Protectionist trade policies started by Donald Trump and continued by Joe Biden have weakened the ability of American companies to defend themselves in China and elsewhere in Asia. New research shows that this is yet another example of how America First’s trade policy has put Americans and American companies last.
“China’s regulatory intervention has affected US and Chinese companies, but protectionist trade policies implemented by the Trump administration and continued by the Biden administration have severely limited the US government’s ability to protect US companies in the Chinese market,” writes Henry Gao, a leading trade expert. Associate Professor of Law at Singapore Management University, in a new study for the National Foundation for American Policy. “Unless the US government changes course, US companies will increasingly be less able to deal with perceived flaws in Chinese government policy and will be at a significant economic disadvantage in large parts of Asia.”
In 2021, China adopted a series of regulatory “interventions”. These included suspending the Ant Financials Initial Public Offering (IPO), investigating Alibaba for antitrust breaches and Didi for cyber security, imposing new restrictions on computer games and banning private tutor companies. Gao points out, “While these regulatory actions created great chaos in the market, people usually assumed that they only affect China’s own enterprises and do not understand the broader consequences for foreign enterprises.”
Gao explains that foreign companies, including many US companies, have many interests that could be harmed by the Chinese government’s tighter regulatory policy. These include investment interests, such as the forced divestment of a previously legal sector or companies facing a new ban on foreign investment in a sector. U.S. suppliers to Chinese companies can also bear significant trading or transaction costs in a more tightly regulated sector.
Governments usually protect the interests of their country’s companies, and providing such protection was a primary reason cited by the Trump administration for initiating the trade war against China. The Trump administration’s 2018 Section 301 Report on China cites the Chinese government’s regulatory policies and other practices to justify U.S. government tariffs on imports from China.
“Although many U.S. policy makers in recent years have said that trade actions against China were due to China’s treatment of U.S. companies, U.S. protectionist policies have limited the ability of the U.S. government to respond to Chinese government policies affecting U.S. companies,” Gao said. . “America First trade policies have limited the ability of the United States to seek compensation, change or encourage the improvement of Chinese regulatory policies that could harm U.S. companies.
“Even if the United States were to overcome several obstacles and win a case against China in the World Trade Organization (WTO), it would still not be able to enjoy the fruits of its success due to the paralysis of the WTO Appellate Body, thanks to the persistent blocking the launch of the appointment process for its judges by both the Trump and Biden administrations.Simply, even if China loses the case, it can simply ‘appeal into the vacuum’ and turn the hard-fought victory of the United States into a ‘waste paper’, which leaves the United States with no recourse.
Gao notes that there are other issues with the US approach. “In addition to the irrational blocking of appointments to the WTO Appellate Body, there are at least two other strategic flaws over the last five years that, if corrected, could have put American companies in a better position. The first is the negotiations on the bilateral investment treaty (BIT) between the US and China, which was launched in 2008 and suspended indefinitely when Trump joined in 2017. The other is the Trans-Pacific Partnership (TPP) agreement, which again saw Trump withdraw from the agreement when he entered the White House.Both agreements contain several useful features for U.S. investors.
“First, there are market access commitments that open up more sectors for U.S. investors,” Gao writes. “More importantly, such investment agreements typically include mechanisms to prevent the withdrawal of liabilities, such as standstill commitments, which serve to ensure that a party will not withdraw from existing liabilities and bind liberalizations at status quo levels; and ratchet provisions, which go a step further by tying the parties to any autonomous liberalization they may introduce in the future, as several of China’s regulatory interventions involve bans on previously permitted business activities, these two provisions would be useful.
“Second, such agreements typically contain material obligations that protect the interests of foreign investors, such as the minimum standard of treatment or fair and equitable treatment, which may be useful to foreign investors dealing with such arbitrary and unfortunate repression. These agreements require in particular that compensation is paid to foreign investors in case of expropriation, which not only covers direct nationalization of investments, but also indirect expropriation such as regulatory actions that make investments worthless, which is exactly the type of scenario we have here.
“Thirdly, and most importantly, both agreements will include the Investor-State Dispute Settlement (ISDS) mechanism, which allows affected foreign investors to seek independent arbitration against the Chinese government. In such arbitration cases, investors typically have a much better chance to obtain appropriate compensation than in the national courts of the host Member States. “
Gao recommends that the United States return to the Comprehensive and Progressive Trans-Pacific Partnership Agreement (CPTPP, the successor to the TPP). It would give American and American companies leverage when China also joins the agreement and engages in regulatory intervention. Gao warns that time is running out. “But the United States must do this quickly, as China has already submitted the application to the CPTPP, and that is a very serious bid. The United States has a narrow window of opportunity of two to three years before China’s application goes through, but should it delay further, it would be extremely difficult, if not impossible, for the United States to enter after China’s accession, as China will certainly demand its pound of meat, just as the United States did in China’s WTO accession process. “
Richard Haass, chairman of the Council on Foreign Relations, reiterates Gao’s concerns. “US trade policy has been shaped by similar forces, showing further continuity between Trump and Biden,” Haass wrote in Foreign Affairs. “The latter has avoided the exaggeration of the former, which destroyed all trade pacts except those his own administration had negotiated until… But the Biden administration has shown little, if any, interest in strengthening the World Trade Organization, negotiating new trade agreements or joining. existing, including the TPP successor agreement, the Comprehensive and Progressive Trans-Pacific Partnership Agreement, or the CPTPP despite the overwhelming economic and strategic reasons for doing so. the Indo-Pacific economic order. “
Gao is hopeful, if not optimistic, as he notes that international trade and investment agreements provide ways to address another country’s problematic regulatory practices. “Unfortunately, many of these tools are not available to the United States, mainly because the United States has cut its own claws under the Trump administration by withdrawing from international agreements that were designed to tackle just such issues,” Gao concludes. “It is enigmatic that the Biden administration, with its declared affinity for multilateralism, will continue to stay away from international regulatory efforts. With China’s recent regulatory intervention, a new sense of urgency is emerging that the United States is returning to international regulatory arena.”