On September 10, Chinese President Xi Jinping and US President Joe Biden had a lengthy and constructive phone conversation, bringing new hope for stabilizing the bilateral relations which is at their lowest point in 40 years.
While the overall relationship remains tense, the bilateral trade flow has been growing in a completely different direction. The China customs data shows that, during the first eight months of 2021, China-US two-way trade in goods soared to an all-time high of $470.32 billion, or a growth of 36.6 percent year-over-year, 2.4 percentage points higher than China’s global trade growth. Chinese exports to the U.S. rose by 33.3 percent to $354.16 billion while its imports from the U.S. rose by 48 percent to $110.81 billion. As August fshows an even stronger momentum of growth than July, this trend is most likely to continue for the remainder of the year. Barring the unexpected, the whole year 2021 will see total two-way trade break the $700 billion barrier, with Chinese exports exceeding $550 billion and imports above $170 billion, all historic records and apparently higher than the pre-trade war level in 2018.
China also enjoyed a good momentum in FDI inflows so far this year. During the first seven months, FDI inflows broke the $100 billion barrier for the first time in history, at $100.74 billion, a year-over-year growth of 30.3 percent. The latest AmCham China white paper suggests that two thirds of its members see China as a market of priority. A recent US-China Business Council (USCBC) white paper also shows that 95 percent of its members made a profit in China market in 2020.
A striking contrast is that the government relations, including the trade policies, are lagging far behind the pace and needs of day-to-day operations by business communities, local governments, and citizens of the two countries. The United States of America-China Chamber of Commerce, USCBC and other leading American business associations have shown increasing anxiety about the inertia of the Biden Administration that has done nothing to change the tariffs and other restrictions imposed by the Trump Administration. Chinese Foreign Minister Wang Yi has also called on the US side to remove the tariffs and lift tech restrictions and sanctions, so as to clear the road blocks for better relations. However, no firm response from the US side has been given yet.
According to a Wall Street Journal news report, USTR is considering a new 301 investigation regarding China’s industrial policies and the subsidies, especially to SOEs which may lead to a new round of additional tariffs on Chinese goods. If confirmed, USTR might keep the current tariffs unchanged as “leverage” during the new 301 investigation, forcing China to change its industrial policies and subsidies. Otherwise, at the end of the investigation, new tariffs will replace the Trump tariffs. It gives the impression that the Biden Administration has no China trade policy of its own, only to follow the Trump roadmap.
The 301 investigation itself will meet with strong opposition from China as the investigation will be conducted under the US domestic law, not WTO law, and thus has no governance over China. New tariffs, if imposed, will undoubtedly give rise to a new, equally resolute counter-attack from China. The economic losses by American businesses and households and the rampant inflation will get worse.
It is thus recommended that the US side revokes the tariffs (then China revokes tariffs on US goods immediately), changes its high-tech restrictions and sanctions, to show its sincerity to end Trump Administration’s wrong policies and facilitate the robust growth in two-way trade and investment flows. Then, the commerce departments of both China and the US should immediately start dialogue and consultations on all issues of concerns.
The industrial policy and subsidies issues could well be on the agenda. It is recommended that both side set up a joint ad hoc group of trade experts for a fact-finding survey of the issue. At the end of its task, a mission report, consisting of, among others, hard facts and verified evidence, not merely opinions, should be forwarded to the Chinese and US governments for assessment and consultations for appropriate solutions.
The survey should equally cover controversies of industrial policies and possible subsidies in both China and the US, and the subsequent government assessment should be based on WTO rules only.
Industrial policies and subsidies are a common practice in many countries today. China has made several high-tech development strategies and plans, including in AI, semi-conductor chips and Made in China 2025, entailing fiscal and monetary supports. Among others, the semiconductor chips strategy envisages energetic fiscal and financial support to the R&D and factory building. Subsidies are also awarded to new energy vehicles (NEV). The US as well has similar policies and subsidies. The National Strategy of Advanced Manufacturing in 2012 envisaged $ 12 billion for chips R&D, and a $25 billion subsidy for building factories. The Endless Frontier Act, still under review in the Congress, sets aside $ 110 billion for supporting AI, IC, quantum projects, advanced telecom, advanced energy technology and advanced materials, $100 billion for R&D and ultimate commercialization, and another $10 billion to set up 10-15 regional centers. The 17 member states of the EU adopted on December 7, 2020 a joint declaration to launch A European Initiative on Processors and Semi-conductor Technologies which aims at 145 billion euros support over the next 2-3 years.
WTO rules do not prohibit industrial policies and subsidies on national treatment basis, only prohibit discrimination among different entities within the border of a member economy. In WTO compliance, China Foreign Investment Law stipulates equal treatment, i.e. equal access by all entities, SOE, private or foreign, to the same fiscal and monetary supporting measures. Chinese Ministry of Industry and Information Technology (MIIT) recently announced the subsidies to NEV manufacturers from 2016 to 2020. Tesla obtained RMB 2.1 billion subsidies from the Chinese government based on the same standard with other Chinese NEV manufacturers including BYD, Beijing Auto, Dongfeng Auto, etc.
The recent USCBC white paper makes clear the complaints and concerns by its members over unfair treatment in China. The ad hoc group should address all their concerns. If there are unfair treatment cases, with hard facts and evidence verified, they should be corrected quickly.
Equally on the US side, any unfair treatment should also be corrected quickly.
Such a roadmap is constructive instead of conflicting. The continuation of Trump trade policy will only lead to a dead end. As mentioned earlier, the government actions are already far behind the robust trade activities. We have no time to waste.