BY EDWARD J. BARSS | PRESS ITEM
Following the failure of China and the US to resolve trade and other issues earlier last year, the Trump administration launched a Section 301 investigation into Chinese Intellectual Property practices, which is the genesis for the proposed $50 Billion in US trade sanctions on Chinese goods. The Chinese government, in response to US limits on Chinese steel and aluminum, has levied $3 Billion in tariffs aimed at agricultural products. The underlying issue for both countries, outside of undermining the WTO or the economic damage a trade war will cause, is the inability to reach a negotiated settlement. Lost in the storm and stress of a trade war between the US and China, there are significant implications for countries in Asia. Furthermore, Taiwan could be affected the most.
THE US LAUNCHES SECTION 301
The Trump administration launched a Section 301 investigation into Chinese Intellectual Property practices, which is the genesis for the proposed $50 Billion in US trade sanctions on Chinese goods. Section 301 of the 1974 Trade Act is a tool that allows for the investigation of trade issues, permitting the US President to respond to trade acts considered to be unreasonable. In the pre-WTO era, Section 301 had been used as a negotiating tool, but has been rarely used since. However, in the President’s 2017 Trade Policy Agenda the Trump administration outlined a plan to use this tool to force other countries to adopt more market friendly policies. As of now there is still time to negotiate before the proposed $50 Billion in tariffs and tighter screening of Chinese capital is imposed, though the likelihood of a breakthrough seems distant. In addition to the proposed Section 301 sanctions, the US has already imposed restraints on Chinese steel and aluminum, prompting retaliatory Chinese tariffs and a complaints in the WTO.
CHINA RESPONDS IN KIND
The Chinese government, in response to US limits on Chinese steel and aluminum, has levied $3 Billion in tariffs aimed at agricultural products. Although, in absolute terms China holds a weaker bargaining position given that it is five times more dependent on US exports than the US is on Chinese imports, there are linkages to other countries which will create a larger impact on the US economy. Regardless, any Chinese response will need to be consistent with WTO rules, otherwise China risks losing complaints in the WTO and undermining the rules-based international trading system of which it is a prime beneficiary.
THE INABILITY TO REACH A NEGOTIATED SETTLEMENT
The underlying issue for both countries, outside of undermining the WTO or the economic damage a trade war will cause, is the inability to reach a negotiated settlement. China’s promises for reform of its intellectual and non-market-based practices are not credible because of its past failures to fulfill similar promises. Furthermore, China is unable reform in a significant way because of the incentives inherent in the makeup of the Chinese political-economic system. The US administration, particularly the US Trade Representative, views China as having abused its status as a WTO member and engaged in widespread state-sponsored intellectual property theft. This leaves a situation where there are strong incentives on either side not to reach a settlement without significant and unpalatable concessions.
IMPLICATIONS FOR OTHERS
Lost in the storm and stress of a trade war between the US and China, there are significant implications for other countries in Asia. Many goods exported by China to the US contain parts from countries outside of China. Other countries, like South Korea, Japan, Malaysia, Thailand, and Singapore add value to Chinese exports to the United States, accounting for a significant amount of each country’s GDP. The most affected will be Taiwan, as over 2% of its GDP is dependent on Chinese value-added goods for export to the US. This may be mitigated somewhat by the exclusion electronic communication devices or other goods, though the final tariff list is still subject to changes and should be finalized after May 11.
TRADE WAR CONSEQUENCES
Although, the consequences of a trade war seem limited to economic growth and the world trade system, negotiations over trade issues could easily spill into other areas. National Security Advisor John Bolton, who has already caused the resignation of several national security officials, has argued for changing the US “One China Policy”, creating a situation where Taiwan becomes part of the US’s trade negotiation strategy. The most plausible direction this could take is a strengthening of the US-Taiwanese relationship to be used as leverage against China. That could create significant pain for Taiwan given its strong economic dependence on Mainland China. No matter what, China will not respond to US moves without action, making negotiating a settlement less probable.