Trump and Tariffs: the start of a trade war, or a hard-bargaining negotiation tactic?

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As China and the United States threaten each other with large tariffs, the public is forced to consider whether a trade war will ensue. Courtesy https://pixabay.com/en/logistic-merchandise-load-import-2636250/

In March of 2018 President Trump announced a 25% tariff on steel imports and a 10% tariff on aluminum imports, set to take effect in 15 days. Trump claimed that these tariffs were necessary as relying too heavily on steel imports, instead of domestic production, could harm the United States’ national security needs. A few weeks later he announced a further 25% tariffs of $50 billion to $60 billion specifically on Chinese exports to the U.S.. Targeted exports included those in the aerospace, information and communication technology industries.

Trump’s proposed tariffs were in a large part based on long-standing concerns that China had been violating intellectual property laws and inappropriately acquiring U.S. technology. In fact, in August of 2017 Trump launched an investigation into Chinese trade practices and potential theft based upon these same concerns. Chinese companies have been accused of forcing foreign companies to hand over intellectual property if they wish to do business in China or access Chinese markets. In addition, Chinese laws often require foreign firms to form joint ventures with local companies when entering China. This set up has the potential to lead to the transfer of foreign technology to Chinese companies. In a 2017 report, the Commission on the Theft of American Intellectual Property estimated that China’s intellectual property theft has led to costs of around $600 billion a year to the United States economy.  In a 2018 survey by the American Chamber of Commerce in China, more than 50% of members reported that the leakage of confidential intellectual property was a significant concern in doing business in China. United States intellectual property concerns further include the sale of counterfeit goods in China, and on Chinese-owned internet vendors like Alibaba. Trumps tariffs aim to push back against these concerns.

China, as the world’s largest steel exporter, was troubled by these newly proposed tariffs. Just hours after Trump’s announcement, the Chinese government countered by proposing tariffs tailored towards aircrafts and American agricultural products including soybeans, cars, sparking wine, chemicals, and Boeing planes.  One day later, following China’s announcement, Trump proposed an additional $100 billion in tariffs on Chinese goods.

These immediate retaliatory responses initiated concerns that an all-out trade war could be brewing between the two countries, demonstrated by a swift tumbling of the stock markets. Although Trump’s tariffs seem to be designed to protect United States industry and intellectual property, an all-out trade war could actually hurt businesses that rely on materials from China, as the costs of such raw materials will go up. The costs of these products could also increase if companies choose to account for increased manufacturing costs by increasing the costs of the goods that they sell to consumers. Further, the tariffs could be detrimental to agricultural farmers that export goods to China.

In past trade disputes, solutions have been found by resort to the WTO’s dispute settlement process, where countries voluntarily refer their disagreement to the WTO for mediation. Although both China and the United States are members of the WTO, such a resolution does not seem likely in this case. The WTO rules allow a member to stray from WTO obligations where national security is at stake. As Trump has used national security considerations to defend his additional tariffs on steel and aluminum, it is likely that the same consideration will be used to justify noncompliance with WTO obligations.

President Trump also seems confident that this dispute is not a trade war. On April 4, 2018 Trump tweeted “We are not in a trade war with China… we have a Trade Deficit of $500 Billion a year, with Intellectual Property Theft of another $300 billion. We cannot let this continue!” These statements have led some analysts to conclude that tariff threats from the White House are more of a negotiation tactic than anything else designed to push China towards a deal that benefits the United States on intellectual property matters. Even if the United States is partially using tariffs as a tool of negotiation, there is no doubt that the White House wants to see a change in Chinese trade conduct. On April 6, United States economic advisor Larry Kudlow told reporters that “Trump is not just using tariffs as a negotiating card, he’s said that to me… Something has to change.” As long as both sides refrain from negotiating to try and come to a mutually beneficial solution, there doesn’t seem to be many ways for them to come out of this unscathed. If the Chinese government refrains from negotiations with the United States and refuses to alter controversial trade practices, it looks like the White House may continue employing tariffs that may lead to economic costs for both parties.

Natalie Robertson is a current 2L at Columbia Law School. She was born in Australia and spent 18 years living in Hong Kong before attending the University of Southern California in Los Angeles.