China's Next Move on Trade

September 9, 2019

People should not be surprised that President Trump put even more tariffs on Chinese goods rather than taking a deal. The current trade conflict, however, is not solely a reflection of Trump's ideology. Starting late in the Obama administration, opinion among business and defense elites of both parties in the United States has shifted markedly towards suspicion of China and worrying about China's economic power.

Yet, this view is very much an inside-the-beltway phenomenon, at least so far. According to reliable public opinion polling data (such as Pew and Gallup), when they ask normal Americans open-ended questions—like "What is your biggest concern?" or "What problem would you like the US government to address?"—China just does not come up unprompted in the top ten concerns. Since this hostility is limited so far to a Washington and business leadership shift, Chinese policymakers would best respond to the Trump tariffs with an eye on how to influence the public debate.

This US-China economic conflict is part of what I have called the corrosion of globalization. There is not an all-out attack on globalization per se, or a unified direction of history pointing globalization downward. Some international economic integration is deepening and accelerating in response to the China-US conflict, for example in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), or in movement of production from China to Vietnam and Mexico. The quality of globalization, however, in terms of how evenly it applies across the world, or how consistently it can be taken for granted in commerce, though, is eroding. There are weaknesses and holes in the network, even while it expands or contracts in some places.

So, it matters critically for the world economy, as well as for China, how the Chinese leadership responds to the breakdown in trade talks with the United States. It is in the American and global interest that China gets the US government to change policy. Trump's trade war is already the economic equivalent of the US war in Afghanistan, wasting blood and treasure in a futile attempt to change the course of a society resistant to change, reducing safety due to exaggerated fears.

A strategic approach for China would include several components, but the unifying theme is to be passive-aggressive in response to the Trump program of trade confrontation. That should lead to the American public and the political system reining in, if not reversing, the Trump policies in 2021 or 2022, whatever happens in the upcoming US presidential election. It will likely take that long to reverse, though, given the spread of hostile suspicion of China across both American political parties and large parts of the bureaucracy.

First, China should only retaliate as much as needed to satisfy its domestic constituents, and otherwise minimize your retaliation. This is not because I am trying to ask you to go soft on the United States. This is because, as with the tariffs in the United States, this will mostly harm Chinese. Moreover, I think it would be very useful if the Chinese economy and the Chinese leadership essentially quietly laugh off Trump, and say you are doing this, and it is not hurting us. We can take it.

If China does retaliate, China should continue to retaliate in the form of which it has done so far, and which a number of other countries have also done in response to Trump tariffs: what I call pseudo-World Trade Organization (WTO) retaliation. Act as though the WTO has decided a dispute case in your favor and retaliate in the form and in the proportionate amount that you would have, had that decision actually been made.

What is particularly wise is to forego imposing discretionary non-tariff barriers. This could mean various things such as the holding up of goods coming into China from the United States, or additional harassment of US companies. Again, this is not to spare the poor United States. This is because non-tariff barriers of that sort are likely to feed the narrative outside of Washington among average Americans that China plays unfair with stories of abusive Chinese power.

Second, I would take a page from the book of the Japanese government, which has been very successful in negotiating or rather limiting negotiations with President Trump. There are two things that they have done in addition to not retaliating. First, they have drawn a line and said we will go no further. The Chinese delegation does not have to decide that any deal is a good deal. They should clearly and specifically state the lines beyond which China will not go and continue to stay away from the negotiating table if those lines are about to be crossed.

Second, China should reach out regionally for other economic relationships including free trade agreements, whatever goes on bilaterally with the United States. The unilateral trade liberalization China has already undertaken in various sectors has been successful. It has partially insulated the Chinese economy from the trade war. It also has promoted greater recognition in the US public of the costs of Trump's policies, through visible trade diversion from the United States, meaning other countries gaining market share from liberalization in China when the United States has not gotten the same access. This will speed the reaction in the United States to the Trump mistakes.

Importantly, China should go further and pursue accession to CPTPP, and stop wasting time with Regional Comprehensive Economic Partnership (RCEP). India is a member of the RCEP negotiations so it will never be a high-quality trade agreement, meaning covering enough of commerce consistently to matter. RCEP is also years away from functioning where CPTPP is already functioning, with much stronger economies involved. CPTPP, in part because of the Obama administration's leadership, deals somewhat with many of the legitimate problems in China-US economic relations, such as state-owned enterprises and digital trade. That provides a basis for future better relations with the United States.

Next and, perhaps most importantly for dealing with the US political situation, it is time for China to engage in very visible enforcement of intellectual property rights. The Chinese government would be smart to go after things that may be of less economic significance but are easily grasped by the American public. For example, crackdown on the millions of illicit software packages that are being used in China without paying royalties. It is not enough to re-state that China has good recent laws on paper regarding intellectual property. Make a big show on TV that you are punishing people who are violating intellectual property rules. This will help your case in the United States, while simply being the enforcement of Chinese laws. Veterans of US trade wars know, Congress is all about the word "enforcement." If you can demonstrate you are enforcing rules, Congress will be much happier.

Finally, China's international representatives need to find a new word rather than constantly making excuses for noncompliance with norms by saying, "We are still a developing country." There is some economic truth to this characterization—there are vast regional differences in Chinese per capita income, and the need for additional infrastructure is obvious. Yet, politically, going back to the Bush and Obama administrations, very few things set an American official's teeth on edge like the Chinese government whining that the world must be patient because it is still a developing country. Some kind of new classification for China has to be part of any WTO reform effort.

The Chinese leadership is already pursuing many aspects of this strategic approach to the economic conflict with the United States. I first proposed this plan in Beijing in May, right after the bilateral talks broke down. The temptation for China now will be to escalate the conflict, given Trump's capricious aggression. For its own sake and the world's, China should recognize that it will win by reaching out to others while being self-restrained with the United States. Think judo rather than kung fu.

This article was originally published on Caixin Global.