That China’s trade and economic practices pose real challenges to the existing trading system is a view deeply held within the US administration and has traction in the US Congress and the private sector. The China challenge is both economic and strategic. China is using its growing economic weight to alter trade and investment rules in its favour and to generate regional outcomes often contrary to US interests. China is also using its economic clout to punish countries that act against its interests.
The China challenge is difficult to address because the trade and investment practices that concern the United States are products of the Chinese political system. China’s consolidation of and support for state-owned enterprises (SOEs) provides the Chinese state with tools of economic management, and thus the means to carry out its geostrategic goals. Where SOEs are not involved in overseas trade and investment activities, China’s private sector is being harnessed to state-driven goals.
This underscores the reality that addressing China’s trade and investment practices cannot be solved merely by China buying more stuff from the United States.
The United States so far has pursued only limited trade action against China in the form of steel and aluminium tariffs pursuant to Section 232 of the Trade Expansion Act of 1962. But relying on tariffs alone is insufficient. Moreover, relying on Section 232 meant that the administration had to develop a national security justification for them. Such a claim is not particularly credible. Chinese steel imports account for 3.5 per cent of US imports, while almost 70 per cent of US steel imports are from its allies and FTA partners. As a result, the tariffs’ main impact is on key US allies and partners such as the European Union (EU), Canada, Mexico and Japan. Trump’s willingness to offer exceptions from such tariffs for reasons unrelated to national security — such as the conclusion of the NAFTA renegotiation — further undermines the administration’s national security claims.
By relying on a broad and seemingly baseless national security exception, the United States has potentially seriously undermined international trade rules and has given a green light for other countries to do the same.
The Section 232 process also revealed the core of Trump’s approach to trade issues: using the threat of tariffs to extract concessions from other governments. The costs of this approach are clear: the domestic economic cost of the tariffs and potential retaliation by trading partners, the impact on trade rules and the reputational cost to the United States as a leader of trade liberalisation.
In March 2018, the United States Trade Representative completed an investigation under Section 301 of the Trade Act of 1974 into whether Chinese trade practices related to intellectual property, innovation and technology transfer violate trade agreements, or are discriminatory to and a burden on US commerce. The Section 301 report identifies a range of Chinese trade and commercial practices of concern, including Chinese practices aimed at acquiring or stealing US intellectual property.
Following the release of the Section 301 report, the United States threatened China with tariffs of US$50 billion, and when China threatened similar retaliation, Trump doubled the proposed tariffs to US$100 billion. A meeting in May 2018 of high-level Chinese and US economic officials to address US concerns merely produced agreement for China to purchase more US agriculture and energy products and both sides observed the importance of bilateral investment.
The lack of any progress on addressing the China challenge underscores that fact that the United States needs to use a broad range of economic tools if it wants to succeed in addressing the state-driven elements of China’s economic policy that it finds so troubling. In addition to using trade and investment restrictions, the United States needs to build new rules and norms that create costs over time to China for continuing to pursue its economic practices. To be effective, other key economies — such as the EU and Japan — will need to be brought onboard with this strategy.
Progress will also require a broader view of the potential role for the WTO in addressing the China challenge. In particular, it will require that the United States itself abides by international trade rules. The advantage of including WTO action as part of the US response is that it reaffirms US commitment to global trade rules and, by highlighting where Chinese trade practices depart from agreed norms, will create political space for countries to support US efforts against China.
China poses a real challenge. The current US approach is too narrowly focussed on tariffs to develop the incentives and opportunities for the type of economic reform that China will need to undertake to truly address the problem. At the same time, the US approach has real costs in terms of the rules-based system, and the credibility and desirability of US leadership more broadly. Failure to develop a more nuanced, comprehensive and coordinated approach to the China challenge risks not only falling short but, in the process, deeply damaging the international economic system that the United States purports to uphold.
Joshua P Meltzer is Senior Fellow in the Global Economy and Development program at the Brookings Institution, Washington DC.
This article appeared in the most recent edition of East Asia Forum Quarterly, ‘Trade wars and Asia’.
Meltsker makes a very good point in stating that other nations, treated equally in China’s favor – all the the EU, Indochina, and Japan, should have jumped on board at the very beginning – or, Pres. Trump should have invited them to do so. Either and both ways, China’s actions favor no one except China, and China should be held accountable.
Their actions in the South China Sea is the same: China considers itself as the elephant that no one can challenge, yet no one wants this elephant if it can’t be ‘house trained.’
“Their actions in the South China Sea is the same: China considers itself as the elephant that no one can challenge, yet no one wants this elephant if it can’t be ‘house trained.’
1 You got that wrong because China and the US are whales and when whales make love the shrimps get squashed. What happens when they make war and a nuclear winter sets in? No nation will be spared.
2 In case the nuance escapes you, the elephant in the China shop is Vietnam. It has no legal claim to any feature in the Spratlys or Paracel islands and yet, according to Tuan N Pham, Treasurer of the Yokosuka Council on Asia Pacific Studies at the US 7th Fleet Naval base in Japan: “Hanoi has made small and incremental upgrades to 21 of its 49 outposts in recent years (in the South China Sea).”
The conventional wisdom is that a pessimist is someone who looks both ways crossing a one-way street. So who is an optimist? An optimist is someone who is silly enough to even want to house-train an elephant.
Taking a call on the economic scenario is a narrow perspective. Can Trump tell all US citizens to boycott Chinese goods possible, like Xi told all citizens to boycott Japanese automobiles or Lotte of South Korea? Trump would get sued, but Xi would be applauded by Globaltimes.
The conflict is very broad based – arbitrary rules based dictatorship v/s rules & laws based democracy. Communism is a palatable phrase to conceal a deep rooted dictatorship in China. The Chinese private sector and citizenry is an extension of the government, as and when required.
Kindly visit the link and the comments at the link http://www.eastasiaforum.org/2018/07/27/china-cant-just-pick-and-choose-from-the-law-of-the-sea/
How can the USA boycott Chinese goods when it has sent its manufacturing jobs to China in the first place? You can’t have a successful boycott when you don’t have your own industries to replace the foreign goods because you let corporations and wealthy people in your own country determine your national economic policy.
You are right. The US corporations have earlier used China as a low labor cost and little regulated base for manufacturing. It will take time for the US corporations to shift out from China – I am sure the US corporations, smart as they are, have realized that this is overdue.
Japan has already faced the commercial backlash – due to the island dispute and shifted focus / investments to alternative markets (some of the goodies are coming to India, including the first Bullet Train from Japan); or like South Korea with Lotte over the US missile defense systems (Samsung has the largest manufacturing base in India https://telecom.economictimes.indiatimes.com/news/biggest-mobile-phone-plant-masks-pm-modis-make-in-india-struggle/65053918). Rule of law is the foundation stone for sustainable business – a dictatorship in the guise of communism can truncate any enterprise and is a big business risk. And open & free societies are ideal for businesses.
Perhaps the US will also face an experience like Japan / South Korea and US corporations will also start walking.
The low labor cost advantage has almost disappeared. With the decades old one child policy, a generation of pampered childhood adults is the present mainstay. Why work when the parents wealth is available?
The tide has begun. Even rich Chinese are transferring their wealth abroad and shifting citizenship.
Even if the American companies come back to the USA, many of the jobs will be automated which means fewer workers and there is a less chance of them organizing into a union. American corporations and the American government have a miserable record of helping to re-train workers and preparing American kids for jobs of the future nor has any attention of doing so.