Trump’s steel, aluminium tariffs may well backfire, giving China the upper hand

William Marshall says World Trade Organisation rules include procedures to address unfair practices without risking a trade war, which may inflict even more pain on the US as nations like China seek oblique ways to retaliate

Trade

William Marshall

Published: 3:30pm, 12 Mar 2018

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US President Donald Trump has made China’s trade surplus a primary economic – and now national security – issue. The tariff protections on steel and aluminium he has issued can be seen as a broad approach to ensnare Chinese exporters of these products – along with every other exporter outside North America.

Founded on a little-used national security exception to World Trade Organisation rules, the US has potentially made itself a target of retaliatory measures where it stands to lose much more than primary metal production capacity. Unrelated but strategically vital US industries may well be exposed to a retaliatory backlash and China may end up with an advantage in this round.

On the basis of national security, Trump has announced aggressive tariff measures on certain primary and semi-finished imports of steel and aluminium from all sources except Canada and Mexico. These tariffs – 25 per cent for steel and 10 per cent for aluminium – are intended to bring up US domestic production of such items, so that 80 per cent of existing US domestic production capacity is put to use. The proclamations on both steel and aluminium highlight global overcapacity as the primary cause of allegedly unfair trade practices and abusive export prices of steel and aluminium into the United States. The term “overcapacity” is code for “China”. Combating Chinese overcapacity, an effort Beijing is actively working to address, could be much more effective through dialogue, cooperation and incentives for value-added exports over the primary and semi-finished exports targeted by the US.

In his presidential proclamations ,Trump made numerous references to “global excess capacity”. A review of trade statistics and public comments by interested parties during the Department of Commerce investigation indicates it is China’s capacity Trump refers to, and at which most public comments were directed, as the largest threat to US steel and aluminium. Regardless, the existing WTO agreement provides effective remedies for predatory pricing, whether based on overcapacity, preferential loans or potentially damaging export incentives.

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The US has effectively employed anti-dumping measures against China, resulting in a decline in Chinese market share of aluminium and steel in the US. No industry anywhere in the world has used such measures more often or with greater effect than the US steel industry. Why national security interests need to be invoked here remains a mystery.

The General Agreement on Tariffs and Trade of 1994 (GATT) Article XXI (b) carves out an exception to ordinary legal protections provided by the agreement when a member state deems it necessary to protect essential security interests. Because the intent of GATT, and the WTO, was to provide a rules-based trading system to foster peaceful economic interdependence and global growth, this exception has been interpreted very narrowly until now. In fact, it has never been the subject of a WTO dispute and there is no formal interpretation of this provision by a WTO appellate body.

Roberto Azevedo, director general of the World Trade Organisation, has warned against steps that could lead to an international trade war. Photo: Reuters

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Not willing to wait for a lengthy WTO proceeding, the European Union has stated its intent to immediate retaliate against US exports like whiskey, blue jeans and Harley-Davidson motorcycles.

Of course, this dispute is unnecessary. The ordinary, appropriate anti-dumping and anti-subsidy remedies provided under both the WTO and US law have proven effective. These measures include appropriate legal safeguards for affected parties. However, the actual act of dumping or inappropriate subsidisation must be proven, not merely alleged, showing actual harm or injury to a domestic industry. Most significantly, these factual determinations and legal conclusions are subject to judicial review. None of those critical legal procedural protections are afforded under an action taken on national security grounds. Where the traditional rules-based trade remedies have been used effectively, aggressive tariff measures on the basis of national security are unnecessary, even dangerous.

The EU, China and other affected exporting countries can all be expected to respond to the US’ aggressive actions. Of course, a challenge at the WTO is expected. However, WTO dispute settlement proceedings and resulting authorised retaliatory duties could take years. Perhaps more worryingly, US steel and aluminium tariffs are framed as national security exceptions to WTO rules. Thus, responses or retaliation could be outside WTO rules. Where does this lead us? Backwards.

Beijing must still focus on trade as partners despite Trump tariffs

Other options are more oblique retaliatory measures, a common tool employed by China to combat national actions it deems to have negatively affected its national interests. A recent example is China’s anti-dumping and anti-subsidy investigation into US sorghum exports, initiated by the Ministry of Commerce last month. This action should be seen as retaliation against the US Department of Commerce’s investigation into aluminium foil late last year.

Pursuing retaliation through an unrelated product where China holds outsized buying power would be effective. In that respect, US hi-tech companies could be vulnerable to retaliation. As I have written before, intellectual property should be seen as the real battleground for a modern trade war between China and the US. US exporters would seem to have much more to lose if the battle were to shift from metal extrusions to high-value technology inputs. That’s where the US jugular vein can be found, and that may well be where China strikes.

As for possible EU action against US Levis jeans? China produces enough jeans to take up the slack – even Levis.

William Marshall is principal of William Marshall & Co, a boutique Hong Kong law firm specialising in international trade and supply chain matters

This article appeared in the South China Morning Post print edition as: US steel tariffs may backfire, giving China upper hand

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