Six Steps To Resolve The U.S.-China Trade WarBloombergQuintOpinion
“We make first our habits, and then our habits make us.”
- John Dryden (1631-1700)
Since the Sino-American Trade War got underway in March 2018, America’s leaders have been developing anti-China, even anti-Chinese, habits. Since then, China’s leaders have retaliated with their own anti-U.S., and even anti-American, habits.
Will the adversarial way in which America and China are interacting become so deeply ingrained that they make their Trade War a habit and, if so, become implacable adversaries?
The answer will emerge in the coming months. The Biden-Harris team assuredly will resume a more mature diplomatic style than the last Administration toward President Xi Jinping’s Chinese Communist Party. There is bipartisan support for continued robust defence of America’s substantive interests. Democrats and Republicans alike appreciate that the U.S. and China share no values about popular governance, social justice, or human rights. But, the two countries can forge a step-by-step plan to stop them from habituating to their substantive trade differences.
Here it is, in six steps.
Step One: Extend the Phase One Agreement
The 96-paged Jan. 15, 2020 Phase One Agreement commits China to purchasing $200 billion worth of American agricultural, industrial, and energy products, and liberalising market access for U.S. financial services providers. Thanks to the COVID-19-induced economic slump, China cannot meet the targets by year-end 2021. Yet, as its economy recovers, it needs U.S. goods and services. Similarly, America needs a boost in its exports to help reflate its economy.
An extension of the Phase One Agreement for at least one year is in the interests of both countries.
Thereafter, toward year-end 2021, data on the size and trajectory of the bilateral trade imbalance can determine whether the Agreement needs a further extension, or possibly expansion, or whether it has served its purpose.
Step Two: Stop Financial Decoupling
Conflict over inbound and outbound portfolio investment is becoming routine in the U.S.-China Trade War. China bans U.S. regulators from inspecting auditing firms in China and forbids those firms from disclosing internal audit documents. In August 2020, Trump’s Treasury Department demanded access for the U.S. Public Company Accounting Oversight Board to audits of Chinese companies – otherwise those companies would be delisted from America’s securities exchanges. Some of them, however, are partly state-owned enterprises, and the CCP is wary of revealing all to all. In May, the Senate passed the Holding Foreign Companies Accountable Act (S. 945), and the House just did so: the securities of any company that fails to show it is free of foreign governmental ownership or control, or which the PCAOB could not audit for three straight years, would be prohibited from U.S. exchanges.
It’s in the interest of both countries for the U.S. Securities and Exchange Commission and China Securities Regulatory Commission to collaborate on auditing procedures and standards. China can’t grow to be a pole in a multi-polar world if its companies are delisted from the broadest, most liquid financial market in the world. American investors will pour funds into overseas markets if they smell growth in Chinese stocks they can’t buy in America. The SEC and CSRC should agree to hold China’s non-SOEs to the same ones as any other foreign issuer, and to put warning labels on securities of partly-privatised SOEs the financial statements of which aren’t properly certified.
Step Three: Deal with TRIPs-Plus IP Issues
The Phase One Agreement covers twentieth-century intellectual property issues about which the U.S. has complained, such as strengthened enforcement mechanisms for patents, trademarks, copyrights and trade secrets by China. It also obliges China to stop de jure or de facto mandates that foreign investors transfer technology to local JV partners. But, the Agreement fails to cover contemporary topics not covered by the WTO Agreement on Trade Related Aspects of Intellectual Property Rights.
To deal with TRIPs-plus problems, the U.S. and China should establish a ‘Bilateral Advanced Technology’ Group. The BAT Group would consist of:
- senior IP, military, and national security decision-makers,
- assisted by a technical staff to provide reports and recommendations, and
- bolstered by a legal panel for non-binding adjudicatory dispute resolution.
