BOFIT Viikkokatsaus / BOFIT Weekly 2019/19

The Office of the United States Trade Representative announced on Wednesday (May 8) it was moving ahead with raising the current 10% punitive tariff imposed last September on Chinese goods to 25 %, effective today (May 10). The tariffs apply to a wide range of Chinese imports with an annual worth of about 200 billion dollars. China promised to take countermeasures. There was apparently little progress in the talks when lead negotiators adjourned on Thursday night (May 9) in Washington, DC. With the tariff deadline now passed, talks continue today.

The impending failure of trade negotiations came as a surprise to many as the parties on both sides earlier reported progress, last when the trade teams met on May 1 in Beijing. Despite apparent progress, president Trump said on Sunday (May 5) that the US would proceed with tariff hikes on Chinese goods. Besides his 25 % hike declared on Sunday, Trump said he also considers imposing tariffs on some 300 billion dollars in Chinese imports currently not subject to tariffs.

The US defended the hikes, claiming China had backed off from commitments it made in the previous rounds of talks. A central issue appears to be China’s unwillingness to change its laws to reflect agreed rule changes. China instead wants to implement changes through administrative measures. Leaving implementation to administrators, however, makes US oversight difficult and unlikely to produce the desired changes in practice at the provincial level.

Little concrete information about the negotiations has been made public, causing additional uncertainty in world stock markets. Media reports up to early May implied that understandings had been reached on topics such as ending forced technology transfers, enforcement of copyright protection and cybersecurity. Even breakthroughs in certain areas of opening up access to China’s markets were mentioned. Among the more difficult unresolved issues are the timetable for lifting current tariffs, free movement of information and allowing access of American cloud services providers to China. Particularly thorny issues are posed by the competitive distortions by preferred government treatment of Chinese state-owned enterprises and government subsidies. Now it also emerged that the earlier-claimed consensus on oversight of agreement implementation evaporated with China’s reluctance to change its legislation to suit American wishes.

One of the main reasons for the current trade dispute is China’s failure to deliver on promises that were part of its WTO accession in 2001, i.e. allowing access to its markets and the ending of unfair trade and investment practices. As such reforms would deeply impact China’s current economic system, it was clear from the beginning that the trade negotiations would be difficult. Moreover, as the trade disputes are a part of wider great power competition, even a positive outcome this week would only provide temporary respite from ongoing trade tensions and uncertainty.