Kimberly Ann Elliott
Washington and Beijing are a little over two weeks away from their self-imposed March 1st deadline to reach a sweeping trade agreement that addresses China’s alleged unfair trade practices. If they fail, and the current truce in their trade war ends with no deal, the costs will be substantial for both sides. The United States imports more goods from China than any country in the world—roughly $500 billion in 2017—and a breakdown in the talks could lead to even higher tariffs on at least half of that. Right now, under the tariffs steadily imposed by President Donald Trump, the U.S. Customs Service is collecting additional duties of 10 percent on $200 billion in imports from China and 25 percent on another $50 billion. If no deal is reached by March, the 10 percent tariffs will also rise to 25 percent.
China does not import enough goods from the U.S.—$130 billion total in 2017—to match Trump dollar for dollar. But Beijing retaliated with an equivalent 25 percent tariff on $50 billion in American exports in the first round of this fight, and tariffs of 5 percent to 10 percent on another $60 billion in the second round. The Chinese authorities also have many other ways to make life miserable for companies operating in China or trying to export there. Since the trade war began, some American firms have reported shipments being held up in Chinese ports and having to undergo far more extensive inspections than before.
There has been some progress since Trump and Chinese President Xi Jinping agreed to their truce in Buenos Aires in December, and China seems eager to get a deal. After a late-January round of negotiations that Chinese and U.S. officials both described in relatively positive terms, China placed another large order for American soybeans. Prior to that, Beijing had reduced the retaliatory tariff on U.S. automobile exports from 40 percent to the 15 percent levied on other countries’ exports and announced it was stiffening the penalties for intellectual property theft.
According to an update of the U.S. Trade Representative’s report investigating China’s unfair trade practices, in particular problems with forced technology transfers and the theft of intellectual property, China loosened restrictions on foreign investment in some sectors, including banking, commercial aircraft, some automobiles and new crop varieties, except wheat and corn. But extensive restrictions remain in place for other important sectors, including energy and telecommunications, as well as many types of automobiles. More recently, Chinese officials accelerated the process for adopting a new foreign investment law that would codify efforts to strengthen and better protect foreign intellectual property and prohibit forced technology transfers by joint venture partners. While welcoming those steps, U.S. negotiators want Beijing to go further in leveling the playing field for American exporters and investors and reducing subsidies and other support for Chinese state-owned enterprises.
Trump—already looking ahead to the 2020 election—may not be willing to bear substantial, short-run costs in hopes of getting a strong deal.
After the late January round of negotiations in Washington, U.S. Trade Representative Robert Lighthizer also emphasized the need for “enforcement, enforcement, enforcement.” The report on China’s forced technology transfers and intellectual property theft, conducted under Section 301 of the Trade Act, includes a table listing eight instances since 2010 when Chinese authorities committed not to use technology transfers as a condition of doing business in China and to crack down on cybertheft—all with limited or only temporary impact. In 2015, President Barack Obama met with Xi and extracted a promise to stop cybertheft of American technology. Yet the November 2018 update of the Section 301 report, while noting progress in some areas, claimed that the frequency of cyber intrusions had increased in recent years.
As part of any trade deal, U.S. negotiators want a tough enforcement mechanism that includes the ability to use tariffs, but that is going to be difficult to get given the nature of the problems the Trump administration is trying to address. Beyond outright theft, including through cyberattacks, the Section 301 investigation identified two main mechanisms that China uses to force American firms to transfer technology or intellectual property when they would rather not: foreign ownership restrictions or demands from joint venture partners; and administrative licensing and approvals for opening or operating a business in China. Many companies also report “facing vague and unwritten rules” when they try to do business in China, and that local rules often diverge from national rules and are “applied in a selective and non-transparent manner.” But companies are often reluctant to complain publicly or report such practices to U.S. officials because they fear retaliationfrom Chinese authorities.
The most effective way to address the problems that American and other foreign investors face in China would be to reduce the restrictions on entry into the Chinese market, which would in turn reduce the leverage that Chinese officials, both locally and nationally, wield over them. But to the degree that Beijing is likely to insist on maintaining at least some restrictions in what it views as strategic industries, problems are likely to persist through behind-the-scenes pressure. Chinese negotiators are unlikely to accept an enforcement mechanism that allows American officials to unilaterally identify violations and impose sanctions with no independent verification.
With such a huge agenda, it is virtually impossible that negotiators will be able to resolve all these issues in just a few weeks. While the Trump administration thinks it has an edge because the Chinese economy is slowing and the trade war is inflicting pain, the costs of escalation for the American economy would be significant as well. Lighthizer, the chief trade negotiator, might be willing to bear some substantial, short-run costs in hopes of getting a strong deal. It is not so clear that Trump—already looking ahead to the 2020 election—is as sanguine, despite his pronounced love for tariffs.
So the likely outcome is an interim deal, whereby China buys some more stuff—soybeans, natural gas—and passes the new foreign investment law while the parties agree to keep negotiating. In this scenario, it is likely that neither side fully lifts its retaliatory tariffs, but neither side imposes new ones, either. That probably won’t make farmers and American companiespaying the cost of all these tariffs happy, but it’s better than no deal.
Kimberly Ann Elliott is a visiting scholar at the George Washington University Institute for International Economic Policy, and a visiting fellow with the Center for Global Development. Her WPR column appears every Tuesday.
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