The escalating trade war between the United States and China will be one of the hot issues during the Buenos Aires G20 meeting. This trade conflict, probably the most important since the second world war, started last January with the US introducing safeguard tariffs on imports from the world of solar panels and tariff rate-quotas on imports from the world of washing machines. These tariffs have been introduced in response to requests by US manufacturers. However, China and South Korea challenged the legitimacy of these tariffs through the WTO. A description of how this conflict has evolved in the past eleven months clearly shows how this is not simply a bilateral trade war, but involves, directly and indirectly, more economies.
In March 2018 the conflict was extended and changed in nature: from this moment all trade policy actions by the US government were self-initiated by President Donald Trump, not being petitioned by any US company. The first set of protectionist actions were tariffs on US imports from the world of steel and aluminium on the ground that these imports were threatening US national security. At the beginning some countries had been temporarily exempted. Among these were Canada, the EU, Mexico and South Korea the largest suppliers of steel to the US and, for the first three, the exemption ended in June with the introduction of tariffs. By the middle of the year China, the EU and Canada retaliated imposing tariffs on many products imported from the US. The US challenged these retaliatory tariffs at the WTO. The national security argument for protectionism is contemplated by the WTO under GATT Article XXI. However, it is very controversial because the article does not define what constitutes national security and leaving open the possibility of that the term may be intentionally misused. In the past, it has not happened because the national security argument has been very rarely utilized. This time it is quite difficult to understand how aluminium and steel imports might pose a threat to the United States’ national security. However, the lack of a clear definition of national security within the GATT law is a big obstacle to the adoption of any ruling against or in favour of it. Notwithstanding this, last November, China, the EU and four other countries filed a protest to the WTO against this type of US protectionism and the WTO agreed to investigate the legality of US tariffs on steel and aluminium. For the EU it is a point of principle. Maria Åsenius, chief of staff of Trade Commissioner Cecilia Malmström, said a country cannot claim that anything is a national interest, otherwise next time we could say that French or Italian wine is.
The first two battle fields involved the US on one side, with the role of protectionism initiator, and the world or many other countries on the other side. The third battle is mainly a bilateral one, between the US and China, self-initiated by President Donald Trump, who ordered an investigation on Chinese unfair trade practices related to technology transfer and intellectual property. The investigation confirmed the use of these unfair trade practices by China. On July 6, a first phase of US tariffs on $34 billion of Chinese imports went into effect and equivalent retaliatory set of tariffs was introduced by China on US imports. At the end of August, The US imposed a second phase of tariffs on additional $16 billion of imports from China, immediately followed by an equivalent amount of retaliatory tariffs by China. Finally, at the end of September a third round of US tariffs on $200 billion of Chinese imports took effect along with retaliatory Chinese tariffs on $60 billion of US imports.
A potential fourth battlefield is in the automotive sector. President Trump has threatened more than once to impose tariffs on European and Japanese cars using the national security argument. The US Commerce Department initiated an investigation, but the report has not yet been published.
In slightly less than a year the tensions on trade issues have increased exponentially. The relationship between the US and China is central, directly or indirectly, in all of them. At the G20 in Buenos Aires, the meeting between Xi Jinping and Trump will be one of the most important. The meeting has been preceded by a probably tactical non-conciliatory approach by the Trump administration. Four days before the meeting, President Trump threatened to impose tariffs on $267 billion of Chinese imports in case no deal is agreed. On the same day, Larry Kudlow, director of the US National Economic Council, rebalanced the picture by claiming that President Trump’s thinks there is a “good possibility that a deal can be made”.
It is not clear which type of deal might arise. The US demand that China purchase more US products to reduce the trade deficit and that it stops forcing technology transfer from US to Chinese firms jointly with a better enforcement of intellectual property rights law. The first request can be hardly defended on economic grounds. The origin of a current account deficits is of macroeconomic nature (low relative savings) and increasing exports to China will have an effect only on the composition of trade flows. The second demand on the contrary is relevant and, if handled with negotiation skills, has the possibility to produce some positive results. The reason is that in the weeks before the G20 meeting a coalition between the US, the EU and Japan was created around the second demand. Moreover, the WTO recently said it would establish a dispute panel to rule the complaint taken in June 2018 to the WTO by the EU against China on technology transfer practices. While currently this coalition is weak, it could gain strength if the Trump Administration accepts to reconsider the WTO as the natural forum to deal with trade issues.