A US Trade Agenda for 2021: Bolstering Global Trade and Countering Chinese Economic Policy

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__The Look Ahead Series is a collection of policy memos examining the challenges that political, military, and business leaders must contend with today to ensure a secure, free, and prosperous world tomorrow.__

The most important and durable achievement of the Trump administration’s trade policy has been recognizing that China is not the “responsible stakeholder” many hoped it would become in the global trading system established after the Second World War. The Trump team has had modest success in trying to convince China to change its mercantilist policies. But the intransigence of the Chinese Communist Party (CCP) in changing its economic structure, and the lack of firm international support for US efforts, has resulted in a near stalemate with the US having a slim advantage.

One accomplishment of the Trump Administration has been to make it clear that the rules and enforcement mechanisms of the World Trade Organization (WTO) are of little help in meeting the Chinese challenge. Although Trump’s trade actions often antagonized longtime supporters of more open trade like Canada and Europe, other friends, notably Australia and Japan (in large part due to their location on the map, as well as their long historical memory of Chinese bullying), followed the US lead. What can we expect from a President Biden if he is victorious on November 3?

In its campaign rhetoric, the Biden team strives to be even tougher on China than President Trump and would likely continue the direction of Trump-Lighthizer trade policies should Biden win on November 3. The Biden team repeatedly stresses that it will do a better job than Trump in “working with allies.” While such a goal is desirable and would be powerful if a united front can be mustered, achieving this goal is much harder than its proponents want to admit.

Europe, and especially Germany, has demonstrated that it intends to let domestic commerce guide its policy on China. As a whole, Europe is much more dependent on China’s economy for exports to fuel its largest industries: autos, commercial aircraft, luxury goods and heavy machinery like machine tools and power generation equipment. Chinese leaders have repeatedly told European counterparts that siding with the United States on issues like 5G infrastructure would result in serious harm to the EU’s export industries. EU policymakers in recent years have pursued in any case a self -interested path which harms US industries. It continually threatens and punishes US technology industries with antitrust actions, is beginning to impose digital taxes to weaken those same US firms, stubbornly refuses to settle the more than fifteen-year old Airbus subsidy case despite at least three World Trade Organization (WTO) decisions supporting US claims, and most recently is planning border carbon taxes on US (and other) industrial product imports. These actions certainly dampen enthusiasm in the United States to chart out a joint path of action on China.

While many European business leaders and more conservative members of the German and EU parliaments are urging closer cooperation with the United States on China (and especially on preventing Huawei’s dominance in telecommunications),1 French, German and European Commission leaders have capitalized on Trump’s (all too frequent) intemperate attacks on Europe to fan the fires of anti-US nationalism. Instead of focusing their political capital on working with the United States to create new WTO rules to sanction Chinese mercantilism, the EU and its largest members have embarked on another agenda. In the wake of the pandemic and widespread calls to repatriate supply chains, European leaders are rekindling the ever-present and quasi-protectionist impetus to create their own “national champions” in industries like semiconductors and cloud computing.

Restoring the comity and cooperation of the decade after the Soviet-collapse is highly unlikely, whichever candidate wins the US election. Long-standing US calls for less protections for EU agriculture and reduced tariffs on autos, combined with the EU’s refusal to negotiate its position on border-adjustable taxes and aggressiveness toward US technology leaders, will ensure the trade agenda with Europe remains as fraught with frictions as it has been the last four years.

The best hope for lowering tensions is through constructive cooperation on limited but important issues. Both sides have an interest in finalizing plurilateral agreements within the WTO structure.2 Negotiations have languished for years on trade in services, including digital services, even though there has been some progress and differences are not fundamental. Transatlantic negotiators are being pushed by their respective business communities to solve the problems with transnational data flows occasioned by the EU’s privacy laws, especially the increasingly important flows of business data driven by the growth of the Internet of Things. Both sides have shown keen interest in preventing China from dominating international standards-making for existing technologies like telecommunications and for emerging technologies like autonomous vehicles and quantum computing. Transatlantic partners have also shown interest in finding alternatives to China-dominated supply chains for key raw materials critical for defense applications, semiconductors, environmental goods, lightweight metals, and lithium-ion batteries.3 Finally, there have been encouraging signs of transatlantic cooperation in both the private and public sectors on firming up supply-chains for pharmaceuticals and other vital medical equipment.

A good existing institutional framework that could serve as a template for solidifying coordination with allies is the “5 Eyes” group that has worked constructively for decades on defense related supply chains.4 Joint work could lead to reducing broad US-EU economic tensions, and could hasten ever greater cooperation on issues such as the urgent need for WTO reforms. Other US friends such as Japan and Australia are already working with the United States, and efforts to convince India to join coalitions on some of these trade imperatives have been given new life as the reality of Chinese expansion, exclusionary economic behavior, and military adventurism becomes more apparent.5

China is exerting growing economic and political dominance over Southeast Asia, especially in 5G, electric and water infrastructure, and transport networks. Many Chinese, Japanese, and Korean firms have moved production into this dynamic area, especially since the United States began to impose trade and investment restrictions on China. To avoid the continued routing of Chinese production to third countries like Vietnam, and to counter the growing reach of its Belt and Road program in the region, the United States should seriously consider joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the trade pact that Japan pushed to completion after the Trump decision (supported by Democratic candidate Hilary Clinton) to abandon the Trans-Pacific Partnership (TPP) in 2017. The CPTPP has good disciplines and rules on cross border data flows and on subsidies by state owned enterprises (SOEs), both important in combatting Chinese mercantilism. Its rules-of-origin language needs to be strengthened to ensure that Chinese production is not easily transferred to member countries for trans-shipment to, or embedding in, products exported to the United States. Especially if the United States cannot complete a free trade agreement (FTA) with Taiwan, it should also work to incorporate that important democracy into the CPTPP.

