International Trade Law Between United States and China

This paper is written to critically analyse the legal and economic implications in relation to the current United States (US) - China trade war on World Trade Organisation (WTO) and one WTO member state, which in this case is Vietnam. The US has decided to declare a trade war with China due to three major concerns which are (1) job creation in the US has been weakened by China’s large trade surplus; (2) China was illegally obtaining US technology at low-cost price; and (3) concern that China is challenging US’ international standing and undermines their national security (Liu&Woo, 2018; Yu, 2019).

The current US-China trade war is still within the WTO which indicates series of disputes are conducted within the dispute settlement system with the presence of Dispute Settlement Body (DSB) (Hur, 2018). Despite that, the trade war has been shown to violate WTO’s main purpose of open and fair international trade and disregard WTO’s authorization by enacting tariffs before remedies are presented (Adekola, 2019). Besides, numerous countries have been impacted by economic disputes which lead to litigation filed at WTO in order contest the tariffs (Reuters, 2018).

This paper is composed of four parts : (1) introduction; (2) legal and economic impact of US-China trade war on WTO; (3) US-China trade war’s legal and economic implication on Vietnam; and (4) conclusion. Part two will be discussing on the articles of General Agreements on Tariffs and Trade (GATT) violated by both the US and China due to the current trade war along with its economic implications whereas part three will explore the similar implications on Vietnam.

1,300 Chinese imports products worth USD 50 billion have been imposed a tariff of 25 percent by Trump administration under its justification of section 301 of the Trade Act 1974 and under section 232 of the Trade Expansion Act of 1962 (Estevez, 2018). Section 301 allows Executive to react to unfair trade practices but on the other hand, it also violates Article I of ‘Most Favored Nation’ principle and Article II:1(a) of GATT 1994 (Hur, 2018). The tariffs charged on Chinese products by the US are not imposed on products from other countries, henceforth is deemed to contravene on the most favored-nation principle. Articles II:1(a) is also breached due to the fact that both the United States and China has imposed heightened tariffs which was not agreed in the tariff rate commitments schedules.

The tariff measures implemented by the US through section 301-310 of US Trade Act of 1974 has raised the request for consultation by China because it has also breached the Article II:1(b) of the GATT 1994. The measures failed to grant China’s product the no less favorable treatment based on United States's Schedule of Concessions and Commitments annexed to the GATT 1994. United States have also submitted request for consultation to the WTO due to retaliation tariffs enacted by China by claiming that the tariffs violated Article I and Article II:1(a) and (b). The US tariffs on Chinese steel and aluminium has been alleged to threaten the national security and claimed that it is aligned with Article XX of GATT 1994 (Hur, 2018; Stewart, 2018). However, US has yet to prove whether the measures fulfilled the requirements under the chapeau of Article XX that the tariff is a non-discriminatory measures and not a disguised restriction.

Although both countries have filed their claims to the WTO against each other, the tariffs measures regardless of unfair trade practices or retaliatory act, were imposed before WTO provide their dispute resolution or authorization (Adekola, 2019; Stewart, 2018). These actions may indicate the dysfunctionality of WTO dispute resolution processes. On top of that, there is a danger of prolonged dispute settlement proceeding due to lack of judges in WTO Appellate Body and Trump’s pressure on reformation (Estevez, 2018; Reuters, 2018; Weinland, 2018). China’s Ministry of Commerce also claimed that the US has illegally implemented the WTO rules and abused the trade remedy measures (Weinland, 2018). This is especially true because Trump refused to comply with WTO appellate body’s final decision and further blocked the new appointments of the seven-member appellate body in protest in order to continue implementing the tariffs.

There is also a risk that Washington will leave WTO if the organization decided to review United States. On the contrary, if WTO claimed that European Union (EU), China, Canada and Mexico has violated its rules and decided to stand with US, these countries may walk away from the organization. This would also lead to any country to justify their protectionism measures based on their national interest (Panagariya, 2018). Hence, it is imperative for WTO to reach diplomacy that would satisfy each and every countries.

US-China trade war has resulted in ‘dramatic spike’ in trade barriers between G20 countries covering trade worth of USD 335.9 billion (Bermingham, 2019). The trade war has also impacted on oil prices by slowing down the growth of oil prices. This is because US, the fastest growing exporter of Liquefied Natural Gas (LNG) has decided to not sign any contract with the world’s fastest growing importers, China. On top of that, there is an insignificant volume of oil deliveries to China from US although US is the world’s largest exporter of oil and gas (Kempe. 2019). The loss of potential buyers could lead to future losses and long term structural impact of decoupling could bring dangers to US companies.

