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Resident Senior Fellow
The main purpose of the upcoming Comprehensive Economic Dialogue (CED) meeting is to: (a) take stock of the progress achieved on the 100-Day Action Plan and (b) craft a longer-term action plan with a consistent cycle of negotiations and stocktaking.
As Commerce Secretary Wilbur Ross had noted at a conference in June, “we generally have two conference calls a day, one early in the morning our time and one late at night with the Chinese … that’s five, six, seven days a week.” The two sides are deeply engaged in charting out a list of give-and-take deliverables by the time of upcoming Comprehensive Economic Dialogue. The list/set of priorities is closely held at this time.
At Mar-a-Lago, President Xi and President Trump established a Comprehensive Economic Dialogue and set in motion a 100-Day Action Plan of initial actions. The outcomes of this initial plan were due by July 16, 2017. Following is Status of Key Initial Actions in this regard:
Both the key American interlocutors within the Comprehensive Economic Dialogue format, Treasury Secretary Steven Mnuchin and Commerce Secretary Wilbur Ross, have conveyed that the next phase of the U.S.-China meetings will center on a broader set of market access prioritizations, most likely over a longer term, with the specific intent of reducing the U.S. bilateral trade deficit with China. Widening the range and deepening the volume of U.S. agricultural exports to China, such as expanded pork and soya beans exports, remains the foremost priority area of interest. To the extent that China’s regulations serve as market access barriers, be it technical barriers to trade (TBT) and sanitary and phytosanitary (SPS) standards in agriculture, intellectual property rights rules for pharmaceutical products, or barriers in services trade, the revision of these regulations, too, are to be prioritized .
Both sides are in continuous and confidential discussions on this subsequent set of market access prioritizations. As Secretary Ross recently noted “We generally have two conference calls a day, one early in the morning our time and one late at night with the Chinese. That’s five, six, seven days a week.” An illustrative list of the key ‘asks’ from the American perspective across various issue areas could include:
Aside from the American ‘asks’, it is likely that China’s domestic agricultural subsidies, as a trade distortion, will also be up for discussion. The U.S. has accused Beijing of exceeding its allowable subsidy limits for rice, wheat and corn and has filed a case in this regard at the World Trade Organization. China’s subsidies to electric battery production is also expected to figure as a discussion topic.
There are a number of trade-related reviews and investigations that the Trump Administration has initiated. The ones that involve China in some form or shape are:
At this time, the understanding is that Commerce Secretary Ross, who is the lead authority in making this determination, is leaning towards recommending an approach that leans towards the more-tailored end of the spectrum. The issue of the imposition of Section 232 steel remedies will likely be broached with Premier Wang Yang at the Comprehensive Economic Dialogue but it is far from certain how substantive that discussion will be. The Trump administration is reaching a unified view on this topic but is not there as yet fully.
Also, the last time that an investigation was conducted under Section 232 of the Trade Expansion Act of 1962 (also in 2001, related to iron-ore and semi-finished steel product imports), the Bush administration had held two public hearings and took eight months to complete that inquiry. It also sent surveys to about 175 U.S. iron ore and semi-finished steel producers and potential consumers, and conducted site visits at places associated with the production, shipment, and consumption of iron ore and semi-finished steel in California, Michigan and Wisconsin. The Trump administration, by contrast, has held one hearing in the current investigation and has completed the probe in less than three months.
On the aluminum 232, views within the administration and among aluminum industry executives, unlike their steel counterparts, is more mixed. A majority do not believe that U.S. imports of aluminum are a threat to national security. At this time, the Commerce Department’s determination is far from done. The likelihood, on balance, is that aluminum imports will not be deemed to be a threat to national security.
The great irony in the cases of both steel and aluminum is that China is only a marginal exporter of these products to the U.S. market. China provides only 3 percent of all U.S. steel imports, and of the top 10 steel exporters to the U.S., half are countries with which the United Sates has mutual defense agreements. Regarding aluminum, China accounts for only 8.5 percent of the America’s foreign supply and its market share in 2016 was slightly down from 2015. Meantime imports from Canada account for more than half of U.S. foreign supply. If the intent of the 232 investigations is to punish China for its steel and aluminum domestic overcapacity, the Trump administration, if it goes down the tariff barrier route, could potentially end up punishing several friendly countries before it starts impacting China’s share of the U.S. market.
