Jurnal 5
Jurnal 5
Jurnal 5
February 2019
Executive Summary
The U.S.-China economic relationship has reached a critical juncture. Over the past year, the
U.S. has imposed tariffs on $250 billion worth of Chinese imports and China has retaliated,
raising tariffs on U.S. exports. At the G-20 leaders’ summit in November 2018, Presidents
Trump and Xi agreed to resolve the trade dispute within 90 days—by March 1, 2019, though this
deadline has been recently extended.
The U.S. concerns that underpin these bilateral trade tensions stem from specific practices
endemic to China’s economic model that systematically tilt the playing field in favor of Chinese
companies domestically and globally. Progress on specific trade issues will require China to
comply with its World Trade Organization (WTO) commitments and to make certain reforms that
will likely touch on areas of state control over the economy. In addition, new trade rules are
needed to address China’s economic practices not covered by its WTO commitments, including
in areas such as state-owned enterprises (SOEs), certain subsidies, and digital trade. These
issues also come at a time of increasing U.S. concern over the national security risks China
presents, particularly with respect to technology access.
Despite the challenges the U.S. has had at the WTO, the WTO should be central to resolving
U.S.-China trade tensions. From this perspective, we outline a multipronged strategy, including
bilateral, multilateral, and unilateral actions, as well as working with allies, that together would
constitute positive next steps for this critical economic relationship. In taking this multifaceted
approach, the U.S. also needs to stay true to its values and not accept short-term gains or
“fig leaf” deals. In particular, creating a managed trade relationship with China would not be
a constructive outcome. The resulting deal should address the real issues at hand in a free
market manner and strengthen the multilateral global trading system and rule of law that the
U.S. has championed in the post-World War II era.
All of these matters underscore the complexity of U.S.-China bilateral negotiations as well as the
stakes at play. Resolving U.S.-China differences in a meaningful way will take time.
The U.S.-China economic relationship delivers more benefits to the U.S. than is commonly
understood. For example, recent data shows that U.S. exports to China support around 1.8
million jobs in sectors such as services, agriculture, and capital goods.1 However, trade with
China has also led to job destruction in some U.S. industries—particularly low wage manufactur-
ing. Despite these costs, the frequent focus by the administration on the bilateral deficit is not
a meaningful yardstick for assessing U.S.-China trade or its impact on employment. The U.S.
trade deficit is less a product of restrictions on U.S. imports than it is a reflection of a low U.S.
domestic savings rate, which requires overseas capital to fund U.S. domestic investment needs
and the growth in U.S. government debt. In addition, the trade deficit does not account for the
activities of affiliates of U.S. and Chinese companies in each respective market, a calculus that
shows the U.S. selling more to China than vice versa.
Nevertheless, the economic costs of the bilateral economic relationship are very real. China’s
economic practices now risk harming the U.S. service and knowledge economy. As identified
in the United States Trade Representative (USTR) Section 301 report, intellectual property (IP)
theft and forced technology transfer and other Chinese unfair trade practices threaten high-
wage jobs and high-value-added manufacturing in the U.S. The role of the state in effectuating
these policies with larger aims of supplanting U.S. leadership in high-tech industries makes
these Chinese policies all the more concerning.
China’s economic model has a range of growing implications for the U.S. and globally. First, the
move towards self-sufficiency in emerging technologies is inconsistent with a trading system
based on comparative advantage. Second, use of SOEs, their access to subsidies, and limited
rule of law in China support state companies within China and globally. Third, China’s use of
industrial policy to pick winners is expected to lead to excess production and dumping overseas.
This has already occurred, for instance, in steel and solar photovoltaic (PV) with negative
1 Oxford Economics for the U.S.-China Business Council. Understand the U.S.-China Trade Relationship. 2017. www.uschina.org/reports/understanding-
us-china-trade-relationship.
Given these challenges, there is a real question as to the capacity of the WTO to respond to
the China challenge. While the WTO is not able to address all the issues that China poses, in
the context of a comprehensive approach to the China challenge, the WTO remains central,
contingent on strong U.S. leadership. The WTO is the only global set of trade rules that both
reflects core U.S. values, such as non-discrimination, transparency, and rule of law, and forms a
baseline on which to build global support to critique and push back against Chinese economic
practices.
Bilateral negotiations
U.S.-China bilateral outcomes need to be verifiable, enforceable, and market-based—not simply
a restatement of prior Chinese commitments such as to do better on IP protection and enforce-
ment or forced technology transfer, or to buy more U.S. products. The bilateral track should
include commitments from China to implement all of its WTO commitments. Additional WTO-plus
commitments should be negotiated in areas such as SOEs, cross-border data flows, and
determining the application of nonmarket economy (NME) status for trade remedy purposes.
Where feasible, enforcement should be through the WTO dispute settlement mechanism, and
recourse to arbitration under Article 25 of the Dispute Settlement Understanding (DSU) could
be used to produce speedier results.
2 OECD. Excess capacity in the global steel industry: The current situation and ways forward. 2015. www.oecd.org/sti/ind/excess-capacity-in-the-
global-steel-industry.pdf.
3 Lawder, David. “IMF’s Lagarde says China needs to do more to cut steel capacity.” Reuters. March 1, 2018. www.reuters.com/article/us-imf-lagarde-
china-steel/imfs-lagarde-says-china-needs-to-do-more-to-cut-steel-capacity-idUSKCN1GD661.
4 Kenderdine, Tristan. “China’s Industrial Policy, Strategic Emerging Industries and Space Law.” Asia & the Pacific Policy Studies, Vol. 4, no.2 (2017):
325-342.
5 United States Trade Representative. 2018 Report to Congress on China’s WTO Compliance. February 2019. https://ustr.gov/sites/default/
files/2018-USTR-Report-to-Congress-on-China%27s-WTO-Compliance.pdf.
