March 14, 2019 at 5:00 am ET
President Donald Trump delayed the March 1 increase in tariffs on Chinese imports citing “substantial progress” in negotiations between U.S. and Chinese trade representatives.
But as the public awaits resolutions to the reciprocal tariff initiatives established as a result of this ongoing trade conflict, one thing has become clear from recent economic data. Namely, the escalating trade war between the two countries is damaging both economies directly, by reducing demand for each other’s exports, and indirectly, by increasing costs of domestic production as global supply chains are disrupted. Additional trade actions by either or both countries could well precipitate a global recession given the importance of U.S. and Chinese economic growth to the health of other economies.
A long-run settlement of the U.S.-China trade dispute is therefore critically important to both countries, as well as to the global economy. However, the long list of U.S. grievances about China’s economic structure and practices, as well as China’s reported reluctance to address non-tariff-related issues in specific terms, obscures a clear basis for any agreement. Against this background, the acceptance of some broad principles by both parties seems necessary if a successful and sustainable trade agreement is to be concluded.
One such broad principle is national treatment. This is already enshrined in the World Trade Organization to which both China and the United States belong. Nevertheless, a U.S.-China trade agreement needs to re-emphasize national treatment as the fundamental basis for bilateral trade and investment relations.
Specifically, U.S. firms doing business in China should face the same set of rules and regulations that domestic firms face. Chinese firms doing business in the United States would enjoy the same protection.
Strengthening this principle through an explicit agreement that covers federal and sub-federal governments would address a major U.S. concern about requirements for U.S. businesses in China to take in Chinese companies as partners and share proprietary technology with those partners. As long as no such requirements were imposed by Chinese governments on Chinese companies doing business domestically, they could not be imposed on U.S. companies doing business in China.
The sticking point in requiring national treatment is national security. For example, recent U.S. government actions against Chinese telecommunications giant Huawei, including blocking sales of Huawei’s equipment in the United States and prohibiting Huawei from exporting technology from its U.S. subsidiary back to China, are inconsistent with national treatment and have antagonized the Chinese government. Unless there is some codification and limitation of the use of a national security justification for discriminatory treatment of foreign-owned companies, the trade conflict between the United States and China is likely to continue.
The difficulty in applying bright-line conditions for allowing national security-related discrimination against foreign-owned companies has broadly plagued international trade and investment relations, with the U.S. imposition of tariffs on imports of steel and aluminum on national security grounds being a prominent recent example. Again, the application of a broad principle might help address this problematic issue.
For example, the United States and China might agree to adopt explicit national treatment exceptions, whereby each country could nominate specific industrial product categories, such as telecommunications equipment, as national security exceptions to the principle of national treatment. If either country wanted to add new product categories as exceptions, the other country would be entitled to add new exceptions.
The United States has been especially vocal about governments in China providing financial subsidies to Chinese companies to promote innovation capabilities, particularly in new areas of technology such as artificial intelligence. The WTO prohibition against export subsidies is unlikely to be a sufficient basis for addressing U.S. concerns, especially given the Trump administration’s skepticism about the WTO’s process for adjudicating trade disputes.
A stronger broad principle might be the following: If China’s government provides subsidies to Chinese companies to promote innovation, those same subsidies must be provided to U.S. companies doing business in China. The same constraint would apply to U.S. government subsidies to U.S. companies.
Successfully addressing non-tariff-related trade irritants is obviously extremely difficult and requires creative compromises on both sides. In this context, a U.S. focus on balancing bilateral trade with China is a needless distraction to addressing the much more difficult and economically meaningful issues facing trade negotiators.
Using broad principles to govern international commerce requires trust between trade and investment partners. Unfortunately, trust is in short supply in the Chinese-U.S. relationship. Eliminating arbitrary deadlines for meeting the other side’s objectives and foregoing threats of tit-for-tat retaliation might help cultivate an environment in which mutual trust can start to take root.
Steven Globerman is a senior fellow at the Fraser Institute.
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