inflict damage on America but are not covered by WTO rules. The Section 301 investigation claimed to find evidence that the Chinese government directs its firms to invest in American firms as part of its industrial strategy, and sometimes to steal information from them. Mr Lighthizer thinks China wants to overtake America and make it less globally competitive. He wants the threat of unilateral action to fill in the multilateral system’s blanks.
If America decides to strike, the first blow would be tighter rules on investment between the two countries. The details are unclear. The president can already block investment on national-security grounds, using the Committee on Foreign Investment in the United States (CFIUS). Blocks on economic grounds might also be allowed, as, perhaps, might curbs on American investment in China.
The second hit involves tariffs of 25% on certain Chinese exports worth up to $60bn in 2017. Mr Lighthizer says that the list of products, which includes aerospace, information and communication technology and machinery, drew inspiration from “Made in China 2025”, the Chinese government’s plan to achieve global dominance in industries it regards as strategic.
Two clocks have thus been set ticking. The full list of proposed tariffs will be published by April 6th, after which it will remain open for public comment for 30 days. Stephen Mnuchin, Mr Trump’s treasury secretary, has until May 21st to come up with proposals for restrictions on investment. It seems possible that neither will actually go into effect. Even as Mr Trump talked tough on March 22nd, he also spoke of a big, ongoing negotiation with the Chinese government. He has asked it to reduce America’s bilateral trade deficit by $100bn. He seems to be presenting China with a choice: a grand bargain or a trade war.
Fighting on many fronts
The first part of the plan seems sensible enough. WTO procedures are designed to reduce the risk that a trade dispute escalates, by giving countries a chance to vent their frustrations in a controlled setting and by setting out the consequences if the rules are broken. America could find support for its case from Japan and the EU, both of which share America’s concerns over China’s technology-licensing practices. Using the WTO to resolve this trade tussle could be taken as a vote of confidence in the multilateral trade system.
A grand bargain, too, might contain some useful additional measures. The Trump administration is reportedly demanding that China lower its tariffs on imported American cars, liberalise its rules governing financial services and, perhaps, cut subsidies for state-owned enterprises. Similarly, more systematic scrutiny of incoming Chinese investment could be prudent, rather than nakedly protectionist.
But given the Trump team’s attitude towards the rules-based multilateral trade system, such hopes seem fleeting. Mr Trump often blasts the WTO for being biased (there is no evidence that it is). That weakens its ability to resolve disputes. For the system to work, WTO members must support it and think that others will, too. If China thinks America may ignore a ruling against its interests, why should it play along? Meanwhile, the Trump administration is undermining the WTO by blocking the appointment of judges to its court of appeals. If America ends up wanting to appeal against a ruling in favour of China, this will become self-defeating.
As for Chinese investment in America, the CFIUS committee was already toughening its oversight. According to Rhodium Group, a research firm, this was part of the reason Chinese investment in America fell by 35% from 2016 to 2017 (a Chinese clampdown on outbound capital was the main factor). New rules that give wide discretion to the president, or block investment on economic rather than national-security grounds, could easily be abused.
In the short term, bullying could get results. Mr Lighthizer is not the only person in Washington frustrated by the limited results of years of talks with China about its economic strategy. The threat of stiff tariffs on South Korean steel imports and of withdrawal from KORUS, a trade deal between America and South Korea that came into force in 2012, speedily secured changes to that deal desired by the Trump administration and announced by South Korea’s government on March 26th.
But browbeating tactics also weaken the rules-based trading system. They do this, in part, by encouraging managed trade. In the 1980s America could be bought off by other countries that promised “voluntary” restraints on their exports. But this made a mockery of the idea that markets, rather than bureaucrats, should determine trade flows. The revamped KORUS includes a cap on South Korean steel exports to America of 70% of the average between 2015 and 2017. (This arrangement would appear to flout the WTO’s rules, though other members may choose not to challenge it.) China is reportedly offering to buy more American semiconductors to stave off tariffs. Wilbur Ross, the commerce secretary, recently suggested that China could buy more natural gas from America.
As the Chinese representative complained during a heated WTO committee meeting on March 26th, Article 23 of the WTO’s rules includes a pledge not to claim violations of the trade rules unilaterally, but to use the WTO’s dispute-settlement process. Article 23 refers only to commitments specified within the WTO. The Americans say that where such commitments have been broken, they have duly filed a WTO dispute. What they do regarding other misdemeanours, they argue, is their own business. But since America is threatening China in ways that would contravene its own WTO commitments not to break agreed tariff limits, the distinction is not so clear. And once WTO members start writing and enforcing their own rules, the existing rules could lose their force.
There is more potential for trouble if America’s unilateral actions do not have their desired effect—especially if the multilateral system weakens. So far China has been keen to be seen to follow the WTO’s rule book. On March 23rd it responded to steel and aluminium tariffs by announcing its own rebalancing tariffs on American goods, including pork products, fruit and recycled aluminium. It argues that such retaliation is allowed under the rules.
A new wave of tariffs on China would probably be met by claims that America had also broken rules, and perhaps an anti-dumping investigation into American soyabeans. In 2009, when Barack Obama imposed tariffs on Chinese tyres, China slapped anti-dumping duties on American exports of chicken feet.
China’s desire to be seen to adhere to the rule book could weaken, however. Cui Tiankai, its ambassador to America, responded to Mr Trump’s announcement by saying that “if people want to play tough, we will play tough with them and see who will last longer.” At risk would be agricultural exporters and American companies operating in China. Mr Lighthizer told a congressional committee on March 21st that he would defend farmers’ interests should they be hit, adding to the impression that Mr Trump would not shy away from a trade war.
Another risk stems from Mr Trump’s obsession with the bilateral trade deficit. No deal can guarantee to bring it down. Whatever the two sides agree to, the fact is that trade is devilishly difficult to manage. Factors beyond China’s control could easily overwhelm the impact of any deal on the bilateral trade deficit. Mr Trump’s cuts to income and corporate taxes mean that America’s economy is about to receive a large stimulus. All else equal, this will suck in imported goods.
American and Chinese trade negotiators thus have their work cut out. Any deal they reach must allow both sides to claim victory. And since it will be judged a success or failure according to outcomes that have little to do with their agreement, it is bound to be a fragile one.