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U.S. President Donald Trump and China's President Xi Jinping make joint statements at the Great Hall of the People in Beijing, China, November 9, 2017. REUTERS/Jonathan Ernst - RC16EDA92520
Up Front

Developing a mutually beneficial US-China economic relationship

The U.S.-China economic relationship has reached a critical juncture. Over the past year, the U.S. has imposed tariffs on $250 billion worth of Chinese imports and China has retaliated, raising tariffs on U.S. exports. At the G-20 leaders’ summit in November 2018, Presidents Trump and Xi agreed to resolve the trade dispute within 90 days—by March 1, 2019, though this deadline was just extended.

Until recently, the U.S. has supported China’s global integration based on a set of core expectations. Among these is the assumption that, as China benefited from the international economic system, including WTO membership, it would become a responsible stakeholder. In such a scenario, China was expected to work with the United States to, in the words of then deputy secretary of state Robert Zoellick in 2005, “sustain the international system that has enabled its success.”

However, this U.S. view of China has since evolved into seeing the country less as a partner and more as a competitor, culminating in the current bilateral economic tensions.

In this environment, the challenge for U.S.-China relations is to avoid fostering a relationship shaped only by competition and to identify where mutually beneficial outcomes are still possible. As detailed in the U.S. Trade Representative’s 2018 report to Congress on China’s WTO compliance issued earlier this month, the trade and investment front is one area where such progress may be possible. As my co-author Neena Shenai and I explain in our new policy brief, “The U.S.-China economic relationship: A comprehensive approach,” in seeking mutually beneficial outcomes, the U.S. should take a comprehensive approach. This would entail using a combination of actions the U.S. could undertake through bilateral negotiations with China, multilaterally through the World Trade Organization (WTO), and working with allies outside the WTO, as well via unilateral actions.

US concerns with China’s economic practices

U.S. concerns that underpin these bilateral trade tensions stem from specific practices endemic to China’s economic model that systematically tilt the playing field in favor of Chinese companies. China’s economic system relies on state-determined economic goals and the allocation of resources and finance to state-owned enterprises (SOEs) to achieve these goals.

In addition, China’s industrial policy, manifested in part through the country’s Made in China 2025 program, is increasingly aimed at self-sufficiency in emerging technologies and at odds with a trading system based on comparative advantage. China’s use of industrial policy to pick winners is expected to continue to lead to excess production and dumping overseas, including in the area of advanced manufactured goods as the economy gears up to produce robots, new energy vehicles, and batteries. The country’s evolving approach to industrial policy, strategic emerging industries, and space law is described in this 2017 paper by Tristan Kenderdine.

U.S. concerns about China’s economic model also arise at a time of increasing concern over China as a threat to America’s national security, particularly with respect to technology access.

Amidst all of this, clarity about the economic costs and benefits to the U.S. from trade and investment with China is important. The U.S.-China economic relationship delivers more benefits to the U.S. than is commonly understood. According to a 2017 Oxford Economics study prepared for the US-China Business Council, exports to China support around 1.8 million jobs in sectors such as services, agriculture, and capital goods. When the activities of affiliates of U.S. and Chinese companies in each respective market are factored in, the U.S. is shown to sell more to China than vice versa. However, China-U.S. trade has also led to job destruction in some U.S. industries—particularly low-wage manufacturing. Moreover, China’s economic practices regarding intellectual property (IP) and technology transfer risk harming the U.S. services sector and America’s knowledge economy.

The impact of China on the World Trade Organization

China’s economic system also places several acute stresses on the WTO. While China undertook significant commitments as part of its WTO accession in 2001, developments in the Chinese economic system make its WTO commitments increasingly difficult to enforce. In addition, China’s economic model presents new challenges that were not anticipated at the time of its WTO accession and are therefore not covered by WTO rules. Meanwhile, skepticism over the WTO’s capacity to deal with the magnitude of the China challenge—both in terms of the rules and the dispute settlement system—is on the rise.

While the WTO is not able to address all the issues that China poses, in the context of a comprehensive approach to the China challenge, the WTO remains central, contingent on strong U.S. leadership. The WTO offers the only global set of trade rules that both reflects core U.S. values and forms a baseline on which to build global support for a push back against Chinese economic practices.

Making progress in US-China economic relations

Finding a way to move U.S.-China trade issues onto a more sustainable, mutually beneficial footing will require action by both sides. For its part, China must comply with its WTO commitments and make certain reforms that will likely touch on areas of state control over the economy. The U.S. and China should seek a WTO waiver for any bilateral deal that includes WTO-inconsistent elements, in order to minimize harm to the institution.

As noted, the WTO should play a central role in framing the issues at play in the U.S.-China trade dispute. The U.S should develop a broader portfolio of WTO cases against China on the issues of technology transfer, IP, and SOEs especially since, in most cases where China has lost a WTO case, it has usually complied. (For evidence, see 2017 paper by Arie Reich; the “China Inc.” Challenge to Global Trade Governance by Mark Wu, and a 2018 Cato Institute policy analysis note by James Bacchus, Simon Lester, and Huan Zhu.)

More broadly, the US should use the WTO as a baseline against which to clearly demonstrate where China fails to comply with its WTO commitments and where WTO rules are unable to discipline Chinese trade practice, such that bilateral or unilateral action may be necessary.

The U.S. also needs a forward-looking trade policy to conclude free trade agreements (FTAs) with allies that raise the standards for trade, and, in this context, rejoining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) should be a priority. The U.S. also should thoughtfully control access to U.S. technologies through foreign investment and export controls, and effectively use WTO-consistent tariff policies to minimize the harm from Chinese economic practices on U.S. businesses.

In taking this multifaceted approach, the U.S. needs to stay true to its values and not accept short-term gains or “fig leaf” deals. Working toward a managed trade framework more akin to the Chinese model would undermine the WTO and be inconsistent with such core U.S. values as nondiscrimination, transparency, and rule of law. China agreeing to purchase more U.S. goods would also likely violate China’s most favored nation (MFN) WTO commitment and disadvantage U.S. allies. The U.S. instead should aim for long-term, market-orientated solutions, while also strengthening the global trading system and rule of law.

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