CIBEL Lunchtime Talk: What’s new about US trade policy towards China under the Trump administration?, given by Prof. Xinquan Tu on 7 July 2017

Author
Xiaomeng Qu, Ph.D. Candidate, Faculty of Law, UNSW Australia

Professor Xinquan Tu discussed the new feature of Trump’s trade policy to China and analyzed the potential US – China trade relations in the near future.

Background

US trade policy towards China has experienced four stages of priority from the second year of the “Reform and Opening-up Policy until now. At the very start, from 1979 to 1989, national security was the major concern of the US government while trade policy was considered an important tool of diplomacy. After the Tiananmen Square protests, human rights took the top priority of US trade policy towards China. This was the second stage (1990-1996). From 1997 to 2016, promoting offensive economic interest in US-China trade relations had been the main job for different administrations, which means the US government made efforts to push China to open up the national market through the WTO negotiation process. During the last stage, from 2017 onward, a less self-confident US is seemingly trying to protect its defensive trade interest by de-globalization. Trump’s administration is trying to the close US market rather than further open up China’s market.

The Reasons behind the Priority Change

There are some objective reasons behind the priority change from offensive to defensive., After rapid and sustained economic growth, China has become the largest exporter of goods since 2013. China has become the second-largest economy after the US, making itself the only comparable competitor with the US. However, its economic development has not caused the political transformation expected by the US. As a result, US deficit with China has been increasing even though China made ambitious concessions during WTO accession negotiations. It is evident that, since 2000, China has taken the position of Japan in terms of the share in US trade deficit and has become the largest source of trade deficits for the US. Finally, China has slowed down its reform and openness since WTO accession. This, however, has not helped to reduce the imbalance, and thus the long-standing offensive strategy seems to be useless.

President Trump’s Trade Policy Preferences and Explanations

The change of trade policy towards China has four personal reasons and two macroeconomic reasons. Firstly, Trump questions the benefits of freer trade to the US, an economic ideology different from previous US presidents since WWII. He also criticizes all trading partners with significant surplus against the US, no matter whether they are economic or political allies, such as China, Japan, Mexico, and Germany. In addition, he hates regional or multilateral trade regimes and prefers bilateral deals because he believes there are more advantages for the US this way The US’s withdrawing from the TPP, renegotiating the NAFTA, blaming the WTO dispute rulings, therefore, could be explained by his anti-establishment sentiment and his obsession with US power and power politics. Moreover, Trump disproportionately emphasizes old manufacturing industries and ignores modern IT and services industries in which the US has strong comparative advantages internationally. This could be due to his identity as a New York real estate developer who has more connections with steelmakers than Internet companies, although his victory is thanks to social media. On the other hand, macroeconomic reasons – US trade deficit and national job losses in manufacturing – also resulted in the change of trade policy. Although the US has a big trade surplus on sales of US majority-owned foreign affiliates and majority-owned US affiliates of foreign companies, it has nothing to do with the national welfare, especially for US workers., The FDI and industrial movement should take major responsibility for job losses in manufacturing, together with the transformation of its production structure and the enhancement of productivity.

Priorities of Trade Policy Agenda of Trump Administration

Firstly, the Trump’ administration will give priority to the US national sovereignty over trade policy. This is nothing is new as the US has the worst record of WTO compliance. Secondly, his administration will strictly enforce the US trade laws as the US has been one of the most active users of trade remedies. Thirdly, as a tradition, Trump’s administration will use all possible leverage to open foreign markets. Fourthly, the administration will embark on negotiating new and better trade deals. The US withdrew from TPP, renegotiated the NAFTA, and will tend to focus on bilateral negotiation because they believe the current global trading system has been great for China. Finally, Trump appears to follows the example of Reagan’s 1980’s aggressive unilateralism which was mainly aimed at Japan. However, China is not the political ally that Japan was to the US.

Available Policy Tools towards China and the Feasibility in the first half year

Prof. Xinquan conceived a range of policy tools towards China which is available for Trump and their implementation in the first half year. It includes:
• More frequent use of trade remedies, which is quite feasible, subject to the capacity of relevant administrative authorities;
• More frequent use of WRO dispute settlement mechanisms, because the US has always been the largest user, but it will take years to conclude;
• More frequent use of Section 337, which is quite possible but subject to the capacity of USITCE;
• Refusing to comply with WTO rulings that are unfavorable to the US. This tool is surely possible especially in the case of China’s non-market economy;
• More restrictions on Chinese companies’ M&A in the US, which is also quite feasible and CFIUS could be granted more power to reject Chinese bids;
• Labelling China as a currency manipulator, which was one of President Trump’s credible threats but there are no agreements insides his administration;
• Initiating Section 302 investigation against China, which is possible but subject to WTO rules;
• Initiating Section 232 investigation against China, which is feasible, but the historical use of Section 232 was cautious;
• Adding 45% tariffs on Chinese imports, which was President Trump’s loudest claim during his campaign but infeasible and impossible since it means the cancellation of MFN to China;
• An Executive border adjustment tax, which is still possible but it will not specifically use towards China;
• Enacting new legislation on currency manipulation, which is possible, but it will not specifically be used towards China.

China’s Responses and the Future of US-China Trade Relations

With regard to President Trump, the Chinese government made corresponding responses. The Chinese government has never explicitly criticized President Trump for his provocative statements during and after the campaign. On the contrary, China has used various diplomacies to establish direct contact with him. President Xi then arranged a special trip to meet with President Trump and proposed the US-China 100 day Action Plan. Prof. Xinquan believes the Chinese government has been smart in dealing with President Trump, who is less ideological and more short-term interest-oriented, by making some tactical concessions in exchange for strategic stability. But what if President Trump does something hostile to China eventually? Prof. Xinquan insists that China will not tolerate any provocative, discriminatory acts against China, and China will not bend to the US unlike Japan. If US actions are under WTO rules, China will first resort to WTO DSM. With respect to the future of US-China trade relations, Prof. Xinquan holds an optimistic attitude and argues that the focus of trade relations will involve bilateral economic interests in the foreseeable future while the world leadership competition will be increasingly intense.