Leibowitz: Trade War with China Escalates

These tariffs are not part of the Section 232 actions on steel and aluminum imports and national security. They are the reaction to a Section 301 proceeding on Chinese practices regarding international trade and investment, including the “China 2025” initiative and requirements for technology transfer. The list of items covers a wide variety of products, from minerals (Chapter 29 of the Harmonized Tariff Schedule) to aircraft seats (Chapter 94). Food and agriculture products (Chapters 1-24) and toys (Chapter 95) were not included in the proposed list.

USTR scheduled a hearing for May 15 in Washington on the proposed list. Requests to appear are due by April 23; prehearing statements are due by May 11; post-hearing comments are due by May 22.

The USTR notice does not indicate when, if ever, the tariffs will go into effect. The comment and hearing processes may spark considerable changes in the list and the rules applicable to it. Here is some of what we know now: The proposed tariffs would be in addition to any other tariffs currently applicable. This includes the steel and aluminum tariffs proclaimed on March 8 (effective March 23); regular duties; and antidumping/countervailing duties. For foreign trade zone admissions, “[t]o ensure the effectiveness of the action,” any covered products must be admitted in “privileged foreign” status. Only goods originating in China would be covered.

The list was intended to target products that benefit from the “China 2025” initiative, which China started in 2015 to bring China to pre-eminence in advanced products. The list was reduced, according to USTR, to remove products “likely to cause disruptions to the U.S. economy” and products subject to “legal or administrative constraints.” The latter term was not defined; however, many products on the list are currently subject to antidumping and/or countervailing duties, so USTR clearly does not believe that AD/CVD is a “legal or administrative constraint.”

USTR initiated a WTO dispute settlement proceeding on March 23 relating to certain alleged unfair practices by China. China was not long in responding. On Tuesday, China’s Ministry of Commerce released a proposed list of retaliatory tariffs of 25 percent on 106 products that China imports from the United States. The 106 products include major U.S. agriculture exports, including soybeans, civilian airliners, automotive products and chemicals. The total value of trade is equivalent to the $50 billion level proposed by the U.S. China is also heading to the WTO to complain about the unilateral U.S. actions against China.

Now, for an initial perspective: The WTO is a key to this. The world trading system is a forum for settlement of disputes through legal channels instead of unilateral action. The U.S. contends that, where WTO rules apply, it will take disputes to the WTO. However, it claims the right to take unilateral action while the disputes are pending, and to take unilateral action where WTO rules DO NOT cover the actions of other countries. Both these U.S. assertions are highly controversial.

These new tariffs will not take effect for many months. In the meantime, there could be negotiations to narrow the lists or even eliminate them.

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The administration has clearly run out of patience with diplomacy in the traditional sense. This new round of tariffs is yet another example of dramatic action to alter the status quo; in coming weeks and months, negotiations and litigation could back away from the abyss.

The consequences of these dramatic changes in the status quo are serious. Supply chains that took years to regularize are subject to sudden and substantial changes. Businesses that relied on those channels of trade and commerce will have to factor in the increased risk of disruption due to government action.

Stock markets, which have seen dramatic increases in volatility in 2018, will continue to reel from these nascent shots in a new trade war. Considering that the market value of New York Stock Exchange listed companies is about $22 trillion, a 1 percent decline in the market means a loss in value of $220 billion. Today’s decline looks like 2-3 percent. Nerves will fray.

The world trading system needs to remain in place, because if not it will be replaced by periodic gunfights at the OK Corral. The Trump administration is seeking to disrupt convention and force discussion of issues that have been festering. It’s a risky strategy; miscalculation in this arena could be disastrous. But there is still time for cooler heads to prevail. I believe those heads are out there.

Lewis Leibowitz

The Law Office of Lewis E. Leibowitz

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