6 Wu, Mark. “The ‘China, Inc.’ Challenge to Global Trade Governance.” Harvard International Law Journal, Vol. 57, No. 2, (Spring 2016).
The U.S. and China should also renew efforts to complete a comprehensive bilateral investment
treaty (BIT) with an aggressive nine-month schedule.
A bilateral deal should avoid commitments by China to increase purchases of U.S. exports, and
reducing the bilateral trade deficit should not guide the negotiations or determine success.
Increased U.S. exports, whether to China or elsewhere, need to be in response to market forces
and not undercut broader U.S. demands for less state intervention. Such an arrangement would
be inconsistent with U.S. values, adopt a managed trade framework more akin to the Chinese
model, would likely be WTO inconsistent, and could disadvantage U.S. allies.
■■ The U.S. should work with China to agree to an in-depth review at the WTO of China’s
compliance with its WTO commitments.
■■ The U.S. should work through the WTO to ensure that China gives a full accounting of its
SOE activities and subsidies as required of any WTO member and pursuant to its Protocol
of Accession.
■■ The U.S. should work with allies and China to reintroduce the China specific safeguard
as well as craft an agreement with China regarding its ongoing use of NME methodology
until such time that China is able to substantiate that it has become a market economy.7
Progress on this issue could be the result of a negotiated settlement of the WTO case
that China has brought against the EU and U.S. regarding their continued use of NME
methodology in trade remedy cases.8
■■ The U.S. should work to reform the WTO dispute settlement system to ensure quicker
dispute settlement proceedings, including potential injunctive relief for unfair trade
practices, would be an institutional change that could be useful vis-à-vis China.9
7 Mavroidis, Petros and Merit Janow. “Free Markets, State Involvement, and the WTO: Chinese State Owned Enterprises (SOEs) in the Ring.” EUI Working
Paper, RSCAS 2017/13 (2017).
8 China has challenged the EU’s and US’ continued use of NME methodology in trade remedy actions at the WTO. See DS515, DS516.
9 WTO communication from the European Union, China, Canada, India, Norway, New Zealand, Switzerland, Australia, Republic of Korea, Iceland,
Singapore, and Mexico To The General Council, WT/GC/W/752. November 26, 2018.
The Trans-Pacific Partnership (TPP), from which the U.S. withdrew in 2017, included important
new rules in areas that matter for the U.S. such as on SOEs, IP, digital trade, and transparency
and due process in the making of regulations affecting trade. With China outside the trading
block, TPP would have created costs for China. According to one estimate, TPP could have
decreased Chinese income by $40 billion annually and this would have grown as more
countries joined the agreement.10 Taken together, TPP would have been an important part of
the “comprehensive toolkit” USTR refers to in creating pressure on China to reform. The TPP has
now been reconstituted without the U.S. as the Comprehensive and Progressive TPP (CPTPP)
and most of the rules for addressing U.S. concerns with Chinese trade practices remain. The
importance of the CPTPP for addressing the China challenge warrants the U.S. to reconsider its
position on the agreement and rejoin.
In the event that bilateral FTAs remain the focus for the time being, the U.S. should aim to
conclude agreements with its strategic allies in the Asia-Pacific region and beyond.
The U.S. has already made progress domestically on addressing technology transfer issues
with the enactment of the Foreign Investment Risk Review Modernization Act (FIRRMA), which
included the Export Control Reform Act (ECRA) of 2018. While companies now largely decide
which technologies to transfer overseas, the careful implementation of FIRRMA/ECRA is critical
to making this a matter for U.S. policy and for considering the national security costs that may
not be properly included in private sector decisions regarding the transfer of technology to
China.11
FIRRMA/ECRA also recognizes the importance of working with allies to strengthen multilateral
export control regimes and to prevent diversion through U.S. allies in attempts to avoid FIRRMA
10 Petri, Peter A., Michael G. Plummer and Fan Zhai, “The TPP, China and the FTAAP: The Case for Convergence.” In: Tang, Guoqiang and Peter A. Petri, eds.
New Directions in Asia-Pacific Economic Integration. Honolulu: East-West Center, 2014.
11 Gros, Daniel. “The Myth of China’s Forced Technology Transfer.” Project Syndicate, November 2018. www.project-syndicate.org/commentary/myth-of-
forced-technology-transfer-china-by-daniel-gros-2018-11.
Making progress on China’s compliance with its WTO commitments will be most effective where
the U.S. is also complying with its WTO commitments. This would require the U.S. to calibrate
its unilateral use of tariffs, which have undermined the WTO. Instead, the U.S. should expand
its use of trade remedy measures—anti-dumping and countervailing duties—that are consistent
with U.S. WTO obligations and provide recourse to U.S. business for China’s unfair trade
practices.
Introduction
The U.S.–China economic relationship has reached a critical juncture. The last year has seen
tit-for-tat tariff escalation. So far, $250 billion worth of U.S. imports of Chinese products have
been hit with tariffs ranging from 10-25 percent and President Donald Trump is threatening
to increase existing tariffs and to place additional tariffs on all imports from China. China has
likewise levied tariffs on the equivalent amount of U.S. imports and has threatened to impose
more. This trade war has roiled financial markets and contributed to slowing global growth.
At the G-20 leaders’ summit in November 2018, Presidents Trump and Xi agreed to resolve
the trade dispute within 90 days—by March 1, 2019, though this deadline has recently been
extended.
The U.S. concerns that have escalated these bilateral tensions stem from specific trade
practices endemic to China’s economic model that systematically tilt the playing field in favor
of Chinese companies domestically and globally. Progress on specific trade issues will require
China to comply with its WTO commitments and to make certain reforms that will likely touch
on areas of state control over the economy. In addition, new trade rules are needed to address
China’s economic practices not covered by its WTO commitments, including in areas such as
SOEs, certain subsidies, and digital trade. These issues also come at a time of increasing
concerns over the national security risks China presents, particularly with respect to technology
access. All of these matters underscore the complexity of U.S.-China bilateral negotiations as
well as the stakes at play. Resolving U.S.-China differences in a meaningful way will take time.
