Talking Trade blog
The response from China
Published 12 January 2017
So, what happens when President Donald Trump, urged on by his equally enthusiastic advisors, significantly ramps up enforcement efforts against China? Or moves beyond standard measures like anti-dumping lawsuits and does impose tariffs or starts to block trade?
These are critically important questions that ought to be asked and answered prior to American actions.
The response matters not just to the United States and China or to American and Chinese companies but much more broadly to Asia and, potentially, to the wider world.
To be fair, Trump and his team have a point. The Chinese economy is different from the American economy.
In some ways, this is a blessing. Anyone who has taken a high speed rail line to probably any airport in China will thank the heavens that China is not like America.
But in others, it is less so. Getting this blog posted from Shanghai was such a hair-pulling nightmare that it had to be done from Singapore instead. Internet access inside China remains a problem and using typical platforms and products used everywhere else in the world can be impossible to use in China.
Foreign companies have always complained about the differences and many have become more vocal about the challenges of operating in China. [Firms should respond now to China’s recent request for comment to a wide-ranging set of revisions to e-commerce laws.]
So there is certainly scope for improvement in the business climate between the United States and China.
But is a series of harder enforcement actions, labeling China a currency manipulator, or escalation to tariffs the best way to handle this situation? Probably not.
Why not? The basic problem is that China is unlikely to take American sword rattling lightly. The hope from Team Trump seems to be that China will be so impressed by the strength and resolve of the new US administration that it will back down. This is unlikely to be the case—and especially not in 2017.
The tangle with China will probably begin with steel, since most of the top-level advisors surrounding Trump have the longest history and experience with this sector, including the presumptive USTR Robert Lighthizer and Commerce Secretary Wilbur Ross.
What can Trump do? He can file cases against the Chinese domestically and at the WTO for dumping steel in the American markets. The US will argue that China is selling the product for less than the cost of making it.
At the WTO, the anti-dumping argument, China says, will be made easier by the American unwillingness to grant China “market economy status” in December 2016. This allows the United States to continue to use a more favorable approach to finding dumping behavior against Chinese companies.
But Trump is unlikely to stop at just anti-dumping cases. He has also threatened to raise tariffs. While it can be difficult to raise tariffs across the board, doing so on a product like steel is quite easy. Trump can use Section 201 safeguards, where he does not need to show unfair trade—just that the injury caused to domestic manufacturers is serious and increased imports are a substantial cause. Section 201 allows tariff increases and quantitative restrictions.
There are other tools in the box that could be used, including the Tariff Act of 1930 that allows the US to block imports that use stolen intellectual property (US Steel already filed a case last year using this trade act). If the President’s team wants to do so, it could dust off another set of tools, Section 301 and Super 301 from the 1974 trade act, last used in the 1990s.
Faced with such threats, what might China do?
Capitulation to American demands is unlikely. Even if the Chinese made the calculation that giving in over steel was important, it would probably not end the story. Instead, what China would view as a gesture of “good will” would probably be interpreted in Washington as a sign that strength wins. Hence, Trump and his team would try pushing China again in a different industry.
So China will likely retaliate. Retaliation in a trade dispute does not come in the same sector. The Chinese will not face problems in steel and respond in steel. Instead, they will retaliate in completely different areas—if they are smart, they will respond in sectors that are carefully selected to cause maximum pain to the most number of Congressional members possible.
What would this look like? It’s not exactly clear, but imagine something like autos, orange juice, soybeans, and electronics.
The point is to get orange growers in Florida to make angry calls to Congress asking why orange juice exports to China, which had been growing nicely, are suddenly facing obstacles over someone else’s problem with steel.
In short, China will respond with strength of their own. This point has been made even by the mildest mannered Chinese scholars who otherwise urge restraint and compromise.
This year is an especially critical one as the country moves towards the 19th National Party Congress. All internal eyes are on the domestic level changes at various levels ahead of the all-important meeting at the end of the year. President Xi Jinping cannot afford to look weak.
He would probably prefer not to have a trade fight with the Americans this year at all. Were he not being poked with a stick by Trump, Xi would likely be focused on domestic issues or a different set of foreign policy concerns. His attention would not be on starting a trade war. But, if one is coming his way, he will show resolve.
This dynamic—two leaders determined not to look vulnerable in front of one another—sets up the prospect for escalation. It is not an environment where cooperation and delicate negotiations are likely to succeed.
Predicting the future is always difficult. In the case of rising US-China tensions over trade in 2017, it looks like it is sadly becoming too easy.
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