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Foreign Policy

Turn the U.S.-China Truce to Rebuild the Rule-Based WTO Trading System

Jul 04 , 2019

US China trade.jpg

The decision announced by the United States at the G20 Summit to suspend further trade measures against China and to reverse, at least partially, the prohibitions on business with Huawei, is certainly welcome news. The US trade actions against China (wrongly described as a US-China trade war, rather than a one-sided action by the US with limited counter-actions by China) have been arbitrary and unhelpful, and have already caused significant short-term damage to both the Chinese economy and the global economy. A truce is therefore very good news.

Yet we are very far from a resolution of the tensions and uncertainties. Part of the reason is Donald Trump’s erratic and mercurial nature. What he promises one day does not hold the next. Alarmingly, the US’s decisions are in the President’s hands almost alone, with little oversight by Congress, the courts, regulatory agencies, or alas, the WTO, which has mostly been pushed to the sidelines by the US. We shall therefore see what follows the announcements.

There are at least four challenges on the table.

First, Trump’s domestic politics are based heavily on blaming foreign countries for America’s woes. The litany of complaints is long: Mexico and migration; Muslim nations, especially Iran, and terrorism; Europe and Japan and under-spending on defense; and so on. Part of the attack on China is simply part of that unfortunate pattern.

Second, US politicians and pundits have had a tendency to blame China for the decline of US manufacturing jobs since 1980. This is mostly wrong. Technology, not trade, explains most of the decline in employment. But even where trade was involved, the right approach is not to stop trade, but to compensate the losers from trade. After all, both China and the US have been overall beneficiaries of the rising trade between the two nations. The US federal government should be using redistributive tax and spending policies to help the losers, but the corporate winners have repeatedly blocked redistributive policies for those left behind. In fact, the corporate winners have gained further tax cuts for themselves! And then China gets the blame.

Third, the neoconservatives in the US security establishment are shocked and dismayed by China’s rapid economic growth and development of advanced technologies. Yet China’s advance is mainly a reflection of China’s successful development strategy, one that has been similar in many respects to preceding development pathways of Japan, Korea, and others. The US establishment is lashing out at China’s success, as it undermines the US claim to global primacy. There is little that China can really do about this other than to champion an open, rule-based multilateral system founded on the UN Charter. Yet with China’s large population, more than four times that of the US, China’s success is bound to trigger some worries.

Fourth, and finally, there are a series of real, open challenges for the rule-based trading system that require further negotiations and agreement among the US, China, European Union, and others. These topics should be addressed within the context of the World Trade Organization, not by unilateral US actions. These unsolved challenges include the following issues: state-backed technology development, state aid to enterprises, industrial policies, and cybersecurity, among others. The current rules of the game are not up to these challenges, so an upgrading of the WTO rules will be worthwhile.

Consider the challenge of technology promotion, for example. The need for government backing of basic science and early-stage technologies should be well accepted. The US Government engages in substantial funding of R&D, both for science and pre-commercial technologies, through the National Science Foundation, the National Institutes of Health, the Department of Defense, the Department of Energy, the US Geological Survey, the National Aeronautics and Space Administration (NASA), and other agencies. America’s complaint that China is unfairly promoting new technologies should therefore be greeted with skepticism.

Still, there are legitimate concerns as to how technology policies should be pursued. Such policies should not be implemented through trade protectionism. They should be transparent. They should not finance already commercial technologies. And such policies should not aim to cripple other countries’ enterprises, such as US actions against ZTE and Huawei.

There are also legitimate concerns over state aid to industry. The US criticizes China for its support to state-owned enterprises, yet once again, the US does the same. The US Government spends vast budget sums on companies such as Boeing, but does not call this state aid as it is part of the Pentagon’s procurement. It would certainly help to make such financing transparent and to agree on global rules (for example, modeled on the EU rules on state aid). We should not end state aid entirely, as it has its purposes, including social, technological, environmental, and security considerations.

Finally, we should agree on new global rules for cybersecurity. We need a global framework to limit the new cyber arms race before it is completely out of control. Recent reports claim that the US has already installed malware into the Russian power grid, and perhaps Russia or others have done similarly in the US or elsewhere. The risks of cyberwarfare are multiplying rapidly.

The most distressing part of the Trump attacks on China is how quickly American politicians and pundits have come to see China as an adversary, even an enemy. Fear and vast oversimplifications often sway public opinion, and can lead to very dangerous conflicts for no valid reason. We should therefore turn the new truce into a longer-term effort to restore trust, normal economic relations, and a strengthening of multilateralism. The WTO should welcome a new round of negotiations on the novel and critical trade issues confronting the world’s major trading regions. The whole world would breathe a sigh of relief to return to trade diplomacy.

 

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