My Questions for Chad on China in the World Trading System

At a Peterson Institute event launching the "How To Win a Trade War" book, Chad Bown said some things about trade relations with China that I found interesting:

My thinking evolved when it became clear to me that the world had changed, and the key driver of that change was China. But maybe not necessarily in the reasons why you would think.

First, initially, the challenges with China were essentially just over its economic system. It wasn't becoming more market-oriented – lots of subsidies, industrial policies, state-owned enterprises.

But over time, it also became clear that China not only had a different economic system, but it had a different way of viewing and interacting with the international trading system than we were used to as well, and that that created conflicts. China's policies and outcomes made it clear that it really didn't believe in interdependence the same way that the other members of the WTO and other economies around the world did.

The Made in China 2025 policy, its dual circulation policy. These were really attempts and efforts to make other countries dependent on China for inputs necessary for their supply chains, while at the same time reducing China's dependence on the rest of the world. And in a trading system that is oftentimes based on trust and the idea that when things happen and you need to engage with trading partners, either to sell them things or to buy things, if one of the major players out there isn't looking at the system in that same way, the world really has changed.

So you put those aspirations together, the policies together with the objectives, and the fact that over time China has just grown so large economically that what it does really, really matters and has impacts around the world, it became impossible to ignore.

In reaction to this, here are some questions I have for Chad (or anyone else who wants to address the issue) about trade relations with China: Would you like to see China participate in the world trading system in the way many other governments do, based on the idea that market-orientation and interdependence are key elements? Would we all be better off if China did so?

If the answer to those questions is yes, then I have this follow-up: Should pushing China in this direction have been, and should it be now, a priority of U.S. foreign policy? (For some people, I sense the answer to the first set of questions is something along the lines of "no, we just want China to go away," but this post is going to focus on the people who say "yes." "No" will have to be dealt with in a separate post some day!)

In terms of this being a priority in the past, I think it's clear that putting pressure on China was not a priority for the U.S. government in the years following China's accession. China acceded to the WTO just after 9/11, and U.S. foreign policy was distracted by the 9/11 response for many years. Pressuring China on anything was not high on the agenda, and in fact getting China's support (or non-objection) for War on Terror things was more of the focus when it came to relations with China.

If pressuring China on trade and economic policy had been a priority, there would have been a much more aggressive effort to try to ensure China's compliance with its WTO obligations. We did see some WTO complaints, and they seemed to work reasonably well. But we didn't see complaints on the big structural issues people are talking about now. (There was also the issue of using Section 421 or standard trade remedies against China, but that's not the same as pressuring China to liberalize).

And while we got some degree of U.S. pressure through bilateral dialogues, and through attempts to negotiate trade in China's neighborhood via the TPP, it never seemed to me that those were likely to have much impact on China's economic policies. I don't know if the people pushing for those approaches believed they were being tough, but as an outsider I always saw these options as much weaker than WTO complaints.

Obviously, it would have been nice if China had just, on its own, kept moving in a market-oriented direction after its WTO accession, so that no one had to do the work of pressuring. But it's fairly common for governments to resist liberalizing in accordance with the commitments they made, and when they don't do what they promised, other governments need to use the available tools to push them. And when it comes to Chinese trade and economic policies, from what I can tell, a ruling by a neutral international judicial body is the most effective tool there is. I'll leave it to the China experts and political scientists to explain why, but it seems to be the case.

Of course, that's not to say this is a perfect tool. How would China have reacted to successful complaints on issues such as industrial subsidies and the behavior of its state-owned enterprises? I don't know! But if it didn't comply, there would have been the possibility of authorized retaliation, which could have gotten us to some rebalancing in a way that was consistent with the rules of the world trading system.

So that's the past. Turning quickly now to the present, some people may say, well, maybe using WTO dispute settlement to pressure China should have been a priority then, but it wasn't, and it's too late now. But I'm not sure that's right. We've seen some successes with WTO complaints in recent years. Why not take it further and see how it goes?

Instead, we have gone down a different path, and are taking an approach based on unilateral tariffs and trade restrictions (along with pressure on allies to also impose tariffs and trade restrictions), with a focus that is more on closing our market to China than on pressuring China to liberalize. (We are also closing our market to other countries, which throws everything off here!)

We'll see how it all turns out. So far, I would say the answer is "not that well." But we can reconvene in a couple years when we've given it a bit more time.