This policy brief assesses the state of the U.S.-China trade relationship by looking at the
economic impact for the U.S. The policy brief then looks at why the Chinese economic model is
so concerning. The brief then explains why, despite the challenges the U.S. has had at the WTO,
the WTO should be central to resolving U.S.-China trade tensions. We outline a multipronged
strategy, including bilateral, multilateral, unilateral actions as well as working with allies that
together would constitute positive next steps for this critical economic relationship. In taking
this multifaceted approach, the U.S. should stay true to its values and not be tempted to accept
short-term gains or “fig leaf” deals. Creating a managed trade relationship with China would
not be a constructive outcome. Instead, the U.S. should work with China to agree on long term
However, this U.S. view of China has progressively evolved into seeing China less as a partner
and more as a competitor, culminating in the positions taken by the Trump administration. The
trade and investment front is where some of the most dramatic shifts in U.S. policy towards Chi-
na have manifested. For instance, the U.S. 2017 National Security Strategy states that “China
and Russia challenge American power, influence, and interests, attempting to erode American
security and prosperity. They are determined to make economies less free and less fair, to grow
their militaries, and to control information and data to repress their societies and expand their
influence.”19 The same National Security Strategy called for the U.S. to rethink the policies over
the past two decades, “policies based on the assumption that engagement with rivals and their
inclusion in international institutions and global commerce would turn them into benign actors
and trustworthy partners. For the most part, this premise turned out to be false.”20
In order to decide what type of trade and investment relations the U.S. and China should have
going forward, it is important to step back and be clear about the current state of the bilateral
economic relationship.
14 U.S. Bureau of Economic Analysis. “International Trade in Goods and Services.” www.bea.gov/data/intl-trade-investment/international-trade-goods-
and-services.
15 In market exchange rate terms.
16 Wright, Logan and Daniel Rosen. “Credit and Credibility: Risks to China’s Economic Resilience.” CSIS Freeman Chain in China Studies. October 2018:
127.
17 “Global 2000:The Worlds’ Largest Public Companies.” Forbes, June 6, 2018. www.forbes.com/global2000/#562d70f4335d.
18 Deputy Secretary of State Robert Zoellick’s keynote address to the National Committee on US-China Relations, Sept 21, 2005.
19 White House. “United States National Security Strategy.” December 2017. www.whitehouse.gov/wp-content/uploads/2017/12/NSS-
Final-12-18-2017-0905.pdf.
20 Ibid.
Yet, trade with China has led to job losses in the U.S. manufacturing sector. From 1999 to
2011, 560,000 manufacturing jobs were lost due to direct competition with imports from
China.26 Taking into account upstream effects—job losses in industries that supplied to those
industries facing direct competition from China—there were 2 million job losses in the manufac-
turing and non-manufacturing sectors.27,28 This data, however, likely overstates the job losses as
it fails to account for the extent to which U.S. imports from China include U.S. value add. China
remains a locus of significant amounts of “processing trade” critical to global value chains,
whereby low value-added product assembly using inputs from the U.S. and elsewhere are then
exported to the U.S. and globally, while high-value inputs such as research and development,
design, distribution, retail, and so on remain outside China. For instance, each iPhone imported
into the U.S. from China is recorded as a $240 import, but China’s value add to the iPhone is
only around $8.50 or 3.6 percent of the total, while the imported U.S. value added in the iPhone
is worth around $70.29 As this example demonstrates, a proper accounting of U.S. trade with
China would better take into account U.S. value embedded in imports from China and reduce
the impact of imports from China on U.S. manufacturing jobs by over 32 percent.30 Moreover,
the initial China shock to the U.S. economy is largely complete and trade with China is having
fewer negative effects on U.S. manufacturing.31 Evidence of firm reorganization and innovation
shows that U.S. business has been more adept at competing with imports from China.32 In fact,
since 2010, the U.S. has added over 1.2 million manufacturing jobs.33
21 Krauss, Melvyn. How Nations Grow Rich: The case for free trade. Oxford University Press, 1997.
22 Feenstra, Robert C. and Akira Sasahara. “The ‘China shock,’ Exports and U.S. employment: A Global Input-output Analysis,” Special Issue Paper,
Review International Economics, 6(5) (November 2018): 1053-1083.
23 Understand the US-China Trade Relationship.
24 Wang, Zhi and Shang-Jin Wei, Xinding Yu, Kunfu Zhu. “Re-Examining the Effects of Trading with China on Local Labor Markets: A Supply Chain
Perspective.” NBER Working Paper (October 2018): 19.
25 Jaravel, Xavier and Erick Sager. “What are the Price Effects of Trade? Evidence from the U.S. and Implications for Quantitative Trade Models.” SSRN
(January 2018).
26 Autor, David, David Dorn, and Gordon Hanson “The China syndrome: Local labor market effects of import competition in the United States.” American
Economic Review, 103, 6 (2013): 2121–68.
27 Ibid.
28 Feenstra. “The ‘China shock,’ Exports and U.S. employment.”
29 Dedrick, Jason, Greg Linden and Kenneth L. Kraemer. “We estimate that China only makes $8.46 from an iPhone – and that’s why Trump’s trade war
is futile.” The Conversation, July 6, 2018. www.theconversation.com/we-estimate-china-only-makes-8-46-from-an-iphone-and-thats-why-trumps-
trade-war-is-futile-99258.
30 Jakubik, Adam and Victor Stolzenburg. “The ‘China Shock’ revisited: Insights from value added trade flows.” WTO Staff Working Paper, (October 2018):
14.
31 Ibid.
32 Magyari, Ildiko. “Firm Reorganization, Chinese Imports, and US Manufacturing Employment.” Working Papers 17-58, Center for Economic Studies, U.S.
