President Trump announced on 10 May 2019 his decision to increase from 10% to 25% tariffs which were imposed in 2018 on $200 billion worth of US annual goods imports from China. The action came after bilateral trade discussions between China and the US on major differences between them failed to deliver an agreement. He set in motion preparations to charge tariffs on a further $325 billion of imports from China. After China retaliated by imposing tariffs on around $60 billion worth of American imports, the US broadened the front by prohibiting American companies from dealing with the Chinese telecoms manufacturer Huawei. President Trump then implied that a revocation of the sanctions was conditional on China agreeing to a deal with the US that would suit the latter’s interests. A worrying bilateral dispute between the two biggest beasts in the international trading world is thus escalating to the point where it could undermine the whole international trading system. The implications for the UK could be far-reaching.
Where things now stand
In an article posted in March 2018[1] we explored the basis for the tariffs imposed by President Trump on imports to the United States predominantly of steel and aluminium, and predominantly from China. We analysed the the probable illegality, in World Trade Organisation terms, of the US’ use of a specious national security justification for imposing the steel and aluminium tariffs. We suggested that for the exporting countries affected the best response would not, however, be to respond with retaliatory trade actions. But to steer clear of stoking a trade war and to maintain the moral high ground while making full use of WTO complaint and dispute settlement procedures. The wisdom of that approach is strengthened by a recent ruling adopted by the WTO’s dispute settlement body in a case between Russia and Ukraine on national security matters, which found that WTO rules limited the scope for discretion in invoking trade restrictions on national security grounds.
Notwithstanding these arguments, China responded to the initial US tariff move by imposing its own tariffs on a range of goods imported from the US worth some $60 billion. It postponed their implementation and left the door open for bilateral consultations which have continued over the past year. No agreement has been reached, for which the two sides predictably blame each other, and in response to the latest US announcement China has threatened to impose tariffs on US goods up to a further $120 billion, meaning $180 billion in all. Both sides clearly realise that in the long run they have to find an accommodation. But meanwhile the public rhetoric is heating up, including an official Chinese statement on May 13 promising an all-out trade fight if the US wanted that.
In the face of strong objections and pressure from other steel exporting countries the US has granted a wide range of exemptions from the steel tariffs to imports from its NAFTA partners Canada and Mexico, as well as from Japan, Thailand, several EU member states including the UK, and Korea. Many thousands of individual tariff exemptions have been granted to US manufacturers who have claimed that they need imported steels for special purposes. Despite the messy-looking coverage and implementation of the steel and aluminium tariffs, President Trump claims that the US economy is booming, and that his tariffs are a big element in that success.
Background politics
The economic claims linking increasing protectionism to growth are as nonsensical now as they were when first made by the current US administration. The administration inherited an economy that was already on a growth trajectory and further stimulated it through tax cuts. Ironically, growth stimulated by tax cuts will increase the trade deficit because the latter is a reflection of the shortfall in domestic saving, on one hand, relative to investment and to government spending on the other. The pronouncements on growth are largely for domestic political consumption, as is the claim that such intervention will “repatriate” manufacturing jobs to the US.
But the Trump administration’s actions are not just about domestic politics. They also reflect the administration’s view on how to deal with the rise of China. The concern is not unique to the US. There are, for a start, strong suspicions among many WTO members that China does not observe the WTO rules fairly, particularly in the matter of intellectual property (IP) protection. China has been accused of imposing unfair conditions on foreign investors, including compulsory sharing of IP rights with indigenous Chinese enterprises, and allegations of outright piracy. The latter are not unfounded. A study by Frontier Economics in 2017 estimated that the global value of counterfeited goods and services would amount to as much as 2.8 trillion US dollars by 2022. Between 50-60% of this is attributable to China.
Secondly, because of the pervasive influence of the state-owned sector there are persistent claims that China is dumping and/or unfairly subsidising exports. But these are difficult to substantiate because in the case of anti-dumping or anti-subsidy investigations against Chinese enterprises, partly because of difficulties in obtaining reliable cost and price data.
These arguments are fuelling a sense of “buyer’s remorse” across industrialised economies that China was allowed into the WTO in 2001, albeit with exceptionally tight conditions to its protocol of accession, which in effect gave China’s partners more discretion in dealing with China, notably in the area of trade remedies. Those conditions lapsed in 2016, the date by which China was expected to have become a modern market economy. Perceptions of widespread government intervention mean that most partners have formed the view that China is not such an economy.
Huawei
The US/China dispute has been sharpened by the hitherto unrelated but ultra-sensitive issue of the US ban for national security reasons, announced in mid-May, on commercial dealings with the Chinese giant telecoms company Huawei. This is important, and it has already caused Google to terminate its collaboration with Huawei, for fear of US government sanctions. Other IT enterprises are bound to follow. The immediate result for US IT firms and the general American public will be greatly to strengthen the position of Samsung in the US market. And this, ironically, at a time when President Trump is already paying unfriendly attention to the US’ trade deficit with Korea.
Extraterritorial action
Typically in such cases US governments seek to apply their domestic regulations extraterritorially, for example by imposing or threatening sanctions against enterprises in other jurisdictions which conduct relevant business with the US that also involves countries blacklisted by the US, in this case China. This could be a particularly tricky issue for the United Kingdom, if the UK Government’s reported (and domestically controversial) decision to allow Huawei to participate on a controlled basis in the development of 5G mobile phone services in the UK were to go ahead. Britain, like Australia, Canada, France, South Africa and the EU as a whole, has “blocking” legislation permitting the government to protect enterprises carrying on business within the domestic jurisdiction from US extraterritorial legal demands; but it seems unlikely that in a situation so sensitive and so fraught between the US and China, national authorities in other countries would risk deploying blocking actions which could endanger their own interests.
