US, China Tariffs Begin Taking Effect, WTO Members Begin China Trade Policy Review

12 July 2018

The first instalment of the US’ Section 301 tariffs on China took effect on Friday 6 July, targeting US$34 billion worth of Chinese products with an ad valorem tariff of 25 percent. The sectors affected by the tariffs include automobiles, aerospace, information and communications technology, and industrial machinery, among others. China’s own tariffs on US$34 billion in US products are also now in place, officials say, targeting goods such as soybeans.

The US duties in place target 818 tariff lines, and the Office of the US Trade Representative indicated last month that the products are meant to involve “industrially significant technologies, including those related to China’s ‘Made in China 2025’ industrial policy.” 

The US has also said that it is ready to impose tariffs on an additional 284 tariff lines, with these due to go into effect after Washington completes the relevant domestic procedures.  These 284 tariff lines account for US$16 billion in imports. 

The US tariffs were imposed following a Section 301 investigation, which refers to the provision of the 1974 Trade Act allowing for investigations and potential responsive measures in response to allegedly unfair practices by trading partners. (See Bridges Weekly, 22 March 2018

The Office of the US Trade Representative also released on 7 July an explanation of how US companies who wish to import some of the affected products can request their exclusion from the tariffs. Interested parties have until early October to ask that the US exclude a product from the duties, which would be time-bound at one year, along with being backdated from when the tariffs took effect. 

China, for its part, responded in kind on Friday with tariffs on US$34 billion of American imports, covering over 500 commodities, and has pledged to impose tariffs on an additional US$16 billion if Washington moves ahead with the second tranche of duties. 

The Chinese Ministry of Commerce also issued a statement, as reported by state-run news agency Xinhua, which said that “these tariffs violate the World Trade Organization (WTO) rules and represents a typical ‘trade bully,’ posing a grave threat to the security of global industry and value chains.” 

The escalation in tariffs, along with sparking concern among other WTO members and trade officials, has also provoked resistance from some US companies with operations in Beijing. The American Chamber of Commerce in China warned that greater trade tensions between the economic giants could be dangerous, and that the two governments must find a negotiated solution. 

“There are no winners in a trade war. Counter-productive import tariffs, such as these, hurt not only the economies of the US and China, but those of every country around the world,” said William Zarit, Chairman of the American Chamber of Commerce in China. 

Lighthizer: USTR prepping tariffs on additional US$200 billion in Chinese goods

While each side is set to impose tariffs on another US$16 billion of goods, unless the US and China manage to agree on a compromise, US President Donald Trump has now asked his trade team to also prepare tariffs that target even more Chinese imports. 

“As a result of China’s retaliation and failure to change its practices, the President has ordered USTR to begin the process of imposing tariffs of 10 percent on an additional US$200 billion of Chinese imports,” said US Trade Representative Robert Lighthizer on Tuesday 10 July. “This is an appropriate response under the authority of Section 301 to obtain the elimination of China’s harmful industrial policies.”  

The US trade chief reiterated past concerns over alleged forced technology transfers and discriminatory licensing practices, which had been cited as the basis of the original Section 301 investigation against China, and are part of the justification for the existing tariffs. He also said that China’s move to respond with its own tariffs were cause for escalation. 

“Unfortunately, China has not changed its behaviour – behaviour that puts the future of the US economy at risk. Rather than address our legitimate concerns, China has begun to retaliate against US products.  There is no justification for such action,” he added, while noting that the new tariff list has not yet been finalised, given the need for a public comment period and other steps. 

The US$200 billion in goods targeted would face a 10 percent tariff, should these duties go ahead. The goods involved would cover over 6000 tariff lines. According to a notice in the Federal Register, the notice, comment, and public hearing period would last through the summer and is scheduled to continue through 30 August, meaning that the tariffs would not be in place until September at the earliest. 

Notably, the goods on the list published by USTR do not exclusively target products related to the “Made in China 2025” industrial strategy. Products on the list include foodstuffs, chemicals, coal, metal ores, tobacco products, textile fabrics, yarn, cotton, and building materials, among others. 

“Modification of the action in this investigation by taking a supplemental US$200 billion action is appropriate in light of the statutory goal of obtaining the elimination of the acts, policies, and practices covered in the investigation,” the Federal Register notice says. 

The USTR announcement has drawn a strong rebuke from some key US trade lawmakers, including from the President’s own Republican Party. 

Orrin Hatch, the Utah Republican who chairs the Senate Finance Committee, said on Tuesday that “although I have supported the administration’s targeted efforts to combat China’s technology transfer regime, tonight’s announcement appears reckless and is not a targeted approach.” 

His counterparts on the House Ways and Means Committee have issued similar warnings. Kevin Brady, the Texas Republican who chairs that panel, as well as Dave Weichert, the Washington state Republican who chairs the Trade Subcommittee, issued a joint statement on Tuesday calling for Trump to meet with Chinese President Xi Jinping in person to resolve the matter. 

“With this announcement, it’s clear the escalating trade dispute with China will go one of two ways – a long, multi-year trade war between the two largest economies in the world that engulfs more and more of the globe, or a deliberate decision by President Trump and President Xi to meet and begin crafting an agreement that levels the playing field between China and the US for local farmers, workers, and businesses,” said Brady. 