The trade war might also bring along macroeconomic effects to the US or China trade-dependent countries such as Europe and Canada. Europe’s GDP has been slowing down and if long-term growth are affected by the rise in US-China trade war, European trade will suffer. On the other hand, collateral damage will affect Canada as tariffs bring risk to potential investment and hurt business sentiment. Countries with high share of export to China such as Chile and Peru are also affected with dropping exports volume due to slowing down of Chinese demands and weaken Renminbi currency. It will also bring significant hits to certain sectors exposed to tariffs such as lower-income consumers as well as small and medium-sized enterprises (SMEs) (Bovino, Roache and Broyer, 2019; Samuel, 2019). Profit margins for SMEs are smaller compared to corporations, hence the increasing cost due to tariff lead to margin cutdown and if they were to pass the cost to consumers, low-income households will be affected the most due to increasing prices.

Investments have also started to shift from China and divert to Southeast Asia (Simon, Fujikawa & Hannon, 2019). However, there are substantial cost associated with the restructuring. Unless the shifting production cost increases beyond the effective tariff cost, companies are highly likely to transfer production to another country (Menon, 2019). Several countries such as Malaysia and Vietnam are expected to benefit from the capital reallocation. However, Malaysia, Vietnam and Philippines have been identified by US Customs and Border Protection as transhipment points. This lead to US enacting additional duties on transhipped goods, consequently eliminate any advantage gained from transhipment. In essence, US-China trade war are disrupting the global value chains.

The trade war has pushed down the global economy growth prospects to 3 per cent or even worse (Steinbock, 2019). This is due to the uncertainty of the trade war and increasing market volatility. As trade talks failed to agree on a compromise, more additional tariffs are enacted, real economic growth in both US and China fall, plunge in world trade and investments and migration crisis among others have pushed the world economic outlook to the edge, a long-term stagnation or recession. It is harder to reverse the effect if it takes longer to reach multilateral reconciliation.

It is recommended for WTO to resolve the trade dispute in the best interest of everyone but it is a complex case to solve due to unclear end goals of President Donald Trump and the willingness of China to give up in order to satisfy Trump’s desired result (Stewart, 2018). Trade war may bring benefits to some countries due to trade diversion effect but it is uncertain as to how long the trade war may persist. It is crucial for trade war to remain bilateral as the world cannot afford to be involved in multilateral trade war (Satoru, Toshitaka, Kenmei, Ikumo & Kazunobu, 2019).

Implications of US-China Trade War

Legal Implications

The trade war has caused several Chinese importers to illegally reroute orders from Vietnam to US in order to avoid the tariffs imposed by US government (Hitch, 2019; Vietnam News, 2018; Xuan &Nguyen, 2019). Therefore, Vietnam are committed in imposing increased penalties to trade-related frauds (Chau & Boudreau, 2019). Besides, US Treasury Department has decided to put Vietnam under investigation for currency manipulation (Finley, 2019; Xuan & Nguyen, 2019) The pressure is growing on Vietnam to take action before US has decided to enact tariffs as a punishment for tolerating mislabeled Chinese product flow to US. Vietnam’s central bank also stated that the exchange rate will not be used to create unfair trade advantages although the trade war will hurt their economic growth (Nguyen, 2019).

Despite Vietnam’s effort to avoid tariff by Trump administration, US has decided to impose 400 per cent import duties on steel imports from Vietnam (Xuan & Nguyen, 2019). US Commerce Department claimed that certain products from South Korea and Taiwan were shipped Vietnam before exporting to US to evade the anti-dumping rules. President Donald Trump also stated that Vietnam as “single-worst abuser of everybody” (Bloomberg, 2019; Finley, 2019; Xuan & Nguyen, 2019). Vietnam has been reaping benefits from the trade war as their exports increase substantially and manufacturers shift their production from China to Vietnam (Hui, 2019). President Donald Trump’s claim is not necessarily accurate as it is based on the trade war effect on Vietnam. Vietnam are simply gaining benefits on the trade war caused by Trump administration.

There is also threat of new US tariffs imposed on Vietnamese products based on Sian Fenner, a Singapore-based economist at Oxford Economics (Xuan &Nguyen, 2019). The main goods exported to US such as textile, computer and seafood are specifically at risk. This diminish the opportunity of potential company thinking to shift their production to Vietnam and endangers those that are already within Vietnam. Trump administration claimed that Vietnam is taking advantage of the trade war (Finley, 2019; Hui, 2019). This is true because Vietnam government are granting more investment licenses and the government are accommodating numerous manufacturers that are entering Vietnam for relocation of their production (Xuan & Nguyen, 2019).

