Commentary

Tough Love: Building a Durable Sino-U.S. Trade Relationship

The recent flurry of activity on the U.S.-China trade front has caused consternation on both sides of the Pacific. Has the Bush administration changed course? Are we entering a new phase in the trade relationship? Is a trade war imminent? No, yes, and not at all.

In early February, the United States formally initiated a complaint within the World Trade Organization against certain Chinese tax laws, alleging that those laws provide subsidies to Chinese exporters and encourage consumption in China of domestic products at the expense of imports.

In late March, the U.S. Commerce Department levied preliminary countervailing duties against imports of Chinese coated paper, breaking with its informal 22-year policy of not applying the U.S. Countervailing Duty (CVD) law to imports from so-called non-market economies.

In April, the United States launched two new WTO cases, one alleging inadequate protection for American intellectual property rights’ holders under Chinese laws and the other concerning market access barriers for copyright industry products.

Incredulity and anger have been expressed by Chinese officials.

But when the commercial value of a bilateral trade relationship nearly triples in a mere five years, from a substantial $121 billion in 2001 to an immense $342 billion in 2006, there are going to be disputes. When that relationship is characterized by a large and growing current account imbalance, the spats can become politically charged. Defusing the charge sometimes requires the serious dedication to resolution that a formal WTO complaint can inspire.

The Bush administration has been a bulwark against a more provocative U.S. Congress that continues to threaten some very bad legislation. The administration has taken a big picture approach to the bilateral relationship, refusing to indulge every protectionist whim—although its record is not perfect, particularly with respect to U.S. textile and clothing restraints.

While some may view the recent trade actions as a sign that the administration has changed tack, the more plausible assessment is that the administration is trying to continue shielding the relationship from a tempestuous U.S. Congress. By bringing the WTO actions and by imposing preliminary CVD duties, the administration can probably keep Congress on the sidelines longer.

The Bush administration has not changed its strategic assessment of the trade relationship. Nor has it really changed course. Its recent actions are apropos of the logical next phase in a vitally important relationship. And that should come as no surprise to Chinese officials, who have been kept more than adequately apprised of U.S. political developments and their tactical implications through high-level exchanges with U.S. cabinet members. The 2006 President’s Trade Report to the Congress expresses, in no uncertain terms, that the honeymoon period of the relationship is over and that WTO complaints would be forthcoming if adequate progress was not made in certain areas.

So, the relationship has entered a new, more “mature” phase. The United States has had more disputes with each of its other mature trading partners—Canada, Mexico, Japan, and Europe.

Bringing formal complaints at the WTO and invoking measures under permissible domestic trade laws are not really extraordinary actions that require extraordinary conclusions. There is nothing particularly provocative or unjustified in the Bush administration’s assertion of U.S. rights in its WTO complaints. This is how WTO members resolve their differences after informal negotiations prove unsuccessful and domestic political pressure for resolution builds. And the CVD case could help convince U.S. policymakers that China should be treated as a market economy in antidumping cases, too.

The three WTO cases are all about compelling China to open its market further in accordance with its commitments and, with the exception of part of the tax laws dispute, are not really about efforts to close the U.S. market. That is not to say that the U.S. positions that China is in violation of its obligations are correct. Only time will tell.

Many wish to characterize this new chapter as the beginning of trade war. That need not—and in all likelihood will not—be the case.

China is in no position to retaliate. Such actions, apart from being economically damaging, would find no support within the WTO. China is simply not entitled to retaliate, even if it wished to, because none of the U.S. actions constitutes a violation of U.S. WTO obligations. If China were to retaliate without the good graces of the WTO, it would be in violation of its own WTO commitments. That is a precedent China is unlikely to want to set because many other governments around the world would like just the excuse to suspend their own obligations to inhibit Chinese imports.

Official anger and incredulity aside, this new phase of the trade relationship is likely to lead to greater mutual understanding, a reduction in U.S. congressional pressure, and a stronger trade relationship.

Daniel Ikenson is associate director of the Center for Trade Policy Studies and coauthor of Antidumping Exposed: The Devilish Details of Unfair Trade Law (Cato Institute, 2003).