In recent years, the debate over the United States’ economic relationship with China has reached ever higher levels of hand-wringing and agonizing. While there is a view that mistakes were made in the past, there is little agreement on what those mistakes were or what actions should be taken now, aside from a vague sentiment that the United States’ response to China’s trade practices should be tougher.
Part of the problem in looking for a way forward is that it is not clear where exactly people — U.S. government officials, policy wonks, ordinary voters — want to go. Is the goal to make China more like the U.S. in terms of the role of the market in its economy and economic policymaking? Is it to “fix” the bilateral trade deficit by encouraging China to buy more from the U.S. and sell less to the U.S.? Or is it to exclude Chinese companies from U.S. markets so that American companies do not have to compete with them?
Which of these goals the U.S. ultimately adopts will determine the approach it takes regarding the rules surrounding trade with China. If the choice is to keep China out of the U.S. market, the answer is simple: Unilateral tariffs and other restrictions will do the job — at a serious cost to the economy, of course. And if the focus is on reducing the trade deficit, a greater willingness to address the macroeconomic causes of trade deficits, such as low U.S. savings rates, is needed.
But if the United States wants China to be more market-oriented, in the sense of moving towards an economy driven by the forces of supply and demand — and that’s what it should want, because this will make both China and the U.S. better off — then there needs to be a discussion of strategy. How exactly can the U.S. nudge China in that direction? As a general matter, influencing the domestic policies of other countries is a delicate operation. But the foundation has already been laid at the World Trade Organization (WTO), and progress could be achieved here if 1) this objective were made a priority of U.S. policy, and 2) policymakers thought carefully about what might be most effective.
This brief reviews the history of U.S. approaches to pressing China on trade issues, including on market-orientation, looking at the various unilateral, bilateral, and multilateral efforts that have been tried. Based on this assessment, it concludes that formal WTO complaints provide the best chance of success for pushing China in a more market-oriented direction.
Lessons From the Past
Late ’80s Through Early ’00s: The Promise of China’s WTO Accession Gets Lost in the Foreign Policy Shuffle
In the late 1980s and the 1990s, the George H.W. Bush and Bill Clinton administrations put significant effort into crafting rules that would make China more market-oriented. As part of China’s WTO accession negotiations, China agreed to a detailed set of “WTO-plus” obligations (meaning that China took on obligations that other governments did not) related to the functioning of its economy. The U.S.-China bilateral negotiations on accession, completed in 1999, were crucial to China’s broader negotiations with all of the WTO member governments, and China’s economic structure was at the core of those negotiations.
Subsequently, as part of the effort to enact domestic legislation that would grant China Permanent Normal Trade Relations (PNTR) and pave the way for its WTO membership, President Clinton laid out the case in 2000 for how China’s WTO membership, and the rules it agreed to, could facilitate its development as a market-oriented democracy that respects individual rights. This was not a promise, but rather a hope that multilateral rules were a way to achieve this goal.
Once China joined the WTO in 2001, progress on Clinton’s hopes might have begun in earnest with a push for China to comply with the broad obligations it had agreed to. But something got in the way: After the 9/11 terrorist attacks, the focus of U.S. foreign policy shifted elsewhere. Instead of pressing China on its nonmarket practices, or human rights, or democracy — as might have been expected in the summer of 2001 — the United States soon got caught up with the invasion of Iraq and the Global War on Terror. In doing so, the U.S. often needed China to go along with its plans. The practical result was that the U.S. had to cater to China’s views and positions a bit more, and scale back pressure for Chinese reforms.
To be clear, the U.S. did eventually bring WTO complaints against China, and they were reasonably successful. But on the big picture principles related to market-orientation of the Chinese economy, the U.S. often left the WTO-plus rules unenforced and did not press China as much as might have been expected, given the broad rules that had been negotiated.
Pre-Trump Alternatives to Multilateralism
WTO complaints are not the only approach that has been tried, so we have the ability to compare and contrast the different options for pushing China toward market-orientation. Various U.S. administrations have tried unilateral, bilateral, and other strategies to address the problems they saw with China trade.
