The Biden administration would target Chinese industrial subsidies rather than the intellectual property theft and forced technology transfers the Trump administration opposed.
The weekly trade report with L.C.
The Biden administration is considering initiating a new Section 301 – unfair trade practices — investigation of China. The target would be China’s industrial subsidies, something the US and many countries have long complained about but until now have acted against only in discrete cases. Previously, such investigations have either been in response to US company petitions for countervailing duties — claiming unfair subsidies for a specific import from China — or through a WTO case also involving a specific product, e.g., the case the US won against Chinese subsidies for wheat, rice, and corn.
The new approach under consideration by the Biden administration would target China’s overall industrial subsidy regime rather than specific product or sector subsidies. The Section 301 China action conducted under President Trump, which led to tariffs on about $360 billion in Chinese exports, targeted China’s intellectual property and forced technology transfer practices, not subsidies.
Section 301 allows the President to impose trade sanctions on trading partners that violate trade agreements or that engage in practices that are “unjustifiable” or “unreasonable” and harm US commerce. Long ago, in a WTO case the EU filed against the US for its use of Section 301, Washington agreed to use the statute only in conjunction with a WTO complaint. Unilateral use of it could be challenged at the WTO, and such use would anger US trading partners.
Strong reaction likely from both China and US business community
A new investigation could lead to new tariffs that would be imposed on top of the Trump Section 301 tariffs that the new administration hasn’t indicated it will lift soon. That would be an explosive move in terms of the likely reaction both from China and from the US business community. New Section 301 tariffs would also be inflationary, hurt consumers as well as certain businesses, and raise prices for the massive infrastructure building program pending before Congress. Moreover, China would likely retaliate against any new tariffs, causing more pain for domestic industries.
According to Bloomberg News, USTR “has asked outside consultants to help quantify the damage from Chinese subsidies in order to measure the kind of response that’s appropriate should the investigation proceed.” That’s considered a difficult task. The US and others have long complained that there’s no transparency in China’s subsidies. There is no way to determine which subsidies are for which specific products. Thus the US uses alternate methods for setting countervailing duties. Calculating the overall impact of Chinese subsidies on the US economy and on foreign businesses that they might be harming would be still harder – and less accurate.
Will political considerations prevail over good economic policy?
But there is also speculation that launching an investigation might be a way for the administration to buy time – to appear to be taking tough action against China before the 2022 elections though not doing anything while the investigation drags on. (Section 301 cases can take over a year).
However, launching a new investigation also raises new uncertainty over US-China trade since the outcome could be significant restrictions on Chinese exports. Already, the US business community is exasperated by the stretched out “top-to-bottom review” of China trade policy that it believes should have been concluded long ago so that businesses could plan around any policy changes. Businesses would object to more uncertainty provoked by a new Section 301 probe with an unknown outcome months away.
Still, that buy-time strategy could help the administration later this year. That’s when the purchase commitments Beijing made in the Phase One trade deal expire. Since China didn’t fulfill the commitments then, the administration would be expected to take some action. But it’s not clear there is anything effective the administration could do if China refuses to engage in new negotiations.
Some tariffs could be removed but business community still in dark as to which
The administration’s China trade policy review is likely to lead to the removal of some but not all the earlier Trump tariffs, with experts currently engaged in determining which might be lifted to help the economy. The review and the new Section 301 probe could be linked. The administration might avoid charges of being soft on China if it removes some of the tariffs but does so while investigating whether to impose other sanctions on Beijing.
Press accounts say that administration officials would like to work together with Japan and the EU and others on the problem of China’s industrial subsidies, perhaps using the Section 301 action to “rally support within the WTO to take on Chinese subsidies,” as an administration source told the Wall Street Journal. If that’s the goal, it isn’t clear why the administration doesn’t just file a WTO case and seek participation from allies. The US could also do both – impose unilateral measures and also file a WTO case. That’s part of what the Trump administration did regarding the tech transfer issue, and that WTO case did indeed rally support from other countries.
Prospects for rallying allied support for tough measures on China might improve after the September 26th German elections. Outgoing Chancellor Angela Merkel was averse to angering China, German industries’ most important business partner.
Embarrassment looms for administration’s planned approach
It is not clear that putting pressure on Beijing to change its subsidies regime could be effective. Industrial subsidies were important for the rise of Chinese competitive industries and are seen by Beijing as necessary for cultivating the new industries it now wishes to emphasize.
For the US, going after Beijing’s industrial subsidies could prove embarrassing. The Biden administration is promoting its own regime of industrial subsidies that might not pass muster with the WTO, let alone afford it credibility in criticizing China for the very same practices.
There are two ways the Biden administration could pursue a smart Section 301 policy against Chinese subsidies: file suit at the WTO in coordination with the EU, Japan, and other allies and meanwhile drop plans to subsidize sectors of the economy for which there is not a credible national security rationale.
Leave a Reply