Potential Impact of the Trump Administration on the US-China Bilateral Relationship

While campaigning for president, Mr. Trump emphasized his desire to change the dynamic of the U.S.-China relationship. For example, Mr. Trump drew headlines in May when he said, “We can’t continue to allow China to rape our country, and that’s what they’re doing. It’s the greatest theft in the history of the world, what China has done.” Notwithstanding bold statements made in the heat of a presidential campaign, Mr. Trump might pursue a more measured approach once in office. 

In his “7 Point Plan To Rebuild the American Economy by Fighting for Free Trade,” Mr. Trump promised that he will: (1) label China a “currency manipulator”; (2) bring cases against China for violations of international trade agreements; and (3) raise tariffs on Chinese imports. As president, Mr. Trump will have the authority to effectuate these promises. He will also have the authority to take other actions that could significantly impact Chinese companies, such as blocking them from acquiring control over U.S. businesses in certain sectors. 

Any of these actions could damage the U.S.-China relationship and also harm the U.S. economy. For example, China might retaliate with protectionist measures of its own. It therefore remains to be seen whether Mr. Trump will follow through on his campaign promises. 

An Analysis of Mr. Trump’s Campaign Promises 

1. Label China a currency manipulator 

Throughout his campaign, Mr. Trump emphasized his intention to label China a currency manipulator. For example, in a November 2015 Wall Street Journal essay, Mr. Trump wrote, “[T]he worst of China’s sins . . . is the wanton manipulation of China’s currency, robbing Americans of billions of dollars of capital and millions of jobs.”¹ While the Obama and Bush Administrations faced pressure to apply this label to China, the U.S. has not made such a designation since 1994. Mr. Trump promised to instruct his Treasury Secretary to designate China a currency manipulator on his first day in office. 

It is unlikely that Mr. Trump’s Treasury Secretary will be able to designate China a currency manipulator so quickly. To make such a designation, the Treasury Secretary will have to find that China has: (1) material global current account surpluses and (2) significant bilateral trade surpluses with the United States.² In its October 2016 report, the Department of Treasury found that China had met only one of these criteria.³ But Mr. Trump’s Treasury Secretary will be able to designate China a currency manipulator once the two findings are made. 

The designation would strain the U.S.-China relationship, and such a strain may negatively impact Chinese companies. The designation would not, however, have any immediate legal impact on the U.S.-China relationship. Instead, it would trigger expedited negotiations aimed at convincing China to adjust its rate of exchange in order “to permit effective balance of payments adjustments and to eliminate the unfair advantage.”⁴ 

2. Bring trade cases against China 

Mr. Trump also promised to instruct his U.S. Trade Representative to bring trade cases against China in both the U.S. and in the World Trade Organization (WTO). Mr. Trump’s promise implies a role currently outside the scope of the Trade Representative’s duties. While the Trade Representative aids in the coordination of enforcement actions, it typically brings trade cases only at the international level pursuant to Section 301(a) of the Trade Act of 1974.⁵ 

Pursuant to Section 301(a), the U.S. Trade Representative has been active in pursuing claims against China since 2001, when China first entered the WTO. Since then, the U.S. has brought 19 complaints against China to the WTO’s Dispute Settlement Body. This is more than all the cases brought against China by all other WTO member countries combined (and, it could be argued, demonstrates that even before the election of Mr. Trump, the U.S. has been comfortable taking an aggressive posture with respect to Chinese trade practices).⁶ Recent claims have targeted tax advantages for Chinese-produced aircraft, subsidies for automobiles and automobile parts, and export restraints on raw materials.⁷ 

In its most recent annual report to Congress on China’s WTO Compliance, the Trade Representative stated, “China continues to provide injurious subsidies to its domestic industries, and some of these subsidies appear to be prohibited under WTO rules.”⁸ Since 2001, the U.S. has brought several claims pertaining to improper subsidies, including one in 2015 focused on government support for clusters of manufacturers and producers on “Demonstration Bases.” Mr. Trump’s campaign promise specifically highlights Chinese subsidies as a target, marking a continuation, and perhaps a ramping up, of such policy. 