Census Bureau. 2017.
33 FRED. “All Employees: Manufacturing.” https://fred.stlouisfed.org/series/MANEMP#0.
-$400B 80%
-$350B 70%
-$300B 60%
-$250B 50%
US trade deficit with China (left axis)
-$200B 40%
-$150B 30%
US-China trade deficit as a share of
total US trade deficit (right axis)
-$100B 20%
-$50B 10%
The bilateral trade deficit needs to be assessed in light of the overall trade deficit which is less
a product of restrictions on U.S. exports than it is a reflection of a low U.S. domestic savings
rate which requires overseas capital to fund U.S. domestic investment needs and the growth
in U.S. government debt.34 Efforts to reduce the U.S.-China trade deficit without addressing the
saving-investment gap, will merely change the composition of the U.S. trade deficit, leaving the
overall trade deficit unchanged.
34 Feldstein, Martin. “Inconvenient Truths About the US Trade Deficit.” Project Syndicate, April 25, 2017. www.project-syndicate.org/commentary/
america-trade-deficit-inconvenient-truth-by-martin-feldstein-2017-04.
Figure 2. Correlation between rising employment and negative trade balance with
China
155 -$400B
-$300B
145
140
-$200B
135
130
Total US employment (left axis) -$100B
125
120 0
2000 2005 2010 2015 2018
Figure 3. Bilateral trade and business activities of affiliates of U.S. and Chinese
companies in each other’s markets
$700B
$600B Minority-owned
$118B (18%) Minority-owned $11B (2%)
Sales of Chinese
Majority-owned $34B (6%) affiliates in U.S.
Services $17B (3%)
$500B
Sales of
U.S.
$400B affiliates in
China
Majority-owned
$345B (53%)
$300B
Exports of
goods
Goods and services
$506B (89%)
$200B
Services
$58B (9%)
Exports of
$100B goods
and services
Goods
$130B (20%)
U.S. China
In March 2018, the USTR issued a report under Section 301 detailing how these Chinese
practices affect U.S. IP and technology.37 In a follow-up report in November 2018, USTR
assessed whether China had changed any of its practices, finding progress in some areas but
concluding overall that China’s attempts to access and acquire U.S. technology remained.38
The Section 301 report also discussed other technology issues, including Chinese restrictions
on data flows, data localization requirements by critical infrastructure providers, encryption
regulations, and inadequate IP protection.
Access to U.S. technology also raises national security concerns. As the U.S. Department of
Defense has noted, many of the key technologies in which China is seeking to obtain global
leadership are integral to American economic growth as well as the ability of the U.S. to main-
tain its military advantage.39
35 IP Commission Report, “The Theft of American Intellectual Property: Reassessments of the Challenge and United States Policy”, 2017.
36 National Counterintelligence and Security Center. Foreign Economic Espionage in Cyberspace. Washington, DC: National Counterintelligence and
Security Center, 2018.
37 Office of the United States Trade Representative. Findings of the investigation into China’s acts, policies, and practices related to technology transfer,
intellectual property, and innovation under Section 301 of the Trade Act of 1974. Washington, DC: Office of the United States Trade Representative,
2018. https://ustr.gov/sites/default/files/Section%20301%20FINAL.PDF.
38 Office of the United States Trade Representative. Update Concerning China’s Acts, Policies And Practices Related To Technology Transfer, Intellectual
Property, And Innovation. Washington, DC: Office of the United States Trade Representative, 2018.
39 U.S. Department of Defense. Assessment on U.S. Defense Implications of China’s Expanding Global Access. Washington, DC: U.S. Department of
Defense, 2018. https://media.defense.gov/2019/Jan/14/2002079292/-1/-1/1/EXPANDING-GLOBAL-ACCESS-REPORT-FINAL.PDF.
China’s economic model has a range of growing economic implications for the U.S. and globally.
First, the move towards self-sufficiency in emerging technologies is inconsistent with a trading
system based on comparative advantage. Second, use of SOEs, their access to subsidies and
limited rule of law in China support state companies within China and globally. Third, China’s
use of industrial policy to pick winners is expected to lead to excess production and dumping
overseas. This has already occurred for instance in steel and solar PV with negative impacts
for U.S. and global industries in terms of output and innovation,43,44 and is expected to occur
in more advanced industries identified in China’s recent industrial policies, such as robotics,
high-speed rail production, new energy vehicles, and batteries.45
40 McGregor, Richard. The Party: The secret worlds of China’s Communist Party. London: Penguin Books, 2010.
41 Wu, 279.
42 Rajah, Roland. “Uncertain Future for China’s State Capitalism.” Nikkei Asian Review (Tokyo), October 26, 2017.
43 OECD Directorate for Science, Technology and Innovation. Excess capacity in the global steel industry: The current situation and ways forward. Paris:
OECD, 2015. www.oecd.org/sti/ind/excess-capacity-in-the-global-steel-industry.pdf.
44 Lawder, David. “IMF’s Lagarde says China needs to do more to cut steel capacity.” Reuters News (Yogyakarta), March 1, 2018. www.reuters.com/
article/us-imf-lagarde-china-steel/imfs-lagarde-says-china-needs-to-do-more-to-cut-steel-capacity-idUSKCN1GD661.
45 Kenderdine, Tristan. “China’s Industrial Policy, Strategic Emerging Industries and Space Law.” Asia & the Pacific Policy Studies 4, no. 2 (May 2017):
325-342.
46 U.S. Chamber of Commerce and American Chamber of Commerce in China. Priority Recommendations for U.S.-China Trade Negotiations from the U.S.
Chamber of Commerce and American Chamber of Commerce in China. Washington, DC: American Chamber of Commerce and American Chamber of
Commerce in China, 2019. www.amchamchina.org/uploads/media/default/0001/10/cb7aaf550a515e8d6af75b1cee200b6531426ee1.pdf.
