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U.S.-China Trade Relations in the Biden Era: Trade War, Industrial Policy, and Rule-Based International Order

Published online by Cambridge University Press:  03 March 2022

Wang Jiangyu and
Dawn Yamane Hewett
Wang Jiangyu
Affiliation:
Professor, School of Law, City University of Hong Kong.
Dawn Yamane Hewett
Affiliation:
Partner, Quinn Emanuel Urquhart & Sullivan LLP.
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Presidential candidate Joe Biden's team declared President Trump's trade war with China a failure when Democratic nominee Senator Kamala Harris told Vice President Mike Pence at the U.S. vice presidential debate that “You lost that trade war.” Half a year has passed since Biden took over the White House, the U.S.-China trade war is still going on, though in a much less pompous manner than what President Donald Trump once liked it to be. President Biden refused to make significant change to Trump's tough stance on U.S.-China trade relations on the ground of the accusations of China's “stealing” intellectual property (IP), state subsidies to enterprises, forced technology transfer from foreign companies, among others. On the other hand, China has not backed off from the trade war, though it arguably made many concessions in the so-called “Phase 1 trade deal” signed by the United States and China on January 15, 2020, in which China pledged to buy US$ 200 billion more of American goods and services in 2020 and 2021, in addition to the commitments to strengthen protection and remove forced technology transfer. Evidence suggested that China was still far behind prorated targets of a full year when Biden assumed presidency in January 2021. More significantly, Chinese President Xi Jinping has been taking the opportunities offered by the trade war to remake the Chinese economy toward state capitalism. Additionally, as the trade war was happening, the Trump administration intensified its assault on the multilateral trading system under the World Trade Organization (WTO) and effectively paralyzed the Appellate Body, a crucial part of the WTO's Dispute Settlement System.

Information

Type
Global Engagement Series – Reconceiving America's Global Role in the Biden Era: International Perspectives in Asia
Information
Proceedings of the ASIL Annual Meeting , Volume 115 , 2021, pp. 315 - 320
Copyright
Copyright © The Author(s), 2022. Published by Cambridge University Press on behalf of The American Society of International Law.

Presidential candidate Joe Biden's team declared President Trump's trade war with China a failure when Democratic nominee Senator Kamala Harris told Vice President Mike Pence at the U.S. vice presidential debate that “You lost that trade war.”Footnote 1 Half a year has passed since Biden took over the White House, the U.S.-China trade war is still going on, though in a much less pompous manner than what President Donald Trump once liked it to be. President Biden refused to make significant change to Trump's tough stance on U.S.-China trade relations on the ground of the accusations of China's “stealing” intellectual property (IP), state subsidies to enterprises, forced technology transfer from foreign companies, among others.Footnote 2 On the other hand, China has not backed off from the trade war, though it arguably made many concessions in the so-called “Phase 1 trade deal” signed by the United States and China on January 15, 2020, in which China pledged to buy US$ 200 billion more of American goods and services in 2020 and 2021, in addition to the commitments to strengthen protection and remove forced technology transfer.Footnote 3 Evidence suggested that China was still far behind prorated targets of a full year when Biden assumed presidency in January 2021.Footnote 4 More significantly, Chinese President Xi Jinping has been taking the opportunities offered by the trade war to remake the Chinese economy toward state capitalism.Footnote 5 Additionally, as the trade war was happening, the Trump administration intensified its assault on the multilateral trading system under the World Trade Organization (WTO) and effectively paralyzed the Appellate Body, a crucial part of the WTO's Dispute Settlement System.Footnote 6

In a nutshell, with respect to trading with China, the Biden administration is not continuing the Trump-style trade war (i.e,. maximum pressure through constantly increasing tariffs), but has stepped on a different path with a view to competing with China for achieving three goals: (1) using Trump's trade tariffs to bargain for further Chinese concessions; (2) increasing American competitiveness through industrial policy and blocking Chinese access to American markets and technology; and (3) working with American allies to reform multilateral trading rules and compelling China to comply with the “rule-based international order.”

