Trump, Trade, and U.S.-China Economic Relations

On November 8, 2016, Donald J. Trump, defeated his Democratic Party challenger, Hillary R. Clinton, in one of the greatest, come-from-behind, surprise victories since Harry Truman defeated his Republican challenger, Thomas Dewey, in 1948. His victory is ascribed to the hollowing-out of basic manufacturing in the “swing” electoral college states of Ohio, Pennsylvania, Michigan and Wisconsin. These states host a disproportionate share of low-wage manufacturing workers exposed to the forces of globalization. Candidate Trump campaigned on an unabashedly anti-trade and anti-immigrant platform and successfully tapped into the accumulated resentment.

Three of the seven central points of President Trump’s economic plan to rebuild the American economy and “Make America Great Again” are outright mercantilist or protectionist initiatives directed at China. From trade flows to foreign exchange markets to inward investment approvals, the single most important implication for US-China economic relations is that they are headed for an extended period of significant turbulence.

President Trump has assembled a team of trade negotiators and advisors who, in various shades, share his tough-minded outlook towards China. Wilbur Ross, Robert Lighthizer and Peter Navarro hold a shared belief that China is the “biggest trade cheater in the world.” They propose several common solutions. First, they propose to impose a stiff tariff on Chinese manufactured goods that are imported into the US. Second, they recommend imposing countervailing duties on Chinese exports after designating the renminbi to be a fundamentally undervalued currency that, effectively, confers an export subsidy to Chinese producers. Third, they propose equalizing the effects of China’s value added tax (VAT) rates by imposing a VAT-like or “destination-based” border adjustment measure on all imports entering the US. Finally, they propose bringing additional cases to the WTO’s Dispute Settlement Body (DSB) to force China’s compliance with its obligations while at the same time strongly resisting any attempts by China to dilute US trade remedies and safeguards relief laws through the DSB mechanism.

For all the unity in their views, Wilbur Ross, Robert Lighthizer and Peter Navarro hold varying individual persuasions vis-à-vis China that do not seamlessly overlap. These views range from the Ross’ mercantilist realism to Lighthizer’s protectionist sophistry to Navarro’s extreme hostility. The National Trade Council (NTC), the new international trade strategy office created within the White House, will ostensibly coordinate these competing viewpoints. It will also enable US trade policy objectives to be more tightly integrated within broader structural industrial policy goals and be more amenable to overall control by the White House. The extent to which the trade oversight committees on the Hill acquiesce (or not) to the relative down-grading of the role of the Commerce Department and the United States Trade Representative’s office – and thereby to their own jurisdictional authority, will determine whether the NTC’s trade policy role is ultimately that of a coordinator, a control tower or something more. The NTC could also assume an expanded role within the Committee on Foreign Investment in the United States (CFIUS) – the inter-agency process that will screen Chinese inward investment into the US.

President Trump campaigned on a platform of ripping up existing trade agreements, renegotiating others, and imposing a 35 % tariff on imports from Mexico and 45 % tariffs on imports from China. Congressionally delegated powers to control foreign commerce and impose unilateral trade measures could, in theory, allow him to follow through on his promises.

Congressionally delegated powers can be divided into three categories: (a) conventional enforcement measures; (b) unconventional enforcement measures; and (c) extreme enforcement measures. Of particular interest are the Unconventional Enforcement Measures that have been used only sparingly by US presidents in recent times but which President Trump could deploy as his principal weapon of trade enforcement. Some of the enforcement tools at his disposal could be newly re-interpreted, such as the authority to slap countervailing duties on exports from countries with “manipulated” currency values. Still others are in the process of being drawn up, such as the potential imposition of a “border-adjusted and destination-based” corporate income tax.

As on select occasions in the past, a period of economic upheaval could also provide a fertile breeding ground for a Congressional-Executive Branch consensus to take hold to augment the statute books with harsher trade enforcement tools. This could be one of the more lasting and illiberal legacies of the Trump Administration in the area of domestic trade policy.

Before President Trump unilaterally follows through with these measures, he should pay heed to the non-discrimination, predictability, and fair competition principles that are embedded in the global trading system’s legal architecture. Treating a currency’s value as a countervailable subsidy is a violation of the WTO’s Subsidies and Countervailing Measures Agreement. The design of a “border tax” that is neither an “indirect” tax nor factors labor costs within its tax base is similarly a violation of international rules. These and other planned enforcement measures laid out by President Trump do not fully conform to the global trading system’s prevailing laws and rules. If enforced against China, they will almost certainly invite legal challenges at the World Trade Organization (WTO) as well as unilateral retaliatory measures, perhaps, against US trade interests that could range from civil aircraft to agricultural products to the availability of rare earth elements used in commercial and military electronics.

Furthermore, repeated adverse WTO rulings could sap the Trump Administration’s commitment to the WTO’s dispute settlement system altogether. Robert Lighthizer has concurred in the past with the view that the US should not necessarily be bound by adverse WTO rulings. In that case, the damage will not be limited to just a noticeable setback in US-China economic ties. The hitherto (relatively) successful multilateral trading order could also suffer a body blow.