Is Trump’s China trade dialogue unraveling?

Over a year ago when Donald Trump was campaigning for US President, he gained considerable support among blue collar workers with his charges of unfair trade against China, his threats to brand them a currency manipulator, and his promise to raise import tariffs to 45%. After becoming President, Trump put some of these plans aside, at least temporarily, and adopted a more moderate approach by initiating cabinet-level dialogues with Chinese counterparts and lengthy internal investigations of Chinese trade behavior.

For example, in April 2017 the US-China Comprehensive Dialogue was announced just after President Xi’s visit to Mar-a-Lago, Florida. A new willingness to engage in dialogue seemed to be motivated in part by China’s agreement to apply more pressure against the increasingly hostile North Korean regime. The Dialogue was designed to have four pillars of discussion: the Diplomatic and Security Dialogue, the Comprehensive Economic Dialogue, the Law Enforcement and Cybersecurity Dialogue and the Social and Cultural Issues Dialogue. These topics clearly include some of the more pressing bilateral and international issues that the US and others have with China, ranging from security threats posed by territorial disputes with Japan and in the South China sea, concerns about hacking and intellectual property theft, perceptions about currency manipulation and trade imbalances, and issues concerning cybersecurity and information restrictions.

The Comprehensive Dialogue follows the pattern and the naming conventions of previous administrations.  In 2006, the China-US Strategic Economic Dialogue was first set up by President Bush and resulted in five high-level biannual meetings. These regular meetings were continued and renamed the US-China Strategic and Economic Dialogue under President Obama in April 2009 and resulted in eight annual meetings. These discussions were at a high level with the Strategic track co-chaired by the US Secretary of State and the Chinese State Councilor while the Economics track was co-chaired by the US Treasury Secretary and the Chinese Vice Premier. There was also participation by many other cabinet level ministers at these annual meetings.

The most recent Dialogue ambitiously included a 100-day action plan to be followed by a one-year plan. In May, an initial announcement was made that included an agreement to eliminate restrictions on beef exports to China and allowances for US credit rating services, electronic payment services and exports of natural gas to China. The US agreed to eliminate restrictions on cooked chicken imports, enable Chinese banking services in the US, while recognizing the importance of China’s One-Belt-One-Road foreign investment initiative.

These were not huge concessions by either side and in some cases were actions already in process before Trump became President, but they did serve to show good faith and get off to a good start in anticipation of follow-up meetings in July. The July meetings ended with little progress beyond the expected formalities for continuing cooperation. The Chinese purportedly offered what some viewed as sizeable concessions to reduce its steel overcapacity but the offer was rejected by President Trump who seemed to prefer more punitive actions including a Section 232 case that might impose tariffs on Chinese steel (and aluminum) imports for national security reasons. Today the Section 232 outcome is still pending.

In August the Trump administration initiated an, also infrequently used, Section 301 investigation of intellectual property infringements against China. This law has rarely been used in lieu of the inclusion of intellectual property into the WTO agreement in the 1990s. The US did file two WTO disputes against China with respect to intellectual property issues in 2007 and 2008 and in both cases the countries reached an agreed settlement. Use of Section 301 bypasses the WTO process by allowing a unilateral investigation with implementation of possible sanctions. In the late 1990s, just after WTO disputes began to be filed, the European Union challenged the US for retaining Section 301, however, the US insisted that if 301 were to be used, it would comply with its WTO commitments. Nonetheless, if unilateral sanctions were to be applied by the US under 301, it may very well be inconsistent with WTO rules and could inspire retaliatory responses.

President Trump’s willingness to follow past administrative practices establishing mechanisms that can lead to cooperative agreements may be nearing an end. Recently, David Malpass, the Under Secretary for International Affairs at the US Treasury, said that talks with Beijing have stopped with no plans to revive them. In a national security speech this week, Trump ramped up the rhetoric somewhat by labeling China a strategic competitor. Finally, after the conclusion of the US tax bill debate, Trump may finally be in a position to turn attention to trade matters and push forward decisions on the Section 232 and 301 cases.

Although these investigations may pressure China to negotiate quicker deals, if the US imposes unilateral sanctions and if those sanctions appear to skirt WTO commitments then it could result in swift retaliations by China which may also skirt WTO commitments. Playing loose with WTO commitments might lead other countries to begin to question the sustainability of the whole multilateral trading regime.

In this respect, I worry President Trump does not have a strong appreciation for how difficult it was to craft the set of “rules” that countries adhere to in the WTO and how long it took to get 164 participating countries to achieve this level of commitment to a more liberal trading regime. One can find many faults with the WTO. It is not a free trade agreement, only a freer trade agreement. Nonetheless, one can probably thank WTO commitments for the fact that the world did not spiral into a wave of heavy protectionism after the financial crisis hit in 2008.

For the moment, the Trump administration has operated within the constraints of the rules-based system.   However, some reports suggest President Trump is quickly irritated with this approach having once proclaimed in an Oval Office meeting, “Tariffs, I want tariffs, and yet these geniuses keep bringing me intellectual property.”

All this suggests that President Trump’s impulsive responses have so far been restrained by the legal limitations that prevent a President from deciding trade policy independently. Nevertheless, there remain enough legal options, such as the Section 301 sanctions, that could disrupt the potentially cooperative US-China economic dialogue and lead countries to back away from their WTO commitments. Although, President Trump and some of his supporters may think the WTO should be dismantled, these same supporters might be forced to re-think that position if they were ever to witness the effects of an all-out international trade war. Let’s hope it doesn’t come to that.