How to hold China accountable without shooting US in the foot
But cutting off trade and investment with China is more complicated than most want to admit.
After a controversial and protracted negotiation led by the United States, China joined the World Trade Organization in late 2001. As part of China’s admission to the WTO, Beijing agreed to cut a number of tariffs and made some market-oriented reforms. China also agreed to abide by a set of rules governing trade and investment. While virtually all of China’s rise is due to its internal reforms since the late 1970s under Deng Xiaoping’s leadership, Beijing’s accession to the WTO symbolized the country’s integration with the rest of the global economy. American firms took advantage of this market opening. The U.S. exports an enormous amount of goods and services to China, which supported about a million American jobs in 2017. Cutting off trade and investment entirely with China could be devastating for certain firms that cannot meet the demands of an increasingly wealthy and growing population.
To be sure, Beijing has fallen short on many of its WTO commitments, and Washington has legitimate complaints about some of Beijing’s trade policy practices, which were documented in the U.S. trade representative’s 2018 report that laid the groundwork for the Trump administration’s trade war. The crux is that China abuses intellectual property and forces the transfer of technology from American firms to Chinese joint venture partners as a cost of doing business in China. More nefariously, government-sponsored hacking, intrusions into commercial networks, and theft of trade secrets have occurred. China also provides massive industrial subsidies to certain state-owned enterprises, which hurts American firms’ ability to compete on a level playing field.
While the Trump administration may have diagnosed the problem, its prescriptions miss the mark. The data are clear: Numerous studies have confirmed that Americans are paying the president’s tariffs on imports from China. Even after the so-called phase one deal between the U.S. and China, tariffs on imports from China are about six times higher than when the trade war began. These tariffs have made certain American businesses, reliant on imported inputs, less competitive in an increasingly globalized economy and strained family budgets. Even before the spread of COVID-19, manufacturers in the U.S. were experiencing a slowdown that economists believed was driven in part by the economic costs and uncertainty of the president’s tariffs.
Likewise, to meet the purchase targets included in the phase one deal, China is relying on state-owned enterprises. This outcome is precisely the opposite of what the U.S. claims it wants from China, which is more firms acting on market-oriented terms, not propped up by the government.
Instead of self-defeating and sclerotic tariffs that weaken the U.S., the moment calls for a responsible hawkishness, one that recognizes the problems with Beijing’s commercial practices but doesn’t hurt ourselves in the process. What might such a policy entail?
First, the U.S. should rejoin the Trans-Pacific Partnership to give countries in Asia an alternative to China. Beijing was the biggest beneficiary of President Trump’s ill-advised decision to abandon the TPP.
Likewise, the U.S. should lead a large coalition of like-minded nations to pursue dispute settlement against China at the WTO. The WTO is the appropriate venue for resolving trade disputes, and it has a decent though not perfect record of disciplining Chinese trade practices that violate various agreed-upon rules.
The U.S. recently bolstered its ability to monitor and block foreign direct investment utilizing the Committee on Foreign Investment in the U.S. If Chinese firms with ties to the Communist Party are trying to invest in American firms that produce sensitive products or those with a national security nexus, the committee can be used to block the proposed investment. Such actions need to be taken in a consistent, narrowly tailored, and transparent manner to ensure technologies and trade secrets are not transmitted back to the Chinese government. Utilizing the Committee on Foreign Investment in the U.S. as a protectionist cudgel will certainly backfire.
These are just some of the tools of economic statecraft that Washington can deploy to counter Beijing’s troubling commercial practices. Humility is necessary; understanding the limits of what Washington can and cannot control is important. Ultimately, the most important thing the U.S. can do is outcompete China in the 21st century, but no country has ever become more competitive by erecting new barriers to trade and investment.
Image credit: Ascannio