On April 29, 2017, the Trump administration initiated a 180-day performance review of all existing international trade and investment agreements, with the intention to take lawful action to address violations or abuses of trade law. There are 164 members of the WTO, 20 U.S. free trade agreement partners and 42 bilateral U.S. investment treaties. The performance review will carefully examine each of the governing agreements. On the surface, China does not seem to be an intended target of the review. China, however, could end up as a casualty. The review will examine the U.S. relationship with the WTO and the WTO Dispute Settlement System. Both the concept of most favored nation, (which is the basis of trade relations in the multilateral system) as well as the consistency of awards by the WTO’s dispute settlement system are to be examined. China is a beneficiary of the system (and MFN concept) and consistently wins anti-dumping and countervailing duty cases against the United States at the WTO’s dispute settlement system. The review could offer a protectionist reason for United States not to comply with dispute settlement cases that it loses, including those against China.
This Executive Order comes against a toughening background of trade remedies and enforcement-related action by the Trump administration over the past three months. These include:
It is worth noting that this investigation is currently not a topic of discussions between the United States and China within the framework of the Comprehensive Economic Dialogue. But the repercussions stemming from these measures, which will take some time to percolate through the U.S. system and which might even be subject to WTO dispute settlement, has the potential to disrupt the bilateral trade relationship. These effects could start to be felt by late-2017 and both sides should brace for their effects.
The Executive Order was issued on March 31 and the review was completed in late-June. The key purpose of the investigation was to understand the causes of the individual bilateral deficits and the linkages and implications of those deficits for unemployment outcomes in industrial sectors in the United States. The investigation assessed whether a bilateral trade deficit was caused by one of seven reasons: cheating or other inappropriate behavior; free trade agreements that have not produced their forecasted benefits; a lack of enforcement by the United States; policy decisions made by previous U.S. administrations; currency misalignment in relation to the U.S. dollar; constraints put in place by the WTO on U.S. behavior, particularly in the area of tax policy; systemic overcapacity in one or more industries; and asymmetrical trade barriers.
At this time, the report is currently under study and review at the White House. China is a key focus of the study, but given that these issues are being tackled bilaterally within the framework of the Comprehensive Economic Dialogue, the review’s findings vis-à-vis China is unclear. But the policy recommendations that are outlined in the review could become agenda items for future Comprehensive Economic Dialogue rounds.
Four new WTO cases were brought against China during President Obama’s last year in office. They centered on Beijing’s subsidy to producers of primary aluminum; tariff-rate quotas for rice; wheat and corn; the country’s domestic support for agricultural producers; and the export duties and other restrictions on the export of certain raw materials.
– In the raw materials case, USTR argues that China’s export duties and restraints on various forms of antimony, cobalt, copper, graphite, lead, magnesia, talc, tantalum and tin are inconsistent with its obligations under various provisions of the GATT 1994 and China’s WTO Accession Agreement.
– In the domestic support challenge, USTR argues that China’s market price support programs for agricultural commodities – notably, wheat, India rice, Japonica rice and corn – exceeded China’s internationally authorized and agreed levels. This excessive support creates price distortions and a tilted playing field for U.S. farmers’ access to the Chinese market.
– In the tariff-rate quotas (TRQ) case, USTR argues that China’s poorly defined criteria and unclear procedures for distributing TRQ allocations as well as failure to announce quota allocation and reallocation, serve as a disguised trade barrier which leaves U.S. producers unsure and unable to benefit from available import opportunities.
– In the subsidy to producers of primary aluminum case, USTR argues that China provides subsidies to producers of primary aluminum that are inconsistent with its obligations under the WTO’s Subsidies and Countervailing Measures (SCM) Agreement.
In addition to the new cases, the United States also continues to prosecute five outstanding cases against China at the WTO. Those active disputes include a challenge of China’s tax advantages for certain domestically produced aircraft; its subsidies for demonstration bases and common services platform programs; its anti-dumping/countervailing (AD/CVD) duties on U.S. broiler chicken products; non-fulfillment of obligations in the area of electronic payment services; and with regard to market access for books, movies and music.
