Negotiating Trade with China

The meetings today and tomorrow between President Trump and President Xi in Florida are unlikely to delve deeply into substantive policy issues.  Rather, the focus will be on establishing a good relationship between the two leaders, in order to lay the foundation for future cooperation.  Trade and security tensions between the two countries will be discussed, but probably only in broad terms.

But difficult talks on the substance of these issues are inevitable. The question is how to approach the disagreements most productively.

On trade, there have been long-standing concerns from U.S. industry about a number of Chinese trade practices (including allegations of intellectual property theft, high tariffs, discriminatory regulations, non-commercial behavior by state-owned companies, and overcapacity in the production of steel and other goods).  To date, the U.S. government approach to addressing these concerns has consisted largely of litigation at the WTO, trade remedy cases (mainly anti-dumping and countervailing duties), and high-level dialogues between the two governments, but these actions have failed to resolve most of the concerns.  Litigation at the WTO can be helpful, but only in those areas where the WTO has rules, and there are many gaps in those rules; trade remedy cases impose tariffs that harm Americans, and do little to resolve the underlying problems with Chinese trade practices; and the dialogues tend to be broad, vague, and unenforceable.

The Trump administration has hinted at adding new unilateral trade restrictions into the mix (beyond trade remedy cases), but such measures are likely to lead to retaliation by China, which could escalate the current tensions into a tit-for-tat trade war.  If that happens, the big losers will be ordinary Americans and Chinese who would feel the brunt of any tariff increases.

In a Free Trade Bulletin published yesterday, my colleague Huan Zhu and I argue that a better approach to these issues would be to sit down with China and negotiate a formal trade agreement to deal with as many of these issues as possible.  For example, with regard to existing tariff levels, the two countries could agree to an across the board lowering of tariffs, a standard feature of trade agreements.

There will be a number of political obstacles to such a negotiation, and don’t expect any big announcement about it at the Trump-Xi meeting.  But as the U.S. government develops its trade policy over the coming months, it may begin to realize the limitations of the alternative approaches to addressing concerns about China.  Trump administration officials have emphasized that the trade deals it negotiates will be bilateral, rather than multilateral.  Why not try to negotiate a bilateral agreement with China, one of our biggest trading partners, and the one that is the source of so many trade concerns?

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