Outlook for US Trade Policy and the World Trade Organization in 2019

European Union, United Kingdom, USA

 

Scott S. Lincicome, Ron Kendler, Brian Picone and Richard Eglin, White & Case LLP

February 6 2019

 

The year 2018 may be remembered as a turning point for US trade policy and the international trading system. The Trump administration took several unilateral trade actions, including the imposition of global "national security" tariffs and quotas on steel and aluminum and of punitive tariffs on nearly half of all Chinese imports as retaliation for that country's commercial and trade policies.Responsive actions followed in many countries, leading to an unprecedented level of national trade barriers and disputes in the modern "WTO" era. The measures and countermeasures have not only disrupted global supply chains and heightened uncertainty for business, but also have raised doubts about the United States' commitment to the multilateral system and the WTO’s continued ability to serve as a negotiating forum and arbiter of disputes.

 

The uncertainty is likely to persist in 2019. Approval by the US Congress of the agreement to replace the North American Free Trade Agreement (NAFTA) is in question. US "national security" tariffs on automotive goods, potentially dwarfing those now on steel and aluminum, could hinge on the rapid conclusion of bilateral agreements with the EU and Japan, neither of which will be easy. The United States and China have entered negotiations aimed at resolving their ongoing trade dispute, but many doubt whether an enduring solution to fundamental economic and geopolitical differences is possible. Moreover, the WTO Dispute Settlement Body will deal with several high-profile disputes revolving around the sensitive issue of national security, and the Appellate Body could cease to function soon unless demands for reform (especially from the United States) are met. Given the magnitude of these issues, 2019 promises to be another important year for US trade policy and the multilateral trading system. Though the year begins without many clear answers, this report assesses how these and other important trade issues may develop over the coming year.

 

US-China Trade Dispute

 

The ongoing trade dispute between the United States and China is one of the most important issues on the 2019 US trade agenda, with implications for businesses, governments, and supply chains around the world. Prompted by the United States’ unilateral imposition of tariffs on Chinese imports under Section 301 of the Trade Act of 1974—purportedly in response to China’s alleged unfair practices regarding intellectual property protection and forced technology transfer—the two countries in 2018 implemented a series of "tit-for-tat" tariff actions that now cover approximately US$360 billion in annual bilateral trade. On December 1, 2018, the sides agreed to begin negotiations aimed at resolving some of the United States’ concerns about China’s trade and industrial policies and averting further tariff increases. The United States set a deadline of March 1, 2019 for the negotiations—allowing for only 90 days of discussion—and has stated that, absent a satisfactory outcome, it will immediately increase to 25 percent the current 10 percent duty rate on approximately US$200 billion in annual Chinese imports into the United States. (Another US$50 billion is already subject to additional 25 percent duties.)

 

There have been signs of incremental progress on some issues covered by the bilateral negotiations, but progress on structural reforms to China’s trade and industrial policies – a demand emphasized by some US officials such as US Trade Representative (USTR) Robert Lighthizer – remains unclear. China has offered the following concessions since the start of the negotiations:

 

·         "Good faith" concessions. At the outset of the negotiations, China announced minor "good faith" concessions on market access for automotive goods, purchases of US soybeans and corn, intellectual property rights enforcement, and the "Made in China 2025" industrial policy, but many details regarding these actions remain unclear. US and Chinese officials also are discussing the possibility of reopening the Chinese market to US chicken exports.

·         Long-term goods purchases. China reportedly has offered to increase purchases of US goods – including energy and agricultural products – by more than US$1 trillion over a six-year period, with the goal of eliminating the US trade deficit with China by 2024. Experts have expressed doubt that this target is achievable, noting that US exporters may be unable to meet such a large and sudden increase in demand. However, observers speculate that the proposal may be appealing to the Trump administration, which has emphasized trade deficit reduction as a central goal of its trade policy.

·         Structural reforms. China's National People's Congress (NPC) on December 26, 2018, released a draft Foreign Investment Law that purports to facilitate various structural reforms sought by the United States, including a prohibition on forced technology transfers, protection of the intellectual property rights of foreign investors, and national treatment of foreign investors. The NPC is expected to approve the law during a session scheduled to open on March 5. However, observers have noted that the current draft law consists largely of broad, aspirational policy statements, and that China’s plans for implementing and enforcing the proposed law remain unclear. China has not publicly announced any other proposed structural reforms.

 

The United States and China held a high-level negotiating round in Washington from January 30 –31, led by Chinese Vice Premier Liu He and USTR Lighthizer. Following the meeting, USTR Lighthizer indicated that the talks had focused primarily on structural issues and that the two sides "did make progress on a variety of key issues", but he declined to elaborate on specific areas of progress and noted that "there’s a lot more to be done". He further stated that "[a]t this point, it’s impossible for me to predict success. But we are in a place where, if things work out, we could have that[.]" He also indicated that the two sides have only just begun drafting a common negotiating document. The White House also issued a vague statement acknowledging "progress" in the talks, but providing few details: "[t]he two sides showed a helpful willingness to engage on all major issues, and the negotiating sessions featured productive and technical discussions on how to resolve our differences. The United States is particularly focused on reaching meaningful commitments on structural issues and deficit reduction. Both parties have agreed that any resolution will be fully enforceable. While progress has been made, much work remains to be done." The reaction of US business groups to the talks has been mixed: they indicated that, while the sides have made progress on market access, intellectual property enforcement, and other issues (e.g., electronic payments), China has not offered substantive concessions on structural issues such as technology transfers and industrial subsidies.

 

Some observers speculate that the Trump administration, motivated by recent declines in the US financial markets, has recently become more amenable to an agreement that would avert further escalation of the US-China trade dispute. The recent announcement that USTR Lighthizer and Secretary Mnuchin will visit China for further talks in mid-February also has been viewed as a positive signal. However, the Trump administration has not elaborated on the specific outcomes it considers necessary for the negotiation to be successful, beyond general statements (e.g., USTR Lighthizer’s statement that the United States seeks "structural changes" (or "an agreement to have structural changes") to the Chinese industrial policies covered by the Section 301 investigation, as well as expanded market access for US goods). Moreover, while President Trump has repeatedly expressed vague optimism regarding the bilateral talks, his deputies have long been skeptical of China’s willingness to adhere to its promises and enact fundamental policy reforms in response to pressure from the United States.

 

The outcome of the bilateral negotiations therefore is uncertain, but there are essentially three possible scenarios:

 

·         No agreement by March 1 ...

 

·         Extension of negotiations beyond March 1 ...

 

·         Preliminary agreement by March 1 ...

 

 

US-Mexico-Canada Agreement (NAFTA 2.0) ...

 

Prospects for US Congressional Approval ...  

 

Timing ... 

 

Possibility of attempted US withdrawal from NAFTA ... 

 

Section 232 Actions ... 

 

Bilateral Trade Negotiations with Japan, the European Union, and the United Kingdom ... 

 

US-Japan Trade Agreement ... 

 

US-EU Trade Agreement ... 

 

US-UK Trade Agreement ... 

 

Congressional Trade Agenda ... 

 

House Ways and Means Committee ... 

 

Senate Finance Committee ... 

 

WTO Dispute Settlement and Negotiations ... 

 

Conclusion ... 

 

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