The Trump Administration Reaches for a Trade Sledgehammer

by Stratfor , financialsense.com:

The White House is planning to launch new investigations into China's trade and intellectual property practices, and soon. The move underscores how talks between the United States and China have broken down over Washington's expectations that Beijing would help rein in North Korea's nuclear program. With the 100-day action plan on trade that followed US President Donald Trump's April meeting with Chinese President Xi Jinping over, and with Pyongyang still aggressively pursuing a fully functional and deliverable nuclear weapon, the White House already had signaled it would no longer be constrained when dealing with China before Trump tweeted July 29 that he was "very disappointed in China" for its inaction on North Korea. And now that comprehensive trade talks are frozen, the United States is pursuing far more aggressive measures against China's economic policy — though it still retains the option to walk this pursuit back if needed.

According to several reports, the Office of the US Trade Representative will investigate technology transfers mandated by China pursuant to Section 301 of the Trade Act of 1974. Beijing requires foreign companies to share technology in exchange for allowing them to invest in China or access the massive and lucrative Chinese market. The investigation could be announced this week and is likely to be rolled into an executive order by Trump that includes other enforcement actions related to trade, investment, and intellectual property.

A Heavy Tool, With Limitations

Section 301 investigations are the sledgehammer in the trade enforcement toolbox that Trump and US Trade Representative Robert Lighthizer have at their disposal. In theory, Section 301 gives the trade representative the ability to investigate and remedy any "unfair trade practices." Such practices not only include other countries' potential violations of their commitments to the World Trade Organization (WTO) and other trade agreements, but also any practice that is "unreasonable or discriminatory and burdens US commerce." Before the WTO and the creation of its dispute settlement understanding, Section 301 investigations were the primary way the United States forced other countries to negotiate certain trade issues. Perhaps the best-known use of Section 301 investigations came in the 1980s when the United States examined barriers Japan had erected against US semiconductor exports. The mere threat of using Section 301's broad authority to punish Japan compelled Tokyo to enter into an agreement with Washington. If the United States finds that China is violating its commitments or is burdening US commerce, then it could take a number of potential actions in response, including restricting imports by imposing tariffs on them and suspending preferential treatment under trade agreements such as the WTO. The actions the United States take must be proportional, though it is unclear how proportionality would be determined when an action is not obviously related to trade.

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There are several factors that limit the United States' use of Section 301 investigations. Since the WTO established its dispute settlement understanding, Section 301 investigations largely have fallen out of vogue. In an early case between the United States and Europe involving Section 301, the WTO's dispute panel ruled that the United States had violated WTO commitments by pursuing unilateral sanctions against WTO members without going through the organization's various dispute and response channels.

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