Talking Trade blog
The challenges of fighting--and winning--a trade war
Published 23 March 2018
How do you fight a trade war? While US President Donald Trump has boasted that trade wars are easy to fight and win, he has launched one today against China without following at least six steps that seem critical.
The US administration has started the process this morning (Asia time) by announcing the imposition of tariffs against up to US$60 billion in Chinese imports to the United States, as well as a host of new measures that will be forthcoming to handle both inbound and outbound investment between the two countries. These measures are all part of the Section 301 process started by USTR Robert Lighthizer last year.
The specifics remain hazy, with 15 days before the release of the products that will receive 25% tariff increases. It will take up to 60 days before the investment restriction rules are clarified. (Between now and then, expect furious lobbying in Washington.)
This is all a response to US claims of Chinese theft of American intellectual property theft as well as forced technology transfer. Previous Talking Trade posts have highlighted the processes involved in this case, including the relatively limited number of public comments received to back up the government’s specific claims, and the use of the US unilateral 301 tool which was meant to have been retired with revisions to the WTO dispute settlement system.
The announcement today has left more questions than answers.
Having moved forward now with tariffs and investment restrictions, the Trump team has launched a trade war without, first, having a clear sense of the point of the war. The original announcement about the Section 301 complaint was muddled. Was this dispute about IP theft? Was it about technology transfer? About both issues? National security concerns got added as well.
The report issued today has helped clarify the specifics, but it still appears that many separate issues are rolled together. Why couldn’t the global system under the World Trade Organization (WTO) have handled these problems? USTR is apparently going to start a WTO case in the hopes of drawing in allies, but 301 as a tool was retired for a reason.
Critically, the case appears to have been put together without much input from key stakeholders in the US system, including members of Congress. There may be enthusiasm for the early elements of this trade war, but as this conflict drags on, the lack of participation from others is likely to tell.
Second, is the “punishment” appropriate for the “crime?” The penalties are all found in tariffs to be imposed on American firms and American consumers. How will tariffs on goods result in changes in IP policies inside Chinese companies? Or how will tariffs imposed on US consumers alter decisions in China about technology transfer?
Third, the original use of Section 301 was meant to be about negotiation, not about punishment. But the Trump team discontinued the primary mechanism for US-China talks more than 8 months ago and has not resumed negotiations under any other pathway. Hence, even if China had wanted to head off these tariffs through a negotiated solution, there would have been no way to do so. Now, the Trump team has gotten 301 entirely the wrong way round—punishment first and talk later.
The argument by Trump’s team seems to be that negotiations have not worked in the past and therefore, more talking will not work this time either. Absent a clear signal about US resolve, nothing new will happen. However, surely timing matters and the individuals involved, the specific circumstances and demands make a difference. Because talks were “unsuccessful” in the past does not automatically mean they will fail this time—they were not even attempted.
Fourth, before heading into battle, the generals need to be in place. Critically important—this Trump administration does not have key China officials in the right locations to direct this “war.” The top USTR post for China remains vacant. Commerce is short on the full compliment of China positions (and many staff are consumed with pouring over thousands of exemption requests from steel and aluminum tariffs already--a task made easier by the simultaneous announcement that allies are now removed from the steel tariff 232 case for national security for the moment). The State department is also lacking China expertise.
No one directing the 301 case seems to have a clear understanding of China or what China is likely to do in response. Much worse, the level of delusion in Washington seems to be very high—China will back down in response to US resolve.
This is not going to happen. China will respond. The response will hit US firms and US consumers all over again. In another piece of irony, the US farmers and consumers at Walmart are going to be paying the price for what Trump says is theft of US IP by Chinese firms.
Fifth, what is the end strategy? What is it, exactly, that China is supposed to do? The point of the 301 case was supposed to be about Chinese IP and tech transfer. What could China do to satisfy the US and remove the tariffs and investment restrictions? Is there anything that could be done? Who would be a position to certify this?
Finally, does the US have any plans for what to do when this issue escalates? The near-doubling of tariffs from the original US$30 billion in tariffs means that many products were likely added at the last minute with limited thought or assessment. Third country firms are likely to be involved now. What will the United States do when other countries get involved?
The investment restrictions are likely to be especially problematic. Firms will be damaged by these changes. Some of these companies may opt to use their rights under existing trade rules, like bilateral investment treaties or free trade agreements, to sue the US government. Of course, the investment restrictions have not yet been fully detailed, so it is not entirely obvious exactly how they will be applied.
While Trump may think that trade wars are easy to launch and win, it seems rather clear that his tiny team involved in this decision today to push back against China has not sufficiently planned for this one. The US has, unfortunately, experience in what happens when launching wars without clear plans—they escalate, linger, consume far more resources than ever anticipated, and ultimately fail.
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