By relying on a broad and seemingly baseless national security exception, in its trade action against China, the United States could have seriously undermined international trade rules and given a green light for other countries to do the same, writes Joshua P Meltzer.
During the US presidential campaign, candidate Donald Trump singled out Chinese trade practices as a key concern. Once in office many of the threats he made against China, such as labelling it a currency manipulator and imposing 30 per cent tariffs, did not come to pass. But this is changing as dealing with China increasingly assumes centre stage for the administration.
That China’s trade and economic practices pose real challenges to the existing trading system is a view deeply held within the US administration and has traction in the US Congress and the private sector. The China challenge is both economic and strategic. China is using its growing economic weight to alter trade and investment rules in its favour and to generate regional outcomes often contrary to US interests. China is also using its economic clout to punish countries that act against its interests.
The China challenge is difficult to address because the trade and investment practices that concern the United States are products of the Chinese political system. China’s consolidation of and support for state-owned enterprises (SOEs) provides the Chinese state with tools of economic management, and thus the means to carry out its geostrategic goals. Where SOEs are not involved in overseas trade and investment activities, China’s private sector is being harnessed to state-driven goals.
This underscores the reality that addressing China’s trade and investment practices cannot be solved merely by China buying more stuff from the United States.
The United States so far has pursued only limited trade action against China in the form of steel and aluminium tariffs pursuant to Section 232 of the Trade Expansion Act of 1962. But relying on tariffs alone is insufficient. Moreover, relying on Section 232 meant that the administration had to develop a national security justification for them. Such a claim is not particularly credible. Chinese steel imports account for 3.5 per cent of US imports, while almost 70 per cent of US steel imports are from its allies and FTA partners.
As a result, the tariffs’ main impact is on key US allies and partners such as the European Union (EU), Canada, Mexico and Japan. Mr Trump’s willingness to offer exceptions from such tariffs for reasons unrelated to national security – such as the conclusion of the NAFTA renegotiation – further undermines the administration’s national security claims.
By relying on a broad and seemingly baseless national security exception, the United States has potentially seriously undermined international trade rules and has given a green light for other countries to do the same.
The Section 232 process also revealed the core of Mr Trump’s approach to trade issues: using the threat of tariffs to extract concessions from other governments. The costs of this approach are clear: the domestic economic cost of the tariffs and potential retaliation by trading partners, the impact on trade rules and the reputational cost to the United States as a leader of trade liberalisation.
In March 2018, the United States Trade Representative completed an investigation under Section 301 of the Trade Act of 1974 into whether Chinese trade practices related to intellectual property, innovation and technology transfer violate trade agreements, or are discriminatory to and a burden on US commerce. The Section 301 report identifies a range of Chinese trade and commercial practices of concern, including Chinese practices aimed at acquiring or stealing US intellectual property.
Following the release of the Section 301 report, the United States threatened China with tariffs of $50 billion, and when China threatened similar retaliation, Mr Trump doubled the proposed tariffs to $100 billion. A meeting in May 2018 of high-level Chinese and US economic officials to address US concerns merely produced agreement for China to purchase more US agriculture and energy products and both sides observed the importance of bilateral investment.
The lack of any progress on addressing the China challenge underscores that fact that the United States needs to use a broad range of economic tools if it wants to succeed in addressing the state-driven elements of China’s economic policy that it finds so troubling. In addition to using trade and investment restrictions, the United States needs to build new rules and norms that create costs over time to China for continuing to pursue its economic practices. To be effective, other key economies – such as the EU and Japan – will need to be brought onboard with this strategy.
Progress will also require a broader view of the potential role for the WTO in addressing the China challenge. In particular, it will require that the United States itself abides by international trade rules. The advantage of including WTO action as part of the US response is that it reaffirms US commitment to global trade rules and, by highlighting where Chinese trade practices depart from agreed norms, will create political space for countries to support US efforts against China.
China poses a real challenge. The current US approach is too narrowly focussed on tariffs to develop the incentives and opportunities for the type of economic reform that China will need to undertake to truly address the problem. At the same time, the US approach has real costs in terms of the rules-based system, and the credibility and desirability of US leadership more broadly. Failure to develop a more nuanced, comprehensive and coordinated approach to the China challenge risks not only falling short but, in the process, deeply damaging the international economic system that the United States purports to uphold.
Joshua P Meltzer is senior fellow in the Global Economy and Development Programme at the Brookings Institution, Washington DC.