A key mechanism for control of SOEs is the State-owned Asset Supervision and Administration
Commission of the State Council (SASAC). SASAC has a stake in more than half of the Chinese
companies on the Fortune Global 500 List. This includes SOEs with returns on capital far lower
than those generated by private firms (sometimes half as less).51 As Harvard Law Professor
Mark Wu explains, the equivalent of SASAC in America would be to imagine a single U.S. govern-
ment agency controlling GE, GM, Ford, Boeing, U.S. Steel, DuPont, AT&T, Verizon, Honeywell, and
United Technologies, with such an entity empowered to hire and fire management, and to deploy
and transfer resources across companies.52
Access to finance by state-owned or controlled banks has also been a key tool of economic
policy. As Wright and Rosen observe, “controlling the flow of credit has been virtually the raison
d’etre of China’s political system for almost half a century.”53 The state has used credit growth
to fuel economic expansion and limit any economic recession so far. Control over access to
finance is exercised in China through Central Huijin Investment Ltd. (a subsidiary of China’s
sovereign wealth fund, the China Investment Corporation), which has a controlling stake in
China’s largest four banks as well as a majority stake in smaller second-tier commercial banks.
Chinese banks account for over 80 percent of all assets in the Chinese financial system, which
at $38.4 trillion is three times the size of China’s GDP in 2017.54 For a point of comparison, the
existence of an equivalent to Central Huijin Investment Ltd. in the U.S. would be like the U.S.
Treasury controlling JPMorgan Chase, Bank of America, Citibank, and Wells Fargo.55
47 The Economist. “China’s state enterprises are not retreating but advancing.” The Economist, July 20, 2017. www.economist.com/
leaders/2017/07/20/chinas-state-enterprises-are-not-retreating-but-advancing.
48 The Economist. “China’s private sector faces an advance by the state.” The Economist, December 8, 2018. www.economist.com/
business/2018/12/08/chinas-private-sector-faces-an-advance-by-the-state.
49 Scissors, Derek. “China’s SOE Sector is bigger than some would have us think.” American Enterprise Institute East Asia Forum. May 17, 2016. www.aei.
org/publication/chinas-soe-sector-is-bigger-than-some-would-have-us-think/.
50 Bremmer, Ian. “How China’s Economy is Poised to Win the Future.” Time, November 2, 2017. http://time.com/5006971/how-chinas-economy-is-
poised-to-win-the-future/.
51 The Economist. “Are China’s state giants reformable?” The Economist, March 1, 2018. www.economist.com/business/2018/03/01/are-chinas-
state-giants-reformable.
52 Wu, 272.
53 Kennedy, Scott, Daniel H. Rosen, and Logan Wright. Credit and Credibility: Risks to China’s Economic Resilience. Washington, DC: Center for Strategic
and International Studies, 2018. 9. https://www.csis.org/analysis/credit-and-credibility-risks-chinas-economic-resilience.
54 Ibid. 6.
55 Wu, 274.
The operation of SOEs is also supported by a complex range of preferences, national standards,
cyber theft, and use of government procurement and regulation to ensure that private and
foreign traders’ and investors’ ability to compete is curtailed.
The development of regulations and standards is another tool of state control used to benefit
SOEs over private and foreign investors and traders.57,58 As rule of law in China often means
the fiat of government officials, domestic courts are usually unwilling to overturn administrative
decisions or to sanction government and party officials who breach the law.59 Central control is
further reinforced through the role of guanxi (i.e., the system of social networks and influential
relationships that facilitate business and other dealings) in the judicial system.60 Compounding
this is the prevalence of corruption and informality as alternative means of settling disputes.61
While President Xi continually affirms China’s commitment to the multilateral rules-based trading
framework, China continues to renege on its WTO commitments. Moreover, China’s economic
model makes it difficult to use the WTO and its dispute settlement system to challenge non-com-
pliance. For instance, state control over public and private businesses makes unclear what is
a public body and what is private. In addition, the state’s role in the judicial and administrative
system, including use of informal notices and verbal demands, undermines the ability to
56 Allen, Jamie, and Li Rui (Nana Li). Awakening Governance: The evolution of corporate governance in China. Hong Kong: Asian Corporate Governance
Association (ACGA), 2018. www.acga-asia.org/files.php?aid=158&id=1107.
57 Chen, Jianfu. “The Transformation of Chinese Law: Mark II.” Hong Kong Law 45, Part 3 (2015): 911:94.
58 Morrow, Judith A., Sida Liu, and Benjamin van Rooij. “Lawyer Discipline in an Authoritarian Regime: Empirical Insights from Zhejiang Province, China.”
Georgetown Journal of Legal Ethics 30, no. 2 (Spring 2017): 267-300.
59 Cui, Wei, Jie Cheng, and Dominika Wiesner. “Judicial Review of Government Actions in China.” (May 31, 2018).
60 He, Xin, and Kwai Hang Ng. “‘It Must Be Rock Strong!’: Guanxi’s Impact on Judicial Decision-Making in China.” The American Journal of Comparative
Law 65, no. 4 (December 31, 2017): 841-871.
61 Cui, Wei. “Does Judicial Independence Matter? A Study of the Determinants of Administrative Litigation in an Authoritarian Regime.” University of
Pennsylvania Journal of International Law 38, no. 3 (2017): 941-998.
Given these challenges, there is a real question as to the capacity of the WTO to respond to
the China challenge. While the WTO is not able to address all the issues that China poses, in
the context of a comprehensive approach to the China challenge, the WTO remains central. The
WTO is the only global set of trade rules, which both reflect core U.S. values, such as non-dis-
crimination, transparency and rule of law, and form a baseline on which to build global support
to critique and push back against Chinese economic practices. As a recent RAND report
noted, the key challenge to the U.S. may come from efforts by China to elevate the viability and
legitimacy of its authoritarian model and “[gain] veto authority over other nations’ economic,
diplomatic and security decisions.” Then efforts to bolster the value of largely U.S.-generated
rules, norms, and international institutions will be a key common point of reference and baseline
for the U.S. and other countries seeking to counter China’s economic and governance models.