The issue is sharpened for the UK because on 23 May Chinese officials publicly threatened unspecified “substantial repercussions” if any action were taken to exclude Huawei from the British market. UK ministers and companies could find themselves between the rock of US legal sanctions if they let Huawei into the UK’s development of 5G, and the hard place of Chinese sanctions if they exclude it.
Immediate impacts
The current situation is that virtually the whole of US/Chinese trade in goods is actually or potentially subject to tariffs far in excess of the general level of tariffs on industrial goods now current among developed economies, which is around 3 percent ad valorem. According to recent research, US applied tariffs are close to those applied in the 1930s under the Smoot-Hawley Act, a “beggar-thy-neighbour” policy that worsened the Great Depression.
The immediate effects, where tariffs are applied, include significant increases both in prices of consumer goods and in the costs of manufacturers who use imported inputs that are subject to tariffs (typically, but not exclusively, steel and aluminium). These various categories of costs must have more impact in the US because America imports vastly more from China than it exports to it. Moreover, the Chinese population at 1.5 billion is four times that of the US, meaning that the effect of increased prices of American goods for individuals and enterprises across China will be greatly attenuated.
The disruption of bilateral trade through reciprocal imposition of tariffs is likely to have consequences for investment, though it is hard to forecast at this still early stage what those might be. It appears that the US tariffs will persist for an appreciable time at or now the levels now proposed. this could lead to a relocation of investment by Chinese businesses outside China and to the rest of Asia, in what would be a reordering of existing supply chains. If that is the case, then US action against China would contribute to rearranging the deckchairs: imports from China would fall but those from other countries would rise (in a manner similar to the Huawei/ Samsung effect described above).
Longer-term issues – undermining the WTO
As regards tariffs, Trump’s strong-arm tactics are illegal under international trade law, given that the selective imposition of tariffs against China almost certainly involves breaches of the US’ tariff “bindings” (highest agreed permissible rates) in the WTO. They are also a flagrant breach of the “most-favoured nation” rule (ban on discriminatory treatment as between a country’s trading partners).
But in the US’ own current terms, Trump’s tactics and tariffs, and his contempt for established international standards, seem to be working, superficially at least. As noted above the US economy is doing well, and China has held off – so far – from all-out retaliation. But whether this argument has merit depends on the counterfactual. The appropriate counterfactual is not inaction against China, but acting through the WTO rules. These provide for a variety of grounds for what some have called a “big, bold, multilateral case” against China.
The fact that the Trump administration has chosen not to play within the rules reflects its general disdain for multilateralism, which it sees as weakening the US bargaining position. Its unilateralism dovetails with its blocking of appointee to the WTO’s Appellate Body, which if it were to persist beyond 2019 is likely to cripple the WTO as a forum for settling trade disputes. All this will play well with his political base.
But looking beyond short-term political cycles, this attitude is likely to harm US interests. Setting aside the economic harm of imposing tariffs on imports, such strong-arm tactics will likely inspire others. Not least China, which, regardless of the current ructions, will become the dominant player on the trade scene over the coming decades.
Outlook for the United Kingdom
The systemic implications of the US-China trade war are significant for the UK. One of the working hypotheses behind Brexit was that there would be a robust system of multilateral rules that would secure the interests of middle and smaller-sized trading nations like the UK.
As multilateral rules weaken, we are more likely to see a fragmentation of the trading system into regional blocs. That is a trend that has already been evident for the last two decades (the WTO currently lists 472 regional trade agreements in force that cover goods). Under such a scenario it will be the big players that prosper because they have the economic and political weight and muscle either to prevail, in their own interests, or to enforce compromises among themselves: specifically the US, China, India, Japan and the EU acting as one under its common commercial policy
This is very much the outlook for the United Kingdom post-Brexit. British ministers have proclaimed the objective, once outside the EU, of concluding dozens of bilateral preferential trade deals with countries round the world, and of resuming Britain’s individual place in the WTO family as a, or even the, leading proponent of liberal open trade (inaccurately referred to as “free trade”).[2] This has unsurprisingly turned out to be much harder than ministers still try to insist: after three years, and with the Brexit date already twice deferred, only a handful of agreements carrying forward the UK’s current rights and obligations under existing (largely minor) EU trade agreements have been agreed. While in Geneva the UK’s proposed new tariff schedules together with its services liberalisation proposals under the General Agreement on Trade in Services are under close and critical WTO scrutiny.
In sum, in the Trump world of bare-knuckle trade deals it is going to find the process increasingly difficult on the wider world stage. Once outside the EU following Brexit, and lacking the weight of 27 other member states and the EU institutions behind it, it will as explained above depend for its wellbeing on an authoritative and trustworthy international trade system, in particular on a WTO whose rules and rulings are fully observed by its members. It is too early to write off the UK’s ambitions for going it alone on the world stage. But the fact that the country is finding it difficult enough to establish a new relationship with what are after all are its closest economic partners is revealing. The Trump administration’s list of negotiating priorities for any trade agreement with the UK shows that for all the rhetoric regarding a special relationship, there will be no kids gloves as far the UK is concerned. An in parallel, the President is acting on the international stage in ways precisely calculated to make the UK’s prospects in its new situation more precarious.
[1] Trump Tariffs on Steel and Aluminium
[2] See our article on What do we mean by “free trade”?