Opportunities for U.S.-China Trade Cooperation
By William Reinsch
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Since the 2009 financial crisis there have been significant changes in the global economy as well as in the U.S.-China bilateral economic relationship as both nations focused on economic recovery. The global economy has been characterized by recovery but in most cases, slower growth generally and slower growth in trade.
After years of increasing bilateral trade, and increasing U.S. deficits, the global slowdown may be starting to affect the U.S.-China trade relationship. It is too soon to predict a trend, but there are indications the period of rapid growth in the bilateral deficit may be slowing.
These changes in trade parallel changes in the way our two countries have approached the trading system. For the United States, the world’s evolution to a global supply chain model assisted by rapid technological change has produced benefits for multinational corporations and their employees but at the same time has increased the number of Americans who see themselves disadvantaged by trade. That creates enormous political pressures to take care of our own first and to abandon the multilateral system we have spent 70 years creating and in effect running. One can see echoes of both in the statements of the new administration.
Conversely, China, which has been the world’s biggest beneficiary of globalization in terms of lifting millions of people out of poverty, has until recently taken a skeptical attitude toward a multilateral system it had no say in creating, but has begun to step up and portray itself as the potential new leader of the system. Look at Xi Jinping’s remarks at Davos and Chinese comments in Chile last April and one sees a government claiming a bigger seat at the table.1 Look at its Asian Infrastructure Investment Bank (AIIB) and One Belt, One Road (OBOR) initiatives and one can see a nation prepared to devote significant resources to promoting global economic growth (albeit in a way that provides major benefits to China).
This portends a change in the global pecking order that would be consequential if it actually occurs, and it raises the issue of the Thucydides Trap which has reemerged as a popular discussion topic as well as a genuine concern.2 It will really be up to the United States to defuse the tensions that will grow as China asserts itself.
Bilateral risks and challenges
Despite some leveling off at the macro level, the past five years have featured significant growth in the number of economic irritants that have plagued the relationship, both in terms of difficulties Americans encounter doing business in China and in terms of the impact Chinese imports have on the U.S. economy and jobs. This growth has exacerbated the dilemma facing U.S. companies doing business in China, and it has complicated policymaking in the United States.
The American business community initially strongly supported Chinese accession to the World Trade Organization (WTO) in the belief that it would increase their access to a potentially very large market and that WTO accession would push China to more fully integrate itself into the developed world trading system by accelerating internal economic reforms and, in former United States Trade Representative Robert Zoellick’s words, to become a “responsible stakeholder.”3 Signals sent by the top Chinese leaders at the time, Jiang Zemin and Zhu Rongji, encouraged that optimism.
Subsequent developments, however, have not fulfilled expectations. The pace of reform slowed during the term of Hu Jintao and Wen Jiabao, and Xi Jinping and Li Keqiang have launched new programs that pose significant challenges for foreign companies doing business in China.
These policies—which are not a secret—appear intended to extract the maximum amount of technology and know-how from Western companies, create viable Chinese companies to compete with them, support those companies through a range of discriminatory tactics, and eventually either force Western companies out of the country or confine them to a relatively small share of the Chinese domestic market while competing with them there, in the United States, and in third countries. The dilemma for many U.S. companies is that notwithstanding these limitations, they are profitable. Their share of the Chinese market may be small in percentage terms, but the economy is so large that even a small share is significant.
As a result, American companies remain in China making money but are increasingly unhappy at their situation while at the same time reluctant to protest to either the Chinese or U.S. government for fear of retaliation from the former.
At the same time, the impact of Chinese imports into the United States has also grown. Historically, debates about imports have followed a predictable path with protectionist forces, usually led by the affected industries demanding relief and the business establishment, along with most economists, arguing that the benefits of free trade outweigh the impact of imports on specific sectors and that job losses are due more to technology changes and the resulting productivity improvements than imports.
While the latter remains generally true, the widely read 2016 study by David Autor, David Dorn, and Gordon Hanson has reopened the debate by, for the first time, providing evidence supporting the argument that Chinese imports cost jobs.4 No one, including the study’s authors, has argued that its findings can be generalized beyond China, and there have been some suggestions that the impact is largely finished in any event. Regardless of whether the latter is true, there appears to be growing acceptance in business and academic circles of the study’s conclusions, which has, in turn, legitimized the already ongoing search for new tools to deal with the problem.
