China’s Latest Trade Maneuver Is Worrying

Here’s the Story

Chad P. Bown (PIIE)

February 6, 2018
Photo Credit: 
REUTERS/Jason Lee

There's a new chapter in the US-China trade tiff. When President Trump slapped tariffs and quotas on billions of dollars of US imports of solar panels and washing machines in January, his targets were China, South Korea, and other foreign producers of these goods.

China just turned to page 1 of its retaliatory playbook. On Sunday, Beijing announced a self-initiated government investigation into whether about $1 billion of US sorghum exports to its market were dumped or subsidized. The investigation could result in new Chinese tariffs that would hurt US farmers.

Beijing's reaction resembles a similar retaliatory move in 2009—and one that ultimately saw US chicken farmers lose out. If Trump responds by counter-retaliating, matters could quickly escalate beyond US sorghum farmers and pose a far greater threat to both economies, as well as the World Trade Organization (WTO).

Trump's solar and washer tariffs were not unprecedented

For all the fanfare surrounding Trump's protectionist rhetoric on trade, the US solar and washing machine tariffs were not without parallel. These tariffs were the result of a legitimate—albeit little-used—provision of US trade law that enables the government to "safeguard" industries adversely impacted by imports under some limited circumstances.

Like Trump, the past two US presidents imposed similar safeguard tariffs shortly after entering office, also under political pressure from domestic producers.

In both cases, the import protection was temporary and the international trading system contained the fallout. Nevertheless, the 2009 case has discomforting parallels with today. Here's how these two episodes played out:

1) The 2002 Bush steel safeguard saw a contained response

In March 2002, President George W. Bush imposed safeguards on imports of steel. It is the biggest trade case to date under this same US law. The global response to the Bush steel safeguard was twofold.

First, the European Union, China, and seven other countries quickly replicated the US trade policy. But this was not retaliation. Meredith Crowley and I compiled evidence that, when the US market closes and a product such as steel is shut out, these products may be rerouted to other countries instead. In this case, trading partners triggered their own steel protection, but only so as not to be overwhelmed with imports.

Since Trump's actions were on solar and washers, Beijing's move on sorghum does not fit this model.

But second—and more importantly—almost immediately after Bush imposed steel tariffs, nine countries challenged those US tariffs via a formal WTO dispute. By late 2003, the WTO had ruled against the United States, and the Bush administration withdrew the tariffs.

All told, the international system worked in 2002–03. It allowed some temporary import protection, and countries used the WTO to manage the friction. Tensions cooled, the global steel market recovered, tariffs were removed—and life (and trade) went on.

In the current scenario, Seoul reportedly has chosen a similar approach to support its exporters hit by Trump's solar and washers tariffs. South Korea will file WTO complaints and trust the rules-based system.

2) The 2009 Obama tires safeguard provoked a more troublesome response

In September 2009, President Barack Obama confronted a similar request for protection. A US labor union wanted a tariff on imports of Chinese tires. With the global financial crisis still unfolding, the timing was worrisome. US unemployment stood at 10 percent, and there was some concern that the tariff might trigger a repeat of a 1930s, Great Depression–style trade war.

Obama applied the tariff. And just as after the Bush safeguard, China filed a WTO dispute. But in this case, WTO judges largely upheld the US safeguard. Beijing was not legally authorized to retaliate.

But Beijing also took provocative actions outside of the formal dispute beginning in 2009. Like the 2018 scenario, almost immediately after Washington applied the tire safeguard, China hit back by launching its own investigation that resulted in a new antidumping tariff on hundreds of millions of dollars of US exports of chicken feet.

In 2009, the Obama administration did not take the bait. Instead of attempting some sort of clumsy counter-retaliation—a move that probably would have fanned the flames—Washington challenged Beijing's chicken feet tariffs at the WTO, and largely won its case. And the multilateral trading system survived to live another day.

Nevertheless, Beijing's tariffs meant that US chicken farmers in 2009 saw their exports to China disappear, largely replaced by imports of chicken from Brazil. For US sorghum farmers in 2018, any new tariffs from Beijing could result in China buying the grain from exporters such as Australia instead.

There's reason to worry about what Beijing or Washington do next

Thus far Beijing has launched only the sorghum investigation, and it has not imposed tariffs. This step is worrisome, although not unexpected. But if China follows through by slapping tariffs on US farm exports, as it did in the 2009 case, the current trade spat could quickly escalate out of control.

The Trump administration is exploring the use of trade policies that are outside the traditional confines of the rules-based system. Under much more controversial US trade laws than those invoked in the solar or washers cases, Trump is also sitting on the possibility of imposing tariffs on steel and aluminum for "national security" reasons, and in response to China's alleged theft of intellectual property. And the administration has shown a willingness to self-initiate trade cases, including a recent one against China.

In Davos last year, much of the media roundly hailed China's President Xi Jinping as globalization's new shepherd—a reaction to Xi's speech declaring that countries "should adhere to multilateralism to uphold the authority and efficacy of multilateral institutions." But taking the multilateralist mantle includes relying on its system of dispute settlement when trade frictions arise.

The big question is whether China and the United States are willing to turn to the WTO to settle their grievances and de-escalate tensions. Both countries have benefited enormously from the system—and both have a strong vested interest in upholding its protections. These latest actions place the struggling institution in further peril. Yet without a way to halt the downward spiral of tariffs, retaliation, and counter-retaliation, the economic interests of all sides will suffer.

Chad P. Bown is a senior fellow at the Peterson Institute for International Economics and former lead economist at the World Bank. With Soumaya Keynes, he hosts Trade Talks, a weekly podcast on the economics of international trade policy. Follow him on Twitter @ChadBown.