Tim Stratford, a former Assistant U.S. Trade Representative and current managing partner of Covington's Beijing office, says we stand at a "crossroads in U.S.-China relations and the future of the international trading system." Learn more about the new U.S. approach with China, its potential impacts, and what role the private sector can play.
Q: Why have trade frictions between the United States and China increased?
Stratford: We stand at a crossroads in U.S.-China relations and the future of the international trading system.
U.S.-China trade frictions are rooted in the significant differences between the two countries’ economic systems, including different degrees of openness, and reliance on market forces and comparative advantage or on state-led industrial policies and government support to promote industrial development.
China has a newfound confidence when it comes to using its economic heft to bend international trade rules to the needs of its economic system—in a way, applying “Chinese characteristics” to the operation of international rules for trade and investment. Meanwhile, existing players in the international system chafe against these (actual or perceived) transgressions.
As China’s state capitalist model put strains on an international trading system designed for more open and free economies, there is a growing consensus in Washington (and, less vocally, in other capitals) that existing approaches and institutions have been insufficient for addressing the type and magnitude of the China challenge. Skepticism toward globalization underpinned by factory closures and stagnating incomes in the United States, and growing frustration by foreign businesses with the operating environment in China, have also fueled sentiment in the U.S. for a different approach.
Q: Why has the United States taken a more aggressive approach with China over trade issues?
Stratford: The U.S. administration, for its part, has decided that the three primary tools used to engage with China on these concerns—bilateral dialogue, the WTO dispute settlement system, and WTO-approved tools like anti-dumping measures and countervailing duties—have not worked.
There are many mechanisms for dialogue and engagement, and they have created stability that is especially important to China. However, action has been limited to small, incremental steps that do not ultimately resolve the problems at hand. For example, the Comprehensive Economic Dialogue ended with no outcomes, and the United States cannot realistically bring litigation through the WTO to address all outstanding issues (in fact, many key issues are not even disciplined by existing rules).
Q: Could this more aggressive approach yield results?
Stratford: China’s changing economic circumstances and industrial policy goals may create leverage for the U.S. that was not previously there. A marked growth in Chinese outbound investment, for instance, could create new Chinese anxieties and new U.S. leverage that may make the concept of reciprocity more compelling. On the other hand, the Chinese government may also feel that its economy is not as dependent on exports to the U.S. as it was in times past.
Q: How could this trade dispute impact international institutions and alliances?
Stratford: As China adapts international trade rules to its needs, and the U.S. resorts to unilateral trade actions due to perceived insufficiencies in international trade rules and institutions, it is important to contemplate the long-term trajectory of international institutions and alliances.
The U.S. and its allies have intersecting interests with respect to China and its economic behavior. However, unpredictability and a lack of transparency in U.S. policy has made coordination between the U.S. and its allies difficult.
Q: How will China react to any formal trade sanctions or restrictions?
Stratford: China will likely react swiftly to U.S. actions through formal channels and informal means. With respect to the latter, China may engage in more rigorous or selective enforcement of rules against American companies, or withhold required approvals for planned business activities. There is some precedent for China compartmentalizing trade disputes, as it did in response to tariffs against Chinese tire exports imposed by the Obama administration. But given the unprecedented scale of tariffs and other remedies threatened by the U.S. side, such compartmentalization may be difficult to maintain in this case.
One potential off-ramp from a trade war posture may be reducing the trade deficit. However, this would not address fundamental concerns at issue (e.g., technology transfer and IP policies). On the other hand, there have been some signs that China might offer some surprises in terms of market openings.
Q: What role can the private sector play in this trade dispute?
Stratford: The U.S. government is good at identifying problems, but not always good at coming up with practical and effective solutions (in part due to lack of capacity). Therefore, the private sector has a responsibility and opportunity to catalogue all of the issues of concern on an industry-by-industry and cross-industry basis, and consolidate them into specific, coordinated asks. It is better to have industry experts present solutions to both governments than wait and hope that a government official has industry interests in mind.
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