China-US relations

US probe into Chinese trade practices will only harm American businesses

William Marshall says any aggressive action to try and protect American businesses this way will only invite Chinese retaliation, either within or outside the scope of the WTO

PUBLISHED : Friday, 25 August, 2017, 2:41pm
UPDATED : Friday, 25 August, 2017, 7:29pm

Last week, US Trade Representative Robert Lighthizer formally initiated an investigation into China’s policies and practices on intellectual property rights. The allegations underlying the investigation are that China and Chinese companies are systematically stealing American intellectual property through various means such as straight-up theft, forced technology transfer in joint ventures, and through the compulsory disclosure of source code and other sensitive information to Chinese government bodies.

It is beyond the scope of this piece to argue the relative merits of these allegations. What is clear, though, is that this approach to trade relations with the world’s second-largest economy is wrong. This trade protection measure is far more likely to harm US business interests than help.

The US investigation will examine whether and to what extent the imposition of a special trade remedy is warranted. Section 301 of the Trade Act of 1974 provides a powerful tool to remedy “unfair trade practices” such as violations of trade agreements, or “an act, policy, or practice of a foreign country that is unreasonable or discriminatory and burdens US commerce”. The trade practices in question here are China’s practices on intellectual property rights. The possible remedies on the table include the suspension of or withdrawal from existing trade agreements with China (of which there are none other than the World Trade Organisation agreement) or the imposition of additional duties or some other restriction on Chinese imports.

Whatever remedy is ultimately sought, it must be proportional to the value of the burden or restriction to US commerce. Thus, Lighthizer’s first impossible mission is perhaps to attempt to quantify the extent of any value lost through the allegedly unfair Chinese intellectual property policies.

The US would be expected to first pursue dispute resolution at the WTO. Interestingly, it seems no such request for consultations with China have been forthcoming.

The US and China can beat the trade deficit with a treaty, not all-out war

Alternatively, the US could move forward under Section 301 without first pursuing the WTO dispute settlement procedures, if it concludes that the unfair trade practices being alleged are not covered by the WTO agreements. In this respect, the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (the Trips agreement) would seem to be directly on point. It is difficult to conceive how the Chinese practices would not be related to the Trips agreement and therefore not covered by US obligations under the WTO agreements.

In fact, the WTO agreements are so comprehensive that exceedingly few areas fall outside their scope. So, beyond quantifying the unknowable, it would be even more interesting to see if and how the US concludes that the Chinese practices fall outside the WTO dispute settlement proceedings. So, that’s two difficult tasks now before Lighthizer.

Even if the US successfully concludes that this particular case does not warrant WTO dispute settlement proceedings as it is outside the scope of the WTO agreements, a unilateral Section 301 case such as this is not without controversy. The US has long been reluctant to pursue such action, not least because it would be fraught with international political peril.

Little appetite for US-China trade war

China says US probe ‘sabotages’ global trade system

On China’s part, we can be sure Beijing would not simply sit back and let US President Donald Trump and Lighthizer run roughshod over it. China could pursue a WTO case finding the US to be in violation of the agreements if Washington were to impose a unilateral Section 301 remedy without pursuing a proper WTO dispute settlement procedure. Again, leaving aside the merits of the underlying allegations, it would be hard to see how China would lose that case. Retaliatory duties authorised by the WTO could then follow. The EU won on exactly this issue in 1999 and the US has not pursued such a unilateral Section 301 case since.

If Trump wants to get China to the negotiation table, he should first study a bit the culture and politics of Asia

In the worst case scenario, China would also bypass the WTO and simply imposes retaliatory measures against US imports and investments into China.

There really is no good outcome here for US business from an aggressive unilateral Section 301 case.

If Trump, the brash New York property developer turned president, wants to get China to the negotiation table, he should first study a bit the culture and politics of Asia. They don’t do business in Beijing the same way they do in Bayside Queens. This full-frontal assault is high unlikely to result in any positive interchange that would address the allegations of unfair trade practices at issue. Economic diplomacy, tact and good-faith negotiations are always more likely to succeed. This is simply the wrong approach.

William Marshall is a trade adviser and senior partner at Deloitte China who has over 20 years’ experience in customs and international trade advisory across the US and Asia-Pacific