The Trump Administration Reaches for a Trade Sledgehammer

The White House is planning to launch new investigations into China's trade and intellectual property practices, and soon. The move underscores how talks between the United States and China have broken down over Washington's expectations that Beijing would help rein in North Korea's nuclear program. With the 100-day action plan on trade that followed U.S. President Donald Trump's April meeting with Chinese President Xi Jinping over, and with Pyongyang still aggressively pursuing a fully functional and deliverable nuclear weapon, the White House already had signaled it would no longer be constrained when dealing with China before Trump tweeted July 29 that he was "very disappointed in China" for its inaction on North Korea. And now that comprehensive trade talks are frozen, the United States is pursuing far more aggressive measures against China's economic policy — though it still retains the option to walk this pursuit back if needed.

According to several reports, the Office of the U.S. Trade Representative will investigate technology transfers mandated by China pursuant to Section 301 of the Trade Act of 1974. Beijing requires foreign companies to share technology in exchange for allowing them to invest in China or access the massive and lucrative Chinese market. The investigation could be announced this week and is likely to be rolled into an executive order by Trump that includes other enforcement actions related to trade, investment and intellectual property.

A Heavy Tool, With Limitations

Section 301 investigations are the sledgehammer in the trade enforcement toolbox that Trump and U.S. Trade Representative Robert Lighthizer have at their disposal. In theory, Section 301 gives the trade representative the ability to investigate and remedy any "unfair trade practices." Such practices not only include other countries' potential violations of their commitments to the World Trade Organization (WTO) and other trade agreements, but also any practice that is "unreasonable or discriminatory and burdens U.S. commerce." Before the WTO and the creation of its dispute settlement understanding, Section 301 investigations were the primary way the United States forced other countries to negotiate certain trade issues. Perhaps the best-known use of Section 301 investigations came in the 1980s when the United States examined barriers Japan had erected against U.S. semiconductor exports. The mere threat of using Section 301's broad authority to punish Japan compelled Tokyo to enter into an agreement with Washington. If the United States finds that China is violating its commitments or is burdening U.S. commerce, then it could take a number of potential actions in response, including restricting imports by imposing tariffs on them and suspending preferential treatment under trade agreements such as the WTO. The actions the United States take must be proportional, though it is unclear how proportionality would be determined when an action is not obviously related to trade.

There are several factors that limit the United States' use of Section 301 investigations. Since the WTO established its dispute settlement understanding, Section 301 investigations largely have fallen out of vogue. In an early case between the United States and Europe involving Section 301, the WTO's dispute panel ruled that the United States had violated WTO commitments by pursuing unilateral sanctions against WTO members without going through the organization's various dispute and response channels.

Moreover, U.S. law requires the United States to pursue any violations of WTO rules through the organization itself. Specifically, the domestic enabling legislation for the United States' ascension to the WTO not only binds the U.S. trade representative to the bloc's dispute mechanism, but also forces the United States to refrain from taking any action unless a WTO panel or the WTO's appellate body rules in its favor and sanctions any U.S. counteraction. This requirement prevents Trump from taking unilateral action for political purposes. Any attempt to get around the WTO process not only would be challenged in the WTO — where the United States almost surely would lose — but also in U.S. courts, where companies affected by punitive trade measures could argue that the Office of the U.S. Trade Representative is not following U.S. law regarding how it must pursue Section 301 countermeasures. In a sense, the legislation restricts the Trump administration's push against the WTO in the name of national sovereignty.

These limitations apply only when the practice the U.S. trade representative is investigating is covered by the WTO. The United States could argue that the WTO's rules do not address some of China's trade practices, though the issues of intellectual property rights and technology transfers mostly are covered. In fact, the United States previously has noted in official communiques that these practices are included in China's WTO commitments.

A Growing Political Issue

Another critical fact about the Section 301 investigation process is that it would force the U.S. trade representative to request negotiations with China to resolve the dispute. In the past, this arguably has been the tool's most potent element. Because it is a sledgehammer that treats every problem as a nail, a successful Section 301 investigation could lead to significant trade measures against China. When the United States has threatened other countries with a Section 301 investigation, as it did with Japan and its semiconductor industry in the 1980s, they have often come to the negotiating table. It is not in China's interest to have the United States take substantial trade action against it. Moreover, the question of China's desire to acquire technology has grown as a political issue in the United States — and Europe — over the past few years as China's technology companies buy up foreign tech firms, potentially eroding the long-standing gap between China's technology companies and their competitors in Europe, North America, Japan, Taiwan and North Korea. Already Germany, France and Italy have pushed the European Union to allow countries to block foreign takeovers — particularly by China — for economic reasons as opposed to national security ones. U.S. Secretary of Defense James Mattis testified to Congress earlier this year that China's technological rise threatens U.S. national security. And prompted by China's support for North Korea, Democratic Senate Minority Leader Chuck Schumer sent a letter to Trump this week calling for him to use investigations by the Committee on Foreign Investment in the United States to block all Chinese takeovers domestically.

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by Mike Rivero via WHAT REALLY HAPPENED More at