SinoTech: US Proposes Tariffs On $50B of Chinese Imports After Concluding China Violates Trade Rules

By Wenqing Zhao, David Stanton
Wednesday, April 4, 2018, 12:00 PM

The U.S.-China trade spat entered its latest phase on Tuesday afternoon as the Office of the United States Trade Representative (USTR) a against Chinese goods. The tariffs would levy new 25 percent duties on roughly $50 billion in Chinese imports, targeting high-tech industries favored under the ‘Made in China 2025’ unveiled by Premier Li Keqiang in 2015. Before putting the tariffs into effect, the USTR will now hear public comments over a period lasting until at least late May. The Chinese government moved quickly to respond, today its own against $50 billion in American imports.

The proposed tariffs had been closely anticipated since March 22, when the USTR , after a seven-month , that the Chinese government had adopted unfair trade practices in order to acquire American intellectual property and technological know-how. President Trump immediately issued a directing USTR to propose sweeping measures, including tariffs, against Chinese imports and investment. Although the tariffs have captured most of the headlines, Trump’s memorandum also instructed USTR to pursue its complaints before the WTO and to propose additional restrictions on Chinese investment in critical American industries. The USTR has already its WTO challenge; proposals for investment restriction are due by May 21.

The trade representative’s office published its conclusions in a 215-page that accuses the Chinese government of unfairly boosting favored domestic industries in an attempt to eclipse American technology dominance. In recent years the Chinese government has initiated a major push, manifested in the ‘Made in China 2025’ plan and , to become a global leader in cutting-edge technology. The report highlights the role that transfer and theft of American intellectual property have played in this push, focusing on four Chinese trade practices that the USTR claims are unfair:

  1. Requiring transfer of technology from foreign investors to local firms;
  2. Discriminating against technology licensing by foreign companies;
  3. Directing outbound investment toward critical sectors of foreign intellectual property; and
  4. Conducting and supporting cyber-enabled commercial espionage against foreign firms.

Notably, the report concluded that China’s continued commercial cybertheft had violated the - September 2015 U.S.-China on state-sponsored cyber-enabled theft of IP, to which the parties in October of last year.

President Trump the USTR’s investigation in August under Section 302(b) of the . He will now consider the USTR’s proposed actions under 301(b), which grants the executive broad powers to impose tariffs, suspend trade agreements, or order “all other appropriate and feasible action within the power of the President” against discriminatory or unreasonable foreign trade practices. Section 301 was among America’s trade weapons during the 1980s, but USTR has not trade sanctions under Section 301 since 1995, when the WTO’s dispute resolution system became available.

indicate that administration officials are also considering restricting Chinese tech investment under the of 1977, a statute that allows the president, through the Treasury Department, to impose sanctions against “any unusual and extraordinary threat, which has its source in whole or substantial part outside the United States, to the national security, foreign policy, or economy of the United States.” This statute could expand restrictions on foreign investment well beyond the current process for review of foreign acquisitions by the Committee on Foreign Investment in the United States (CFIUS), which has taken toward Chinese tech-related mergers and acquisitions over the past year.

Chinese government responds with its own tariffs but encourages conciliation

The Chinese government responded to the Trump administration’s actions by the U.S. administration of pursuing destructive “unilateral trade protectionist action” and proposing its own retributory tariffs against targeted American imports. On March 23, China’s Ministry of Commerce a of proposed duties against 128 U.S. goods in retaliation against the President Trump launched under Section 232 of the . The Commerce Ministry put these tariffs on April 2, one week after its initial announcement. After the USTR published its proposed list of Section 301 tariffs yesterday afternoon, the ministry this morning with its own $50 billion tariff package (), targeting soybeans, automobiles, and planes, among other goods.

