The latest round of negotiations in the on-going trade war between the United States and China concluded yesterday in Washington, DC. We are now less than a month away from the additional duties imposed on Chinese-origin articles included on List 3 increasing from 10% to 25%, and the possible initiation of a List 4 (the imposition of additional duties on the remaining $267 billion worth of Chinese-origin imports), so we thought it would be helpful to recap where we are and share some thoughts on where we may be going.
To recap: The U.S. administration determined under section 301 of the Trade Act of 1974, as amended, that China’s laws, policies, practices, and actions are unreasonable or discriminatory and are harming American intellectual property rights, innovation, or technology development. Specifically, the U.S. concluded that China uses foreign ownership restrictions (e.g., joint venture requirements, etc.), restrictive technology licensing terms, strategic investment in, and acquisition of, U.S. companies and assets, and unauthorized intrusions, cyber theft, etc. to improperly obtain U.S. intellectual property, trade secrets and other confidential information.
Based on this, the U.S. took a number of measures in an effort to get China to change its behavior. These measures included, among other things, the imposition of additional customs duties on Chinese-origin products imported into the United States. So far, the U.S. has imposed additional duties on 3 separate lists of Chinese-origin products (List 1 =25%, List 2 = 25% and List 3 = 10%). In response, China took retaliatory measures that included imposing additional customs duties on U.S.-origin products imported into the United States.
Late last year, the two sides agreed to a temporary cease fire to allow negotiations to begin. The two sides gave themselves 90 days (until March 1, 2019) to work out a resolution. Since then, there have been a series of discussions/meetings, including the meetings that occurred this week in Washington. If a deal is not reached, the additional duties imposed on Chinese-origin articles included on List 3 are scheduled to increase from 10% to 25%. President Trump has also indicated previously that, if an agreement is not reached, the United States is ready to proceed with imposing duties on the remaining $267 billion worth of Chinese-origin imports (i.e., initiating a List 4).
Resolving this dispute is a tall order, under the best of circumstances. The U.S. administration believes that China needs to make structural changes to how it operates and that there needs to be strong enforcement mechanisms in place to ensure continued compliance. In response, China has reportedly focused on purchasing more U.S. products and services over time (with one series of reports suggesting that China would increase its purchases of U.S. agricultural, energy and other products to eliminate the trade deficit with the United States within 6 years – a period that would coincide with a second term for the Trump administration). By most accounts, the two sides are still far apart. That said, President Trump is expressing optimism that a deal can be reached. He has also said, however, that a final deal (and a great deal, it would be) could only be reached during an in-person meeting with President Xi. Thus far, no such meeting is scheduled.
As a result, we view that the two most likely scenarios are (1) the parties continue negotiating over the next month and make enough progress that further escalation is delayed until a meeting between President Trump and President Xi where the two sides declare victory and then retreat to their respective corners, and (2) not enough progress is made and the U.S. increases the duties on List 3 goods to 25%. While both sides are interested in reaching a deal, the two sides are too far apart to expect that a substantive solution will be reached in the next 30 days. The question is whether China’s offer to purchase more U.S. products and some small structural changes will be sufficient to get the U.S. administration to declare victory.
If an agreement is ultimately reached, people should also watch how the other presidential candidates react. As you know, the race for president has already begun and several of the Democratic Party candidates have expressed ‘economic nationalist’ sentiments. It will be interesting to see if President Trump is criticized for being ‘soft on China’ if an agreement is reached that does not address the issues covered in the Section 301 report.
We hope this is helpful. If you have any questions about how best to cope with the Section 301 duties, please let us know.