Trade tensions reflect US-China battle for 21st century world order

The arms race was a defining element of the Cold War between the U.S., its allies and the Soviet Union. President Trump’s recent proposal for $60 billion in unilateral actions against China presages a pitched 21st-century battle over technological supremacy, with fateful consequences for the world order.

The Trump administration rightly sees that China’s aggressive efforts for economic domination hurt the competitiveness of U.S. industries — and that of our allies. But its unilateralist response is unlikely to change China’s approach and could damage U.S. interests. A more comprehensive, coordinated and strategic U.S. approach is necessary.

{mosads}Since President Carter normalized relations in 1979, China’s economic rise has been staggering. China’s economic reforms took off, culminating in China’s 2001 World Trade Organization (WTO) entry. Today, China boasts the second-largest number of Fortune 500 companies and the world’s four largest banks.

China is the world’s largest exporter and second-largest importer and will soon surpass the U.S. as the largest economy. China has indeed built itself into the “world’s manufacturer” of consumer goods and industrial products. Today, China is our largest trading partner in goods, yet the U.S. has a $375-billion annual trade deficit with it.

China charges that the U.S. seeks to limit its rightful economic gains, but it is not China’s economic growth that is the problem. Rather, it’s the economic model.

It is not simply a nation with state-driven capitalism. The all-powerful state and the Communist Party control, subsidize and finance scores of state-owned enterprises (SOEs), create national champions, but with a vibrant private sector, as well.

China turbo-charged its industrial policy in 2015, launching “Made in China 2025.” President Xi’s 2015 strategy specifies 10 leading-edge sectors and 5G technologies for China’s global preeminence that will drive the global economy of the future — AI, semiconductors, sensors, broadband and smartphones.

Rather than rely upon market-based integration into global markets, China is using government tools and state actions to achieve dominance in key sectors, which may leave the U.S. exporting mainly commodities, not high-tech, 21st-century products, to China’s huge market.

In its quest, China:

• controls information on platforms such as Facebook, Google and Twitter;
• deploys state-subsidized financing for key sectors;
• makes strategic use of import barriers;
• forces companies to transfer technologies and trade secrets; and
• obliges companies to form joint ventures with Chinese companies.

China also uses technical standards to block foreign sales, and it hacks private U.S. computer networks to steal sensitive technologies. Chinese purchases of technology companies, at times, involve corporations with ties to the state or military. As FBI Director Wray stressed last week, China leads the world in economic espionage.

There is no silver bullet for China’s massive distortions of traditional global market systems. U.S. unilateral tariffs would tax U.S. consumer purchases and undercut household gains promised from recently-enacted tax cuts and disadvantage some of our own industries.

Few if any Chinese exports to the U.S. are made solely of Chinese inputs. China assembles many products from global supply-chain inputs, including from the U.S. While iPhones are assembled in China, for example, less than half their value is from Chinese manufactured products.

Moreover, China is hardly without options to retaliate against U.S. agricultural exports, like soybeans and sorghum, and U.S. companies. U.S. tariffs may not even reduce the overall U.S. trade deficit, as buyers will source more products from other low-cost suppliers.

The U.S. needs a multi-pronged policy. We should retain as much of the $650 billion in annual trade with China as we can. We should also target limits on Chinese investment carefully and surgically, reflecting clear national security interest while addressing China’s most damaging improper and illegal actions.  

First, the Trump administration should join with our allies to work effectively against China’s unfair trade and investment practices. This is harder when U.S. actions target the very allies we need. President Trump’s recent steps to limit imports of steel and aluminum, under Section 232 “national security” provisions, initially targeted our closest allies.

President Trump’s withdrawal last year from the 12-nation Trans-Pacific Partnership (TPP), which would have enhanced America’s ability to shape and enforce global trade rules, was a strategic mistake.

Throwing into question the future of the North American Free Trade Agreement (NAFTA) and the U.S.-South Korea Free Trade Agreement, until it was resolved last week, complicates working with our allies on China.

Canada, rather than joining the U.S. strategically on China, has filed a trade case in the World Trade Organization (WTO) against the United States.

If new U.S. tariffs are necessary, they should be targeted to products with substantial Chinese content and be designed to limit harm to U.S. consumers and companies. Such actions should be clearly linked to specific Chinese policies and practices that violate China’s WTO commitments.

The administration is beginning to get this message. It has now exempted Canada, Mexico, Australia, the European Union and Argentina from Section 232 sanctions. Unfortunately, Japan, crucial to engaging China, is still targeted.

We are encouraged that the administration has recently agreed to work cooperatively with the EU and Japan to address China’s damaging practices cooperatively, including in the WTO, Organization for Economic Cooperation and Development (OECD), Group of 7 (G-7), G-20 and the International Monetary Fund (IMF).

It would also send a strong signal to China if the U.S. re-joined TPP negotiations, which is what President Trump suggested might happen in January in Davos.

Second, the U.S. should have triggered WTO dispute resolution mechanisms, perhaps jointly with key allies, before threatening to impose unilateral tariffs on Chinese goods. Imposing tariffs without having a WTO finding of wrongdoing may complicate united allied efforts to engage China.

The administration is absolutely right to call for WTO consultations with China over its theft and coercion of U.S. intellectual property rights. But the administration has repeatedly questioned the WTO’s value rather than working to ensure its effectiveness and continues to block the appointment of appellate judges needed for WTO dispute resolution.

Certainly, the expectations that joining the WTO would lead China to adopt a market-based approach and international norms have not been met. U.S. Trade Representative Robert Lighthizer was right that the WTO is “wholly inadequate to deal with China’s version of a state-dominated economy that rejects market principles.”

The WTO can deal effectively with some Chinese misbehavior, but it was not designed for the comprehensive economic weapons the Chinese government is using unfairly to dominate civilian and military technology globally. The WTO must adapt to this reality.

Third, the U.S. should reinvigorate the U.S.-China Comprehensive Economic Dialogue (CED), which began under President George W. Bush and continued during the Obama administration but broke down in the Trump administration in 2017 when China rebuffed America’s legitimate concerns.

Hopefully, Treasury Secretary Steve Mnuchin’s current efforts with Chinese officials to avert a trade war will bear fruit and open the way for a productive CED.

The U.S. should identify, in consultation with allies and industry, China’s most distortive practices in priority sectors and let China know that if all else fails, the U.S. will have no choice but to employ “reciprocity,” subjecting Chinese companies to restrictions and regulatory burdens like those China now imposes against U.S. and other foreign firms.

Stuart Eizenstat is the former U.S. ambassador to the European Union, undersecretary of commerce and international trade, undersecretary of state for economic, business and agricultural affairs and deputy secretary of Treasury in the Clinton administration (1993-2001). He was also the chief White House domestic policy adviser to former President Jimmy Carter (1977-81).

Anne Pence is the former international policy adviser to the State Department (1992-2005).