The Trump administration, for its part, has not initiated any WTO Dispute Settlement Case against China, so far. And, in fact, the administration has questioned certain aspects of the Dispute Settlement Body’s authority and its judicial interpretations. In its March 2017 Trade Policy Agenda Report, USTR specifically notes:
… In other words, even if a WTO dispute settlement panel – or the WTO Appellate Body – rules against the United States, such a ruling does not automatically lead to a change in U.S. law or practice. Consistent with these important protections and applicable U.S. law, the Trump administration will aggressively defend American sovereignty over matters of trade policy. … And, when the WTO adopts interpretations of WTO agreements that undermine the ability of the United States and other WTO Members to respond effectively to these real-world unfair trade practices with remedies expressly allowed under WTO rules, those interpretations undermine confidence in the trading system. None of these outcomes is in the interest of the United States or a healthy global economy. Accordingly, the Trump administration will act aggressively as needed to discourage this type of behavior – and encourage true market competition.
These observations do not bode well for the multilateral rules-based trading and dispute settlement system – particularly, in the context of China’s own initiation of dispute settlement proceedings at the WTO against the United States and European Union in December 2016 over their failure to abide by China’s WTO Accession Protocol and revise their treatment of China as a “non-market economy” in trade remedy cases. USTR Lighthizer has threateningly observed at a recent Congressional hearing that “a bad decision with respect to non-market economy status with China … would be cataclysmic for the WTO.” Given the Trump administration’s harsh views on trade remedies and enforcement-related measures, this case, without question, is one of the most serious litigation matters under way at the WTO.
On the other hand, the Comprehensive Economic Dialogue could provide a valuable forum to resolve some of the U.S.-China trade cases in ways that go some way towards satisfying America’s market access demands, while at the same time removing them from the WTO’s case docket. Just like issuing of guidelines by Beijing to allow U.S.-owned suppliers of electronic payment services to begin the licensing process was one of the 10 deliverables in the 100-Day Action Plan, so also the tariff-rate quota (TRQ) administration case and the export duties on raw materials case could be resolved on terms that are satisfactory to the United States, and which would qualitatively enhance the U.S.-China bilateral trade equation.
On the campaign trail, candidate Trump had promised that he would label China as a “currency manipulator” on his very first day in office. In the event, on April 14, 2017, the Trump administration released its first semi-annual report of the Foreign Exchange Policies of Major Trading Partners of the United States and China was not listed as a currency manipulator. No other major trading partner was listed either. China, along with 5 other countries, was however placed on a “Monitoring List” of major trading partners that merit close attention in terms of their currency practices. To be placed on the Monitoring List, a country must meet two of three criteria – a significant bilateral trade surplus with the United States; an overall material current account surplus; and evidence of persistent, one-sided intervention in foreign currency markets. In spite of meeting just one criterion, China was placed on the Monitoring List because its large bilateral trade surplus with the United States was deemed to “account for a disproportionate share of the overall U.S. trade deficit.” The next semi-annual report is due out in October. The currency issue is not expected to be a significant topic of conversation at the forthcoming meeting of the Comprehensive Economic Dialogue – although the issue has not been taken off-the-table either.
The United States was China’s top destination for foreign direct investment in 2016 with $45.6 billion in completed acquisitions and greenfield investments. During the January to May 2017 period, the pace of inward investment registered a 100 percent increase. Further, from 2010 to 2016, Chinese investors were involved in providing financing roughly to the tune of $700 million for 51 artificial intelligence (AI) projects; $253 million for robotics start-ups; and $1.3 million in the area of augmented reality and virtual reality ventures. Rapid growth in Chinese foreign investment in these sensitive sectors, including semiconductors, and in the area of sensitive technologies, including artificial intelligence and machine learning, have raised anxieties within the U.S. political and defense establishment.
At this time, the Committee on Foreign Investment in the United States (CFIUS), which vets all significant inward investment proposals, does not plan to expand the criteria that it uses to test the suitability, threat or utility of a particular merger, acquisition or greenfield investment. It will continue to review mergers and acquisitions of companies in the U.S. only for potential national security implications and will not expand the purview to include a broader economic security test – the so-called “net economic benefit test.” Certain legislative fixes that tighten CFIUS appraisals, though, are nevertheless in the works on Capitol Hill, and which have the support of the Administration in principle. These include:
Bilateral investment related topics are not likely to feature in this upcoming round of the Comprehensive Economic Dialogue (CED). Discussions on the long-running Bilateral Investment Treaty (BIT) negotiations, too, are also expected to take a back-seat. The CED will continue to remain for the time being focused on its market access agenda with the explicit intention of reducing the America’s large trade imbalance with China.
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