I. Lessons from Trump's Trade War with China

The trade war started in early 2018, and it was supposed to be ended with the end of the Trump administration. During the trade war we saw extensive exchange of punitive and retaliatory measures between the world's two largest economies. In the end, the United States slashed tariffs on more than US$360 billion of Chinese goods and China responded with retaliatory tariffs on more than US$110 billion of American products. In January 2021, the United States maintained an average tariff of 19.3 percent on imports from China, and China a 20.3 percent for goods from the United States.Footnote 7

An obvious lesson is that the trade war has inflicted economic wounds for both the United States and China. The tariffs led to significant reduction of bilateral trade between the two nations. In 2020, though China was still the goods trading partner of the United States, U.S. goods imports from China fell by US$103.8 billion from the bilateral trade volume in 2018.Footnote 8 A report by Oxford Economics, prepared for the U.S.-China Business Council, pointed out that Trump's trade war with China has caused a peak loss of 245,000 U.S. jobs, and would certainly lead to further significant reduction of U.S. GDP and increased unemployment rates.Footnote 9 These costs were the consequences of the Trump administration's policy choices, and they demonstrated that President Trump was wrong when he famously tweeted hat “trade wars are good, and easy to win” in 2018.Footnote 10

From the perspective of international law, an astonishing lesson is that it appears to be rather easy for powerful trading nations to ignore and breach the long-established binding rules of world trade. Legally speaking, both the American punitive measures and China's retaliatory measures directly violated the rule of the WTO. For the Trump administration's tariffs on China, a WTO panel already concluded that the American measures were inconsistent with Article 1:1 of the General Agreement on Tariffs and Trade (GATT), which is the “general most-favoured-nation treatment” (MFN treatment), and Article II of GATT (on tariff binding).Footnote 11 However, China's retaliatory tariffs also violated both Article I and Article II of GATT. In addition, China also breached Article 23 of the WTO Dispute Settlement Understanding (DSU), which requires a WTO member, when perceiving that its trade interests are infringed upon by another WTO member, shall not unilaterally make a determination about whether a violation by infringing members has occurred. It also shall not launch retaliatory measures to unilaterally seek address. Instead, the member must resort to the WTO dispute settlement procedures, including the panel process and, when necessary, the appellate process, and retaliate only when authorized by the Dispute Settlement Body (DSB) of the WTO.Footnote 12 The refusal by the United States and China to follow WTO law is a significant development in the WTO's history after the organization was established in 1995. The fact that the two largest trading powers in the world purposely acted outside the widely accepted international legal framework for global trade is a serious matter for—and threat to—international rule of law.

II. U.S. Trade Policy Toward China in the Biden Era

Although Biden disagreed with Trump's approach to U.S.-China economic relations, its own trade policy vis-à-vis China is largely built upon Trump's foundational work, though rhetorically less confrontational. The overall approach is based on the administration's repositioning of China as “simultaneously a rival, a trade partner and an outsized player whose cooperation we will also need to address certain global issues,”Footnote 13 which shall be understood in the U.S. domestic political context in which both the Republicans and Democrats requested to take a hard line on China on almost all fronts of U.S.-China relations.

Three features of the Biden administration's trade policy have revealed themselves in the course of the first six months of Biden's first year. First, although Biden has not imposed new tariffs on Chinese imports (and a Trump presidency would be more than likely to do so should Trump got re-elected), his government has no intention to remove the Trump tariffs. This is, however, not an indication that the Biden administration is in favor of protectionism-oriented tariffs. Instead, the U.S. Trade Representative (USTR) aimed to use the existing tariffs as a “leverage” over China to extract more Chinese concessions in future trade negotiations.Footnote 14

Second, Biden escalated the “tech war” with China. President Trump started the tech war, initially as part of his effort to heighten trade relations with China, by sanctioning a wide range of Chinese high-tech companies including, most notably, Huawei, a Chinese telecom equipment company who is now denied access to computer chips made using U.S. technology. The tech war has now morphed into a battle for leadership in core technology like artificial intelligence (AI), big data, 5G, and semiconductors. At the outset of his presidency, the Biden administration issued an executive order to require the U.S. government to review American supply chains for critical technologies, allegedly for the purpose of avoiding any dependence on China.Footnote 15 Biden has continued the Trump-era hard line on export controls on Chinese companies, and recently issued an executive order to ban U.S. entities from investing in fifty-nine Chinese companies with ties to China's military or in the surveillance industry.Footnote 16 On the other hand, Biden also revoked Trump's executive orders to ban Chinese social media apps TikTok and WeChat, indicting there might be less fire and fury in Biden's tech war with China.

