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Economy

Trade War Should End This Way

Feb 26, 2021
  • He Weiwen

    Senior Fellow, Chongyang Institute for Financial Studies

US China trade.jpg

This year will be critical for China-U.S. trade relations. At the center is a question: Will the Biden administration bring a substantive change to Trump’s hostile policy and cooperate with China to bring bilateral trade relations back to a stable development track?

U.S. President Joe Biden has made clear that U.S. competition with China will be fierce, and that the U.S. will address trade issues according to international rules.

“We will confront China’s economic abuses; counter its aggressive, coercive action,” he said. “But we are ready to work with Beijing when it’s in America’s interest to do so.” 

Trade war must end

When he launched his trade war against China in early 2018, President Trump was all confident, saying that trade wars are “a good thing,” and “easy to win.” He imposed extra tariffs on $370 billion of Chinese goods, imposed a strict ban on Huawei, restricted tech trade, put hundreds of Chinese companies on the U.S. entity list and barred Chinese companies from U.S. stock markets. The actual developments over the past three years, however, have turned out just the opposite of what Trump had wished.

According to Chinese customs, exports to the U.S. experienced a spectacular jump during H2 of 2020, resulting in a 7.9 percent increase for the year — much faster than its global exports, which grew by 3.6 percent. At $451.81 billion, Chinese exports to the U.S. last year were 5.6 percent lower than the record year of 2018; however, the only reason for that was the sharp fall during H1 with the outbreak of the coronavirus pandemic — 11.0 percent down year-on-year and 18.4 percent lower than H1 2018. The situation changed completely during H2 last year, when Chinese exports to the U.S. soared by 25.2 percent year-on-year — 5.1 percent over H2 2018. The rebound was even more striking during Q4 2020, when China’s exports to the U.S. soared by 32.9 percent year-on-year, 9.4 percent over Q4 2018.

The U.S. was, paradoxically, the largest contributor to Chinese global export growth in 2020. Of the total net growth of $91.62 billion in Chinese global exports, the U.S. market accounted for $33.14 billion, or 36.2 percent. The European Union and ASEAN, with no extra tariffs on Chinese goods, contributed $24.84 billion and $29.31 billion, both less than the U.S.

If the current momentum continues this year, which appears likely, Chinese exports to the U.S. will hit a new historical high, no matter if tariffs are dropped or stay in place.

The trade war also eroded the U.S. share in China’s global trade. Over the past three years (2017-20), the U.S. share fell by 1.6 percentage points while the EU and ASEAN gained by 1.0 and 2.2 percentage points, respectively. China gained ground in the U.S. and global trade, outstripping Canada as the largest U.S. trading partner in 2020. China also outperformed the U.S. in trade with the EU, becoming the EU’s largest trading partner in 2020. 

A USCBC report issued in January last year showed that the trade war with China cost the U.S. economy $108 billion, or 0.5 percent of GDP, in the 2018-19 span. This includes the loss of 245,000 jobs and $88 billion in real income for U.S. households. Over 3,500 U.S. companies have sued the federal government in the U.S. Court of International Trade demanding that the extra tariffs on Chinese goods be dropped. CEOs of 160 Conference Board member companies have also appealed to the Biden administration for the tariffs to be called off.

Technology bans or restrictions, while hurting China without any doubt, is also hitting the U.S. high-tech sector. In a letter to the U.S. Department of Commerce, SEMI complained that the semiconductor ban on Huawei and other Chinese companies has resulted in a $170 billion loss to the U.S. semiconductor industry, knocking profits off 15 percent. Qualcomm, for example, lost at least $8 billion in 2020, because its China sales dropped by 48.1 percent and its China market share fell from 37.9 percent to 25.4 percent. SEMI thus appealed for a reconsideration of the ban.

The investment restrictions, or decoupling policy, also seemed unnoticed by U.S. and world investors. According to estimates, more than $210 billion flew from the U.S. to China’s bond market in 2020. An HSBC report showed that out of the more than 900 global institutional investors and leading companies, more than two-thirds are planning to increase their China market investment in 2021 — by 25 percent on average. 

The World Investment Report 2020, issued by UNCTAD last month, showed that global cross-border direct investment flows in 2020 fell sharply — by 42 percent from the previous year — to $859 billion, with FDI inflows to the U.S. off 49 percent to $134 billion. China was a major exception, gaining 3.3 percent to $163 billion, thus replacing the U.S. as the world largest recipient of FDI inflows for the first time in history.

In conclusion, the trade war imposed by the previous U.S. administration has been a failure. The above-mentioned USCBC report also warned that if the trade war continues to escalate, the U.S. will lose $1.6 trillion in GDP and 732,000 jobs over the next five years. Hence, it must end as soon as possible. 

