The emergence of China’s BYD as the world’s largest producer of electric vehicles in 2023, overtaking Tesla, should have rung alarm bells for the Biden administration.
The emergence of China’s BYD as the world’s largest producer of electric vehicles in 2023, overtaking Tesla, should have rung alarm bells for the Biden administration.Picture credits: BYD

US tariff war on China subverts WTO rules

By increasing tariffs for 14 Chinese products, including electric vehicles, the US has undermined its WTO commitment of refraining from unilateral actions against member nations. With such a precedent, other countries may feel encouraged to launch trade wars.

This May, the Biden administration unilaterally increased tariffs on 14 Chinese products, including electric vehicles, lithium-ion batteries, semiconductors, solar cells, select medical products, minerals, steel and aluminium, valued at $18 billion. These increases, between 50 and 100 percent, were introduced using Section 301 of the US Trade Act, 1974. The administration thus undermined its commitment to the World Trade Organization (WTO) to refrain from taking unilateral action against member nations. Most increases would take effect this year on August 1, while higher tariffs on semiconductors and lithium-ion batteries would be introduced from 2025 and 2026, respectively.

US Trade Representative (USTR) Katherine Tai argued the action was due to China’s “unfair technology transfer-related policies and practices that continue to burden US commerce and harm workers and businesses.”

Two issues arise from this action, namely, the raison d’être for its action, and the larger implications for the rules-based multilateral system that prohibits WTO members from taking such actions.

The manner in which the Biden administration launched this offensive against the US’s largest trade partner reflects a steep escalation of conflicts of interest between the two superpowers. One of the main factors is China has stolen a march over the US in key areas of technology, especially in green energy and semiconductors, that would be the drivers of the global economy for the next several decades.

Over the past few years, China has been focusing on the use of advanced technologies, especially in the sectors the US administration has targeted by raising tariffs to extend its dominance as an industrial power. The import of this approach was underlined by President Xi Jinping in 2023, when he emphasised the need to integrate scientific and technological innovation that could lead to the “development of strategic emerging and future industries, and accelerate the formation of new-quality productive forces”.

In the recent plenary session of the National People’s Congress, the centre of attention was on “new productive forces” and the “new three” sectors, namely, electric vehicles, lithium-ion batteries and solar panels, sectors in which Chinese producers had unparalleled dominance. The Chinese leadership has chosen these sectors to bolster its post-Covid growth.

The global domination of Chinese firms in the “new three” sectors has become a worrying sign for the US. Though it currently does not import electric vehicles from China, the emergence of China’s BYD as the world’s largest producer of electric vehicles in 2023, overtaking Tesla, should have rung alarm bells for the Biden administration. Besides, the US has had very high levels of dependence on imported solar panels, largely manufactured in China, but its imports of semiconductors from its rival have been declining. The growing presence of China in these areas is a potential threat to the huge investments the Biden administration has supported to develop domestic industries in these sectors.

The administration claims its ‘Investing in America’ agenda has attracted “more than $860 billion in business investments through smart, public incentives in industries of the future like electric vehicles, clean energy, and semiconductors”. Backed by support from the Bipartisan Infrastructure Law, CHIPS and Science Act, and Inflation Reduction Act, the US expects investments in these sectors to create new jobs in manufacturing and clean energy. Notwithstanding its deep resentment against industrial policies in the past and its proactive role to ensure government-backing for developing domestic industries became history the world over, the US has taken significant initiatives towards refurbishing its industrial base with huge state support. With its focus on increasing reliance on domestic production capacities, questions should be raised as to whether the US has taken a step back from globalisation.

Besides the ideological underpinnings of globalisation, which the US backed through what was popularly called the Washington Consensus, this process also had institutional support. The mandate of the WTO is to keep members committed to globalisation through strict adherence of rules, the basis of which is to ensure trade restrictions are not imposed unilaterally.

As mentioned at the outset, the US’s unilateral tariff increases were based on the provisions of Section 301 of its Trade Act, which authorises the USTR to investigate and take action against trade partners whose policies adversely affect American interests. This means the US Congress vested powers in the USTR to undertake trade retaliation based on its own investigation.

Action under Section 301 is a contravention of the WTO rules for dispute settlement. These rules stipulate no WTO member can take unilateral action against another in case the latter violates its commitments taken while joining the organisation. The dispute settlement body (DSB) of the WTO provides the institutional wherewithal to settle disputes and therefore, the US should have removed provisions like Section 301 from its statute book. However, the strongest economic power did not, despite losing a dispute brought against these provisions by the EU in 1999. Following this, the US gave an undertaking not to use Section 301 against any WTO member before the DSB determined if there was a violation. The US has now reneged on its undertaking through its latest action.

With the US setting this undesirable precedent, others may feel encouraged to take unilateral actions against trade partners. Does this set the stage for trade wars?

(Views are personal)

(bisjit@gmail.com)

Biswajit Dhar | Former professor, Jawaharlal Nehru University and
Vice President, Council for Social Development

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