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U.S.-China Trade Relations: Ideas for Improvement

Feb 08 , 2013

The United States Trade Representative released its 2012 Report to Congress on China’s WTO Compliance in December. The report expressed concern about the large role of the state in the Chinese economy over the past decade or so and urged further economic reform. It also said that the United States “will not hesitate” to deal with trade problems with China through the World Trade Organization’s dispute settlement system or by invoking domestic trade laws when dialogue does not resolve them.

Given the importance of the U.S.-China economic relationship, it is critical that the U.S. government get its trade policy on China right. Too little pressure on China might mean that China thinks too much of its self-interest to the detriment of U.S. business; too much pressure might mean that China is less willing to cooperate and that it engages in retaliatory actions against the U.S. There are already cases where the latter has happened, or appears to have happened as the Chinese government does not typically confirm tit-for-tat measures. One case was when the United States filed a complaint against China at the WTO in 2007 concerning China’s protection and enforcement of intellectual property rights and cooperation on the issue was hindered. Another case was when the U.S. created legislation in 2009 that effectively banned Chinese chicken imports to the U.S. for appropriations-related reasons and U.S. poultry exporters to China began hearing during the summer of that year that the Chinese government was no longer granting import licenses for their products. China also initiated dispute settlement proceedings on the matter before that.

There are several things that U.S. policymakers should keep in mind about China. One is that China is a large country – geographically, demographically and economically. This means that China cannot be bullied, especially since it is flush with cash and has a huge domestic market that gives it leverage over foreigners. A second point is that China has a history of around 5000 years. Part of that history involved China in the role of major power and creator of a system in which foreign participants paid tribute to China, events which live on in Chinese psychology in the form of pride. Another part of Chinese history is its “century of humiliation,” which has instilled within the Chinese a sense of grievance and fairness. A third point is that Chinese government officials see China as a developing country, at least when they want special treatment on trade deals and other matters. The implication of this is that a “one-size-fits-all” approach may not work and that what is needed is sensitivity to local conditions. Such a focus might result in capacity-building assistance and flexibility in policy implementation, which the WTO allows on some matters, such as the Agreement on Trade-Related Aspects of Intellectual Property Rights.

So far, the U.S. has brought 15 complaints against China at the WTO. These complaints have involved a variety of Chinese trade practices such as tax treatment for domestically-produced or designed integrated circuits, market access for foreign publications and audiovisual entertainment products, restrictions on exports of raw materials and measures affecting the production of wind power equipment. Some of the cases have been settled through “mutually satisfactory solution” or memoranda of understanding as occurred, for example, in a case on government subsidies and another involving the distribution of foreign financial information in China. Other cases have been settled through panel reports and appellate judgments, with China winning on some issues and the U.S. on many more in a system in which the complainant wins more than the respondent. On issues in which China has lost in cases, the Chinese government has tended to carry out WTO judicial recommendations as it did in an auto parts taxation case begun in 2006, an indication of the effectiveness of the WTO and the general willingness of China to comply with its WTO obligations. Even in a sensitive case involving U.S. films, the U.S. and China struck a deal that provided benefits “in compensation for China’s inability to comply with the WTO’s rulings regarding China’s importation and distribution restrictions in a timely manner,” as the USTR compliance report makes clear.

Other U.S. actions have occurred outside the WTO, including the imposition of anti-dumping duties and countervailing measures on some Chinese products. The Obama Administration also undertook a rare safeguard action in 2009 when it imposed additional tariffs on some Chinese tire imports for a three year period, a measure permitted by China’s WTO accession protocol but nonetheless a source of anger for China. There has also been much huffing and puffing in the U.S. Congress and elsewhere about the value of China’s currency and even calls to impose a new tax on Chinese imports to prevent China from deriving benefits from its commonly described (though not by the U.S. Treasury) “currency manipulation,” what seems a very bad idea, in part because U.S. consumers would likely have to pay higher prices for Chinese products. That is a reminder that trade issues are not only about conflicts between nations but also conflicts within nations – between import-resisting producer groups, exporters and consumers.

One cause of trade conflict between the U.S. and China is that the economic systems of the two countries are different. China is a country that has been embarked on serious economic reform since 1978 or a few years thereafter and has an economic system that is described by the Chinese government as “socialism with Chinese characteristics” and others as “state capitalism.” The U.S. is a more free-market system in which private enterprise is given great rein, though it too has great government involvement in the economy in a developmental capacity and is also dominated by large corporations, though generally not national champions. The result is “systems friction,” a term used by Richard Steinberg, a professor of law at UCLA.

One thing that China can do to help smooth relations with the U.S. is to further reform its economy. This might include increasing transparency, making it easier to sell foreign agricultural goods in China and following through on the commitment to join the WTO’s Government Procurement Agreement – things mentioned in the USTR report. What it should not involve is a simple imitation of American business practices – some of which, such as excessive risk-taking by financial institutions – got the U.S. economy into serious trouble.

The U.S. also has an important role to play. Instead of simply blaming China for its economic ills, it can get its own house in order. Elements of such an approach might include investment in education, improvement of the health care system, modernization of infrastructure, measures to reduce economic inequality, reform of campaign finance laws and efforts to prevent regulatory capture. Those measures are likely to do more to improve American competitiveness than harping on “unfair Chinese trade practices.”

James F. Paradise will start teaching at Yonsei University in March. He graduated from University of California, Los Angeles with a Ph.D. degree in Political Science.

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