3. Impose Tariffs on Chinese Imports 

Mr. Trump has said that he would be willing to impose a 45% tariff on Chinese imports. According to Peter Navarro, a policy advisor to Mr. Trump, the 45% figure captures the economic injury that the U.S. economy is suffering as a result of unfair Chinese trade practices, including intellectual property theft, currency manipulation, lax environmental regulations and worker safety regulations, and illegal export subsidies.⁹ Mr. Trump has not clarified whether the 45% tariff would be limited to imports from particular Chinese industries, nor has he clarified whether the tariff would distinguish between inputs and finished goods. Moreover, it is not clear whether Mr. Trump has the authority to impose unilaterally such a high across-the-board tariff.¹⁰ 

Any significant across-the-board tariff would have negative implications for Chinese businesses that export to the U.S., and it likely would also have negative consequences for the U.S. economy. First, it would hurt U.S. companies that rely on Chinese inputs. Second, it would grant China the right to retaliate under international law.¹¹ Third, it could spark a trade war with China, which would cause significant damage to U.S. companies. These potential negative consequences may cause Mr. Trump to reconsider his proposal. 

Limits on Acquisition of Control of American Companies 

In addition to the trade policy-related promises that he made during his campaign, Mr. Trump will have the authority to stymie the ability of Chinese companies to acquire controlling interests in American companies in certain sectors. Pursuant to the Defense Production Act of 1950 and the Foreign Investment and National Security Act of 2007, the president has the authority to review any transaction that could result in the control of a U.S. business by a foreign person to determine whether it may have a negative impact on U.S. national security.¹² This authority is exercised through the Committee on Foreign Investment in the United States (CFIUS), an interagency committee chaired by the Department of Treasury. If CFIUS determines that a transaction poses a threat to U.S. national security, it may impose conditions to mitigate any such threat. CFIUS also may refer the matter to the president for final action. The president has the ultimate authority to block a deal, or to require a completed deal to be unwound, where there is credible evidence that the threat to U.S. national security cannot be mitigated. 

Although most cases ultimately clear CFIUS review with little if any impact on the transaction at issue, China has expressed concerns about unfair treatment in the CFIUS process because (i) in recent years China has been the source of more CFIUS cases than any other country across a wide range of U.S. sectors, including electronics, utilities, and transportation; (ii) the only two transactions that CFIUS has officially blocked were attempted investments by Chinese companies; and (iii) Chinese companies have been involved in a significant percentage of the transactions that have been abandoned due to an informally communicated likelihood of receiving a rejection. Recent Administrations have dismissed China’s unfair treatment argument, emphasizing instead that CFIUS conducts unbiased case-by-case determinations. 

Chinese companies seeking to invest in U.S. businesses operating in electronics, utilities, transportation, and other sectors likely to raise potential threats to U.S. national security may face more obstacles during the Trump Administration. In light of the proposals discussed above, it is conceivable that a Trump Administration could take a more aggressive approach to CFIUS reviews of transactions involving Chinese investors. Doing so might dampen the appetite of Chinese companies seeking to invest in those sectors of the U.S. economy. 

Footnotes

_{1) Donald J. Trump, Ending China’s Currency Manipulation, The Wall Street Journal (Nov. 9, 2015).
2) Omnibus Foreign Trade and Competitive Act of 1988 § 3004(b), Pub. L. No. 100-418, 102 Stat. 1107 (codified at 22 U.S.C. § 5304(b)).
3) U.S. Department of Treasury Office of International Affairs, Foreign Exchange Policies of Major Trading Partners of the United States (October 2016), (Fall 2016 FX Report) FINAL.PDF.
4) Omnibus Foreign Trade and Competitive Act of 1988 § 3004(b), Pub. L. No. 100-418, 102 Stat. 1107 (codified at 22 U.S.C. § 5304(b)).
5) 19 U.S.C. § 2411.
6) World Trade Organization, Dispute Settlement: The Disputes: Disputes by country/territory (last visited Nov. 11, 2016).
7) United States Trade Representative, 2015 Report to Congress on China’s WTO Compliance 38 (2015).
8) Id. at 24.
9) Peter Navarro, Trump's 45% tariff on Chinese goods is perfectly calculated, The Los Angeles Times (July 21, 2016).
10) According to a report by the Peterson Institute for International Economics, there are five bases upon which tariffs could be raised: (1) Section 232(b) of the Trade Expansion Act of 1962; (2) Section 122 of the Trade Act of 1974; (3) Section 301 of the Trade Act of 1974; (4) the International Emergency Economic Powers Act of 1977; and (5) the Trading with the Enemy Act of 1917. Marcus Noland, Gary Clyde Hufbauer, Sherman Robinson, and Tyler Moran, Assessing Trade Agendas in the US Presidential Campaigns, the Peterson Institute for International Economics (Sept. 2016).
11) Marcus Noland, Gary Clyde Hufbauer, Sherman Robinson, and Tyler Moran, Assessing Trade Agendas in the US Presidential Campaigns, the Peterson Institute for International Economics (Sept. 2016).
12) 50 U.S.C. App. 2170; P.L. No. 110-49.}