For space reasons, this paper will focus on multilateral tools, but both countries also have bilateral and unilateral options available as well.
Prospects for cooperation
Multilateral : One of the things we have learned about China is that it is uncomfortable being an outlier. Multilateral efforts that include the European Union, Japan, Australia, New Zealand, and other countries in the region have sometimes had more success in changing Chinese policy than bilateral efforts.
A current example of that approach is the G20 initiated Global Forum on steel overcapacity. Reaching an agreement will not be an easy task, but it has promise since a multilateral forum allows China to argue domestically that responsibility for the problem is spread widely, and it is easier to make concessions as part of a group rather than individually.
WTO : Similarly, in a more structured context, using the WTO for both negotiations and dispute settlement is another constructive, albeit lengthy, way to address issues that are bilateral but also impact others. With respect to negotiations, the failure of the Doha Round, in part but not entirely due to U.S.-China differences, has pushed negotiation proposals in the direction of plurilaterals. These “coalitions of the willing” offer an opportunity for further trade liberalization that, if successful, will draw other participants into a larger multilateral framework. The updated Information Technology Agreement (ITA-2) was recently concluded successfully, and conclusion of the Environmental Goods Agreement (EGA) awaits resolution of changes demanded by China. Conclusion of this agreement would be win-win-win: good for the environment, trade liberalization, and market access for Chinese and American manufacturers.
At the same time, China’s reluctance to make significant concessions in both these cases delayed the negotiations, created doubts about the eventual outcome, and convinced the United States to resist letting China join the Trade in Services Agreement (TiSA) talks for fear the same thing will happen again. In the absence of a more forthcoming Chinese approach, that same scenario is likely to play out in future plurilateral cases being considered.
Dispute Settlement : It appears that the Trump administration will use the WTO dispute settlement process aggressively and will continue the Obama administration’s crusade against “overreach” by the Appellate Body—rules and interpretation that go beyond the limits of what was negotiated in the Uruguay Round. China will probably reflexively oppose these efforts, but as the third most frequent respondent (after the United States and the European Union), it would have a lot to gain from the stricter interpretation of the rules the United States is advocating.
Multilateral Institutions : Washington has an opportunity to validate China’s growing footprint on the international stage by supporting its initiatives in the AIIB and OBOR and facilitate it by encouraging further reforms in the World Bank and International Monetary Fund that give it a larger voice.
Investment : Negotiations on a Bilateral Investment Treaty (BIT) are on hold, but there is doubt that the administration will resume them and also widespread skepticism in the American business community that it will be possible to reach an agreement that adequately addresses their concerns. An alternative is to try to restart the talks on a Multilateral Agreement on Investment that stalled in the late 1990s. A multilateral agreement would likely benefit both countries, but the political obstacles to it are as great now as they were 20 years ago. In addition, China will have to contend with growing congressional sentiment to further restrict its investments in the United States.
- Recognize, validate, and encourage Chinese global leadership: As noted above, recent statements by Xi Jinping indicate China’s desire to play a leadership role on the global stage. This is a potentially positive development that the United States should encourage and attempt to channel into constructive directions.
- Move disputes into a multilateral framework: As in the case of steel overcapacity, chances for resolution are greater in a larger group. In addition, many of the Chinese laws and regulations that American companies complain about are not so much anti-American as they are antiforeign. They may be affecting U.S. companies first and foremost, but others will be affected as well, and their governments need to deal with that.
- Launch a global campaign to improve global intellectual property protection : Intellectual property is the foundation of American competitiveness, and protecting it is the key to our ability to maintain our position of global economic leadership over the long term. However, IP theft threatens not only the United States but developed economies and individual innovators throughout the world, and China is the chief culprit. U.S. officials have given the speech many times, but there is still a need to enlist allies in a campaign to address theft and other unauthorized transfers more aggressively.
- Resume BIT talks: Ultimate agreement on a text may be unlikely, but the issues involved are important ones for both sides and deserve airing. The talks would also provide a framework for a broader discussion of trade and investment issues in a negotiating context, which could prove useful in light of the failure of the 100-day action plan announced at the Mar-a-Lago summit in April 2017 to produce significant results.5
While there may be some signs that macroeconomic conditions are improving, bilateral trade grievances have grown, and the political climate, at least in the United States, has grown markedly worse. It is particularly important that the two countries work harder to address their particular grievances in order to ensure that the political concerns do not grow and take control of the policy process.