6 April 2018
Is anyone playing by the rules of global trade?

Global trade rules are being used and tested in extreme ways. The US and China have acted before due process has taken place, but each are requesting consultations at the WTO to resolve the disputes

An eye for an eye

In the US’s escalating dispute with China about intellectual property practices, both countries are at pains to stress the justification for their actions in the rules of global trade, even if they aren’t waiting around for due process.

The US’s other recent actions on steel and aluminium imports are outside the rules of global trade, but with cover from the very same rules: the US has invoked the “security exception”. A country is allowed to opt out of its commitments under the global trade rules where it judges that the protection of its “essential security interests” are at stake. However, using this exception to raise tariffs on steel and aluminium is widely seen as a pretext for safeguarding domestic industry, and the tariffs as a tactic for forcing concessions in other trade negotiations.

Countries have reaffirmed their commitment to the global trade rules, but their responses to the US have also featured a jab or two below the belt. China has requested consultations with the US at the WTO under its Safeguards Agreement as a first step to claiming compensation for trade losses due to the steel and aluminium tariffs. But well ahead of this process being completed, China has also implemented tariff increases on 128 products it imports from the US, the equivalent of shooting first and asking questions later. In total, over 40 WTO members have raised concerns at the WTO about the US’s steel and aluminium tariffs.

Why the US trade deficit is heading the wrong way

Macroeconomic policy, not just trade barriers, affects the trade deficit. Trump's tariff policy is trying to swim against an economic tide

For Trump, it’s all about tariffs

President Trump’s aggressive stance on trade policy has put the spotlight firmly on the US’ trade balance, which continues to worsen as February’s trade balance of -$57.2bn was the worst since 2008. The US administration argues that unfair trading practices by other countries, and especially China, causes persistent US deficits.

There may be something to that argument, in particular when it comes to some of China’s policies. But by focusing on tariffs and other trade-related measures, the Trump administration risks ignoring other factors that influence the trade balance.

China hits back where it hurts - soybeans

China said it would retaliate against US tariffs, and that is exactly what they did today. But to the surprise of many, they included US soybeans in the reciprocal tariffs, which sent the soybean market plunging downwards. If these tariffs stick, expect further pressure 

A blow for US soybean farmers

China is the world’s largest soybean consumer, with the country estimated to consume around 111 million tonnes (mt) of soybeans over 2017/18, which is equivalent to 32% of total global soybean consumption. The bulk of this demand is met by imports, with the country estimated to import 97mt over 2017/18. This is a significant number when you consider that global import demand totals around 151mt.

Developments between the US and China will certainly play into the hands of Brazilian farmers

The US is the largest soybean producer in the world and a key supplier of soybeans to China. Historically the US was the largest supplier to China, although over recent years this has changed, with China increasingly turning to South America, due to the strong growth in Brazilian soybean output. In 2010, the US met 43% of Chinese import demand, however, this fell to 34% in 2017.

Now with US soybeans set to attract a further 25% import tariff, the trend that we have seen over the last few years, is likely to pick-up in pace, with Chinese buyers turning as much as they can to alternative supplies.

Unfair trade: Does President Trump have a point?

According to President Trump, there isn't a level playing field between the US and many of its trading partners. For example, China doesn't protect the intellectual property of foreign firms and on average levies higher import tariffs. Does he have a point? 

Investment restrictions and the theft of intellectual property

“A historic move against economic aggression”, is what the White House called it when announcing a 25% tariff targeting US$50-60bn of imports from China. This follows frequent complaints about the abuse of intellectual property rights by China and the restrictions on foreign investments in China. According to President Trump, the US trade deficit is the result of unfair trade policies by other countries.He refers to unequal tariffs, like those in the automobile industry, complaints about unequal restrictions for foreign investments in China and the abuse of intellectual property.

The new US tariffs on imports from China have been announced, citing the section 301[1] investigation into alleged intellectual property theft by China. Does Trump have a point here? According to the European IPR SME help desk, there are indications for this. IFR SME puts forward that plant inspections in China, which are required for certifying products for sale on the Chinese market, are not uncommonly carried out by inspectors from competing for Chinese firms.


[1] Section 301 of the 1974 Trade Act allows the President to retaliate against countries if they violate international trade agreements, act unjustifiable, and, or, burden US commerce.

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