Thus, despite the organization’s challenges, the WTO can continue to play a key role in address-
ing the China challenge if the U.S. provides leadership for such a path forward.
In this light, any outcome in U.S.-China bilateral trade negotiations that achieves short-term
wins, such as more trade with China, but does so in ways that undermine WTO legitimacy, would
come at an enormous strategic cost. As discussed below, positive, long-term outcomes for the
U.S.-China relationship should support and strengthen the WTO and the rules based system.
In seeking mutually beneficial outcomes, the U.S. should take a comprehensive approach to
the negotiations, using a combination of actions the U.S. could undertake through bilateral
negotiations with China, multilaterally through the WTO, and working with allies outside the WTO,
as well unilateral actions.
In taking this multifaceted strategy, the U.S. should aim for long-term, market-orientated
solutions, while also strengthening the global trading system and rule of law.
62 Wu, 300.
63 U.S. Department of Defense, “Assessment on U.S. Defense Implications of China’s Expanding Global Access”. December 2018.
64 United States Trade Representative. 2018 Report to Congress on China’s WTO Compliance.
Having a mechanism to ensure compliance will be critical to concretize these commitments. The
U.S. and China could agree to resort to Article 25 of the WTO DSU for noncompliance with any
bilateral deal struck which allows for “expeditious arbitration within the WTO as an alternative
means of dispute settlement…that concern issues that are clearly defined by both parties.”
Article 25 requires WTO members using this mechanism to provide all WTO members with
notice and, with a favorable arbitral award, would allow the U.S. access to retaliation through
the WTO DSU (including with tariffs or suspending other market access the U.S. gave China
through the WTO), were China to not comply with commitments. 67 An arbitration mechanism
could also be used for any WTO plus commitments to which China agrees. In addition to raising
tariffs in the event of non-compliance, the U.S. should consider Office of Foreign Assets Control
(OFAC) financial sanctions or travel bans against Chinese persons and companies who steal
U.S. technology.68
Given that the tariffs which have been imposed to date by the U.S. and China are not WTO
consistent, such any U.S.-China bilateral deal should aim to bring tariffs back to their WTO
bound levels when specific benchmarks are met, but with scope for tariff snap-backs in the
event of non-compliance. The U.S. and China should seek to make such a deal WTO consistent
by seeking a WTO waiver. Such an approach is a pragmatic compromise that recognizes that
the U.S. and China will likely focus on bilateral negotiations to address their trade issues, while
minimizing the harm to the WTO as an institution.
65 Ibid.
66 Ibid.
67 Pohl, Jens Hillebrand. “Blueprint for a Plurilateral WTO Arbitration Agreement under Article 25 of the Dispute Settlement Understanding.” In Restoring
Trust in Trade: Liber Amicorum in Honour of Peter Van den Bossche. 2018.
68 Branstetter, Lee G. China’s Forced Technology Transfer Problem – And What to Do About It. PIIE Policy Brief. 2018. https://piie.com/publications/
policy-briefs/chinas-forced-technology-transfer-problem-and-what-do-about-it.
Without a doubt, U.S. business, farmers, and ranchers aim to export more to China. However,
increased U.S. exports, whether to China or elsewhere, need to be in response to market forces
and not undercut broader U.S. demands for less state intervention. Such an arrangement
would be inconsistent with U.S. values and adopt a managed trade framework, more akin to the
Chinese model. In the short-term, a large increase in exports to China would also likely mean
the U.S. exporting less to other countries. China agreeing to purchase more U.S. goods would
also likely violate China’s most favored nation (MFN) WTO commitment, as a decision to buy
more U.S. energy or agriculture exports would mean purchasing less from other countries. Such
an outcome would also disadvantage U.S. allies.
The U.S. should also not make reducing the bilateral deficit a focus of the negotiations. For the
reasons outlined above, the U.S. should focus on pushing for economic reform and more market
access.
69 U.S. Chamber of Commerce and AmCham China. Priority Recommendations for U.S. China Trade Negotiations. January 16, 2019. www.amchamchina.
org/uploads/media/default/0001/10/cb7aaf550a515e8d6af75b1cee200b6531426ee1.pdf.
As noted earlier, China reiterating its commitment to comply with its WTO Protocol of Accession
should be a bilateral priority and its enforcement (outside a BIT) should be done through the
WTO dispute settlement system. The U.S should also develop a broader portfolio of WTO cases
against China on the issues of technology transfer, IP, and SOEs especially since, in most cases
where China has lost a WTO cases, it has usually complied.71,72,73 Though USTR claims that 23
WTO cases have been brought against China, so far Trump’s USTR has initiated only one case
against China and continues to litigate a few more started under the Obama administration.
A former American WTO Appellate Body member has made the case that a range of Chinese
practices of particular concern to the U.S., such as access to trade secret, forced technology
transfer, lack of IP enforcement, and Chinese subsidies to SOEs could be litigated at the WTO.74
There are further areas where the U.S. and allies should seek to work within the WTO. This is not
to underestimate the challenges of making progress in the WTO given the diverse membership
and institutional challenges. The U.S. and China would need to have the political will to make
progress on some of their bilateral issues in the WTO context. Taking a more multilateral
approach to some of the bilateral trade issues could also give President Xi political cover to
make commitments which he would not be able to undertake unilaterally.
