U.S. CASE AGAINST CHINA

U.S. President Donald Trump has approved tariffs worth USD 50 billion on import of goods from China. China will respond with retaliatory tariffs on USD 50 billion of U.S. products such as cars, planes and soybeans.

The U.S. Trade Representative has found that

• China uses foreign ownership restrictions, including joint ventures, licensing processes and other means, to pressure or force U.S. companies to transfer technology and other intellectual property to Chinese entities;
• China imposes non market-based restrictions on U.S. companies seeking to license technologies in China;
• China directs and unfairly facilitates predatory investments and acquisitions in the United States to generate large-scale technology transfers to Chinese companies;
• China conducts and authorizes cyber intrusion into U.S. companies to access their sensitive commercial information, such as trade secrets.

According to the White House, China’s unfair acts, policies and practices cause tens of billions of dollars in damages to the U.S. economy each year.

The U.S. will impose a new 25 percent tariff against imports of Chinese products supported by China’s allegedly unfair practices. The sectors subject to the new tariffs include aerospace, information communication technology, and machinery.

The president also committed the United States to confront China’s technology licensing practices by initiating a dispute proceeding at the World Trade Organization (WTO).

Furthermore to make Chinese investment in the United States more difficult, the Treasury Department will also lead an inter-agency effort to propose new rules restricting investment, particularly by Chinese-state-run companies in sensitive U.S. technology.

Note

There is no denying that China sometimes fails to play by the rules in world trade and investment. The U.S. government estimates that the American economy loses over U.S.$ 200 billion annually from Chinese intellectual property theft. However, Trump’s unilateral as opposed to a reciprocal action sanctioned by international trade law may lead to a trade war. In trade wars, each side normally accuses the other of starting of starting the conflict. Ultimately, the level of commercial aggression spirals out of control as each partner responds to the latest protectionist measures of the other.

The WTO’s Role

The fear of uncontrolled trade wars like this led to the incorporation of a dispute settlement process when the World Trade Organization was created in 1995. Under this process, when one country suspects another of violating its WTO commitments, it can lodge an action with the organization’s quasi-judicial body. The WTO judges then hear arguments from both countries and determine if the complaint is justified. When they believe it is, and when the defending state refuses to change its policies, the WTO adjudicators can legalize the reciprocal imposition of tariffs up to a specified threshold. The beauty of this procedure is that it produces a credible judgment about which country is at fault, which in turn creates reputational costs for the country found to be violating its agreements. This country, if it refuses to abide by the WTO ruling, will find itself isolated internationally. And if the violator has the temerity to retaliate against the WTO-legitimized sanctions, it risks undercutting its position in the world trading order. On top of that, the WTO procedure limits the scale of any trade war by putting a cap on the legal punishments to be imposed.

The WTO dispute settlement process has been good for the United States. Since 1995, America has brought actions against 117 other WTO members, and has been on the receiving end of 136 complaints. Research shows that the U.S. tends to have better odds of winning cases at the WTO than other countries.

It is true that the Trump administration has initiated a dispute proceeding at the WTO to contest China’s technology transfer policy. But the U.S. unilateral imposition of $50 billion of tariffs on China risks not only a damaging trade war but also undercuts any chances for the U.S. to build the type of international coalition necessary to force real changes.

A U.S.-China trade war, one undertaken outside the WTO process, will be seen by other countries as a fight between two powers that are equally in the wrong. Trump’s unilateral approach to China risks conflating the real problem of China’s intellectual property theft with the broader, and more contested, issue of the U.S.-China trade balance. Some economists question whether the U.S. should be worried about the trade balance at all, and there is also some question about the extent that unfair Chinese practices are contributing to the problem. Whatever the case, tariffs are not going to fix the structural issues contributing to the imbalance. For that, the U.S. will need to increase its competitiveness or reduce American consumption, a much taller order.