Bereft of new ideas, US Trade Representative Katherine Tai recently doubled down on China tariffs and the Phase One trade deal. As Gary Hufbauer writes in our first feature this week: ‘Three-quarters of Tai’s actions are Lighthizer’s policies with softer edges and a smiling face’. The only new policies are the protectionist Buy American measures that limit US government procurement to domestic production. President Biden has taken that principle to heart and bought Trump’s ‘America First’ trade policies.
The United States used tariffs and the threat of higher tariffs to coerce China into a bilateral trade deal, signed in January 2020. Japan was coerced into a trade deal with the United States the year before under the threat of tariffs on automobiles. The Phase One trade deal between the United States and China moved the world’s two largest economies and trading nations decisively towards managed trade, away from free trade.
Instead of opening new Chinese markets, the deal centred on an agreement for China to purchase US$380 billion worth of American agricultural goods, manufactures and energy by the end of 2021 — without regard to the interests of competitors in the Chinese market. Large powers like China and the United States rarely consider the spillovers of their actions on smaller powers, even if they are allies. Purchase quotas of US$80 million worth of US agricultural goods means that China has to divert imports from other import suppliers. The collateral damage has fallen significantly on Australian producers, with the added insult of their being at the receiving end of the most blatant economic coercion China has unleashed on any country to date. American wine growers, barley and beef farmers as well as coal miners have displaced more competitive Australian producers in the Chinese market, at US instigation and with deliberate Chinese complicity.
At the same time, high-level officials, like Indo-Pacific tsar Kurt Campbell, claim the United States has the back of the very allies and partners that have been injured by the trade diversion resulting from managed US–China trade. As James Curran points out, asked how ‘an inherently bilateral agreement that has no regard for the multilateral consequences of how those Chinese commitments are fulfilled’ squared with her emphasis on the wellbeing of allies and other market economies, USTR Tai had no answer.
Trade coercion against Australia is but one of the long list of Chinese trade practices with which much of the global trade community has a problem. The industrial subsidies that China extends to state-owned enterprises distort markets and competition in China, and those distortions spill over into international markets. Forced technology transfer has been required of many foreign companies as the price to pay for operating in the Chinese market. There are other non-market practices in China which the Phase One trade deal with the United States is entrenching.
True, China is breaking no rules on some of these fronts, because they are areas in which there are no international rules to break. Industrial subsidies and pervasive agricultural subsidies, for example, are both yet to be disciplined by international agreement.
The rules in the WTO have not kept pace with developments in modern commerce and they need updating. But the US embrace of managed trade with China and its market-sharing approach to tech and other trade with Europe (despite reversing course on Trump’s steel and aluminium tariffs there) is not the kind of leadership that’s now needed.
Bilateral and regional agreements have tried to fill the gap. Prominent among those agreements is the Trans-Pacific Partnership (TPP) for which the United States led the negotiations, before Trump nixed the deal on day one of his presidency. The TPP was salvaged with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which created new rules for international commerce in areas where they were lacking in the WTO and opened new markets for its members. Strategically, it was meant to entrench the United States in Asia, lift trade standards and counter China’s economic influence.
In our second lead article this week, William Reinsch bluntly explains that US ‘Administration officials are acutely aware that they have no trade policy for the region and that sending an aircraft carrier through the South China Sea every few months is really no substitute’.
The Biden administration’s nonexistent China and Indo-Pacific trade policy has been unmasked by China’s bid to join the CPTPP. Japan (and Australia) led the conclusion of CPTPP with the remaining 11 members of the group in 2018 after the US exit from TPP, keeping the door open to the United States in the hope that it might eventually return.
The Chinese government has considered its application to join CPTPP long and carefully and appears well aware that membership would require significant reform — the state-owned enterprise chapter was written precisely with China in mind and the soft deal on SOEs for Vietnam offers no equivalent promise for Beijing.
China’s application to join CPTPP provides an opportunity for Australia and other members to sort out their own problems with Beijing as well as to engage on the major trade reform issues of the day. The negotiation will take time but is likely to be a helpful process, and Chinese interest in the CPTPP may help entice the United States back into the pact.
Chinese negotiations with other CPTPP members prior to US involvement is also a chance for Beijing to carry its reform agenda forward without American heavy breathing and intrusive posturing. And it would open a route to Chinese economic re-engagement with the United States, and a path towards the Free Trade Area of Asia and the Pacific — Beijing’s strategic response to the Obama administration’s early tilt towards the Pacific when it launched the TPP idea.
As Reinsch points out, the tactical way forward for Washington is to declare the existing CPTPP agreement inadequate, as Biden has already done. It can then announce it is going to fix it (although the 11 will be very reluctant to reinstate the absurd US provisions on intellectual property into any CPTPP 2.0 version of the agreement). And it can proceed to negotiate and change something, pronounce it fixed and join. All the better if China has been brought to the starting gate on the way towards this conclusion.
A US signal of interest in re-entry to its own agreement would be a start. Removing the punitive tariffs and undoing managed trade arrangements that the United States has with China while negotiating market opening and reform in China would be welcomed across the region. That would help lock the United States into the Asian economy in a productive way.
Removing the blockage in the WTO dispute settlement system is an easier step, and would be an important indication of good faith in and respect for the multilateral trading system that the United States can take immediately. Until then, criticising Chinese practices while taking Australian markets away is hypocritical and continues to ring hollow.
The EAF Editorial Board is located in the Crawford School of Public Policy, College of Asia and the Pacific, The Australian National University.