What The WTO Ruling Against Trump’s China Tariffs Means For A Potential President Biden
The World Trade Organization ruled yesterday that the Trump Administration’s tariffs on China, based on fair trade principles under the Trade Act of 1974, are a breach of member rules. Trump will obviously tell the WTO to go pound sand. What would a President Biden do, should it come to that next year?
First, here is what happened.
On Tuesday, the WTO said that the United States’ Section 301 tariffs on roughly $230 billion worth of thousands of Made in China imports broke with Article 1 of the trade club’s rules. In other words, if you are a member of the WTO, you can only slap tariffs on other WTO members if they are dumping products in your country or for what is known as counter-veiling duties, which are temporary and usually the result of a government investigation brought on by years of costly study by industry groups complaining that a foreign competitor is using unfair trade practices to take over a market.
The Trump trade team, led by U.S. Trade Representative Robert Lighthizer, obviously knows the rules. Including that a country can self identify as a developing nation and enjoy the rules bestowed on emerging markets. Why not just declare the U.S. an emerging market, he said yesterday.
Anyway, knowing the rules, they tried go around anti-dumping and counter-veiling duties exceptions to the Article 1 favored nation status by using Section 301 of the 1974 Trade Act. Section 301 gives the USTR leeway to punish countries for unfair trade practices. It’s a fair trade act, aimed at reciprocity. And Washington, clearly, believes that China is no free, or fair, trader. Nor is it reciprocal.
China manufacturers will literally sell you a widget for a penny even if it costs them five. The goal of full employment is what matters way more than making money, especially to the thousands of non-household name companies in China making everything from American Christmas ornaments sold at Joann’s Fabrics, to a cute outfit for $35 at H&M.
As far as reciprocity goes, China companies doing business here do not have to partner with American firms. Baidu BIDU develops automated vehicles in California in a R&D center. They don’t have to partner with Microsoft MSFT , or Google, Ford or Tesla TSLA to do it.
The United States has the flexibility to determine whether to seek recourse for foreign unfair trade practices in the WTO or act unilaterally using Section 301.
The USTR is supposed to invoke dispute settlement procedures at the WTO under a Dispute Settlement Understanding agreement for an investigation that involves an alleged violation of trade between members. The WTO said the U.S. never invoked that, because the U.S. position was that the Chinese trade dispute was happening between the two parties and they didn’t need a slow, clumsy mediator in Geneva.
For example, China retaliated against Trump’s tariffs and did not wait for the WTO to make a ruling on whether they could do so.
Section 301 tariffs were placed against China in August 2017, Trump’s first year in office. The complaint of “unfairness” centered around forced technology transfers among joint venture partners; and intellectual property protections and malpractice. The USTR said that at least four Chinese IP-related practices were unreasonable (or discriminatory) and burdensome (or restrictive) to U.S. companies and therefore that justified action due to unfair trade practices on China’s part.
Those actions included five separate tariff moves since May 2018. Approximately two-thirds of U.S. imports from China are subject to Section 301 tariffs currently, ranging in extra prices at the port from 7.5% to 25%.
As part of the U.S.-China Phase One Trade Agreement, the USTR announced reductions for certain tariff rates as of February 2020.
The WTO reviewed China’s technology licensing requirements in November of 2018 but those proceedings were suspended at the request of the United States in June 2019. I don’t know why.
Since April 2018, China has filed three WTO cases challenging Section 301 tariffs. And yesterday, the WTO responded. They’re no good. (The tariffs. Not China.)
Once again, Trump and Lighthizer will tell the WTO to pound sand. Peter Navarro has said in the past that if the U.S. ever left the WTO, it would be finished, and not be run by China.
Biden and His Allies
All of this puts Biden in a bind.
He has pledged to be tough on China, too. He has to. Unless all of his campaign tour talk about “building back better” means building back better in China, he will have to get tough on China goods trade (unless he means building hamburgers).
Getting tough on China for human rights is one thing. But China’s a big country. The whole country and its companies are not human and labor rights violators. Thousands of companies making thousands of products are tariffed above usual rates right now, not the roughly 9 that are currently subject to import bans by Customs and Border Protection due to alleged human rights violations in the Uyghur autonomous region of Xinjiang.
Blanket trade tariffs across a host of goods manufacturers are the one way to bring China to the table to talk.
The problem is that Biden’s approach — if we are to assume he wants to keep with Trump’s protectionist measures — is to tackle China together with our allies. And his allies were also slapped with Section 301 tariffs. On the EU (April 2019) and on France individually (July 2019). The French tariffs of 25% on $1.3 billion worth of imports were suspended until January 2021.
The WTO’s ruling, for now, is just on the Section 301 tariffs impacting China. They have not said anything yet about the EU and French tariffs.
Biden, if elected, will have to deal with yesterday’s decision. He has a couple of obvious options.
One is to be like Trump. The market is already watching Biden play the “kinder, gentler Trump” on trade, so this is plausible. If so, he sticks with his word and does not lift tariffs on China.
But the second option looks even more plausible if you take into consideration Biden’s history of going along with status quo foreign policy. Biden’s USTR (it won’t be Lighthizer) will say they have to be compliant with WTO Article 1 and that means they have to lift these tariffs on China. China will then lift its retaliatory tariffs. The tariff front of the trade war ends.
By lifting them on China, the Section 301 fair trade tariffs will also be lifted on the European Union, and the French exemption that ends in January when Biden takes over, assuming he does, would also be shelved.
Biden will then say “come on, man…we have to work together” against China. Then they will have a meeting in Monaco and have a nice dinner and put out an MOU with trade ministers from Europe on China mercantilism, which China will understand to be nothing but a weak plotted short story published on some multilateral organizations website. They’ve read it before.
“Most experts have agreed that a President Biden would be unlikely to remove the China tariffs for a variety of reasons. Now that the WTO has ruled that the tariffs were imposed improperly, Biden would be faced with a dilemma,” says John Scannnapieco, a shareholder at law firm Baker Donelson in Nashville and chair of the firm’s Global Business Team. “If he does he accept the ruling of the WTO — international trade rules and norms — and provide China with a big victory or does he ignore the rule of law and the U.S.’s global trading commitments in exchange for not looking weak against China so early in his Presidency,” he says.
If Biden lifts tariffs, he loses leverage on China. But if Biden doesn’t lift tariffs, he will be in violation of WTO membership. Will the allies like that? They’re not in violation of WTO membership. In fact, they are being threatened by Section 301 tariffs. They would prefer not to face the tariff risk from the U.S.
The WTO blows up Biden’s strategy because his strategy is that he can be a tougher leader on China by getting American allies (Europe, Japan, South Korea and Australia mainly) on board with changing China’s ways. The WTO is not changing China’s ways.
His allies are in the WTO. The cost of doing business with those allies post-Trump will be to get in compliance with the WTO, come to terms with the country club members pledge, and ditch the Section 301s against them because the WTO will eventually come for those next.
My prediction: President Biden is going to dump Section 301 and the tariff war ends. If I am right, Wall Street will love it.