China accounts for half of the US trade deficit, but much less in value-added terms. In value-added terms, the bilateral trade deficit (16% of total) is only slightly smaller than the deficit with Japan (13%) and Germany (11%). (This is not likely to cut much ice.)
On March 31, 2017, President Trump issued an executive order for the USTR and Commerce Department to submit an Omnibus Report on Significant Trade Deficits that focuses on major bilateral merchandise trade imbalances. At the April 6-7, 2017, summit meeting, Presidents Trump and Xi agreed to establish a “100-day plan on trade”. On April 20, 2017, the Trump Administration initiated a Section 232 investigation on the effects of steel imports on U.S. national security. On April 27, the administration initiated a similar investigation on aluminum. (China is the world’s largest producer of these commodities.) On August 14, 2017, President Trump issued a memorandum directing the USTR to determine if China's policies regarding IPR theft and forced technology requirements "may be harming American intellectual property rights, innovation, or technology development," and thus warrant USTR action under Section 301 of the 1974 Trade Act. On August 18, 2017, the USTR announced it had launched a Section 301 case against China.
The US imposed tariffs of 20-50% on US imports of solar panels and washing machines (including imports from China) in January. US solar and washing machine tariffs were the result of a little-used provision of US trade law Section 201, Trade Act of 1974 (global safeguards action). Under Bush and Obama, safeguards were used but proved temporary (2002 Bush steel; 2003, the WTO ruled against the US and the Bush administration withdrew the tariffs; Obama 2009 tariff on Chinese tyres; China filed a WTO dispute, but WTO largely upheld US safeguards and Beijing was not legally authorized to retaliate. China hit back by launching its own investigation that resulted in a new antidumping tariff on US exports of chicken feet. Washington challenged Beijing's chicken feet tariffs at the WTO and largely won its case.) As for the 100 day plan on trade, China promised to import more beef (but this is a promise it had made before the Trump administration took office) and open its financial sector further. In an attempt to assuage Washington, it also signed large business deals during the US president’s visit to Beijing (but these deals were generally already in the pipeline.) This has not satisfied the US administration and has not prevented it from taking trade measures, directly or indirectly aimed at China.
Under more controversial US trade laws than those invoked in the solar case, the US administration has also decided to impose tariffs on steel and aluminum for national security reasons (under Section 232 of the 1962 Trade Expansion Act). It is also seeking to take measures in response to China's alleged theft of intellectual property (under Section 301 of the 1974 Trade Act). The US administration decided to impose tariffs on Chinese aluminum foil producers, which it says were unfairly subsidized and were selling the products below fair-market value. Antidumping duties are said to range from 49% to 106%. Countervailing duties are said to range from 17% to 81%. (In 2016, value of foil imports from China estimated at USD 389m.) The US will reportedly also impose tariffs of 25% in steel and 10% on aluminum imports under Section 232 as early as next week.
Beijing has been trying to manage trade tensions in a number of ways (signing of large business contracts, promise of market opening). In response to the imposition of tariffs on Chinese solar exports, Beijing has launched an anti-dumping/ subsidy investigation into USD 1 bn of US sorghum exports to China. It also seems to consider taking action on US imports of aircraft and soybean. The investigation could result in new Chinese tariffs that would hurt US farmers. China seeks retaliation by targeting the US president’s political base. China will seek to retaliate without violating WTO rules ensuring that retaliation is proportionate.
A full-blown trade war remains unlikely given the economic damage it would do to both sides. There are signs of increasing congressional and business opposition to US protectionist policies. The fall in the equity market following the steel and aluminum tariff announcement might also make the US administration more cautious. China will retaliate, but only in a measured way. The EU, Canada, Mexico and others are likely to do the same while bringing their cases to the WTO.
The US is also moving towards tightening the rules governing its inward FDI regime. Congress is keen to tighten the rules, not just on national security grounds but also to prevent China from acquiring “strategically important technologies”. It is very likely that such a move is also being seen as a possible bargaining chip vis-à-vis Beijing in an attempt to open the Chinese economy to US/ foreign direct investment. Investment and IPR are other points of contention between the US and China and is likely to remain a cause of friction (and bargaining).
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| Source: WTO |