The George W. Bush administration started the Strategic Economic Dialogue, involving high level U.S. and Chinese officials talking about trade issues. The Barack Obama administration continued this approach in the form of the U.S.–China Strategic and Economic Dialogue.
President Obama also led the negotiation of the Trans-Pacific Partnership (TPP), a plurilateral agreement in the Pacific region that excluded China, explaining that the TPP would allow the U.S. to “write the rules” of trade rather than allowing China to do so. Obama also took unilateral actions, imposing tariffs on China under Section 421 of the PNTR statute, a special China-specific safeguard mechanism that was authorized under China’s WTO accession agreement.
None of these approaches had much impact on China’s trade policies or general economic policies, though, and when President Donald Trump first took office he elevated concerns about U.S.–China trade to the forefront of his policy priorities.
Trump’s Approach: Tariffs, Deals, and Discussions
While prioritization is important, Trump’s focus on tariffs and the trade deficit undermined his efforts to steer China toward a market-oriented economy during his first term. In practice, his approach to issues relating to trade with China was a mix of unilateralism, bilateralism, and multilateralism. None of these strategies achieved much success.
With regard to unilateral measures, the Trump administration initiated a Section 301 investigation on specific Chinese practices related to tech transfer, intellectual property (IP) protection, and innovation, and then imposed tariffs based on its findings. Predictably, this led to tariff retaliation by China.
The Trump administration also negotiated a bilateral trade deal with China, generally referred to as the Phase One deal. This deal included managed trade policies such as promises by China to buy specific quantities of U.S. goods and services, as well as more traditional market access concessions such as liberalizing Chinese agricultural regulations. However, the deal did not have a traditional dispute settlement mechanism, and there is no public information about whether the unique approach to disputes included in the agreement has led to any significant reforms of China’s economic or trade policies.
In addition, the Trump administration initiated discussions at the WTO General Council of China’s nonmarket practices. The concerns expressed there were legitimate ones that get at the core of the problem of a state-oriented economy such as China participating in a world trading system that assumes a certain degree of market orientation. However, the Trump administration did not file WTO complaints on these matters and the discussions did not lead to any changes.
Similar issues were raised by the Trump administration in trilateral discussions with the European Union (EU) and Japan, as well as at the annual G7 meetings of world leaders to discuss and coordinate solutions to global issues. But again, there was no concrete progress on issues related to China’s market orientation.
Biden Continues Most Trump Trade Policies
During his presidential campaign, Joe Biden was critical of Trump’s China strategy. Then, early on in his administration, his U.S. Trade Representative, Katherine Tai, gave a high-profile speech laying out her views on the problems with China trade, in which she offered this assessment of the state of affairs on trade with China:
“For too long, China’s lack of adherence to global trading norms has undercut the prosperity of Americans and others around the world. In recent years, Beijing has doubled down on its state-centered economic system. It is increasingly clear that China’s plans do not include meaningful reforms to address the concerns that have been shared by the United States and many other countries.”
It took a while for the Biden administration to put its vision for U.S.-China trade into practice, but eventually the administration offered a new variation on the critique of China’s economic policies, focusing on the idea that Chinese nonmarket policies had led to “overcapacity.”
In terms of specific trade policy changes, rather than making significant revisions to the Trump administration’s Section 301 tariffs, or taking any enforcement actions in the Phase One deal or at the WTO, the Biden administration focused on encouraging domestic investment in strategic industries through the use of subsidies and coordinating supply chains with allies. With regard to the Section 301 tariffs, towards the end of Biden’s term, his administration tweaked them, imposing new tariffs on a slightly different set of imports, including 100% tariffs on electric vehicles. To date, the imposition of these Section 301 tariffs has not led to significant changes in Chinese trade policies and practices.
Crafting a New Trade Policy Toward China
With all this experience, we should be able to learn some lessons. What has worked and what has not worked? And based on this analysis, what should the U.S. and allies such as the EU, Japan, and Australia, do going forward?
Finding the right approach to dealing with China depends on what the goals are. One view is that China was never going to change, and people holding this view seem to have given up on the China economic integration project and just want to shut China out of the U.S. market as much as possible.
