October 5, 2021

Asia

US/CHINA: Biden’s new China trade strategy sidesteps tough questions

BY Gabriel Wildau

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  • US Trade Representative (USTR) Katherine Tai announced that the Biden administration will relaunch the exclusion process for Trump-era trade war tariffs and restart trade talks with Beijing.
  • But Tai did not commit to any rollback of Trump-era tariffs, nor did she announce a new Section 301 investigation, which could have provided political cover for eventual tariff rollback.
  • Despite the anti-China mood in Washington, political support for tariff relief is growing, and the Biden administration will likely grant tariff exclusions more liberally than its predecessor.

Tai outlined the Biden administration’s approach to China trade in a speech on 4 October, following a months-long internal review of Trump-era tariffs and the Phase 1 trade deal. The speech signals a high degree of continuity with the Trump administration’s approach and is broadly in line with our recent forecasts. Our model of Biden’s political calculations holds that the administration is maneuvering between two opposing coalitions. On one side are business interests that favor lifting tariffs; opposing them are anti-China security hardliners and economic nationalists who favor keeping tariffs in place to promote at least partial economic decoupling.

On tariffs, USTR will not revoke any of former president Donald Trump’s Section 301 tariffs, at least not in the short term. But USTR will provide some tariff relief by restarting the exclusion process. The Biden administration will also engage in new trade discussions with Beijing that will encompass both an assessment of China’s performance under Phase 1 and other issues not covered in that agreement. Tai did not confirm media reports (discussed previously) that USTR will launch a new Section 301 investigation focused on Chinese corporate subsidies, but left the door open, stating that her agency will consider all potential enforcement tools.

Regarding China’s implementation of Phase 1, Tai said: “commitments in certain areas have been met, and certain business interests have seen benefits, there have been shortfalls in others.” Though she declined to name the specific shortfalls, Tai was likely referring to China’s purchase commitments obligating China to increase imports of US goods and services by USD 200bn in 2020-21 against a 2017 baseline. China missed its 2020 commitments by around 40% and was around 30% behind its year-to-date targets for January-August 2021, according to the Peterson Institute. But even if USTR eventually declares that China has failed to implement Phase 1, the administration is highly unlikely to implement the consumer-focused tariffs that Trump had threatened to impose if the two sides had not concluded Phase 1.

Given Tai’s speech, two key questions arise. First, how generously will the Biden administration grant applications for tariff exclusions? Second, what are the medium-term prospects for revoking Trump-era tariffs and/or imposing new tariffs?

Outlook for tariff exclusions

On tariff exclusions, it is likely that the Biden administration will be somewhat more generous than the Trump administration. From 2018 to 2020, US importers submitted around 53,000 requests for exclusions of specific products, of which the Trump administration granted only 13%, or 6,700. Because of duplicative requests, these exclusions covered 2,200 specific products. Of the USD 463bn worth of US imports from China subject to Section 301 tariffs from July 2018 through December 2020, exclusions covered USD 71bn, or 15%. Most exclusions expired by the end of 2020, while some 99 Covid-19 related exclusions expired on 30 September.

Among the various reasons that Trump’s USTR cited for denying exclusion applications, failure to show tariffs would cause severe economic harm accounted for 69% of denials, with failure to show product was only available in China accounted for a further 23%. Among categories of imports, capital goods were most likely to win exclusions, with 24% of applications approved. For consumer goods, the approval rate was only 7%.

As discussed above, the Biden administration faces political constraints on its ability to lift tariffs or grant broad exclusions. As a matter of economic philosophy, however, most administration officials probably oppose tariffs due to concerns about economic efficiency and deadweight loss. The Biden administration will therefore likely grant more exclusions than its predecessor. Inflation pressure may provide the administration with a justification for being more liberal in granting exclusions on consumer goods. Capital goods needed to support the pending bipartisan infrastructure bill and renewable energy equipment needed for Biden’s climate initiatives are also likely to receive exclusions.

Tariff rollback down the road?

As noted, Tai did not announce any tariff rollback tariffs or a new Section 301 investigation. As previously discussed, a new 301 probe that led to some new tariffs justified by Chinese subsidies could provide political cover for the Biden administration to roll back some of Trump’s 301 tariffs, which were justified by allegations of Chinese intellectual property violations.

One possibility is that the administration has no intention to roll back tariffs but will rely entirely on exclusions. Given the anti-China mood in Washington, the administration may judge that rollback is politically impossible absent clear concessions from Beijing. In this scenario, Washington may still use the threat of a new 301 investigation to try to extract concessions in new bilateral discussions. Tai referenced the need to address “China’s state-centered and non-market trade practices that were not addressed” in Phase 1.

As previously discussed, Beijing is unlikely to offer major concessions on subsidies but might offer limited concessions related to enhanced disclosure and transparency. In an optimistic scenario, Beijing might also commit to limiting subsidies to a relatively small number of strategic industries; making subsidies available to foreign companies on an equal basis; or enabling foreign companies to compete equally for government procurement contracts. Faced with these limited concessions, the administration would assess whether they are significant and credible enough to justify tariff rollback, given the likely pushback in Washington.

Alternatively, even if Beijing does not offer concessions, the Biden administration could still use a 301 investigation to justify partial tariff rollback later on – perhaps by late 2022. This possibility would become more likely if anti-tariff political pressure from retailers, chipmakers, and farmers continues to build; if US inflation remains elevated and supply-chain bottlenecks worsen; or if overall US economic growth weakens such that the economic hardship from tariffs becomes more difficult to ignore. In this scenario, the administration could argue that it was not going soft on China but simply re-calibrating tariffs to target the most problematic Chinese trade policies, while providing targeted relief to US importers unfairly harmed by Trump’s tariffs.

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