The third and most impressive feature of Biden's trade policy concerning competing with China is its efforts to enhance American competitiveness by boosting innovation and manufacturing power at home. Driven by the Biden administration, the U.S. Senate passed the U.S. Innovation and Competition Act, a bipartisan legislation aimed at countering China's technological ambitions by investing more than US$250 billion in American technology, science, and research.Footnote 17 In particular, the law will provide US$52 billion over five years to subsidize semiconductor manufacturing, and allocate about US$195 billion to support research in ten focus areas including AI, robotics, biotechnology, 5G technology, among others. The Act also contains “Buy American” requirements, and has provisions to direct the U.S. secretary of state to publish a list of Chinese state-owned enterprises (SOEs) which have engaged in unfair trade practice and authorize the President to impose sanctions against persons or entities who have stolen U.S. trade secrets or undermined U.S. cybersecurity on China's behalf.

The Innovation and Competition Act certainly highlighted President Biden's aggressive stance as well as a “bipartisan hostility towards China.”Footnote 18 An even more significant aspect of the Act is that it may arguably marks the beginning of a new era of economic development in the United States, that is, the massive use of industrial policy in trade policy as well as economic planning.Footnote 19 Industrial policy entails government use of policy instruments to direct resources to selected industries to accord producers a “comparative advantage.”Footnote 20 For a long time, it was regarded as the secret, but to some extent, unhealth, weapon for the success of the East Asian developmental states/economies including Japan, Korea, Taiwan, and later China, and it would once unthinkable that a liberal market economy like the United States will allow the government to pick winners and losers, or championing certain industries over others, in the markets.Footnote 21 This development will certainly have profound impact on the state-business relations insofar as foreign trade is concerned. Although industrial policy has played a decisive role in China's economic growth, it would not be a surprise that China and other countries might use the Act as a leverage in future trade negotiations or dispute resolution process against the United States.

III. Rule-Based International Order for Trade?

The Trump administration seriously undermined the international trade order not only by launching global tariffs wars against a variety of countries including most notably China, but also, more significantly, by paralyzing the WTO's Appellate Body (AB). Thanks to American blocking of every new nomination to the AB, the AB has become “an entity that exists only in the Treaty of DSU” after Dr. Hong Zhao departed as the last AB Member on November 30, 2020.Footnote 22 By crippling the dispute settlement mechanism, the United States has essentially rendered the rule-based multilateral trading system dysfunctional.

The Biden administration has been championing a “rule-based international order” with China as the particular audience in mind. U.S. Secretary of State Antony Blinken, in his first meeting with top Chinese diplomats in Anchorage, Alaska on March 18, 2021, stressed that “Our administration is committed to leading with diplomacy to . . . strengthen the rule-based international order.”Footnote 23 In a recent interview, Blinken underlined again that the United States must defend “the rules-based international order” which is now threatened by China.Footnote 24

On the trade front, a “rule-based international order” may mean the use of international trade rules hold China accountable for its “trade distorting policies.”Footnote 25 In particular, this entails that the United States and its allies, including European Union and Japan, among others, will make rules to govern SOEs, industrial subsidies, forced technology transfer, etc., and China would only be expected to comply with those rules.

What is China's position? Interestingly, China has been walking with two legs respond to the pressure created by American trade policy. On one hand, China has been continuing the external liberalization of its economy as well as improving the legal environment for doing business. During this process, China's door has opened wider for foreign investors. At the international level, China has appeared to be a promoter of free trade. On the other hand, domestic, state involvement in the economy has been strengthened. These two seemingly contradicting trends have been shaping the future of China's trade policy which is full of uncertainties.