Joining the CPTPP will cement the current strong ties and coordination the United States enjoyed under former Prime Minister Abe in recent years, as well as provide further incentives to Korea to join that trade pact. Because China is unlikely to change its current mercantilist trajectory in seeking to expand its own economic sphere of influence, the United States will need to ensure access to as many markets as possible. Bringing Southeast Asia (and India, depending on how open it is to further market reforms) into closer to alignment with the US-centered economic and political sphere will be important for achieving scale economies, maintaining access to human capital and raw materials, and strengthening private sector led standards organizations required to compete successfully with China. Since China largely closes off its own markets in areas like telecommunications and social media, acquiring the scale needed to compete in these sectors, let along the big data that they generate, is all the more important to the competition in technologies of the future such as artificial intelligence and business services.

The United States should prioritize a robust FTA with Taiwan. Achieving this goal would assist Taiwan in its long-term struggle to maintain its independent democracy, but also help build the increasingly important ties with the US technology sector. Taiwan is now the leading manufacturer of semiconductors, a key component for security-related technologies and for global leadership in nearly every important industry of the future. There has long been a nexus between semiconductor design firms in the United States, the world leader in this part of the production process, and Taiwanese-based fabrication plants. The world’s largest fabricator of semiconductor chips, and leader in fabrication processes, is Taiwan Semiconductor Manufacturing Corporation (TSMC). This firm recently announced the location of a new fabrication facility in Arizona just as it is moving production away from China. Although Taiwan’s largest consumer electronics firm, Foxconn, ostentatiously announced a huge new facility in Wisconsin in 2018, progress on this plant has fallen far short of original plans. If the United States and Taiwan can negotiate a mutually beneficial FTA incorporating rules of origin similar to those in the revised North American Free Trade Association (NAFTA), it could facilitate and promote even closer cooperation in the important technology areas for which the two countries have a symbiotic relationship, as well as accelerating the trend of Taiwanese firms to move away from China.

One final priority for trade policy in the next administration is an FTA with our oldest and deepest economic partner, the United Kingdom. Absent an unexpected breakthrough in the UK-EU exit negotiations, it may be that the UK will no longer be able to serve the role of gateway to continental Europe (as it has since joining the EU). Consolidating the bilateral trade relationship will ensure the continuation of the highly beneficial economic and political relationship. It would also incentivize the EU to seek, at a minimum, to lower frictions with the United States.

Given the emphasis of both major party candidates on rebuilding US industry by reshoring manufacturing and strengthening domestic resilience,6
it may seem counterintuitive to suggest ways to work more with allies and to negotiate new trade agreements. But the trajectory of our rivalry with China is likely to produce some form of decoupling, as China clearly intends to create its own economic and political model and attract as much of the world as possible to its system.7 China has had some success in meeting its goals of economic growth, although recent research suggests fragility of the economic model as well as increasing global resistance to its political component.8 China’s political stability is linked to its state-dominated economic model and, despite strong pressure from the United States, the CCP appears confident that it does not have to alter it in any fundamental ways.

Given this reality, the United States must take steps to ensure its own economic sphere is large enough, with attendant economies of scale and access to needed human capital and research capabilities, and stable enough to support its own market-oriented and democratically-governed system. If China can access both deep markets and advanced technology outside the United States, unilateral trade and export sanctions lose their ability to influence Chinese behavior. US Trade policy cannot do this alone. Additionally, efforts to reinvigorate domestic production must be supplemented with renewed attention to strengthening US tax, investment and regulatory policies and institutions that support a vibrant industrial economy.9

If China is ever going to be convinced to alter its current path, a more unified approach by a US-led coalition of the willing, comprising leading market-based industrial economies in Europe and the Pacific Rim but also including South Asia, has a better chance of success than a go-it-alone approach. Even though incentivizing old and new friends to join a common cause may entail some sacrificing of US economic interests, the larger goal of countering the Chinese juggernaut is worth the effort.

On the other hand, if allies fail to be convinced to work more constructively with the United States, it must persist in taking the sorts of isolated initiatives with tariffs, anti-dumping and countervailing duties, export controls, and investment restrictions which at least brought China to the table in 2019 and 2020. While the ultimate results were not what negotiators had intended, especially since China appears to be backing away, yet again, from its own commitments, China did have to respond since it had not achieved enough technological and financial independence to decouple totally from the United States. One can detect isolated but clear signs in Europe, India, and Southeast Asia that leaders are recognizing the malign direction of Chinese economic and political policy. Whether they choose to vigorously oppose it is an open question. The United States needs to continue to make its case either in relative isolation or in a broad coalition.

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