Brady also criticised trade officials on both sides for not holding “serious trade discussions” to address the matter, and for not indicating plans to hold negotiations any time soon. 

WTO members review China trade policy

Across the Atlantic, WTO members began their biennial review of China’s trade policies and macroeconomic environment this week at the organisation’s Geneva headquarters, with the two-day event beginning on Wednesday 11 July and due to conclude on Friday 13 July. 

China, as one of the world’s four largest traders, faces this review every two years, though this interval will change to three years from 2019 onward. The review is based off a WTO secretariat report as well as a government report, with delegations able to submit questions both before and during the meeting. According to a Geneva trade official, China received nearly 2000 written questions from its fellow WTO members ahead of the review. 

During the first day of the event, the US, EU, Canada, Japan, and various other delegations gave statements either asking questions or providing feedback on China’s trade policy environment during the period under scrutiny. 

Chinese Vice Minister Wang Shouwen, meanwhile, gave an opening statement before these interventions, highlighting the various contributions China has made to the WTO, both since joining in December 2001 as well as in the specific two-year period under examination. 

Wang also noted the challenges facing the system, including from a lack of judges on the WTO’s Appellate Body, as well as from the US’ above-mentioned use of Section 301 investigations, as well as a separate tool referred to in trade shorthand as Section 232. The latter is a provision of a 1960s-era US trade law which allows for investigations and potential measures targeting imports in response to national security concerns. 

The US ambassador to the WTO, meanwhile, gave a detailed statement outlining a series of criticisms of China’s trade policies, as well as Beijing’s purported response to Washington’s various concerns. 

“Given China’s very large and growing role in international trade, and the serious harm that China’s state-led, mercantilist approach to trade and investment causes to China’s trading partners, this reckoning can no longer be put off. If the WTO is to remain relevant to the international trading system, change is necessary,” said US Ambassador to the WTO Dennis Shea on Wednesday. 

Shea specifically highlighted the Chinese government’s role in attempting to support industrial development domestically, arguing that Beijing gives such industries “massive, market-distorting subsidies and other forms of state support” while trying to hamper the competitiveness of their overseas counterparts. His criticisms also included claims of lax enforcement of intellectual property rights, forced technology transfers, and cyber theft, among others. 

“It is clear, moreover, that the WTO currently does not offer all of the tools necessary to remedy this situation,” Shea added. He argued that the dispute settlement mechanism has limitations as a tool to address these concerns, and said that “there is no clear path toward the negotiation of new rules to address the unique problems posed by China’s state-led, mercantilist trade and investment regime.” 

(Editor’s note: A full report on China’s TPR will be included in the upcoming Bridges Weekly, with the event due to conclude at the end of this week.) 

WTO warns of rising G20 trade restrictions 

The escalating tensions among major players, fuelled by the US and China, has had knock-on effects across the global trade and investment system. Trade officials and analysts alike have debated what continued frictions could mean for the global economic recovery, as well as the multilateral trading system’s medium and long-term resilience against such challenges. Of particular concern are the potential impacts on smaller economies that are particularly susceptible to such changes. 

WTO Director-General Roberto Azevêdo issued a warning last week on a “disturbing increase in trade-restrictive activity by major economies,” following the release of a semi-annual update on such measures being applied by G20 members. Azevêdo’s statement came within days of the first tranche of US-China tariffs mentioned above, though the WTO update was previously scheduled. 

“More than twice as many restrictive measures were applied during the period in question as in the previous six months. It's time for anyone who cares about the health of the economy to sit up and take notice,” said Azevêdo on Twitter late last week. 

The WTO report on G20 trade restrictions and facilitating measures covered the period of mid-October 2017 to mid-May of this year. The report therefore does not cover, for example, the tariffs that the US and China imposed on Friday 6 July. 

The WTO found that G20 economies have put in place “39 new trade-restrictive measures,” in different forms, while also enacting 47 trade facilitating measures, noting that the latter type of measure covered more trade, in terms of value. The global trade club also noted that goods such as steel, iron, plastics, and cars, were among those facing trade remedy measures in the form of new investigations. 

The WTO chief, along with other economic agency heads, also warned that the growing use of trade restrictive measures could be damaging not just to the health of the global economy, but to the continued strength and durability of the global trade system. 

“The multilateral trading system was built to resolve such problems and it has the tools to do so again. However, further escalation could carry potentially large risks for the system itself,” said Azevêdo, together with Ángel Gurría, Secretary-General of the Organisation for Economic Co-operation and Development (OECD), and Mukhisa Kituyi, Secretary-General of the UN Conference on Trade and Development (UNCTAD), in a joint summary of the report on G20 trade and investment measures. 

While the WTO part of the report covers trade restrictions and trade facilitating measures, the OECD and UNCTAD issued their own review of developments in the investment policy landscape, which the two agencies say “also show a mixed picture.” 

ICTSD reporting; “U.S. has ignited largest trade war in economic history: China's MOC,” XINHUA, 8 July 2018.

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