How To Deal with China’s Trade Practices

In a recent Washington Post op-ed on China’s trade practices, Fareed Zakaria concludes by saying: “Getting tough on China is a case where I am willing to give Trump’s unconventional methods a try. Nothing else has worked.” In my view, he gets a number of things wrong in this piece, but he does raise some important issues, and it’s a good jumping off point for a discussion of how China actually behaves in its trade policy, and what the possible responses are.

Zakaria’s main claim is that, “on one big, fundamental point, President Trump is right: China is a trade cheat.” Many people say this, or some variation of it. But what exactly does it mean to be a “trade cheat”?

What Zakaria seems to have in mind is that China is breaking some World Trade Organization (WTO) rules or taking actions that undermine them. Zakaria refers to the recent Section 301 report by USTR, which he says finds evidence that China “uses formal and informal means to block foreign firms from competing in China’s market.” According to this report, he explains, “the Chinese government has increased its intervention in the economy, particularly taking aim at foreign companies,” and he notes that “[a]ll of this directly contradicts Beijing’s commitments when it joined the World Trade Organization in 2001.” Later, he elaborates on the Chinese behavior at issue:

Look at the Chinese economy today. It has managed to block or curb the world’s most advanced and successful technology companies, from Google to Facebook to Amazon. Foreign banks often have to operate with local partners who add zero value — essentially a tax on foreign companies. Foreign manufacturers are forced to share their technology with local partners who then systematically reverse engineer some of the same products and compete against their partners. And then there is cybertheft. The most extensive cyberwarfare waged by a foreign power against the United States is done not by Russia but by China. The targets are American companies, whose secrets and intellectual property are then shared with Chinese competitors.

The difficulty here is that some of this behavior violates WTO rules, while some may not, as WTO rules don’t cover everything. There’s a good case to be made that the forced technology transfer imposed on foreign investors does violate the rules; but some of the cybertheft issues may not be covered.

For the behavior that is covered by WTO rules, the answer is easy: File more WTO complaints. As my colleague Huan Zhu and I have argued, WTO complaints against China are pretty effective. The system is far from perfect, and sometimes governments do not comply immediately and fully, but overall it works and China complies as well as other governments do.

But what about areas that are not covered by the rules? Can China be “cheating” in a more general sense, even if it is not breaking any specific rules, by not behaving “fairly”? One key area, which Zakaria does not mention, is state-owned enterprises (SOEs), which China has a lot of and which often don’t behave in a market-oriented way. Unfortunately, the WTO does not have extensive rules on SOEs. The best approach here is to add new trade rules on SOEs, so as to require these entities to behave in a manner consistent with commercial principles. The Trans Pacific Partnership has some detailed rules on this, and although China was not a member of the TPP, there was the possibility that it would join, or that the SOE rules in there could be used as a model for applying such rules to China in a different trade agreement. But the Trump administration pulled out of the TPP, and the opportunity for the administration to push this in relation to China may have been lost for now.

A similar issue is that China’s tariffs are higher than U.S. tariffs, which is something the Trump administration has complained about. This is true, but it’s within WTO rules. The reason China’s tariffs are higher is that China was fairly poor during the period (1986-1999) when it was negotiating to join the WTO, and therefore it was allowed to take on fewer commitments in some areas. As part of its WTO commitments, China did agree to lower its tariffs from existing levels, but not by as much as wealthier countries had done over the years in a series of trade negotiating rounds.

Since then, of course, China has become wealthier, although it is not nearly as wealthy as the United States. There is a case for China lowering its tariffs further now, but the way to pursue that would be another negotiation. Keep in mind that although China had fewer commitments on tariff reduction, it did take on additional commitments in other areas (so-called “WTO-plus” commitments), so a negotiation of this sort might involve a mix of adding new obligations on China and removing some of the existing ones. That’s probably the most politically viable approach to this issue.

Putting all this together, there should be two components to efforts to address China’s behavior in trade policy: (1) File more WTO complaints, and (2) sit down with China to negotiate new rules (on issues not yet covered, and so that China takes on more liberalization commitments in the areas that are covered). Both of these will work better if the U.S. joins with its trading partners in a coordinated effort. 

I don’t mean to make this sound easy. It would be a lot of work. But Zakaria is missing the mark when he says, “Previous administrations exerted pressure privately, worked within the system and tried to get allies on board, with limited results.” When previous administrations brought WTO complaints, the results were usually pretty good. But there were a lot of possible complaints that were not filed, and the negotiating efforts were fairly limited. Perhaps there were reasons for this, such as a reluctance to press China on trade because the U.S. wanted China’s help on foreign policy issues. But it sounds like now the Trump administration is elevating trade concerns to the fore. If so, there are plenty of opportunities to press China within the system, or to expand and improve that system. 

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