IV. Concluding Remarks

The U.S.-China trade relationship has entered probably the most critical juncture since the two countries began to restore their normal trade in the 1970s. In the four decades thereafter, although there were still ups and downs in the economic relationship between the two countries, U.S.-China trade was featured with complementarity and, to some extent, friendly cooperation. The situation has drastically changed now. The trade war, as a landmark event in U.S.-China relations, is both a result and a cause. It is a result of long-term discontent among polity elites in the United States with respect to the trade imbalance with China as well as their worry of United States being surpassed by China in the international system.

Looking into the future, there might be three scenarios in the next stage of the U.S.-China trade relationship. The first one is a confrontational approach, in which the two economic superpowers continue the trade war with elevated tariffs and other trade barriers, and pursue “decoupling” from each other. In the end, the world would be divided into two international economic systems, centered upon China and the United States, respectively. Each system will have its own supply chains, markets, and trading rules, though they will certainly interact with each other in some manners. The second scenario an idealistic one, under which the United States and China could agree on most of the principles, rules, and institutions governing their trade relationship in the spirit of free trade and good faith cooperation. The third scenario is a pragmatic middle ground. That is, both countries, realizing that they cannot defeat each other in a trade war, agree to resolve their disputes through the existing rules of world trade (i.e., the WTO law) and work together, in a pragmatic manner, to develop mutually agreed rules for governing SOEs, industrial policy, digital trade, and other controversial issues in bilateral and multilateral trade relations.

Footnotes

Before the 115th Annual Meeting, ASIL convened audience members from around the globe to listen to panelists, who discussed critical areas of engagement between the United States and Asia on their various interests and how the incoming Biden administration's policies and interpretations of international law will affect U.S. relations with countries in Asia. First, Dawn Yamane Hewett, partner in the international arbitration group of Quinn Emanuel Urquhart & Sullivan LLP and former Deputy General Counsel for Strategic Initiatives in the U.S. Commerce Department, gave an overview of U.S. policy concerning Asia in recent history, including differences and similarities in the approaches being taken by the Biden administration and the importance of the Asia region to U.S. foreign policy. Next Professor Wang Jiangyu discussed the potential impact of the Biden administration's engagement with the World Trade Organization and the Human Rights Council on countries in Asia, Professor Pouria Askary discussed the nuclear deal with Iran, and Yasmin Ullah, a Rohingyan activist, discussed challenges for trade and economic growth, human rights issues in China and Myanmar, and technology and security issues, as well as the links between these areas.

Here, Professors Jiangyu and Askary provide some background and delve deeper into both of their respective topics.

1 Ken Morira Su, Wajahat Khan, Alex Fang & Marrian Zhou, US Vice Presidential Debate: Harris Says Trump Lost China Trade War, Nikkei Asia (Oct. 20, 2020), at https://asia.nikkei.com/Politics/US-elections-2020/US-vice-presidential-debate-Harris-says-Trump-lost-China-trade-war.

2 Aime Williams, Biden Administration Says Trump's China Trade Deal “Under Review,” Fin. Times (Jan. 30, 2021), at https://www.ft.com/content/166e648e-c382-40ab-9a29-a1fa75fbf35d.

3 Office of the U.S. Trade Rep. Press Release, Economic and Trade Agreement between the United States of America and the People's Republic of China: Fact Sheet (Jan. 15, 2020).

4 Chad P. Bown, US-China Phase One Tracker: China's Purchases of US Goods, Peterson Inst. Int'l Econ. (May 25, 2021), at https://www.piie.com/research/piie-charts/us-china-phase-one-tracker-chinas-purchases-us-goods.

5 Xi Jinping Is Trying to Remake the Chinese Economy, Economist (Aug. 15, 2020), at https://www.economist.com/briefing/2020/08/15/xi-jinping-is-trying-to-remake-the-chinese-economy.

6 Chad P. Bown & Soumaya Keynes, Why Did Trump End the WTO's Appellate Body Tariffs?, Peterson Inst. Int'l Econ. (Mar. 4, 2020), at https://www.piie.com/blogs/trade-and-investment-policy-watch/why-did-trump-end-wtos-appellate-body-tariffs.