Beijing’s official rhetoric has been equally adamant. In a March 23 statement regarding the Section 301 investigation, the Chinese Embassy in Washington to “fight to the end to defend its own legitimate interests with all necessary measures” in case of a trade war. State newspapers of upsetting the international trade order, and China Central Television, one of the government’s leading mouthpieces, Trump’s tariffs as an American attempt to obstruct China’s development in cutting-edge industries and maintain its technological hegemony. The Chinese Embassy “strongly condemn[ed] and firmly oppose[d]” the USTR’s latest list of proposed tariffs in its this morning.

The Chinese government has been careful to balance these sticks with carrots that could assuage the Trump administration’s concerns. Most significantly, Chinese officials maintain that the government will carry out the conciliatory market access measures it during its dual legislative assemblies last month. In a March 27 speech at the China Development Forum, Premier Li Keqiang that China would not force foreign companies investing in China to transfer their technology and promised that China would continue to to foreign enterprise.

But the Chinese government has also initiated policies that could protect domestic firms from U.S. retribution and boost its own high-tech industries. In the most forthright of these policies, China’s State Council for chipmakers and other technology companies that were expected to be targeted by the USTR’s tariff proposal. In response to Chinese firms’ enthusiasm for , the China Securities Regulatory Commission a pilot program that offers expedited listing on domestic stock exchanges through issuance of China Depositary Receipts (CDRs) to Chinese firms listed overseas.

Notwithstanding the public posturing from Beijing and Washington, any real progress in avoiding a trade war is likely to be achieved through behind-the-scenes negotiations. Last week, Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer held talks on China’s tech trade and investment policy with Vice Premier Liu He, the Chinese government’s economic czar. The U.S. side reportedly for reduced tariffs on U.S. automobiles, improved access to China’s financial sector, and increased microprocessor exports from American chipmakers. The Chinese government amenable to that final request, but progress on other U.S. priorities was unclear. The Commerce Ministry further negotiations in its April 1 announcement of retributory tariffs against Trump’s steel and aluminum duties.

Conflict spreads to the WTO

The U.S.-China trade dispute is bubbling over to the World Trade Organization, where Washington and Beijing have each the other of violating international trade law. On March 23, the U.S. took the toward WTO action by a consultation with the Chinese government on its measures relating to intellectual property rights. The Chinese representative to the WTO responded at a March 26 of the Council for Trade in Goods, that the U.S. tariffs themselves violate WTO law and WTO members to unite to prevent the U.S. from “wrecking” the international trade order through unilateral tariffs. In its statement this morning, the Chinese government promised to seek formal redress for the USTR’s proposed tariffs through the WTO’s dispute resolution system.

Both Beijing and Washington have sought to enlist support from other WTO members. Trump China’s trade practices during phone calls with French President Emmanuel Macron and German Chancellor Angela Merkel, while China made a broader appeal to “lock arms to defend” against American unilateral action. Most WTO members have chosen to remain at least publicly nonaligned. At the March 26 meeting, Japan and the European Union their shared concern about Chinese IP policies but warned against non-WTO solutions, and WTO director-general Roberto Azevedo that a U.S.-China trade war would have “a severe impact on the global economy.”

FCC takes up campaign against Huawei

On March 26, FCC Chairman Ajit Pai a draft Notice of Proposed Rulemaking that would prohibit telecom providers from using the Universal Service Fund, a program that subsidizes rural communications services, to purchase equipment from “companies that pose a national security threat to United States communications networks or the communications supply chain.” The proposed rule as a further attempt to prevent Chinese telecom equipment manufacturers, most notably Huawei, from penetrating American communications infrastructure, and Pai that his action was prompted by a December letter from 18 members of Congress warning of Huawei’s ties to the Chinese government. Chairman Pai will call for FCC Commissioners to vote on the proposal at their April 17 meeting. Congressional bills that would prohibit all federal agencies from buying equipment from Huawei or compatriot ZTE, proposed early this year in the and , remain in committee.