In terms of what the U.S. could seek to pursue at the WTO, first, the U.S. should work with
China to agree to an in-depth review at the WTO of China’s compliance with its WTO accession
agreement. Second, the U.S. should work through the WTO to ensure that China actually gives a
full accounting of its SOE activities and subsidies as required of any WTO member and pursuant
to its Protocol of Accession. Third, the U.S. should work with allies and China to reintroduce the
China specific safeguard75 as well as craft an agreement with China regarding the ongoing use
of NME methodology until such time that China is able to substantiate that it has become a
market economy.76 Progress on the NME issue could be the result of a negotiated settlement
of the WTO case that China has brought against the EU and U.S. regarding their continued
use of NME methodology in trade remedy cases.77 Fourth, working to reform the WTO dispute
settlement system to ensure quicker dispute settlement proceedings, including potential
injunctive relief for unfair trade practices, would be an institutional change that would be useful
vis-à-vis China.78 Fifth, the U.S. should use a bilateral deal with China or a BIT as the basis for
re-energizing the negotiation of new rules at the WTO on areas such as technology transfer,
SOEs, and digital trade.
70 United States Trade Representative. 2018 Report to Congress on China’s WTO Compliance.
71 Reich, Arie. “The effectiveness of the WTO dispute settlement system: A statistical analysis.” EUI Department of Law Research Paper, 2017/11 (2017):
20.
72 Wu.
73 Bacchus, James, Simon Lester and Huan Zhu. “Disciplining China’s Trade Practices at the WTO: How WTO Complaints Can Help Make China More
Market-Orientated.” CATO Policy Analysis, No. 856 (November 15, 2018).
74 Ibid.
75 See China’s Protocol on Accession to the WTO Part 1, Article 16 and U.S.-China WTO Market Access Agreement. Article 1.
76 Mavroidis, Petros C. and Merit Janow. “Free Markets, State Involvement, and the WTO: Chinese State Owned Enterprises (SOEs) in the Ring.” EUI
Working Paper, RSCAS 2017/13 (October, 2017): 571-581.
77 China has challenged the EU’s and US’ continued use of NME methodology in trade remedy actions at the WTO. A decision on this issue will likely be
one of the most important cases to be decided by the WTO. See DS515, 516.
78 WTO communication. November 26, 2018.
The key U.S. rationales for negotiating the TPP, from which President Trump withdrew the U.S. in
January 2017, were just that. The TPP was a high-standard agreement that would have ex-
panded trade amongst the TPP parties, many of which are also U.S. allies, such as Japan, and
important trading partners for China. The TPP included important new rules in areas that matter
for the U.S. such as on SOEs, digital trade, and transparency and due process in the making
of regulations affecting trade. With China outside the trading block, TPP would have created
costs for China. According to one estimate, TPP would have decreased Chinese income by $40
billion annually and this would have grown as more countries joined the agreement.79 Taken
together, TPP would have been an important part of the “comprehensive toolkit” USTR refers to
in creating pressure on China to reform. The TPP has now been reconstituted without the U.S.
as the CPTPP and most of the rules for addressing U.S. concerns with Chinese trade practices,
remain. The importance of the CPTPP for addressing the China challenge warrants the U.S. to
reconsider its position on the agreement and re-join.
In the event that bilateral FTAs remain the focus for the time being, the U.S. should aim to
conclude bilateral agreements with its strategic allies in the Asia-Pacific region, such as
Japan, Thailand, Vietnam, Malaysia, and other countries counted among China’s largest
trading partners.80 While the current focus of the Trump administration on bilateral FTAs is no
substitute for larger regional or plurilateral trade agreements and would be time-consuming
and challenging to negotiate, high standard bilateral FTAs would provide these countries with
preferential access to the U.S. and include new rules in areas such as SOEs and digital trade.
Such FTAs would also provide a basis for the U.S. to ensure that its FTA partners reform their
economies and trade practices in ways consistent with U.S. interests and values. The U.S. has
already begun “trilateral talks” with the Japan and EU that include topics such as technology
transfer, the role of SOEs, and subsidies, and outcomes here could be included in bilateral FTAs
with these partners.
79 Petri, Peter A., Michael G. Plummer and Fan Zhai, “The TPP, China and the FTAAP: The Case for Convergence.” In: Tang, Guoqiang and Peter A. Petri, eds.
New Directions in Asia-Pacific Economic Integration. Honolulu: East-West Center, 2014.
80 China’s largest trading partners according to the World Bank: https://wits.worldbank.org/CountryProfile/en/Country/CHN/Year/LTST/TradeFlow/
EXPIMP/Partner/by-country.
How the U.S. implements FIRRMA/ECRA will be key to whether concerns over technology
transfer to China are addressed adequately. Company decisions as to which technologies
to transfer overseas tend to be short-term, risk-based decisions driven by costs, actions of
competitors, and returns to shareholders. Companies may not always make optimal decisions
due to information asymmetries—where the opportunities of being in China are often high and
more easily quantifiable, given the size of Chinese market, while the downside risks are harder
to assess. There may also be a mismatch between the business assessment of the risks of
technology transfer and theft and the national security costs to the U.S. Individual company
decisions to transfer technology may be rational, but the collective outcome where China uses
IP and know-how gained across multiple foreign investments to gain control or leadership in a
particular a technology sector can create additional national security risks. The implementation
of FIRRMA/ECRA is important for addressing this collective action problem and for considering
the national security costs that may not be properly included in private sector decisions
regarding the transfer of technology to China.82 The export controls that ultimately result from
the FIRRMA/ECRA process could also help U.S. companies push back against ongoing Chinese
demands for technology transfer. The implementation of FIRRMA should be carefully targeted
and not designed to stifle inbound or outbound investment by making clear that there are
significant sectors where Chinese investment is welcome. This is consistent with the importance
of having a targeted response to the threat that has been identified—avoiding unnecessary
economic costs for the U.S. and leaving room for ongoing mutually beneficial economic relations
with China.
