Yesterday, President Biden's nominee for U.S. Trade Representative, Katherine Tai, testified at a confirmation hearing before the Senate Finance Committee. (Tai is very likely to be confirmed, and the hearing was not particularly contentious). Many of the questions she was asked were about the specific trade interests of the Senators' constituents, but there were also some broader systemic questions, including a couple on China. In this post, I'll mention two questions on China trade issues where I found Tai's answers interesting (once in a good way, once in a bad way).
First, Senator Bennet of Colorado asked the following (starts at 2:34:43)
President Trump had a go it alone approach … , launching trade wars around the world that alienated our allies and undermined an effective global response to China.
At the same time, China was strategically investing in the Mediterranean and African countries, expanding its reach in the South China Sea region, and the One Belt, One Road initiative. While China is an important market for agricultural products …, they failed to live up to their agreements.
How will you work with partners and allies, and the broader administration, to hold China accountable for its mercantilist and predatory practices. I should say the Chinese Communist Party, not the Chinese people, but the Chinese government. You mentioned earlier in an answer to one of my colleagues that there had been a well worn path trod by former trade ambassadors, sort of expecting China to somehow adopt our economic system. That's clearly not going to happen. What tools are available to us, and maybe even beyond the trade tools, to be able to push back and ensure that we continue to lead?
Here was Tai's answer:
Again, I feel like this is part of the most consequential questions that we collectively as servants in the US government will need to figure out. …
I guess there are a couple ways that I would think about it. One is, rules that China has clearly signed up for, and agreed to. Those may be agreements that it has struck with trading partners. They may be the WTO rules. So rules that they have taken on as a member of a larger organization. And when we are in that area, we have designed for use enforcement tools to engage with the Chinese and hold them accountable. You promised to do X, you need to deliver on X.
There are also a lot of areas that are gray areas, where the rules are not clear or where we don't have rules yet. And I think that in that area, in terms of working with others, we have a couple options. One is, we create and we craft new rules, to address the gray areas. Separately, I think that that provides us with a lot of opportunity as well to think strategically about how to respond to the strategies that China is pursuing.
This combination of enforcing existing rules and negotiating new rules is pretty close to what I argued for with my colleagues Jim Bacchus and Huan Zhu in this paper. It may not be attention-getting like former President Trump's tariffs and tariff threats, but it could actually work to prod China to liberalize a bit more than it did as part of its accession to the World Trade Organization. (Trump's tariffs, by contrast, haven't had much impact on Chinese trade practices).
Second, Senator Casey of Pennsylvania asked this (starts at 3:03:52):
Let me move, secondly, to China. … We face just a myriad of challenges when it comes to the Chinese government, especially. We've got to engage in coordinated efforts to address a number of issues. Market distortions is one. Second, subsidies. And third, anti-competitive behavior that the Chinese government engages in. Through our trade subcommittee in the finance committee in the last Congress, Senator Cornyn and I working on a range of issues posed by the Chinese government, including the Belt and Road Initiative, extraterritorial censorship, and market access challenges. These are of course cross cutting issues, which will require both coordination and cooperation. You have … significant experience in this regard. Can you discuss your observations with respect to the evolution of tactics and strategy employed by the Chinese government in the trade and economic space, and how USTR can work in coordination with the interagency to combat some of these efforts to support domestic production and competition?
Here was Tai's response:
I've watched those hearings that you and Senator Cornyn have put on here in the Senate Finance Committee, and appreciate the levels of expertise and interest that you have demonstrated with respect to our China trade and competition issues and challenges.
… I think that what I would say is that, with respect to the nature of the Chinese challenges, I think it's clear that when we as Americans, with our economic traditions, look at the Chinese economy, what we see is an extremely formidable competitor, where the state is able to conduct the economy almost like a conductor with an orchestra, whether or not through companies that are officially state-owned, or just companies that are part of the Chinese economy. I think that traditionally, we, in our system, have been very trusting of the free market, of the invisible hand that Adam Smith described, to try in terms of the market forces taking care of our economy and global competition. And I think that what the most recent years has taught us is that we need to revisit how we conduct our economic activity, our cooperation and our trade policies, not to become China, but how to be true to ourselves and our traditions and be more strategic, knowing the quantity and the strategy and ambition we are up against.
With regard to the Chinese state "conduct[ing] the economy almost like a conductor with an orchestra," there's a recent Foreign Affairs article with a more nuanced take on how things work in China. (Here's one interesting observation: "In some ways, WTO membership reinforced the central government’s inability to prevent local governments from interpreting higher-level directives to serve their own interests.") But more broadly, the issue of state intervention in the economy is an area where the Biden administration makes me nervous. There are a lot of people in the administration who are skeptical of free markets, and want to shift U.S. economic policy towards more intervention. They don't necessarily want to become China in terms of economic policy, but they do want to move a bit in that direction. It won't be the U.S. Trade Representative's Office leading the charge, because the responsibility falls mostly to other agencies, but Tai's statement is another indication that various kinds of industrial policy are likely to be on the table. I don't think any of it will work out the way proponents hope, but that's not going to stop them from trying. Under the Trump administration, we had a lot of good lessons on the failure of tariffs and protectionism. Under Biden, we may have the same with industrial policy.