Commentary

Leveling the Playing Field with China

In recent months, the Trump administration has intensified its trade war with China. Some have suggested there is an impending “economic cold war” between the United States and China, with an effort to “decouple” the world’s two biggest economies. While this kind of talk can become a self-fulfilling prophecy, such an outcome is not a foregone conclusion at this point. With a change in approach, it is still possible to find a peaceful solution.

The administration is right to criticize China for its relatively closed markets. China’s wealth has grown significantly in recent decades, yet some of its trade practices remain rooted in its past as a fairly poor country. At this point, it is fair to ask China to take on trade commitments commensurate with its rising income level.

The problem lies with the administration’s strategy. It has imposed tariffs on almost half of Chinese imports, which has led China to impose retaliatory tariffs on nearly all U.S. imports. There is no sign of either side backing down. If the administration’s goal is to open up China’s market, its strategy is not working, and it is time to consider alternatives.

If the Trump Administration really wants to convince China to move in a more market-oriented direction, it needs to understand that unilateral tariffs and bullying will not work.

China is already doing some liberalizing on its own. For instance, China is slowly opening up more sectors for foreign investment and lowering its tariffs.[1] Chinese officials have promised to continue with more of this type of liberalization.

But China needs to extend its efforts beyond these narrow issues and make broader structural improvements to its economy. China should reform its state-owned enterprises, rein in its subsidies, pare back its various restrictive domestic regulations, and also improve its intellectual property protection, including efforts to address the cyber-espionage that has been well-documented in the Office of the U.S. Trade Representative’s Section 301 Report.

The Trump Administration should encourage China’s efforts in these areas, but unilateral tariffs will not help. They come across as “bullying” to China, to which China reacts badly.[2] Just as importantly, tariffs will undermine economic well-being in both economies.

One good alternative for the Trump administration is to work with other nations and file a wide range of WTO complaints against China. China’s compliance record in WTO disputes is better than many people realize, and there are a number of issues for which complaints have a good chance of success. Intellectual property protection and subsidies are two promising areas in this regard.

For other issues, clearer and more explicit obligations are needed — either within the existing WTO framework or though bilateral/multilateral negotiations. The TPP was one avenue to pursue this, but bilateral or multilateral efforts could also work.

In contrast to those approaches, the Trump administration’s latest idea is to look for ways to pressure certain allies into taking collective action against China’s practices. The most recent initiative of this kind is a provision in the new US-Mexico-Canada Agreement (USMCA) that creates hurdles for Canada and Mexico if they want to negotiate a trade deal with China. Article 32.10 of this agreement requires a Party to inform other Parties of the intention to negotiate a trade agreement with a non-market economy and provide the full text of the agreement for review. If such an agreement is negotiated, other Parties may terminate the USMCA and negotiate a new bilateral agreement to replace it. The USMCA provision does not mention China by name, but it clearly targets China.

While some may worry that this provision completely eliminates the possibility of an FTA with China, it could actually offer an opportunity. The Trump Administration seems reluctant to engage in a real negotiation with China, through which each side gives something and gets something. But rather than give in to the U.S. pressure here, Canada may be better served by demonstrating to the Trump Administration how to negotiate with China in order to address some of the trade practices in question. Australia and New Zealand have already concluded trade deals with China. If Canada could do so as well, some people in the U.S. government might take notice. The conditions set out in Article 32.10 could make the negotiating process a little bumpy, but they do not prohibit a Canada-China deal.

If the Trump Administration really wants to convince China to move in a more market-oriented direction, it needs to understand that unilateral tariffs and bullying will not work. China may be a difficult negotiator, but it has made concessions in trade agreements before, and it would be willing to do so again. [3] Overall, China has more respect for the international rule of law than people realize, at least in the area of economic relations. It is also looking to play a bigger role in the global economy. Instead of fanning the flames of a trade war, let’s use this opportunity to move China in a more market-oriented direction.

Notes:

[1] http://gss.mof.gov.cn/zhengwuxinxi/gongzuodongtai/201809/t20180930_3033435.html

[2] https://www.bloomberg.com/news/articles/2018-10-09/china-commerce-minister-discusses-u-s-trade-dispute-full-text

[3] https://www.ft.com/content/6f1bd226-cb67-11e8-b276-b9069bde0956

Simon Lester is the Associate Director of the Herbert A. Stiefel Center for Trade Policy Studies at the Cato Institute. Huan Zhu is a Research Associate at the Stiefel Center.