7 Trump's Trade War with China Will Be Left for Biden to Win, Wall St. J. (Jan. 4, 2021).

8 U.S.-China Trade Relations, Cong. Res. Serv. (Feb. 16, 2021).

9 Oxford Economics, The US-China Economic Relationship: A Crucial Partnership at a Critical Juncture, at 4 (Jan. 2021), available at https://www.uschina.org/sites/default/files/the_us-china_economic_relationship_-_a_crucial_partnership_at_a_critical_juncture.pdf.

10 How China Won Trump's Trade War and Got Americans to Foot the Bill, Bloomberg Businessweek (Jan. 12, 2021), at https://www.bloomberg.com/news/articles/2021-01-11/how-china-won-trump-s-good-and-easy-to-win-trade-war.

11 United States – Tariff Measures on Certain Goods from China, Report of the Panel, para. 7.98, WTO Doc. WT/DS543/R (Sept. 15, 2021).

12 Julia Ya Qin, WTO Reform: Multilateral Control over Unilateral Retaliation – Lessons from the US-China Trade War (Wayne State University Law School Legal Studies Research Paper Series No. 2020-73).

13 Opening Statement of Ambassador-designate Katherine Tai Before the Senate Finance Committee, Feb. 23, 2021, at https://ustr.gov/about-us/policy-offices/press-office/press-releases/2021/february/opening-statement-ambassador-designate-katherine-tai-senate-finance-committee.

14 As Biden's U.S. Trade Representative Katherine Tai put it, “no negotiators walks away from leverage.” See Bod Davis & Yuka Hayashi, U.S. Sits Tight on China Tariffs, Wall St. J. (Mar. 29, 2021).

15 Executive Order on American Supply Chains (Feb. 23, 2021), at https://www.whitehouse.gov/briefing-room/presidential-actions/2021/02/24/executive-order-on-americas-supply-chains.

16 Biden Expands Trump's Investment Blacklist of Chinese Companies to 59 Firms, Fortune (June 4, 2021), at https://fortune.com/2021/06/04/biden-trump-china-us-investment-blacklist.

17 United States Innovation and Competition Act of 2021, S. 1260, 117th Cong., 1st Sess., passed Senate on June 8, 2021, available at https://www.congress.gov/bill/117th-congress/senate-bill/1260/text.

18 Stephen Bartholomeusz, Biden Unleashes $US250 Billion Plan to Frustrate China, Sydney Morning Herald (May 31, 2021), at https://www.smh.com.au/business/the-economy/biden-s-us250-billion-plan-to-frustrate-china-20210531-p57wo0.html.

19 David E. Sanger, et al., Senate Poised to Pass Huge Industrial Policy Bill to Counter China, N.Y. Times (June 8, 2021), at https://www.nytimes.com/2021/06/07/us/politics/senate-china-semiconductors.html (calling the Act the “most expansive industrial policy legislation in U.S. history”).

20 United Nations Conference on Trade and Development (UNCTAD), The Relationship Between Competition and Industrial Policies in Promoting Economic Development, para. 6, TD/B/C.I/CLP/3 (Apr. 27, 2009).

21 See generally Marcus Noland & Howard Pack, Industrial Policy in an Era of Globalization: Lessons from Asia, Inst. Int'l Econ. (2003).

22 Hong Zhao, Farewell Speech of Appellate Body Member Prof. Dr. Hong Zhao, World Trade Org. (Nov. 30, 2020), at https://www.wto.org/english/tratop_e/dispu_e/farwellspeechhzhao_e.htm.

23 Leigh Hartman, Blinken Presses Beijing on Violations of Rules-Based Order, Share America (Mar. 22, 2021), at https://share.america.gov/blinken-presses-beijing-violations-rules-based-order.

24 Secretary of State Antony Blinken on the Threat Posed by China, CBS News (May 2, 2021), at https://www.cbsnews.com/news/antony-blinken-60-minutes-2021-05-02.

25 Office of the U.S. Trade Rep. Press Release, Joint United States – European Union Statement on Addressing Steel and Aluminum Excess Capacity (May 17, 2021), at https://ustr.gov/index.php/about-us/policy-offices/press-office/press-releases/2021/may/joint-united-states-european-union-statement-addressing-global-steel-and-aluminum-excess-capacity.