President Trump has given China six months to prove that it is committed to preventing a nuclear-armed North Korea, and it seems his tolerance for China’s dithering has finally reached its limit. Now that President Xi Jinping has established that his government is unwilling to engage in a meaningful crackdown on its neighbor, the era of using carrots like improving trade relations to coax China into helping solve the “North Korea problem” has ended. It is now time for the stick.
According to reports in the New York Times, Wall Street Journal and Associated Press, the Trump administration is planning to use an obscure 1970s law to launch a "broad-based" investigation into whether China’s trade-related intellectual property policies constitute “unfair trade practices.
The US inquiry could become an obstacle for one of the Communist Party’s top economic priorities: the Made in China 2025 initiative, while calls for China to become a “global leader” in ten industries with the help of huge infusions of state money.
In the coming days, the US trade rep will launch a “Section 301” investigation, named after a portion of the 1974 Trade Act. Here’s a breakdown of the likely timeline for the investigation, as well as possible outcomes, courtesy of the NYT:
“Under the process that the Trump administration plans to set in motion, the Office of the United States Trade Representative will start an investigation into China’s trade practices. Following the investigation, which could be completed in as little as a few months, the United States could impose steep tariffs on Chinese imports, rescind licenses for Chinese companies to do business in the United States, or take other measures. The process is known as a Section 301 investigation, after the relevant portions of the 1974 Trade Act.”
Another option being considered by the Trump administration would involve invoking the International Emergency Economic Powers Act, another 1970s law that gives the president broad powers to regulate commerce after declaring a “national emergency,” according to WSJ.
A Section 301 investigation could “pave the way for the U.S. to impose sanctions on Chinese exporters or to further restrict the transfer of advanced technology to Chinese firms or to U.S.-China joint ventures.”
This latest – and, to date, most aggressive - change of heart follows an unsuccessful meeting on July 21 between US and Chinese trade officials where the two sides failed to agree to anything beyond an Obama-era trade deal. Bilateral trade talks had earlier shown some progress when the two sides agreed to an expansion of the Obama trade deal back in May.
It’s also the latest vacillation in the administration’s China stance since Trump initially decided to soften his China-bashing campaign rhetoric following a meeting with President Xi at Mar-a-Lago back in April.
In the past, Trump has hammered China for its massive trade surplus and widespread government intervention in its corporate sector. But by instead focusing the investigation on intellectual property, the administration is going to bat for business groups that have long griped about China’s penchant for stealing trade secrets, according to WSJ.
“American business frustration with Chinese trade and market-access practices has mounted in recent years, with U.S. business groups urging the government to take a tougher trade line with China. Many organizations have complained that the Trump administration hasn’t pushed hard enough in areas like intellectual property, as it has focused more on Chinese manufacturing and China’s $347 billion trade surplus with the U.S. last year.
That discontent has intensified as China’s economy continued to expand and its computer and software sectors became bigger competitors internationally. Western firms fear China will use the regulations to bar foreign investments in areas that Beijing targets for investment, including semiconductors, advanced-machine tools and artificial intelligence.”
Many questions remain, but one of the biggest is the role that the WTO will play in resolving a trade dispute between the world’s two largest economies. Trump administration officials have in the past favored a unilateral approach that circumvents the WTO, according to WSJ.
“One big question hanging over the White House review is whether the administration pursues any complaint through the World Trade Organization, or whether it chooses to impose penalties on its own without first seeking permission from the international body, which some Trump advisers have argued is incapable of dealing with China’s trade practices. Trump aides have regularly vowed to pursue a more unilateral approach to trade but have so far done little along those lines.”
Just invoking Section 301 would be an implicit snub to the WTO, which was created to prevent unilateral actions in trade disputes, WSJ continues.
“Widely used in the 1970s and 1980s, Section 301 cases have largely disappeared since the 1995 creation of the WTO, which has its own dispute-settlement process. A main goal of the Geneva-based institution was to curb such unilateral trade actions and to have them handled by a more neutral international arbiter. U.S. administrations over the past two decades have decided to steer nearly all trade complaints through the WTO and have rarely touched Section 301.”
Notably, the last Section 301 case was brought by a union, and was largely ineffective, as the NYT notes.
“The last Section 301 case was in 2010 and was initiated by a labor union, the United Steel Workers, instead of by the government, as the Trump administration is preparing to do. The case focused on Chinese business practices in the solar panel and wind turbine industries, and the Chinese government later promised to limit some of these practices.
But China’s solar and wind turbine industries have gone on to dominate their global industries, after receiving multibillion-dollar loans from China’s state-controlled banking system despite major defaults on earlier loans.”
Trade Representative Robert Lighthizer worked on many Section 301 investigations during his stint as a deputy trade rep in the Reagan administration. As the NYT notes, the US “energetically” invoked Section 301 to resolve trade disputes during the 1980s (notably before the birth of the WTO).
Of course, other WTO members could be reluctant to chastise the US for confronting China over its intellectual-property policies, which in many cases are tantamount to extortion, as China demands companies essentially hand over their trade secrets in exchange for access to the Chinese market. According to the AP, “foreign companies have long complained over rampant piracy and technology theft by Chinese companies.” It’s a testament to the Communist Party’s power that China has been allowed to steal technology from other companies and countries with impunity.
A confrontation is overdue.