Trade War or Message War?

Economy

Trade War or Message War?

Washington Policy Analyst Ed Mills addresses the new executive memo targeting Chinese trade policies.

March 23, 2018

The Trump Administration has kicked off the next round in the trade fights (not yet willing to call it a trade war) with the signing of an executive memo to target China’s trade practices. The executive memo requires various aspects of the Trump Administration to “take a range of actions responding to China’s acts, policies, and practices involving the unfair and harmful acquisition of U.S. technology.” The list of tariffs is targeted for at least $50 billion and is set to be published in 15 days, with a 30-day public comment period before they would take effect. The memo also directs the U.S. Trade Representative (USTR) to pursue a dispute settlement at the World Trade Organization (WTO) on technology licenses and the Treasury Secretary to address concerns about Chinese investment in U.S. companies in certain technologies.

Executive Memo

The executive memo requires various aspects of the Trump Administration to take action to protect the United States from Chinese trade policies, including new tariffs of 25% on a yet to be released set of imports, WTO disputes and reexamination of foreign investment from Chinese firms on national security grounds. The tariffs are being imposed following a so-called “section 301” investigation, which gives the President wide discretion on imposing tariffs. One key part of this debate will be how much any of these timelines could slip and how much the list of tariffs could change with the public release/request for comment over the next 45 days. Another key issue will be the Chinese response, with early indication of approximately $3 billion in tariffs on 128 U.S. items, absent striking a compromise. This initial reaction is less than would have been feared.

Trade War or Message War?

The market clearly did not like this announcement, but there is an expectation that these actions will be watered down or mitigated with subsequent actions in the coming weeks. The immediate debate has been a comparison to the rollout of the steel and aluminum tariffs, where sharp rhetoric gave way to massive exclusions. The threat of a misstep remains high, and there will be plenty of debate on whether this action already represents a potential misstep, which is destabilizing for the market. Ultimately, we do see the technicalities of the WTO and the Committee on Foreign Investments (CFIUS) process (both included in the memo) as key areas where the bark can be louder than the bite.

Three-Part Response

The President has instructed that the appropriate response to China’s harmful acts, policies and practices should include three separate actions.

  1. Tariffs. The President has instructed the USTR to publish a proposed list of products and any tariff increases within 15 days of Thursday’s announcement. After a period of notice and comment, the Trade Representative will publish a final list of products and tariff increases.
  2. WTO dispute. The President has instructed the USTR to pursue dispute settlement in the WTO to address China’s discriminatory technology licensing practices.
  3. Investment restrictions. The President has directed the Secretary of the Treasury to address concerns about investment in the United States directed or facilitated by China in industries or technologies deemed important to the United States.

 

Legislative and regulatory agendas are subject to change at the discretion of leadership or as dictated by events.



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