Huawei remains the favored target of U.S. lawmakers, who have to block its entrance into the U.S. infrastructure and consumer markets. Last week, Huawei’s efforts to penetrate the U.S. market took another hit when Best Buy to stop selling Huawei phones in stores—although there is no indication that Best Buy’s decision was the result of specific pressure from lawmakers. The move Huawei without a major retail partner, while its phones remain available through Amazon and other e-commerce sites. Richard Yu, CEO of Huawei's consumer business group, that the company would remain “committed to the U.S. market and to earning the trust of U.S. consumers” despite the “groundless suspicions” against it.

In Other News

  • While Ube its autonomous driving tests in all U.S. cities after the first self-driving car , the Beijing city government its first self-driving car license to Baidu’s autonomous-vehicle division. Shortly after, Baidu completed China’s first autonomous driving road test in one of China’s new development zones. Shanghai its first licenses for driverless cars on March 1. Earlier this year, China’s National Development and Reform Commission released a for the development of autonomous vehicles as part of the accelerated construction of China as an innovative nation.
  • In addition to ground transportation, the Chinese government also moved forward in air delivery by for drone delivery to SF Express, a top courier company. The permit SF Express to conduct commercial drone deliveries in “approved airspace nationwide.” In early February, the Chinese government to promote drone technology in transportation. On Friday, Chinese authorities the first reported case of cross-border smuggling by drone, arresting 26 suspects accused of illegally flying iPhones worth a total of nearly 500 million yuan ($79.8 million) from Hong Kong to Shenzhen.
  • On March 30, Airbnb began information on guests in China, including passport and registration details, with the Chinese government. Airbnb explained the shift as a necessary step to with Chinese regulations, which require hotels to share their guest information with the government and foreigners to register their accommodations with the local authorities.
  • Apple CEO Tim Cook last week’s China Development Forum, where he called on the U.S. and China to .Cook also plans to found a joint AI research center with Tsinghua University. CEOs from Google, IBM and Qualcomm also attended.

Commentary & Analysis

Elsewhere on Lawfare, Ashley Deeks and Shannon Togawa Mercer the costs and benefits of facial recognition in China, the U.S., and around the world; Richard Harknett the U.S. Cyber Command’s new command strategy; and Timothy Meyer and Ganesh Sitaraman “The Power to Declare Trade War.” On the Cyberlaw Podcast, Stewart Baker and former Deputy U.S. Trade Representative Susan Esserman (relevant section begins at 11:00), and briefly touch on China’s new social credit system (at 31:50).

At the Center for Strategic and International Studies, Scott Kennedy whether Trump’s trade measures are likely to achieve their objectives, and Samm Sacks on how China could use countermeasures ostensibly outside of trade law—such as the 2017 Cybersecurity Law—to retaliate against U.S. companies. Over at New America, Sacks joins Rogier Creemers, Paul Triolo, Xiaomeng Lu and Graham Webster to the Central Leading Group for Cybersecurity’s promotion to Commission status. Elsa Kania, writing for the Australian Strategic Policy Institute in , asks whether U.S. concern about Huawei is justified. At the Council on Foreign Relations, Edward Alden the conditions that would be necessary for Trump’s tariffs to succeed; Lorand Laskai the U.S. antipathy toward Made in China 2025; and Lucas Ashbaugh whether “Cracking Down on Chinese Investment Might Lead to an Uptick in Cyber Espionage.”

The past two weeks spawned far too much analysis of the U.S.-China trade conflict to provide a comprehensive list; insightful articles appeared in The New York Times (“,” “,”), Reuters (“,” “”), The Washington Post (“,” “”), and The Wall Street Journal (“,” “”). Also in the Journal, Newley Purnell and Stu Woo also Huawei’s determination to lead 5G development, and Drew Fitzgerard and Stu Woo how the FCC’s restrictions on Huawei infrastructure may burden rural telecom providers. Louise Lucas of the Financial Times Huawei’s unencumbered success outside the United States.