How to Increase Trade between China and the United States

Even among supporters of the United States' economic integration with the world, China is rarely seen as a model trading partner. Chinese imports are at an all-time high, but China is routinely criticized for allegedly flooding the United States with cheap goods, paying low wages, unfairly subsidizing its industries, manipulating its currency and stealing intellectual property—all while putting up its own barriers to US-made goods and services.

There is a remedy to these complaints, but it is counterintuitive. The United States should be engaging in more talks and negotiations with China, not fewer. With President Obama traveling this week in Asia on a mission to mend economic ties, this is a good time to do so.

The United States is taking on its most ambitious trade agenda ever, helping to write the future rules of international trade. The trade agreements being negotiated by the United States are now going to allow for the most comprehensive liberalization of trade barriers ever. However, China is not included in the US trade agenda, leaving out the future largest economy in the world and leaving China's barriers and unfair trade practices unchanged.

A closer economic relationship with China would bring many advantages. First, it might help overcome the increasing strategic distrust between the United States and China. History shows that countries with high degrees of trade and investment between them have had less conflict. Additionally, a US-China trade agreement—whether as part of the Trans-Pacific Partnership (TPP) or not—would work to reduce Chinese barriers significantly.

The United States has a strong comparative advantage in service exports, regularly achieving a surplus of around $200 billion in services trade. But some of China's highest barriers are in the service sector and, as a result, the United States loses a lot of potential exports to China. Service exports in industries like banking, insurance, engineering, transportation, consulting and software development would expand significantly from trade liberalization.

Investment is another area where major potential is unfulfilled. The United States has invested more than $2 trillion globally, but just 2 percent of that has been in China. Likewise, China's foreign direct investment (FDI) in the United States had been paltry until a few years ago, but it is a major investor worldwide. Increased FDI from China could bring a substantial boost to the US economy and would create jobs.

There are some small discussions under way. China, the United States and a host of other countries are negotiating the information technology agreement, an attempt to reduce tariffs on a long list of IT products; the environmental goods agreement, a similar accord for manufactured products relating to fighting climate change; and the government procurement agreement.

The United States, the European Union, and 21 other countries have begun negotiating an agreement to facilitate trade in the service sector, called the Trade in Services Agreement, and China has expressed interest in joining. But these talks cover just a small portion of the trade barriers, and more needs to be done.

There are substantial economic gains to be had. In Bridging the Pacific: Toward Free Trade and Investment between China and the United States, my coauthors and I analyze many of the sticking points that stand in the way of closer economic ties, and how they can be resolved. The model in our book looks at the benefits of a bilateral free trade agreement between China and the United States, and the results are impressive.

China would stand to gain more than $300 billion in annual income gains 10 years after implementation, while the United States would see annual gains of over $130 billion. China's gains are larger because the country with more barriers sees the most benefits from the reduction of those barriers, in terms of cheaper imports and higher productivity gains.

The United States would stand to gain huge amounts from the lowering of these barriers as well, with a more than doubling of annual exports to China above the baseline projection, after 10 years.

The United States is a very open country, with low tariffs and low barriers to foreign investment. And this is not going to change, no matter the policies of another country. So it's time to step up trade negotiations with China and lay the foundation of a future where China and the United States trade freely with each other.