Others, however, say they want to influence China in a more market-oriented direction. For example, Brian Deese, the former director of the National Economic Council in the Biden administration, recently wrote: “Responding to China’s anti-market behavior strongly enough to discourage it … is challenging but essential to the well-being of our economy and that of our peers.” If making China more market-oriented is the objective, WTO complaints are clearly the best option.
WTO complaints have had success in the past. Multiple studies evaluating the impact of those cases against China have shown a reasonable degree of compliance. Not every dispute has resulted in full compliance, of course, but that is true for complaints against the U.S. and the EU as well. When China has been the subject of a complaint, it has sometimes agreed to make changes to its policies even before a dispute settlement ruling, and has generally made at least some effort to comply in cases that result in a ruling.
However, the WTO complaints that have been brought to date have tended to focus on narrow, industry-specific issues, rather than broad systemic ones, and that has limited the scope of their impact. If the world wants China to become significantly more market-oriented, it may be time to test the broader obligations China agreed to when it joined the WTO. For example, in the Working Party report related to its WTO accession, China promised the following:
“The representative of China further confirmed that China would ensure that all state-owned and state-invested enterprises would make purchases and sales based solely on commercial considerations, e.g., price, quality, marketability and availability, and that the enterprises of other WTO Members would have an adequate opportunity to compete for sales to and purchases from these enterprises on non-discriminatory terms and conditions. In addition, the Government of China would not influence, directly or indirectly, commercial decisions on the part of state-owned or state-invested enterprises, including on the quantity, value or country of origin of any goods purchased or sold, except in a manner consistent with the WTO Agreement.”
This is a broad obligation that China agreed to and complying with it could have a real impact on China’s economic structure.
Some people have doubts about the effectiveness of WTO complaints and seem to believe that unilateral action would work better. It is understandable that unilateralism feels like the toughest and strongest approach. With the large U.S. economy, to which many countries want access, it is not surprising that some people think the United States can just force other countries to change by using its economic leverage. Generally speaking, however, the answer in practice has been that this approach does not achieve much, and that is particularly true with regard to larger countries such as China. As evidence of this, the Biden administration has acknowledged that the Section 301 tariffs have not led to significant changes in China’s policies and practices.
To be clear, it is important not to overstate the case here. There is no guarantee of success with WTO complaints. And in some circumstances, unilateralism might work a bit, at least in the short term. Nonetheless, based on past experience, WTO complaints provide the best overall chance of success over the long term.
One important caveat to the argument set out here is that currently the WTO’s dispute settlement mechanism is not functioning for all members, as the U.S. has blocked the appointment of WTO appeals judges on the basis of a number of concerns, including allegations of judicial activism. Ideally, the U.S. will eventually reverse course and agree to a compromise that restores full functionality. In the meantime, one of the various governments that have agreed to an alternative WTO appeal mechanism could take the lead in bringing these complaints.
Conclusions
The goal of integrating China into the club of market-oriented countries is still worth pursuing. Both China and the rest of the world would be better off if China moved in this direction. While the way things played out after China’s accession to the WTO was a missed opportunity, if we make China’s economic structure a priority now, as it was in the 1990s, we might see some progress.
The current political environment may not support this approach, as keeping China out of the U.S. market has become the primary trade objective. And the best opportunity for pushing market-orientation may have been in the years immediately following China’s WTO accession in 2001. Nonetheless, completing the unfinished business of integrating China into the world trading system would still be of value today. It looks as though U.S. trade policymakers are in the midst of trying all other options at the moment, but if and when those do not succeed, the foundation exists for a more productive approach.
In terms of the reaction from China, some of the actions and rhetoric coming out of Washington these days could be characterized as “anti-China.” But establishing and applying a set of rules about market orientation should not be seen as punitive. Rather, it simply reflects what China and other WTO Members agreed to as part of China’s WTO accession. Everyone has an interest in, and benefits from, this system of rules. If approached diplomatically, a renewed effort to push for China to be more market-oriented could actually be part of an improvement in relations between China and the West.
To read the issue brief as it was published on the Baker Institute website, click here.