Update: The 301 trade “war” countdown has started with China

As the USTR press release noted:

“On Monday, President Trump instructed me to look into Chinese laws, policies, and practices which may be harming American intellectual property rights, innovation, or technology development,” said Ambassador Lighthizer. “After consulting with stakeholders and other government agencies, I have determined that these critical issues merit a thorough investigation. I notified the President that today I am beginning an investigation under Section 301 of the Trade Act of 1974.” 

Thus, after an extensive consultation of 5 days, the US has moved from thinking about 301 to actually using this tool.  This fairly benign sounding press release is the announcement of a self-investigation of 301 towards China.

The clock embedded in 301 has now started and the US will expect China to effectively resolve all issues to the complete satisfaction of the US Administration--otherwise retaliation is in the cards in just 12 short months.  

We have moved into uncharted waters now.

To recap, the original Talking Trade post from last week read:

The United States has now moved one step closer to dusting off a Cold War trade relic and applying it to China.  In authorizing US Trade Representative (USTR) Robert Lighthizer to investigate whether to self-initiate a Section 301 case against China for alleged unfair trade practices, we have started down a path first traveled in the 1970s and 1980s.

This will give rise to a dangerous trend that could rapidly shake the very system of global rules that have worked well for most firms for decades.  While there appears to be strong pressure from different quarters to Washington to “do something,” it is not at all clear that many understand the power of 301 to destroy the trading system now.

As Politico reported, Trump said in the signing ceremony at the White House for his latest memorandum, "Ambassador Lighthizer, you are empowered to consider all available options at your disposal. We will safeguard the copyrights, patents, trademarks, trade secrets and other intellectual property that is so vital to our security and to our prosperity."

One of those options on the table is the use of Section 301.  This was meant to be rolled out several days ago, but was postponed, apparently over a vote at the United Nations for sanctions on North Korea.

Section 301 is a very different type of trade tool.  It was first authorized by Congress in 1974 and, until it was essentially retired from use in 1995, there were a total of 122 cases.  Of these, about a third were launched by the US government in the absence of specific US industry complaints (the so-called “self-initiated” cases).

For comparison, the US has participated in thousands of trade remedy cases over dumping of goods and subsidies. 

The United States originally argued that it needed 301 because the international trading system did not work well.  There were two glaring issues that especially vexed the Americans. 

First, the global trade agenda was not sufficiently broad.  Members of the General Agreement on Tariffs and Trade (GATT), as the international trading system was known at the time, were constrained by rules on trade in goods, but there were no international rules covering services, government procurement, intellectual property rights, or investment.  Even in goods, coverage largely excluded agricultural items.  Standards were weakly addressed.

Second, and more problematic, violations of the existing rules were not well enforced.  Under the GATT system, members found guilty could simply “veto” the final report and nothing happened.

To correct both of these shortcomings, Congress created a suite of rules lumped together under “301.”  Under these provisions, the United States retained the right to act as judge, jury and executioner in determining whether or not trade partners were practicing unfair trade and could impose unilateral trade sanctions if the partner was unwilling to adjust what the US determined were problematic practices at the end of the period.

The 301 system gave rise to much unhappiness from the global trading community, especially during the 1980s under US President Ronald Reagan (when Lighthizer last served in USTR), as the number of cases rose to 49. 

The type and complexity of cases increased and the use of trade threats, sanctions and counter threats also escalated.  One of the more famous cases, for instance, involved a dispute over Japanese autos that nearly resulted in over a billion dollars of planned sanctions with nearly the same amount in counter retaliation.

The rising number of disputes and growing anxiety over US actions led all sides to make changes to the international system.  The GATT became the World Trade Organization (WTO) in 1995 as the reach, extent and depth of the institution changed to better accommodate a new range of rules. 

Whereas the GATT covered only trade in goods, the WTO included more on goods, and for the first time added services, government procurement, intellectual property rights, standards, trade remedies, and more.  The end of the Uruguay Round negotiations also included a built-in agenda for future discussions on deepening commitments in agriculture and services.

Equally important, the WTO had an entirely new system for managing trade disputes with a legally binding enforcement mechanism.  This included a new appellate body system to review panel cases and a beefed up legal department at the WTO Secretariat. 

In exchange for these far-reaching reforms in the global system, the United States basically agreed to give up use of the 301 tools.  The rationale for needing such a toolkit had disappeared with the enlarged agenda and a binding dispute system. 

This brings us back full circle to the announcement that the United States has gone back to deciding whether China is in violation of trade rules that may soon "require" the use of self-initiated 301.

What, specifically, is China supposed to be violating?  If China is practicing unfair trade, why can’t this be addressed under the existing WTO trade rules?  Particularly if the alleged issue is one of intellectual property rules, the WTO now has provisions on IP that were not in existence at the time that 301 was drafted.  Lighthizer's statement appears to have already widened beyond Trump's IP concerns.

If rules at the WTO are now inadequate, why doesn’t the United States take the lead in pushing for change at the global level like it did in 1986? At the moment, the US says it remains engaged in an extended "period of reflection" in Geneva as the rest of the organization prepares for the next big ministerial meeting in Argentina in December.

If the only possible response to China’s actions is to resort to unilateral actions, what is to stop other countries from following suit?  If other countries started using similar measures against the United States for “unfair” trade practices, what will the US response be?

Under a 301 determination, USTR Lighthizer has a 12 month period to decide if China has made sufficient progress on resolving the issue before he can announce sanctions (most likely tariff hikes and restrictions on imports for Chinese products). 

Many will therefore declare that the latest trade memo is not actually practicing aggressive unilateralism, since a 301 case may not go forward and the use of sanctions has not yet been determined. 

Perhaps. 

We might take bets now on the odds that China will accede to US demands to the full and complete satisfaction of the Trump Administration.  In the meantime, it is also highly likely that China will respond to this provocative action with some measures of its own. 

What those actions will be is unclear.  As a start, it could be easy to imagine that US companies operating in China will find themselves facing stronger scrutiny over whether they have completely complied with a new cybersecurity law that is rather ambiguous.  Or whether every rule on labeling or sanitary or phtyosanitary restrictions are followed to the letter. 

A desire to “do something,” ought to be tempered with careful thought.  The 301 toolkit was retired for good reason.   Bringing it back in 2017 is likely to be more deeply problematic to more firms in more places than many might expect.