Coming to Terms with China’s Rise

U.S. and Chinese negotiators may soon reach terms to ease the tariffs that have been uprooting supply chains and straining relations. That would be welcome news to beleaguered farmers, manufacturers, and consumers. But unless that deal compels Beijing to end its predatory technology practices and discriminatory commercial policies, détente will give way to intensified sanctions, collapse of the rules-based trading system, and the onset of an economic cold war. Depressingly, that outcome may be unavoidable, regardless.

That may sound over the top to those who think this dispute is about trade imbalances and the solution is for Beijing to purchase more U.S. commodities and lower a few market access barriers. President Trump might be tempted to accept that kind of deal, declare victory, and boast about how the trade war was easy to win. But that outcome would trivialize the compelling evidence of China’s transgressions, leave persistent structural problems unresolved, and provide an opening for Trump’s 2020 rivals to outflank him on the China issue.

Nor might that dire warning resonate with those who see Trump—and not Chinese policies—as the bigger problem. Certainly, Trump’s misinformed, zero-sum view of trade; his disdain for diplomacy and decorum; his grievance-laden, protectionist, nationalist narrative; and his contempt for global trade rules and institutions are the proximate causes of the trade war. But the United States and China were heading for a showdown long before Trump’s arrival and it is fanciful to assume U.S. policy will revert to historical norms once Trump is gone.

There is cause for doubt that any deal to end the trade war will be long-lasting.

The tone may change, and some tactics may, too, but for all the divisiveness Trump foments and exploits, his blunt force approach to the China relationship uniquely attracts broad bipartisan support. Many are willing to excuse Trump’s defects because in his confrontation with China they see a higher purpose. Whether to make amends for years of ignoring China’s transgressions or to preserve America’s technological edge or to reassert the primacy of Pax Americana and compel a rising China to stay in its lane, the shift in public opinion and among policymakers toward a more unyielding posture is unmistakable.

These perceptions, which have been nourished by a combination of fact, fallacy and hyperbole, didn’t emerge overnight. They were sewn in the wake of the Great Recession, grew roots, and proliferated over the course of the last decade. Today, China is regarded as a strategic rival—if not an imminent adversary—intent on leapfrogging the United States to the technological fore by any means necessary. And that is cause for doubt that any deal to end the trade war will be long-lasting.

Even if Beijing takes measures to end forced technology transfer, significantly reduce intellectual property theft, remove the artificial advantages afforded state-owned enterprises, fully implement its WTO commitments, and become more transparent about its laws and regulations, there is still the matter of the national security imperative of being at the technological fore.

As long as technological preeminence—with all of the first-mover advantages that implies—is the overarching eco-strategic objective of the United States and China, the existing rules and institutions cannot be relied upon to restrain either government from taking whatever measures it sees as best serving that goal. Realistically, neither Washington nor Beijing could be expected to refrain from industrial policies or protectionism if those measures were deemed essential to maintaining or attaining the inside track in the technology race.

Consider that the U.S. government has imposed a de facto ban on telecommunications gear produced by the Chinese company Huawei because of concerns that it will channel sensitive information to the Chinese government. Theoretically, that’s a legitimate concern. If the infrastructure through which information and data are transmitted is susceptible to cyberespionage, cybertheft, or other forms of cybermalfeasance, then governments are justified in taking measures to mitigate those risks. But the U.S. government’s approach, which is to prevent any Huawei gear from being deployed in the U.S. 5G infrastructure build-out, and to use its leverage to compel other governments around the world to ban Huawei gear, is too absolutist to be considered “mitigation.” Eradication is more the theme.

The World Trade Organization is not equipped to handle this problem. Sure, China could bring a case against the United States for discriminating against Huawei products. The United States could then defend its actions by invoking what is known as the “national security exception,” or it could just ignore the WTO altogether, adopting the posture that the United States will no longer submit to rules that limit its options for responding to national security threats, real or otherwise.

By banning Huawei gear and putting pressure on third countries to do the same, the United States is effectively saying that a huge swath of 21st century trade—an estimated $12.3 trillion in sales activity across multiple industries involved in developing 5G infrastructure and producing 5G enabled products by 2035, according to the Congressional Research Service—will not be subject to the disciplines of the global trading system. If that doesn’t consign the WTO to insignificance, the ensuing race to carve up the world into spheres of influence based on competing 5G standards will.

In what will look like a replay of the Cold War, Beijing and Washington will compete for the loyalties of the rest of the world by offering carrots and threatening sticks to countries to adopt their respective 5G standards. Dividing the world into these technology blocs will deprive the technology ecosystem of global economies of scale and open the door to bloc-based tariffs and other forms of protectionism, making the world a poorer place. Creation of the open global trading system induced a steady climb in global exports from 4% of GDP in 1947 to 26% of GDP in 2015. Erecting tariffs and non-tariff barriers through that system would undoubtedly cause a decline in global trade and output.

In an era when national security has been invoked frivolously as an excuse for protectionism, it is easy to forget that there are legitimate national security interests to protect. The rules and institutions developed under U.S. leadership after World War II, which fostered unprecedented economic growth, wealth creation, and relative peace, emerged not because the United States was an altruistic, benevolent giant that subordinated its own interests to the global order, but because a stronger Europe, a stronger Japan, and a stronger world capable of purchasing U.S. products and resisting Soviet expansionism was very much in America’s national security interests.

If the United States and China are going to adhere to international rules going forward, they will have to be convinced that doing so is, first and foremost, in their own interests. That will require new rules, and it will be no easy task.

Daniel J. Ikenson is the director of Cato’s Herbert A. Stiefel Center for Trade Policy Studies, focusing on WTO disputes, regional trade agreements, U.S.-China trade issues, steel and textile trade policies, and antidumping reform.