By: Bob Brewer, Braumiller Law Group
In the ongoing tit-for-tat trade war with China and the U.S., new developments are actually old policies, but seem to be resurfacing as the escalation in loss of patience continues to bring about more protectionism. It’s a global implementation, but the United States will target China with a new “strike force” to combat unfair trade practices, the Biden administration recently announced. It’s based on a review of U.S. access to what is considered to be critical product, such as semiconductors, electric-vehicle batteries, and as the pandemic exposed, an array of critical medicines, only manufactured in China. It will also be taking a look at various supply chain bottlenecks, some of which have been caused by the pandemic. I actually look at it as few different things, unfair trade practices, pandemic related snags, and our own shortcomings in manufacturing critical product domestically. (For decades) There will always be bad actors, from a variety of countries who are intent on breaking the rules of trade, but the U.S. coming up short on critical items in a supply chain, especially during a pandemic, well, that’s not China’s doing, that is ours. The task force, which will be led by the secretaries of Commerce, Agriculture and Transportation, will also aim to reduce the U.S. reliance on goods from outside the country. Imagine that…to be self-sufficient, especially in relation to critical medicines.
So, those who have been paying attention to the world of trade (semi-post pandemic given the recent surge with the Delta variant and the unvaccinated) regain its footing, have also seen the variety of shortcomings in the various critical supply chains. I use the term “regain” lightly, as come to find, we, the U.S., are also dependent on China for the making of shipping containers, which are in short supply, and one of the main reasons the supply chains with the U.S. are bottlenecked. The list of critical products is extensive, and has been building for decades, as the U.S. turned a blind eye to what has always been a road map to a strategy of China Plus One. (I wrote an article on a couple years back: https://www.braumillerlaw.com/china-plus-one-and-the-immex/) It’s pretty much the proverbial question of “Why would you put all of your eggs in one basket?” President Biden actually ordered the review of critical supply chains back in February, requiring executive agencies to report back regarding risks to the U.S. access to critical goods, for which the U.S. is far too dependent on overseas sources.
To be clear, it’s really the “supply chain trade strike force”, led by the U.S. trade representative Katherine Tai, who will look for specific violations that have contributed to the disruption of supply chains that could be addressed with trade remedies. Trade remedies of course also includes the use (again) of the Section 301 tariffs, which the USTR has only recently decided against using with Vietnam. The Biden Administration also just reached an agreement with the Vietnam’s central bank who pledged to refrain from suppressing the value of its currency to gain an economic advantage. The USTR has had Vietnam under its microscope for the last 18 months. Due to the Section 301 tariffs with China, and a subsequent strategy to avoid them, many manufacturers moved operations to Vietnam, but brought the same sourcing and operations with them…so…to the USTR…in many cases…it’s still “Made in China.” This includes continued sourcing from China, as well as substantial transformation. If it, the transformation in processing, isn’t substantial, well, it’s still made in China, and subject to the Section 301 tariffs. From our firm’s perspective in international trade compliance, the “Country of Origin” has become a critical factor in dealing with Customs and regulatory compliance, and Vietnam is not the only violator in this scenario in Asia.
Finger pointing aside, as previously mentioned, it really does beg the question though how much the U.S. is to blame for the current situation regarding shortcomings in the supply chains with essential goods. We have been sourcing (like the rest of the world) hundreds of products from only China for decades, and just now realize how incredibly bad of a strategy this has been? What? The timeline, variables, and ultimate responsibility regarding the current landscape, well, that’s a separate article in itself. Getting back to unfair trade, and China, they have a strategy of their own. They are calling it the “Dual Circulation Strategy/Policy”, (reintroduced in May 2020) which is not new by any stretch of the imagination, and simply translates to them taking better advantage of the buyers within the local economy of 1.4 billion people. This strategy is also aligned with boosting manufacturing and technological development, while at the same time avoiding the middle-income trap of stagnant growth. This does not mean trade isolation, but instead a program to build the infrastructure of less dependence on exports to the world market. Both the U.S. and China are heading in the same direction regarding the overall “plan of action,” which of course charts much less of a need for each other, but this “scaling back” will be a colossal task for both countries.
The fact remains, the tit-for-tat trade battles are likely to intensify, as the success, and/or failure of the dual circulation strategy will depend greatly on China’s ability to ignite domestic innovation and achieve technological superiority, or at least become par with the most developed countries. This endeavor, in the opinion of the Biden Administration, translates to China using any means necessary to achieve its technological objectives, including very generous government subsidies, forced technology transfers and a litany of other activities used by state-owned enterprises. Obviously, this new focus on domestic China will also be aligned with those trade policies that have already created the most friction with its developed world trade partners.