Managing Differences

In fact, China and the U.S. do have another way to handle and address trade issues.

Biden has made clear that the U.S. will engage in fierce competition with China and will address trade issues according to international rules. China should agree on this point. However, it is not clear what “international rules” are.

Biden claims that America is back in the multilateral system. On trade issues, the WTO and its legal documents are the core of multilateral trading, and both China and the U.S. are signatory members. China and the U.S. should make contact to explore ways to articulate the key differences, and make judgements in compliance with relevant WTO rules.

Article 23 of Annex 2 of the WTO Uruguay Round Agreement — Understanding on Rules of Procedures Governing the Settlement of Disputes — is titled “Strengthening the Multilateral System.” It stipulates explicitly that “members shall: (a) not make a determination to the effect that a violation has occurred.” This means that no WTO member has a legal right to determine that another WTO member has violated WTO rules; that can only be done by resort to the WTO dispute settlement process, which makes determinations and rules. 

Under this clause, neither the U.S. nor China has the legal right to determine the other side has violated WTO rules. All the U.S. accusations about China’s economic and trade policies, measures or practices should be presented to the WTO for determination and settlement. 

Meanwhile, both sides should discuss the following key issues: 

• Unilateral tariffs. The U.S. tariffs imposed during 2018-19 period on Chinese goods was a unilateral action with no WTO approval. It has been found illegal by the WTO panel and should be cancelled. When the U.S. cancels, China should immediately cancel the retaliatory tariffs on U.S. goods.

• Application or abuse of the national security exemption clause. There is a national security exemption clause (NSE) in GATT and is inherent in the WTO. It is too broad and not specific enough to regulate the practices of members. Thus it could easily lead to abuse.

A number of U.S. bans and restrictions on Chinese companies were based on national security, mostly perceptions and lacking adequate hard facts and details tied to the NSE clause. It is recommended that the WTO set up an ad hoc group on articulating national security exemptions and their application. On that basis, the WTO could launch negotiations to update and clarify how the NSE works.

China and U.S. should have a bilateral working group on that matter and, based on the findings and recommendation of the group, and in conformity with the WTO ad hoc group recommendation, engage in NSE talk to regulate the policies of both countries. If both sides fail to agree on a certain NSE measure, the case should be referred to the WTO dispute settlement mechanism, rather than triggering unilateral action.

• Cybersecurity and management. Both governments need to proceed on the basis of the dialogue between Chinese president Xi Jinping and U.S. president Barack Obama in 2015 on cybersecurity cooperation. Both countries should participate in broader international agreements in this regard.

• Economic and trade system. The key demand of the Biden administration is to review and change China’s fundamental system of economy and trade to conform with the standard of international rules. The only international rules are WTO rules, and they should serve as the common standard to review the economic and trade systems of both China and the U.S. equally, including market access, fair competition, government competitive neutrality, industry policies, subsidies and SOEs. China should be open all the argued issues is a review, while the U.S. should also accept the review.

There are reasons to raise the question under WTO rules: Is the U.S. still a market economy in which the government maintains competitive neutrality? The U.S. mobilizes its governmental power to intervene in normal market competition, to ban and restrict specific Chinese companies in competing with the U.S. companies and to impose tariffs on steel and aluminum imports to protect home manufacturers. “Buy America” has been the policy pursued by White House for decades. The USMCA stipulates that by 2023, 40 percent of automotive products must be manufactured in the region, with wages above $16 per hour.

It is apparently a planned trade. Through a detailed review of all the major subjects, and using the same standard, China and the U.S. could find many points in common and work together to clear all those not compatible with WTO rules. Thus they would lay a cornerstone for a stable trade relationship.

• China-U.S. BIT. Both governments spent tremendous time and resources in BIT talks during the Obama administration and were very close to a conclusion. They should restart the BIT talks, update its content where necessary, respond to all the basic concerns of both sides and try to conclude the BIT in the near future.

While the U.S. government can talk with the EU by all means, the more important way is to talk with China, as the EU has already concluded the CAI with China. Since great progress has already been made in the BIT talks, we have every reason to restart and conclude it. The conclusion of the China-U.S. BIT will be a milestone in overall bilateral relations, especially trade relations.

• Business talks for major projects. The SINOPEC-Alaska natural gas plan should proceed. Chinese companies could invest in the rust-belt areas of the U.S., in the steel and automotive industries, to update and revive the factories there. Some of the products should be sold to China, or elsewhere in the world. This would be a win-win outcome, creating benefits for the local people and enhancing mutual trust among our two peoples.

China and U.S. do not lack for differences and will continue to have them in the future. What we lack is a feasible way to address and manage them in compliance with multilateral rules, rather than escalating trade tensions. It is highly anticipated that both countries will make efforts in the same direction and bring about a positive turn in 2021 and beyond. 

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