FIRRMA/ECRA also recognizes the importance of working with allies to strengthen multilateral
export control regimes and prevent diversion through U.S. allies in attempts to avoid FIRRMA
review.83 The U.S. will need to convince other governments to adopt similar investment
and technology export restrictions in order for these U.S. reforms to be most effective. U.S.
81 Wolf, Kevin J. et al. “The Expert Control Reform Act of 2018 and Possible New Controls on Emerging and Foundational Technologies.” Akin Gump
Strauss Hauer & Feld LLP International Trade Alert. September 2018. See also: www.federalregister.gov/documents/2018/11/19/2018-25221/
review-of-controls-for-certain-emerging-technologies.
82 Gros, Daniel. “The Myth of China’s Forced Technology Transfer.” Project Syndicate, November 2018. www.project-syndicate.org/commentary/myth-of-
forced-technology-transfer-china-by-daniel-gros-2018-11.
83 ECRA. Section 1758.
Conclusion
U.S.-China economic relations are at an important crossroads. Developing a durable basis for
mutually beneficial economic relations will require benefits for both economies while upholding
U.S. values of market-based solutions and reaffirming the importance of the rules based
international economic architecture. Failure for the U.S. and China to find ways to resolve their
differences will strengthen the hand of those arguing for U.S. disengagement from China, with
all the costs that would entail for both countries.87,88
As outlined in this policy brief, the U.S. and China have a complex economic relationship, which
has borne benefits and costs for the U.S. While many U.S. producers and consumers have
reaped billions of dollars of gains from the relationship, concentrated employment effects in
manufacturing have been acute and concerns over Chinese IP theft and forced technology
transfer now threaten U.S. knowledge-based industries. What makes these emerging concerns
all the more problematic is the role of the state in the Chinese economy, which systematically
tilts the playing field in favor of Chinese businesses domestically and globally. Furthermore,
China’s use of industrial policy, and control over SOEs and the provision of pervasive subsidies
has become of even greater concern for the U.S. as China has focused its attentions on
dominating certain technologies and supplanting U.S. leadership. Alongside ongoing cyber theft
of U.S. technology and IP, these economic practices also raise U.S. national security concerns.
The Chinese economic model has also revealed the limits of the WTO. Combined with other
challenges the institution has faced, the effects of China on the world trading system have
84 Mazarr.
85 Brattberg, Erik and Etienne Soula. “Is Europe Finally Pushing Back On Chinese Investments?” Carnegie Endowment for International Peace. September
2018. https://carnegieendowment.org/2018/09/14/is-europe-finally-pushing-back-on-chinese-investments-pub-77259
86 European Commission. “Commission welcomes progress in approval of the foreign investment screening framework.” December 11, 2018. http://
trade.ec.europa.eu/doclib/press/index.cfm?id=1953.
87 Bader, Jeffrey. “U.S.-China relations: Is it time to end the engagement.” Brookings Policy Brief. September 2018. www.brookings.edu/wp-content/
uploads/2018/09/FP_20180925_us_china_relations.pdf.
88 Edwards, John. “Economic conflict between America and China: A truce declared, the talks begin.” Lowy Institute. December 2018. www.lowyinstitute.
org/publications/economic-conflict-between-america-and-china-truce-declared-talks-begin.
To address the challenges China poses, this brief argues that the U.S. should thus undertake a
comprehensive strategy including bilateral, multilateral, unilateral actions, and work with allies.
Bilateral negotiations should be the key forum for making progress. Here, the challenges are
both agreeing on a substantive agenda and developing mechanisms that create incentives for
Chinese compliance. Mere reaffirmation by China of commitments already made is insufficient.
The U.S. and China should consider using WTO arbitration as an enforcement mechanism and
seek a WTO waiver of any bilateral deal that includes WTO inconsistent measures, such as tariff
snapbacks or WTO plus commitments, to maximize compliance and minimize impacts on the
rules based system. The U.S. and China should renew efforts to complete a comprehensive
bilateral investment treaty (BIT) with an aggressive nine-month schedule. It is also important
that the U.S. not simply agree to Chinese offers to buy more exports. This strategy would yield
short-term gains but would require the U.S. to co-opt managed trade with China, at the cost of
the U.S. commitment to WTO consistent, market-based international trade outcomes.
At the WTO, the U.S. should work through the institution to expose where China’s economic
practices depart from its WTO commitments and where possible, the U.S. should increase its
use of WTO dispute settlement to challenge China’s WTO non-compliance. The U.S. should
work with its allies and China to reintroduce the China specific safeguard and ensure China’s
continued treatment as a non-market economy for trade remedy purposes. In addition, China
and the U.S. should commit to use any bilateral deal as a launching point to make rapid and
comprehensive progress on new trade rules at the WTO in areas, such as reformed dispute
settlement, technology transfer, SOEs, and digital trade.
The U.S. should not take on these ambitious plans alone. It needs to work closely with allies
to develop new trade rules and to create incentives for China to reform its economy and trade
practices. Joining the CPTPP would be the quickest way to reinforce a range of new trade rules
important to the U.S., including on IP protection, SOE reform, and digital trade. Expanding CPTPP
membership would increase the costs to China for non-participation, creating an incentive
for China to reform. If re-entry into the CPTPP proves elusive, the U.S. should undertake an
ambitious bilateral FTA policy to achieve similar ends.
Finally, the U.S. has a number of unilateral actions it should also explore to better deal with the
challenges China presents. Targeted use of the foreign investment review process and export
controls will be an important response to China’s quest for U.S. technology. Heightened use of
WTO-consistent trade remedy tariffs should also be in the U.S. toolkit.
If the current level of U.S.-China trade tensions remain for an extended period of time, bilateral
trade and investment are likely to decrease, which would be a lose-lose for both sides. The U.S.
and China have a historical opportunity to level the playing field between the world’s two largest
economies to ensure not only growth and prosperity for both countries but the world economy
and the global trading system.
Acknowledgements
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