Is a protracted trade war between the U.S. and China now unavoidable? What are the long term implications for global trade? Aline Doussin, partner in the global trade practice at Hogan Lovells, takes a look.

It does appear that the trade war is escalating - there have been several rounds of tit for tat action, initiated by the U.S. which have created a response from China.  We now have several phases of U.S. measures that have been adopted, targeting US$50bn worth of Chinese imports to the U.S.  Some key points to note at this stage, are:

  • We have seen significant reforms to the Committee on Foreign Investment in the United States (CFIUS), signed into law on 13 August by President Trump.  CFIUS is the U.S. interagency committee that conducts national security reviews of foreign investments. The reforms were driven by concerns about China's acquisition of advanced U.S. technologies and they expand the kind of transactions that are subject to CFIUS review and place greater scrutiny on inbound investments and outbound transfers of critical and emerging technologies. They also make CFIUS filings mandatory for certain transactions.
  • There is no sign of appeasement. The Office of the United States Trade Representative (USTR) is working on an additional list of "Chinese tariffs" (list three) due to enter into force in October. On 16 August the USTR said that it is planning to hold six days of hearings to hear from as many as 370 witnesses as it considers tariffs on US$200bn worth of Chinese goods stemming from a Section 301 investigation into Beijing's intellectual property and tech transfer policies. Although it has recently been announced (16 August) that a Chinese delegation from the Ministry of Commerce will travel to the U.S. for trade talks in late August, there is little hope that these talks will stop the escalation. The possibility that a “deal” could be done during this new round of talks, and a resulting de-escalation of activities by both sides, remains low. 
  • The aftermath of the Section 301 investigations, Section 232 investigations (steel and auto), and the “America First” agenda, is a blow to the multilateral trading regime, and to its guardian, the WTO.  The EU is also impacted and again there appears to be no real sign that the U.S. administration plans to withdraw its planned tariffs on auto. 
On the one hand this could all galvanize broader unilateral "retaliation" actions from other countries, creating a kind of domino effect of unilateralism and further undermining the WTO and its broader framework of trade rules. The international trading system could return to the “Wild West” days of a pre-WTO world. However, on the other hand it could also turn America’s trading partners against it. Washington’s trading partners are all retaliating, (ie China, the EU, Turkey and India have all responded unilaterally), and are challenging these actions to the WTO. They are moving ahead without the U.S. in confirming their commitment to the multilateral trading system. 
The retaliatory actions are hurting U.S. economic interests, and this creates opportunities for some. For example, in the U.S./China context European companies and farmers will gain, as China will need alternative suppliers for products from the U.S. that are now subject to 25% tariffs. This could make the WTO more, not less, relevant as a dispute resolution mechanism, but only if the announced reform of the WTO actually delivers. 

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