What started as a trade war over China’s unfair economic policies has now evolved into a so-called cold war, propelled by different ideologies. Bilateral relations between the US and China took a nosedive in 2018 when US President Donald Trump’s obsession with trade deficits led him to impose punitive tariffs on China. The tariffs were followed by restrictions on both China’s access to high-tech US products and foreign investment raising security concerns, and by allegations of unfair Chinese trade practices.
Despite corporate pleas to ease tensions, US President Joe Biden has so far strengthened his predecessor’s policies by strengthening anti-China alliances and introducing additional sanctions. Biden now describes the US-China conflict as “a struggle between the usefulness of twenty-first century democracies and autocracies.”
But the logic behind the US trade war was flawed, and the more recent politically driven restrictions are counterproductive given the long-term damaging economic impact on both sides. Nevertheless, so far there are few signs that Biden is likely to change course. In the meantime, Europeans may be in a better position for productive give-and-take discussions with China over economic policy making.
Misguided US trade policy
The Trump administration’s first mistake in launching a trade war was to assume that U.S. trade deficits — which occur when a country imports more than it exports — were inherently bad and that China was to blame.
However, trade deficits are not a good indicator of the state of the economy, and US trade balances are largely determined by rising US federal budget deficits, which have little to do with China. The irony is that three years after Trump’s tariffs were introduced to settle the US trade deficit, US-China bilateral trade has now recovered to record highs, China’s trade surplus has increased and the US deficit has widened. deteriorated.
Trump also echoed popular but misguided sentiments that US companies had invested too much in China, resulting in a loss of competitiveness. But in the past two decades, only 1-2 percent of annual US foreign investment has gone to China. By contrast, the EU, which is comparable in economic size to the United States, has invested about twice as much as the United States annually. The concern should be why the United States invests so little in China instead of so much.
China’s Intellectual Property Safeguards
China’s alleged failure to protect intellectual property rights is also mischaracterized. At its worst, China is accused of stealing foreign intellectual property, especially technology. But after taking into account the magnitude of China’s foreign transactions and research activities, such events will not be unusually frequent or may be exaggerated.
Furthermore, China’s patent courts have matured in dealing with this issue – foreign plaintiffs are now more likely to win their cases than domestic companies. In addition, theft is becoming less of a concern as payments for royalties and licenses by Chinese companies have increased nearly four-fold over the past decade, according to a think tank scholar, making China the second largest payer of such royalties worldwide.
The reality is that it takes generations to develop a solid intellectual property rights regime, as has been the case in the United States. The foundation of China’s system was laid only two decades ago with reforms that accompanied China’s accession to the World Trade Organization in 2001. Remarkable progress has been made in recent years, as evidenced by the findings of the “2020 Business Climate Survey” by the American Chamber of Commerce in China; The survey found that nearly 70 percent of US companies surveyed in China believed China’s enforcement of intellectual property rights had improved, compared to just 47 percent in 2015.
China’s protectionist policies
But there are also credible concerns that China’s investment policy is unfairly treating foreign companies. One complaint is the use of subsidies by China. All countries provide subsidies to domestic businesses and households, such as US aid to farmers, tax deductions to households to encourage clean energy use, and incentives for companies like Amazon to relocate. But in China, subsidies tend to focus more on using the country’s banks and stock markets to support high-tech companies and strategic industries.
The US government could choose to pressure China to align its subsidy policies more closely with Western norms, but instead the Biden administration is copying China’s roadmap by proposing its own subsidies to promote strategic industries.
China’s protectionist tendencies are also reflected in the requirement that foreign companies form joint ventures with domestic Chinese companies as a precondition for market access in some economic sectors. This provision has been widely cited as a means of promoting the so-called forced technology transfer, whereby foreign companies pass on new technology to their Chinese partners as a precondition for investment and production in China.
But these Chinese requirements also seemed to be loosening in recent years, as evidenced by large foreign investments in chemical production (BASF), car production (Tesla) and finance (BlackRock). These foreign companies have gained access to key sectors without a Chinese partner for the first time.
China’s willingness to drop the joint venture requirement was featured prominently in the EU-China Comprehensive Investment Agreement negotiated in December 2020 (which has not yet been ratified). This experience suggests that policy differences can be addressed through consultation if both sides are willing to compromise.
Building better bilateral relations
The key to more harmonious economic relations is the recognition that a more developed China need not threaten the well-being of the West. The United States, Europe and China have several comparative advantages, which are reflected in the composition of their exports. Europe specializes in high-quality consumer goods and machinery; the United States in agricultural products, high-tech components and services; and China in consumer staples and inputs. All parties can continue to prosper by operating under a rules-based international trading system.
Tensions between the US and China, however, are now driven less by economic realities and more by rivalry between major powers and nationalism – factors exacerbated by mutual mistrust of each other’s strategic intentions. In describing the United States’ multifaceted relationship with China, the Biden administration has emphasized the need to “compete, confront and cooperate” simultaneously. But as Chinese President Xi Jinping emphasized at the 2021 World Economic Forum, “competition is for the pursuit of excellence – not for eliminating a rival.”
Punitive trade measures have had little effect on changing economic outcomes, and the experience of countries around the world shows that sanctions generally do little to change governments’ core beliefs. Instead, there is more to gain from leveraging China’s reliance on a rules-based international trading system as the country strives to become a more prosperous and modern country.
Practical steps forward
The challenge now is to put a self-defeating cold war behind it by working for arbitration and mitigation of tensions within the international economic system. The initiative for such a venture may have to come from Europe, as Republicans and Democrats in the United States are united in their tough approach to China.
Europe and the United States may have similar goals in dealing with China, but Europe is more integrated economically with China in terms of investment and trade flows. Because of this, the competitive aspect of their relationship offers more opportunities for mutual benefit. In addition, Europe is not as preoccupied with big power politics and not as reliant on technological advantages as the United States, making the bloc more open to compromise.
If the United States is to maintain its technological and moral authority, it must first address economic and political weaknesses at home. Complaining about the unfair policies of China and its authoritarian regime will not solve this problem. Instead, the United States should focus on strengthening its own economic competitiveness, forging internal political cohesion, and working with European and Asian partners to build sustainable international institutions.