- On Monday, President Donald Trump is expected to sign a measure that will initiate an investigation into IP violations against American companies by Chinese firms.
- The investigation will be seen as an act of aggression because it is based on a law that fell into obsolescence with the formation of the World Trade Organization.
- This will not help US efforts to deescalate tensions with China's ally, North Korea.
On Monday afternoon President Trump is expected to to sign a memo that will initiate an investigation into intellectual property violations of American companies coming from China.
There is a wrong way and a right way to do this, and Trump plans on doing it the wrong way — by dredging up an outdated trade measure from 1974.
It is a measure that will anger China's leadership at a delicate time, a time when the US is trying to cool tensions with North Korea. China is the isolated nation's most powerful ally and economic benefactor.
De-escalating tensions with North Korea while ratcheting them up with China probably won't work.
The law Trump plans to use is Section 301 of the US Trade Act of 1974. Basically it allows him to put a tariff on another country without Congressional approval.
"The law hasn't been used in 50 years and there's a good reason for that," economist Chad Brown of the Peterson Institute for International Economics told Business Insider on a phone call. "We built a brand new trading system so we didn't have to use this law."
That trading system is called the World Trade Organization — the body formed in 1995 which handles trade disputes between member nations. Nationalist, protectionist elements of Trump's cabinet — like National Trade Council head Peter Navarro and adviser Steve Bannon — have shown disdain for the body. To them, it's a symbol of globalization, and China's entrance into it in the 1990s led to the decline of American manufacturing.
But to the rest of the world — as it used to be to the United States — the WTO helps to support the foundation of a peaceful world order. And if the Trump administration casts it aside, it will alarm not only countries the US has an antagonistic relationship with, but also our allies.
Wrongs and rights
(Business Insider composite (Reuters/KCNA/Rick Wilking))
Now, none of this is to say that Chinese IP violations aren't an issue, they are to both US and Eurozone companies. The problem is that solving the problem would be a lot easier if the US and EU worked on it together.
"Actually our lives would be a whole lot easier if we were acting in a way that is collegial," Brown explained.
Issues like this are about balancing the complicated interests of US and EU companies that want to tap into China's markets. It requires a coordinated effort from countries that want to see IP theft stopped, the WTO's rules which make their grievances legitimate, and Chinese authorities who must adhere to the rules of the body.
Instead, Trump plans to use section 301, which has only been used once since 2001. The measure was most commonly used during the Reagan administration, during which current US Trade Representative Robert Lighthizer served as deputy trade minister.
The US stopped using Section 301 after allies started getting mad about what they considered the US's "aggressively unilateral" trade policy. That, combined with the dispute settlement mechanisms the US built into the WTO, eventually made the law obsolete.
Making a list, checking it twice
(Institute of International Finance)
That is, of course, until the Trump administration pledge to buck not only its own party, but also potentially the world order the US built, with its protectionist trade policy.
So far, measures as extreme as Section 301 haven't been taken, but our allies are watching. The EU has been outspoken about proposed steel tariffs that could hurt its steelmakers.
Cecilia Malmström, EU trade commissioner, said that she feels that as a friend of the US, the EU is being "unfairly targeted" and that "if it hits us like it could, we will of course retaliate."
That retaliation will likely hit Trump's base. The Europeans plan on targeting bourbon from Kentucky and dairy products from Wisconsin.
They've chosen industries that are "vulnerable in the US and may be able to influence Trump. All countries I'm sure have a strategy — have a process that works like that," Brown explained to Business Insider. "We turn allies into enemies."
China, a target of Trump's bellicose language about trade throughout his presidential campaign, has been making preparations to retaliate against the US in the event of aggressive action for some time.
Back in January China's Foreign Ministry spokesman Lu Kang spoke in a rare, wide-ranging interview in which he warned the Trump administration against using hot button issues to push its trade agenda. In that case, he mentioned the One China Policy — the US's agreement not to publicly recognize Taiwan as a separate country.
It could very well be that North Korea is another issue China would prefer not to have turn into a bargaining chip.
Or perhaps it does. As it stands now, Trump "has no carrot to offer" if he uses this Section 301, according to Brown. Beijing is holding the cards. It can pressure North Korea, and it can retaliate against any tariffs the US puts on its goods. Once the Trump administration leaves the world of WTO rules, it has to remember that its on its own.
And that means Beijing doesn't have to play by the rules either.
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