Outcompeting Beijing: A Roadmap for Meeting China’s Commercial Challenges

The relationship between the United States and China is one of the most important geopolitical relation- ships in the world—and will be for the foreseeable future. How Washington and Beijing manage their relationship will have far-ranging consequences for global peace, prosperity and stability for decades to come.

With a global pandemic ravaging the world on the heels of a temporary détente in a protracted and intense trade war, the relationship between Washington and Beijing is souring. The media, politicians and pundits now routinely refer to the deteriorating relationship between the United States and China as a new “cold war.” However, the analogy is flawed. The United States and the Soviet Union were never economically integrated the way the United States and China are today, which makes the Washington-Beijing relationship much more complicated and challenging to manage. Though the United States’ and China’s economic integration began in the 1970s, Beijing’s place in the rules-based economic system was guaranteed by its admission into the World Trade Organization (WTO). Much of the current dis- course today revolves around Beijing’s membership in the WTO, which ostensibly prevents the United States from discriminating against Chinese trade and investment.

One of the bedrock principles that governs international trade is the most-favored-nation (MFN) status. With some exceptions, such as bilateral or regional free trade agreements, MFN status requires WTO members to treat other WTO members equally when applying tariffs or other trade barriers to their goods. When Beijing began negotiations to join the WTO, U.S. law prohibited permanently grant- ing communist countries like China MFN. However, after a lengthy negotiation between Washington and Beijing, and a vigorous debate in Congress, President Clinton signed legislation granting China permanent normal trade relations (PNTR) in October 2000. A year later, China formally joined the WTO. Though increasingly controversial today, the decision to grant China PNTR and welcome Beijing into the WTO enjoyed wide bipartisan support in Congress at the time—and was broadly supported by foreign policy analysts and the U.S. business and agricultural communities.

Today, critics contend that rather than moving China in a democratic, capitalist direction, admitting Beijing into the WTO simply empowered a brutal regime and decimated U.S. manufacturing through a surge of imports. Yet policies must be judged by the calculus facing lawmakers at the time the decision was made, not based on information avail- able to policymakers nearly two decades ex post. Under that framework, the decision to admit China into the WTO was the right one at the time. Likewise, even with the benefit of hindsight, the decision still makes sense today even if some of the more Panglossian predictions about the nature of the government in Beijing did not come to fruition.

To be sure, all is not well with the U.S.-China relationship. From the trade war and investment restrictions to tensions over Hong Kong, Taiwan and the treatment of Uighur Muslims, the Biden administration inherited an increasingly toxic relationship with Beijing. Opportunities to de-escalate the tensions exist, but it will be a fraught task. This paper will briefly detail the recent history of the U.S.-China commercial relationship, diagnose the current problems, explain the failures of the current approach and provide policymakers with concrete policy ideas to outcompete China in the 21st century.

To understand the current economic clash between Wash- ington and Beijing, it is imperative to understand a brief post- World War II history of Sino-American relations, though a full accounting is beyond the scope of this paper.

Between the establishment of the Republic of China in 1949 and the early 1970s, the United States and China had little interaction, including virtually no international trade or investment. After Secretary of State Henry Kissinger’s secret visit to Beijing in 1971 and President Richard Nixon’s subsequent trip in 1972, relations between the United States and China began to thaw.11 These meetings would eventually lead to the normalization of diplomatic and economic relations between the two countries as the United States sought a new ally in its Cold War with the Soviet Union.

In the late 1970s, China made internal reforms to its eco- nomic model that continue to have a profound impact on the global economy. As one economist notes in his comprehen- sive history of U.S. trade policy:

In the 1970s, China was one of the poorest coun- tries in the world…and it had virtually no presence in world markets. In 1978, China’s premier, Deng Xiop- ing, began to open what had been a closed economy, moving it away from rigid state control and central planning toward a market-oriented system with lim- ited private enterprise. Agricultural collectives were phased out, and private farming was introduced; the state monopoly on foreign trade was abolished; foreign investment was gradually permitted; and trade barriers were reduced in stages.

These policy reforms led to a dramatic acceleration in China’s economic growth and sparked a rapid expan- sion in its foreign trade…Within two decades, China made an enormous impact on world markets and trade flows. China’s share of world exports rose from miniscule proportions in 1980 to 5 percent in 2000, reaching 12 percent in 2014.

Indeed, Beijing’s own internal reforms are much more important to its status today as an economic superpower than Washington’s decision to grant China PNTR—or the rest of the world’s decision to admit the country into the WTO. In many ways, the “main explanation for the rapid growth in imports from China in the 1990s and 2000s was the large size and rapid growth of the Chinese economy.”