Speaking of friction, in the ongoing battle between China and the U.S., who is winning? I say neither at this point, as the Section 301 tariffs get passed along to businesses and in many cases the consumers. However, data collected from 2002 to 2019 regarding China and the U.S. and trade disputes filed with the WTO (40 cases filed total since 2002) put the U.S. as the favored country in decisions at over 50%. U.S. officials have won 23 times in their challenges to Chinese trade practices since the first U.S. WTO case against China in 2002. Chinese officials have brought 16 complaints against the United States since 2002 and won five, lost one, and gotten a split decision on three, with seven cases pending. U.S. cases against China target export duties and quotas, subsidies, restrictions on market access to service sectors, and other practices. Almost half of the cases brought by China against the United States involve complaints about U.S. antidumping and countervailing duty investigations, particularly the methods used to calculate these practices and the way the United States imposes penalties. Throw in the U.S. accusing China of currency manipulation and the ever-present theft of intellectual property, intentional misclassification to avoid Section 301 tariffs, country of origin violations, including via transshipping through Vietnam (or another Asian country), and the list goes on. I must point out though…the WTO sided with China on the Section 301 tariffs on Chinese product being imported to the U.S. The World Trade Organization ruled that tariffs the U.S. slapped on Chinese goods in 2018, triggering the trade war, were “inconsistent” with international trade rules. The WTO said that the U.S. did not provide evidence that its claims of China’s unfair technology theft and state subsidies justified the tariffs. I guess they failed to show them pictures of Shenzhen’s many unauthorized Apple stores as a prime example. WTO decisions however take years to come to fruition, and neither China nor the U.S have the luxury of waiting for a favorable outcome, much less the patience with one another at this point. China doesn’t expect a favorable outcome at this juncture anyway from the WTO, so it’s just “for the record” to file.
So, what’s the plan of action from the U.S. perspective to fill some of the huge gaps in essential product? China’s plan is the Dual Circulation Policy, and China 2025. One prime example of the U.S. filling the gap in the critical supply chain shortcomings, is the 50 billion dollar “Chips for America” Government push. (and I don’t mean Frito-Lay) The current global chip shortage is costing major industries millions of dollars, and causing disruptions in supply chains from automotive manufacturing to cell phones, and basic electronics that we use daily as consumers. Kudos to Taiwan, who, at this time in history, is actually the chip manufacturing capital of the world. Actually, it’s one company in Taiwan called Taiwan Semiconductor Manufacturing, who makes most of the world’s chips. Crazy, but true, this one company has a great deal of influence over the world economy, with a market cap of approximately $550 billion and ranks as the world’s 11th most valuable company. In my opinion, it’s one of the main reasons China claims Taiwan as its own. As I always say, to find the route of the problem, just follow the Benjamins, or in this particular case, the Dr Sun Yat-sens (Father of the Taiwanese Nation, and the face of the red 100 yuan)
This inevitable chip supply shortcoming (to other top world economies as well) has been an oversight of epic proportion in U.S. economic planning for the future. “Semiconductors are the building blocks that underpin so much of our economy, and are essential to our national security, our economic competitiveness, and our daily lives,” U.S. Commerce Secretary Gina Raimondo said in a statement. Yes, it’s a very accurate statement, and they have been for decades. In hindsight, look at what it’s costing some companies. At the time of this writing, General Motors in temporarily shutting down some plants that make full size trucks and SUV’s, in the U.S., as well as Mexico due to the shortage. Overall, automakers will be forced to cut production by almost 4 million vehicles worldwide in 2021, costing them $110 billion in lost revenue this year. Whoops! I guess the estimates in the post COVID supply chain demand of chips, didn’t predict such a quick rebound in sales. I can’t help but think, what an absolute windfall for Taiwan Semiconductor Manufacturing.
So, the task at hand via the USTR is to identify the gaps in the supply chain, beef up our own supply chains with essential products, and in any case, where a gap in these essential products is caused via unfair trade practices by another country, apply one of many trade remedies in the U.S. tool chest to combat the foe. I must mention at this juncture, in all fairness to China, the U.S. has faced unfair trade practices from “a number of foreign governments” across all four of the supply chains covered in the initial review, including the previously mentioned government subsidies and forced intellectual property transfers. In the official statements, it was highlighted that the U.S. was not looking to “wage trade wars with our allies and partners”, noting that the strike force would be instead focused on “very targeted products.”
It will be interesting to see what the “very targeted product” list looks like in about another 6-8 months, moving into 2022. In the meantime, the tensions between the U.S. and China are getting even more heated in the South Pacific, and as we all know, this doesn’t help the overall situation regarding trade. Pacific Air Forces in Hawaii will be sending 25-30 F-22 Raptors from the Hawaii Air National Guard and from Joint Base Elmendorf-Richardson, Alaska, which will deploy (July 2021) to Guam and Tinian islands for Operation Pacific Iron 2021. The ever-growing stockpile of these war toys is not a good sign…in any respect, much less that of needed diplomacy. The proverbial cherry on top of this pile of bad intentions, the U.S. and its allies in Europe and Asia have accused China of widespread malfeasance in cyberspace regarding a massive hack of Microsoft’s email system and other ransomware attacks. I don’t think there is going to be another meeting in Alaska anytime soon.
More articles by this author: https://www.braumillerlaw.com/author/bob/
