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World War Trump

World War Trump

If you thought the Trump Administration’s steel tariffs caused a stir, just wait until it unveils its planned suite of new duties on Chinese goods, which Politico reported Wednesday will be rolled out in the coming weeks. The new tariffs will follow the conclusion of an investigation by the U.S. Trade Representative into alleged Chinese violation of U.S. intellectual property law and WTO rules, with reports suggesting that the administration will announce at least $30 billion in new annual duties against a variety of Chinese products to combat what it says is the unfair forced transfer of U.S. technology to Chinese firms.

Chinese IP practices have long irked U.S. policy makers, as the terms of China’s accession to the WTO allowed China to keep broad restrictions against foreign investment, including rules that force foreign companies to form 50-50 joint ventures with domestic foreign firms in order to do business in the Middle Kingdom. This set up leads to a de facto forced transfer of technology from foreign firms to Chinese ones, even though WTO rules bar China from policies that do just that.

Unfortunately for tariff-loving Trumpers, just because China appears to be in violation of the accession agreement, doesn’t mean that the administration has a free hand to implement new duties. In fact, it’s because WTO rules proscribe forced technology transfers that the Trump Administration would also violate WTO rules by acting unilaterally to punish China in response.

Of course, the Trump Administration has shown little inclination to rely primarily on the WTO to resolve its disputes. In fact, just the opposite: at every turn it has taken steps to sabotage the international body, whether it be by instituting steel tariffs on national security grounds, or by refusing to nominate judges to the WTOs appellate body. Given this history we should prepare for the following:

  1. The Trump Administration will institute at least $30 billion in new annual tariffs, rather than pursue justice through the WTO: Reports say that Trump actually wants an even higher figure than $30 billion, but even that floor would represent new taxes on 5% of all the goods imported from China. Policy makers will try to target these towards products that can be imported from elsewhere, but the broader the tariffs, the more difficult that will be. This could mean significantly higher prices here at home for common consumer goods like televisions and apparel.
  2. The Chinese will retaliate: This could come in the form of directing state-controlled firms to refrain from buying goods from American companies (to choose Airbus over Boeing, for example). It could also come in the form of China bringing a complaint to the WTO against the U.S., for its breaking the rules by unilaterally instituting tariffs against China. Finally, the Chinese may decide to simply make its investment rules and technology-transfer practices permanent.
  3. U.S. companies hurt by the tariffs will challenge them in court: International trade lawyer Scott Lincicome argues that such tariffs would not only break WTO rules, but would be in violation of U.S. law. The 1994 law that was passed in concert with the creation of the WTO, he says, “expressly directed USTR to take unilateral action under Section 301 for only those foreign trade barriers that fall outside of the WTO Agreements.” Since the WTO agreement does bar forced technology transfer, U.S. companies hurt by the tariff would have standing to sue the administration and block the imposition of those tariffs.
  4. The Europeans won’t stand on the sidelines: Despite the Europeans actually having a lot to gain from China easing its investment rules and refraining from IP theft, the Trump Administrations apparent mission to blow up the WTO will likely force them into the Chinese camp. Don’t be surprised if the Europeans join a Chinese complaint against the U.S. for its unilateral actions, in an attempt to save the WTO from a Trump wrecking ball.
  5. The Republican Party won’t mount an effective opposition to new tariffs: While the president has been quite clumsy in mustering an international coalition to achieve his trade goals, he has been masterful at neutering Republican opposition to them. Where in the past, Republicans have opposed nearly all tariffs as taxes the raise the cost of consumer goods, such a stance doesn’t fly in Trump’s newly nativist GOP. Instead, Republicans like Marco Rubio have criticised the tariffs simply for not being effective enough in the fight against a predatory China.

The global trade system is an intricate network of actors with opposing interests, and given this complexity, it’s impossible to predict  the first, second, and third-order reactions to the Trump Administration’s mission to dismantle the global trade status quo. But it is clear that the president is feeling more confident than ever in his protectionist agenda, and with free-traders in the U.S. politically sidelined, we’d all better prepare for the global trade war of 2018.

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