Nonetheless, Vietnam may offset the serious effects of the trade war due to trade agreement of Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and free-trade agreement with the EU (Pham & Murray, 2018). CPTPP may serve as an opportunity for Vietnam to strive in the midst of US-China trade war. US sanctions against the Russian arms industry are affecting Vietnam as well due to Russia being Vietnam’s main arms supplier. Essentially, although trade war are meant to impact on a certain country, the effects may be overflowing to multiple other countries and some of this effect may be irreversible.

Economic Implications

Companies have long searched for alternatives locations for cheap manufacturing labor other than China due to increasing wages and the trade war are said to expedite the trends (Elmer, 2019; Finley, 2019). This lead to increased Vietnam exports worth from USD 176.6 billion in 2016 to USD 290.4 billion in 2018, an increase of approximately 64 per cent. Although currently, the trade war may seem to benefit Vietnam but US-ASEAN Business Council CEO Alex Feldman indicates that trade war is not a good thing for every country because everybody will be affected, regardless of the winner. Both US and China is a huge markets and tariff could lead to less consumer spending within both countries (Vietnam News, 2019). This is especially alarming considering Vietnam’s biggest exports is to US, which equaled to 20 per cent of gross domestic product (GDP) in 2018 and 29 per cent in the first half of 2019 and consequently, it could lead to potential loss.

Tariff could lead the demand for variety of products made in China in which components are manufactured elsewhere to reduce. In addition, tariff imposed on China could also impact multiple countries because the components are manufactured outside of China (Elmer, 2019; Finley, 2019; Pham &Murray, 2019). Therefore, these are risks that Vietnam may face if Chinese firms decide to implement ‘China plus One’ strategy (Samuel, 2019) Shifting production completely outside of China could offset the tariff but the cost associated with restructuring may be beyond the tariff itself. Likewise, Chinese firms as material supplier could benefit the most if they relocate to Vietnam as Vietnam’s garments sector imports a lot from China (Pham & Murray, 2018). On the other hand, Vietnam may have to compete in terms of labour forces. The increased demand for labour forces might raise Vietnam’s minimum wages, which may result in improved living standards and higher disposable income (Choudhury, 2019) but it is also considered a bad news for employers. Therefore, Vietnam may benefit from the surge of foreign direct investments (FDI) flowing in due to low minimum wages but it will also put Vietnam at risk in Washington’s crosshairs.

Additionally, Vietnam is also running a current trade deficit account of USD 38 billion in 2018 with US and favorable outcome in the midst of US-China trade war may bring scrutiny with US which may lead to US imposing new tariffs (Hitch, 2019; Pham & Murray, 2019; Xuan & Nguyen, 2019). Vietnam adopt open economy hence, if US were to impose tariff on Vietnam, it would have a huge impact on their economy (Vietnam News, 2018; Xuan & Nguyen, 2019). Vietnam’s GDP are predicted to jump by an additional 1.32 per cent by 2035 with the establishment of CPTPP. With CPTPP in place, Vietnam may attract potential FDI by pulling business to shift their production to Vietnam in order to avoid the impacts of trade war (Pham & Murray, 2018).

Conclusion

The current trade war may not drag the economy into recession yet but evidences are suggesting that the economy might soon drop into fatal fall. In the short-term, the trade war may bring benefits to Southeast Asian countries due to trade diversion effect but in actuality, there are no winners in a trade war, including the countries that started the dispute. A bilateral trade war would not bring a serious impact to the global economy. Nonetheless, if other countries decided to initiate a multilateral trade war, all countries will be worse off. Moreover, an all-out trade war may plunge the economies into recession.

Therefore, entrepreneurs and corporations must be dynamic in nature in order to ride the wide of uncertainties by adjusting to new technology, management style and the ever-changing policy. Also, Trump administration’s effort to fix trade imbalance with Vietnam by imposing tariff may only isolate the country which could affect US international standing. Thus, continuous engagement on regional trade and development policy along with discussion on common issues related to China may help to alleviate the problem of trade deficit and indirectly strengthen the political relationship with Vietnam. Vietnam must also adapt and innovate its way up the supply chain. WTO must also play a role by being an umpire in the trade disputes and provide a diplomatic settlement in order to avoid prolonged trade war effects.