The United States announced recently that it would begin negotiations with Japan on the steel and aluminum tariffs imposed by the Trump administration in 2018. These discussions will likely be informed by the October 30 agreement between the European Union (EU) and the US that ended a multi-year dispute on the same subject. In particular, the US-Japan agreement ought to account for one particular provision of the EU deal, and the problem it acknowledges. the EU-US deal places restrictions on those products that, while finished in Europe, use steel that originate from elsewhere – South Korea, Russia, or China.
This is an important provision because it directs the benefits of the agreement to the parties involved in the negotiation. It has befuddled some economists, who are accustomed to trade remedies oriented around bilateral trade flows rather than multi-country value chains.[i] Although in a Band-aid fashion, the provision addresses a reality of the modern trade environment that existing trade tools are ill-equipped to resolve. The distortive market practices of one country, namely China, are no longer contained to operations in or shipments originating from that country. They can no longer be addressed only through bilateral trade policies directed at that country.
China’s industrial policy operates through a wide-ranging, multi-dimensional apparatus that is designed to export its model and to circumvent measures designed to protect against its distortive practices. This apparatus orients around localization and third-country re-export in and through areas that do not maintain strong trade enforcement tools and may even receive preferential trade treatment.
These mechanisms are not necessarily unique to China. However, the scale of China’s distortions is unique and makes its use of localization and third-country re-export particularly problematic. The carve-out in the recent EU-US trade constitutes a laudable recognition of the problem.