On October 4, 2021, U.S. Trade Representative Katherine Tai announced during a speech at the Center for Strategic and International Studies in Washington, D.C., that the United States would be launching a new trade strategy toward China.  Tai’s announcement comes on the heels of a months-long, comprehensive review of the U.S. trade policy toward China, announced earlier this year by the Biden Administration. We understand that a report on the review is forthcoming.

Initial Elements of the New China Trade Strategy

Tai highlighted four elements of the revised U.S. approach:

The first element will involve renewed diplomatic engagement with China to assess the state of the bilateral trade relationship and discuss China’s compliance with the “Phase One” trade agreement, which was signed by the Trump Administration in January 2020 and entered into force on February 14 of the same year.  In her speech, Tai refrained from declaring China to be in violation of its commitments under the deal to purchase a certain amount of U.S. goods, perhaps to provide diplomatic space for the talks with China.  According to Tai, this renewed engagement with China, which is expected to take place between her and Chinese Vice Premier Liu He as well as at lower levels, will also involve “honest” discussions about China’s “state-centered” trade and industrial policies.

A second element involves the launch of a new, but narrowly limited, exclusion review process for Section 301 tariffs on Chinese exports.  The tariffs, implemented by the Trump Administration under Section 301 of the Trade Act of 1974 and estimated to affect some $360 billion in annual trade, were rolled out in four tranches between July 2018 and September 2019.  In her speech, Tai indicated that a “targeted” exclusion process would allow U.S. companies to request tariff exclusions for products not available within the United States, though she declined to provide specifics.  The next day, the Office of the U.S. Trade Representative (“USTR”) formally launched a public consultation process, issuing a Federal Register notice to invite public comments on whether 549 previously extended Section 301 product exclusions should be reinstated.  USTR is currently not accepting requests for new exclusions, nor is it now considering extensions for the vast majority (more than 75%) of previously granted product exclusions, which were not extended.  For the 549 product exclusions that were extended, the public comment period will be open from October 12 through December 1, 2021.  [For more information on the Section 301 exclusion process, see our separate post here.]

The third element of the revised U.S. approach will seek to address China’s “state-centered” trade policies and practices, including what USTR deems to be trade-distorting industrial policies.  These “structural issues” were not addressed in the Phase One deal. While Tai said these issues would be raised in USTR’s discussions with China, she did not commit to formal negotiations toward a “Phase Two” agreement.  Moreover, Tai underscored that the United States will also consider using all available policy tools — as well as creating new ones — to address China’s non-market policies.  While Tai provided no specifics on which tools may be used, likely to keep her options open, this could conceivably involve new U.S. actions under Section 301, the filing of new disputes at the World Trade Organization (“WTO”), as well as working with Congress to legislate new authorities under which USTR may take action against China.  That Tai declined to announce imposition of any major trade actions against China during her speech suggests that a renewed escalation of tensions in the U.S.-China trade relationship is not imminent. While U.S. trade enforcement actions against China are likely in the near term, they are not likely to be as disruptive or sudden as those of the previous administration.

Finally, a fourth element of the new U.S. strategy will focus on working will allies and like-minded countries to address issues of mutual concern relating to China, and to shape the rules for fair trade to facilitate “a race to the top” for market economies.  This will involve coordination with third-countries through bilateral, multilateral, and regional fora, including the G7, the G20, the U.S.-EU Trade and Technology Council, the “Quad” (U.S.-Japan-India-Australia), the Organisation for Economic Co-operation and Development (“OECD”), and the WTO.  In response to questions regarding the current status of the WTO, namely the partial paralysis of its dispute settlement function stemming from a U.S. refusal to agree to appointments to the WTO Appellate Body under the Trump Administration, Tai expressed the Biden Administration’s support for the organization and its reform, but emphasized that relying solely on WTO mechanisms to address China’s non-market policies had not been an effective approach in the past. Notably, Tai gave no hint of plans for major new trade negotiations in the Asia-Pacific as a counter to China’s assertiveness in seeking to join regional trade pacts.  When asked whether the Administration would consider joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (“CPTPP”) — which China recently applied to join and which is the successor to the Trans-Pacific Partnership (“TPP”) previously championed by the United States — Tai only said that the United States would continue to engage with partners to address common challenges.

Assessment of Past Approaches Suggested a New Strategy is Needed

Tai laid out the rationale for a new approach by describing what the review of U.S. trade policy had concluded were shortcomings of previous approaches.  She noted that, following China’s accession to the WTO at the end of 2001, the United States had pursued a dual track approach to addressing issues with China.  First, through senior-level dialogue, the United States regularly negotiated commitments that China would, among other things, implement market reforms and increase market access for U.S. exports.  She said that as time went on, however, it became increasingly difficult to obtain China’s commitments and follow-through on such issues under this approach.  At the same time, the United States also rigorously pursued enforcement of China’s WTO obligations by filing disputes against China at the WTO, often in coordination with allies.  Though the United States was successful in every such dispute, she said, the results were similarly disappointing, as China would modify discrete policies or regulations, but not the underlying non-market practices that were of real concern to U.S. businesses and policy makers.

Tai said that in more recent years, as China doubled down on its non-market policies, the Trump Administration turned to unilateral tools, such as Section 301 of the Trade Act of 1974.  This approach, which led to the imposition of U.S. tariffs and Chinese trade retaliation, culminated in the conclusion of the Phase One agreement in January 2020.  However, she said, while this agreement brought stability to U.S.-China trade relations, it did not meaningfully address China’s practices, and China continues to shape its economy through state industrial policies and massive subsidies.  Tai noted China’s policies affecting the global steel, agriculture, solar panel, and semiconductor industries as particularly illustrative.

Based on this assessment of the results of prior approaches, and the Administration’s conclusion that “China is not reforming,” Tai said that the Biden Administration has concluded that a new approach is needed to further U.S. strategic and economic objectives.  In addition to the specific actions she outlined, Tai said this approach would emphasize dealing with China “from a position of strength” by first and foremost strengthening the competitiveness of the United States at home through investments in infrastructure, incentives for accelerating technological innovation, human capital development, supply chain resiliency initiatives, and Buy American policies.  Her remarks suggested that negotiating expanded market access for business is not a the top priority in the Administration’s “worker-centric” trade policy.

Looking Ahead

Tai’s speech contained few additional details or specific timeframes for implementation of the new U.S. trade strategy toward China.  USTR is reportedly planning to issue a detailed report in coming weeks on the results of its comprehensive review of U.S. trade policy toward China.  In the meantime, U.S. companies with business interests in China should be on the lookout for upcoming announcements regarding USTR’s forthcoming exclusion process for Section 301 tariffs on Chinese exports, monitor the results of USTR’s engagement with China for signals that issues of concern to specific industries may be raised, and be prepared for potential U.S. trade actions against China — and possible Chinese government responses —in the near term.