Eagle versus Dragon: Provisional Ceasefire between the United States and China

On the sidelines of the G20 summit in Buenos Aires, the United States and China reached a ceasefire on retaliatory trade measures. U.S. President Trump agreed to hold off on plans to raise tariffs from ten to 25 percent on 200 billion U.S. dollars in Chinese goods, which had been announced for January 2019. Within the next 90 days, further negotiations will take place to reach an agreement on several trade issues. If negotiations fail, German companies could significantly be impacted by a further escalation of the trade conflict.

The United States has had a large deficit in merchandise trade with China for many years. Amounting to around 376 billion U.S. dollars in 2017, it is higher than that with any other country. Due to the positive balance regarding trade in services, the overall trade deficit is somewhat lower but remains substantial at 336 billion U.S. dollars.

China has become a heavyweight in the world economy by now, but has yet to assume the concomitant responsibility in the world economic order. Quite the contrary, the country often fails to adhere to the rules of the World Trade Organization (WTO). European companies also suffer due to these unfair trade practices. Therefore, the European Union filed a complaint against China with the WTO in June 2018 with a particular focus on China’s inadequate protection of intellectual property rights. U.S. President Donald Trump has also sharply criticized Beijing’s trade practices. Late November 2018, the WTO agreed to establish a dispute settlement panel upon request of the United States concerning China’s measures pertaining to the protection of intellectual property rights.

An escalation of the trade conflict between the United States and China would have severe implications for the world economy, the World Bank warned. If WTO members were to raise tariffs to the maximum bound rates permissible under WTO rules, this would lead to a 9 percent decline in world trade. A downturn like this would be equivalent to the collapse caused by the 2008 global financial and economic crisis.

Tit-for-Tat Escalation

Trump wants a better “deal” for the United States, in part to decrease the high U.S. trade deficit. Thus, he has threatened high punitive tariffs on the basis of Section 301 of the 1974 Trade Act in order to proceed against inadequate protection of intellectual property rights in China. Following an investigation and political consultations, Section 301 allows for economic sanctions against countries which infringe trade agreements or disadvantage the U.S. economy through other unfair trade practices.

In early July, the United States imposed import duties of 25 percent on Chinese imports worth 34 billion U.S. dollars on the basis of Section 301. The duties relate primarily to high-technology product groups such as aircraft parts, batteries, flatscreen televisions, and specialist medical equipment – products which China has identified as being particularly important in the current five-year plan as part of the Made in China 2025 strategy. The Chinese government criticized the U.S. action sharply and announced retaliatory measures. The Chinese retaliatory tariffs covering a trade volume of around 30 billion U.S. dollars entered into force on the same day as the U.S. duties. But Trump further turned up the heat. Duties were extended to imports worth 16 billion U.S. dollars late August, meaning that imports worth 50 billion U.S. dollars were hit by duties. For the Trump Administration, this amount reflects the damage suffered annually by the United States through violations of intellectual property rights and enforced technology transfer by China. Again, China announced retaliatory tariffs, also covering a trade volume of around 16 billion U.S. dollars that came into force the same day. 

From Trade Conflict to Trade War

A few days after the first 301 tariffs, the United States Trade Representative published a further list with 6,000 Chinese merchandise goods. The list comprises a trade volume of 200 billion U.S. dollars on which duties of ten percent were levied late September 2018. The tariffs are to increase to 25 percent starting on 1 January, 2019. In this way, the United States is reacting to China’s retaliatory duties. In total, U.S. imports from China worth 250 billion U.S. dollars, or almost 50 percent of U.S. imports from China in 2017, are now burdened with additional tariffs.

Trump has repeatedly signaled that, if necessary, tariffs could be imposed on imports from China worth 500 billion U.S. dollars if the country does not back down. This corresponds to nearly all U.S. imports from China.

Provisional Agreement in Buenos Aires

On the sidelines of the G20 summit in Buenos Aires, the United States and China reached a ceasefire. The United States agreed to hold off on plans to raise tariffs from 10 to 25 percent on Chinese imports. Within the subsequent 90 days, negotiations will take place to reach an agreement on several trade issues, such as intellectual property protection and forced technology transfers. As long as negotiations are hold, no tariffs will be levied or increased. In return, China announced to increase imports of agricultural, energy, industrial, and other products from the United States to gradually ease the trade imbalance. However, China has yet to define the actual amount of additional imports from the United States. This spells trouble: only few days after the agreement, President Trump showed first signs of impatience.

Dangerous Side-Effects for Europe

The trade conflict between the United States and China is dangerous. Both countries are heavyweights in the world economy. Value-added and production networks have never been as interlinked globally as they are today. Hence, other countries will not be shielded from the ramifications of the conflict. European companies produce in both countries and deliver from each to the other market. The conflict also poses a serious challenge for WTO as both countries have filed complaints against each other.

Unilateral measures are rarely successful. The United States, the European Union (EU), and Japan should therefore act jointly against market distortions and more strongly employ their trilateral forum to this end. The objective is to create fair conditions for competition, to limit illegal subsidies, protect intellectual property rights, and secure transparency in public procurement. The EU and the United States in particular could work more closely together to improve competition rules. They could also more often file joint complaints at the WTO in order to address infringements by other WTO members. The joint proposal on WTO notification obligations is a step in the right direction.