By Clay Chandler
August 5, 2017

It has been widely reported that President Trump plans to invoke Section 301, an obscure provision of the U.S. Trade Act of 1974, as the opening salvo in a more confrontational approach to dealing with China.

The Associated Press says Trump wants to “punish China for failing to crack down on intellectual property thefts and forcing U.S. and foreign companies to share their technology in return for access to the vast Chinese market.” The New York Times and Washington Post report that Trump will invoke Section 301 to order an investigation by the U.S. trade representative into unfair Chinese trade practices. That would start the clock on a process that under which Trump could hit China with sanctions, including tariffs, in a matter of months.

Never heard of Section 301? It’s a golden oldie, for me triggering a pang of nerdy nostalgia for the 1990s when I covered the Clinton economic team for the Washington Post. Clinton and his advisers found Section 301 a useful weapon in their battle with that era’s trade bogeyman, Japan. They saw the provision as a kind of all-purpose legal loophole allowing the U.S. president to claim authority to impose whatever measures necessary, including tariffs, to remedy unfair trade practices—regardless of other U.S. commitments to global trade law.

Clinton used the provision to justify tariffs on Japanese imports of motorcycles and steel, and tiptoed right up the brink of issuing a 100% import tariff on Japanese luxury autos.

As Reuters notes, Section 301 investigations haven’t resulted in trade sanctions since the creation of the World Trade Organization in 1995. But in a way, threatening Japan with sanctions succeeded. Eventually large Japanese manufacturers like Toyota and Honda came to the conclusion that if they wanted to continue selling stuff to American consumers, they’d have to make said stuff in American factories employing American workers. These days, three of every four Japanese cars and trucks sold in the United States are manufactured in North America.

Is Trump simply lifting a page from the Clinton playbook? The recent pledge by Foxconn, the leading maker of Apple iPhones, that it would open a $10 billion factory in Wisconsin, seems broadly consistent with that interpretation.

But there are at least two reasons to doubt a Section 301 bluff will work with China. One is that China has developed a much larger, more sophisticated manufacturing ecosystem than Japan’s in the 1990s. My Fortune colleagues and I have been making this argument for much of the past year. (We hope to highlight some of the reasons we think China’s manufacturing ecosystem is so unique and so durable at this year’s Fortune Global Forum in Guangzhou.)

But don’t take our word for it. Bloomberg this week has a brilliant short video explaining why opening a Foxconn factory in Wisconsin won’t be enough to bring manufacturing jobs back to America.

A second reason for skepticism is that, in recent months, both the U.S. Congress and the Chinese government have grown wary of Chinese investment in the United States. Many proposed Chinese investments have languished while awaiting approval from Congress’s Committee on Foreign Investment in the United States. Meanwhile Beijing in recent weeks has tightened restrictions on Chinese companies expanding overseas.

In any case, Trump may abandon the idea of using Section 301 if China signs on to a United Nations resolution imposing new sanctions to pressure North Korea to end its missile and nuclear weapons program. Several reports, including this one in Politico, suggest a deal along those lines is in the works.

That may come as a relief to many U.S. companies operating in China, who fear that U.S. sanctions would trigger immediate retaliation by Beijing, and fear the risk of a trade war.

Clay Chandler
@claychandler
clay.chandler@timeinc.com

SPONSORED FINANCIAL CONTENT

You May Like