Lighthizer Says Section 301 Tariffs Not Enough; Select Committee Largely Seems to Agree

Lighthizer said that when it comes to strategic decoupling from China, "The only question" is "are you going to do it before or after it’s too late?"

He told the Select Committee on the Chinese Communist Party the evening of May 17 that they should recall that supply chain diversification started because the government added 25% tariffs on many Chinese imports.

"Why does Apple go to India" to build iPhones, Lighthizer asked, and answered: "There’s a sense this is an unstable relationship."

Two Republican members of the Select Committee asked Lighthizer if the U.S. should withdraw MFN status from China, with Rep. Ashley Hinson, R-Iowa, asking why China should be given such a "sweetheart deal."

Absolutely, Lighthizer said.

Rep. Jim Banks, R-Ind., asked: "What prevented us from repealing this during the Trump administration?"

Lighthizer replied: "These things are all an evolution. We began the process of decoupling about as radically as you could have done it, as the system would tolerate. But we’re past that now. Now we should take the next step." He said he thought it would have overwhelming support in a congressional vote, with only those who have free trade as a religion voting no. He did say as an aside that it would have to be phased in.

Committee Chairman Rep. Mike Gallagher, R-Wis., did not endorse such broad policy strokes, saying there are complexities to the issues. However, in his opening remarks, he said that the U.S. should reshore "our most critical supply chains like pharmaceuticals and munitions supplies. No one is talking about full decoupling from China. That’s a strawman propagated by the pro-engagement media."

Gallagher asked Lighthizer how the law on de minimis should be changed. "In my opinion, the Congress should completely get rid of the de minimis rule; and go back to what it was meant to be, that is to say $50 or $100 dollars.

"If you can’t repeal it entirely, and go back to a nominal amount, at least take it away from China," he said. He added that Mexico and Canada should not be eligible for de minimis either unless they stop accepting Chinese imports in bulk and then ship them to individual U.S. consumers from warehouses.

"We have no idea what’s in them. There’s no way to check any of it," he said of de minimis packages. CBP disputes that (see 2304240038), saying they do screen the packages, and detain goods for forced labor and counterfeit violations. CBP officials also note the average de minimis value is under $50.

Several Republicans, including the committee chairman, called for free trade negotiations with allies. "We also need a positive trade agenda that promotes collective resilience with our partners and allies and opens new markets for American companies," Gallagher said.

Rep. Darin LaHood, R-Ill., told Lighthizer he and many others feel President Joe Biden's caution on FTAs doesn't work to counter China.

Lighthizer disagreed. "I am not one who believes we need additional FTAs, or that we should help our allies like us more by giving U.S. jobs away."

Dusty Johnson, R-S.D., said that Lighthizer's skepticism about future FTAs surprised him. He said he believes that voluntary trade transactions with allies build prosperity for both the exporter and the importer.

Lighthizer continued to disagree, arguing that offering market access to countries such as Malaysia would only increase the bilateral trade deficit.

Instead, he argued, if you want to improve the ability of soybean farmers to export, USTR negotiators should say: "Either take our soybeans or I’m going to take back something you have now. This is exactly what we did with Japan." He described his argument to Japanese trade officials as: "Listen, you have a pretty good deal, you’re running a $70 billion [trade] surplus and we’re defending you!

"We got all the TPP agriculture stuff and it didn’t really cost us anything!"

Witness Eric Schmidt, former Google CEO and now chairman of the Special Competitive Studies Project, was more nuanced in his policy recommendations on trading with China. "There's plenty of trade with China that’s not strategic," he argued, and therefore should not be discouraged. He said the export restrictions from the administration on chipmaking technology were the right approach.

Rep. Andy Kim, D-N.J., said to Schmidt that Lighthizer is arguing for raising tariffs on all Chinese exports, and asked Schmidt if he has a different vision for more targeted actions. Schmidt said the U.S. should focus on artificial intelligence, semiconductors, biotechnology, quantum computing, 3D printing manufacturing and energy storage. "I don’t want to be dependent on the Chinese for any of these," he said.

Kim replied, "It sounds like there’s a real risk in pushing this type of separation too fast and too far."

Schmidt agreed. "All it would do is take non-strategic components and raise their prices for Americans," which would make U.S. manufacturing less competitive and not change the outcome of the competition, he believes.

Kim said the committee needs to think through the cost-benefit of its actions toward strategic decoupling. He told Lighthizer that he doen't think erecting barriers to most Chinese companies who want to have operations in the U.S. is the right approach.

"We’re not necessarily talking about steps for the United States to take to behave more like China," he said.

Rep. Jake Auchincloss, D-Mass., was the most forceful advocate for putting the brakes on government action to compete with China. He said that America's efforts to improve its own competitiveness "should not devolve into zero-sum protectionism under the guise of industrial policy."

He said that if the Chips Act approach spread to other strategic sectors, instead of advancing innovation, "what is more likely to happen is that industries will divert money from their scientists and their engineers to their lobbyists and their lawyers."

He pushed back on Lighthizer's description of "devastating impacts on American workers" from allowing China into the World Trade Organization. Auchinloss said the U.S. was responsible for 25% of the world GDP 30 years ago, and, even with China's rise, still accounts for that proportion of the world's production. He said the U.S. represents 60% of the G-7 countries' collective GDP, up from 40%.

That economic strength was not achieved by raising tariffs, he said, adding: "Now too many in Washington want to … follow China’s lead of command and control economics."

At the end of the hearing, Gallagher said it would be hard to grapple with these ideas, but said, "We are hoping to arrive at a framework for derisking that is strong, smart, bipartisan."