The Group would work, point-by-point, unbiasedly, strengthened in the knowledge that its American and Chinese members share a common goal: neither wants to be ripped off blind, or hacked to death, by the other. And, because China and the U.S. respectively account for 23% and 12% of cross-border data flows, their collaboration can prevent the internet fracturing into two different oligopolistic data spheres.
Step Four: Exchange Plans In Advance
Also central to the Trade War has been China’s market share goals in Made in China 2025, coupled with support for state-owned enterprises to effectuate those goals. The CCP forges industrial policy non-transparently, with perfunctory endorsements from the State Council and/or National People’s Congress. That modality is unbecoming of a great power.
America’s pattern is similarly self-involved. The U.S. implements trade policies with little advance consultation with, or information shared to, other countries. Hence the troubled Trump bequest to Biden of Section 232 cases.
Less unilateralism is necessary on both sides.
A priori consultation, not fait accompli presentation, should be the lodestar. Neither America nor China alone can govern, or even guide, the world trading system. But, they can improve trade rules for their mutual benefit via a ‘Bilateral Early Consultation Group’.
BEC Group members should be senior executive and legislative branch decision-makers responsible for proposing and implementing trade laws and policies.
Unlike the toothless World Trade Organization Trade Policy Review Body, the Group would discuss trade measures before they take effect to avoid disputes before they happen. The BEC Group’s remit would be every point in the aforementioned USTR, White House, and Chinese publications. The BEC Group would have no authority over either country’s measures, much less to alter either’s economic system. Thus assured, America and China could look to the Group for long-term, orderly market arrangement ideas.
Step Five: Gradually Unwind Tariffs
The Trade War isn’t over until Tariff Man’s tariffs are eliminated. That means Waves One (25% duties on $34 billion worth of Chinese-origin merchandise, imposed on July 6, 2018), Two (25%, $16 billion, Aug. 23, 2018), Three (25%, $200 billion, Sept. 24, 2018), and Four, List A (7.5%, $120 billion, Oct 15, 2019) need to be repealed. So, too, must each and every tit-for-tat Chinese counter-retaliatory tariff and non-tariff barrier.
Alas, neither side will be willing to start until the other treads the first Four Steps.
So, the BAT and BEC Groups should be charged with certifying to Presidents Biden and Xi that the journey is well underway. If so, then why not repeal the four tariff waves?
If the pre-eminent goal is to stimulate trade, America and China will do so on a ‘last-in, first-out’ basis, because LIFO will peel away tariffs on the largest values of goods (Waves Four and Three). If they’re still dubious about each other, they’ll use ‘first-in, first-out’.
Step Six: Hedge Bets
As the U.S. and China walk together, each will worry the other won’t earnestly take all Five Steps. Thus, they’ll need to hedge against non-performance, simultaneously but independently, via Step Six.
For America, Step Six is to re-engage in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (before China attempts to join it), negotiate a bilateral FTA with Taiwan, and establish an Indian Ocean First Fleet based in Singapore. Greater American engagement in the Asia-Pacific region means stronger positioning to check China.
For China, Step Six is to continue broadening and deepening its integration in the same region through the Regional Comprehensive Economic Partnership it signed on Nov. 15, 2020, plus the Belt and Road Initiative. Greater Chinese involvement in the non-western world means less dependence on America’s markets.
John Dryden, Role Model
England’s first Poet Laureate, John Dryden is a role model for America, China, and their leaders. His cross-genre work spanned, without polarising, Royalists and Parliamentarians, Puritans and Catholics. England developed new, better habits.
Presidents Biden and Xi will need to think laterally, outside the box, and with precision, so that America and China don’t fall victim to the habits they’re developing.
Raj Bhala is the inaugural Brenneisen Distinguished Professor, The University of Kansas, School of Law, Senior Advisor to Dentons U.S. LLP, and Member of the U.S. Department of State Speaker Program. The views expressed here are his and do not necessarily represent the views of the State of Kansas or University, Dentons or any of its clients, or the U.S. government, and do not constitute legal advice.
The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.