China Unveils Retaliation Targets, Responding to Proposed US Section 301 Action

April 4, 2018

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KEY POINTS:

• Less than 24 hours after USTR issued its list of proposed 25% tariff increases under the US Section 301 investigation of China’s intellectual property (IP) practices, today China announced tariffs to be levied when the US implements its 301 tariffs.
• The US tariffs proposed cover roughly $50 billion of Chinese imports, including semiconductors, engines, agricultural/textile machinery, batteries, tires, “industrial robots,” medical products and instruments used in aeronautical and space navigation.
• Meanwhile China’s proposed 25% tariffs are designed to be reciprocal and cover US exports of soybeans, corn, cotton, sorghum, wheat, beef, orange juice, whiskey, cigars, SUVs, passenger cars, chemical products, and aircraft, covering 106 tariff lines.
• Beijing has left open the possibility of a negotiated settlement, stressing that any talks must be conducted under the WTO or a bilateral framework, not under the auspices of Section 301. The tit-for-tat issuance of tariff proposals leaves little optimism for serious negotiations in the near term, certainly not before the culmination of the US public comment period on May 22.
• MA’s base-case is that little progress will be made bilaterally until after the application of tariffs by both the United States and China.

Tensions in the US-China trade relationship continue to mount. Late on April 3, the US published its target list of tariffs on about $50 billion worth of Chinese imports, citing the Section 301 investigation of China’s IP practices and focusing primarily on products supported by China’s 2025 industrial policy. Beijing immediately proposed retaliatory tariffs covering politically sensitive US goods including soybeans, corn, cotton, sorghum, wheat, beef, orange juice, whiskey, cigars, SUVs, passenger cars, chemical products, and aircraft, covering 106 tariff lines. Soybeans are particularly sensitive, with roughly 62 percent of US exports going to China. The Chinese are unlikely to impose the proposed tariffs unless/until the US levies its 301 tariffs, which would occur only after the US public comment period concludes May 22, at the earliest.

China’s Ministry of Commerce said it will resort immediately to WTO dispute settlement to address the proposed Section 301 tariff hikes, providing a possible forum for consultations outside of the 301 process, which China views as illegitimate.  This comes on the heels of USTR’s 301-based request for WTO consultations on China’s technology licensing practices and USG consideration of restrictions on investment by China in sensitive US technology.

This latest development in the US 301 investigation immediately followed China raising tariffs February 2 on some $3 billion US exports in response to US steel and aluminum tariffs, applied March 23 under a Section 232 national security measure. China had sought consultations under the WTO Safeguards Agreement regarding the tariffs but decided to retaliate when the US rejected safeguard consultations.

The confluence of the two-way 232-inspired tariff increases and the proposed 301 tariffs by the US, quickly countered with the Chinese counter-list, have inched us closer to a trade war with China. However, it is important to note that tariffs have only been applied thus far on $3 billion of products each way, from the 232. There is still time to discuss the proposed 301 tariffs, although the forum for any discussions remains unclear and President Trump seems resolutely committed to punish China for its IP practices with tariffs. There are currently no senior visits or bilateral exchanges scheduled. Further, the USG has spoken in blanket terms regarding how China can address US IP concerns, rather than defining incremental steps that China could take to lead to success. This complicates the end-game of any talks.

Chinese Vice Finance Minister Zhu told a press briefing today that a trade war would be “a lose-lose” proposition and urged the two countries to talk “constructively.”  The Chinese have reportedly asked the US side for specific steps the Americans wish to see to preclude an exchange of punitive measures. Zhu indicated Beijing will be cautious in taking additional actions such as limiting purchases of or selling US Treasury bonds or depreciating the Chinese currency, citing responsibility for maintaining financial market stability.

Finding a path forward may become even more difficult if ascendant China hawks in the administration succeed in securing further actions, potentially including new CFIUS guidelines or restrictions on US high-technology exports to China. Another idea under consideration is limitation of visas for Chinese citizens focused on areas of technological study or work.

Despite challenges on the trade side, the two countries share common national interests in the efficient operation of the global trading system and the maintenance of peace and stability on China’s borders.  Whether those overarching interests will drive the relationship in the long term is an open question; for the immediate future friction and tension will likely increase across the broad scope of the relationship.

 

Suggested Stakeholder Actions:

• Encouraging US and Chinese Governments to engage in discussions to avoid further escalation. Contacts at the US congressional and administration level may be considered.
• For industries captured by the Section 301 investigation findings, helping define steps by China that could contribute to an interim definition of success in any talks could help to provide an eventual roadmap for productive discussions.
• Actively participating in USTR public comment period on proposed 301 tariffs.