US and China Inch Towards Trade War

Posted on 4th April 2018

On 22 March 2018, President Trump signed an executive memorandum calling for retaliatory tariffs of up to USD 60 billion in Chinese imports. According to the White House, the new measures are to penalise China for stealing American companies’ intellectual property and will target China’s high-tech products sector. The US Trade Representative recommended these measures following a rarely-used Section 301 investigation. The memorandum also called for investment restrictions and a new WTO challenge to Chinese practices.

China directly responded to the announcement by lambasting the Section 301 investigation and calling the US administration “irresponsible” for taking unilateral action. Shortly after, China announced retaliatory tariffs of USD 3 billion on 128 US agriculture, meat and steel products, while also urging the US to revoke its own tariffs, arguing that they violate WTO rules.

This comparatively mild reaction has surprised some. China appears to be seeking to take the high road in international trade relations to position itself as a responsible actor, protecting a WTO system against a US threat. However, a more severe reaction is expected after USTR provides more clarity on which specific goods will be subject to tariffs and moves closer to imposing them.

The US and China are also reportedly negotiating behind the scenes. Rumours have floated that the United States has made specific requests concerning semiconductor sales and financial services market access, among other areas, while China for its part has proposed measures to boost imports from the US while also widening market access for strategic US sectors.

Additionally, in response to US tariffs on China’s high-tech products, China has increased domestic support for its high-tech industries. China has announced reductions in the value-added tax (VAT) on manufacturing, as well as transportation, construction, and telecom services and will exempt semiconductor companies from income tax on certain new projects for up to five years, halving the rate for several subsequent years. China’s State Council also recently issued guidelines that tighten scrutiny over intellectual property transfers to foreign investors citing national security concerns. Under the new guidelines, technology exports and intellectual property transfers that are part of acquisitions made by foreign firms involving patents, integrated circuit layout design, computer software copyright and certain agricultural technology will be subject to national security checks.

USTR will reveal a targeted list of products subject to tariffs no later than Friday, followed by a 30 day consultation period. These are expected to focus on high-tech Chinese goods related to Chinese industrial policy goals, including potentially semiconductors. The Trump administration will also propose further restrictions on Chinese investment, and is considering implementing “strict reciprocity” in investments through the President’s emergency economic powers.

Further reading: US Proposes Tariffs On USD 50 Billion of Chinese Goods

Author: Logan Finucan

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