Commentary Type

Why the US Needs Allies in a Trade War Against China

Chad P. Bown (PIIE)


On December 1, in Buenos Aires, President Trump started the 90-day clock to negotiate a trade deal with China. He claims he wants to tackle the big systemic concerns involving theft of American intellectual property, the forced transfer of technology from American firms, and the state-driven nature of the Chinese economy. For trade watchers, the time frame for such ambitions sounds absurd. But they are not entirely out of reach. If Trump makes up with scorned friends in order to take on a common adversary, he could get a meaningful deal.

Admittedly, Trump did spend the first two years of his presidency alienating traditional American allies as much as officials in Beijing. He reversed the Obama administration's signature foreign policy moves by pulling out of the Paris Accord on climate, Iran sanctions deal, and Trans-Pacific Partnership agreement. And his own protectionist actions on trade policy—tariffs imposed on steel, aluminum, and threatened on cars—mostly hit exports in economic allies like Europe, Japan, Canada, and South Korea. Because they weaken an otherwise concerning alliance, China's view of many of those Trump policy actions is fairly positive.

But a change in approach is conceivable. In what would be a stunning policy plot twist of the Trump presidency, it is possible that American negotiators could join forces with their previously rebuffed counterparts in Europe and Japan to form a collective front, all pushing for Chinese reform. Although the White House has yet to signal anything like this, it's worthwhile to consider how such a strategy might play out.

This coalition of market-oriented economies would make three fundamental demands. First, Beijing would have to commit to a crackdown on state-sponsored cyber-espionage and theft of commercial trade secrets. Second, the Chinese government would also need to move away from its legacy system of coercing western companies to form joint ventures with domestic firms, as this has created tension with companies being compelled to transfer their technology on noncommercial terms. Finally, China would have to cut its industrial subsidies and the excess credit it has used to prop up state-owned enterprises.

In fact, European and Japanese trade ministers have been working behind the scenes—with the support of President Trump's US Trade Representative, Robert Lighthizer—to develop new rules to address each of these joint concerns with China. The three publicly announced the initiative almost exactly one year ago on the sidelines of a World Trade Organization conference, coincidentally also in Buenos Aires. The trilateral group revealed further progress after meeting in March in Brussels, in May in Paris, and in September in New York.

The December 1 announcement created a moment for this trilateral group to put their plan into action. Trump could take it, reunite with European Commission president Jean-Claude Juncker and Japanese Prime Minister Shinzo Abe, and confront China en masse. And proceeding as a bloc is more likely to work, mainly because it capitalizes on the right economic incentives.

To see why the three must work together, remember that American negotiators have already tried to press Beijing on their own. Though it received strikingly little public attention at the time, the Obama administration undertook sustained attempts to negotiate a bilateral investment treaty with China. This one-on-one effort sought an agreement to protect foreign companies from suffering from the same problems Trump purportedly now wants to fix. Such a treaty might have addressed the coercion and theft of American intellectual property, as well as some of the concerns over China's massive subsidies, through new rules and better enforcement.

However attractive this all sounds, the US-China bilateral treaty approach was probably doomed for failure. It is a deceptively simple example of what the Harvard-trained economist Mancur Olson popularized as the collective-action problem. The "harm" caused by China's unfair trade practices is spread out across all of its trading partners, each of whom has only a minor incentive to act. Therefore, on its own, America simply does not possess enough incentive to ask China to do the structural change required to make a difference.

The problem is something of a paradox. America would not reap all of the benefits if China took on all of the reforms being demanded. Beijing can't improve intellectual property protection in a targeted fashion that would only advantage American companies, scientists, and workers—its efforts would also end up helping German, Japanese, and British entrepreneurs. And a Chinese agreement to cut back on subsidies improves conditions facing steel and aluminum companies also operating in Europe and Japan, not just in the American Midwest. The sheer inability to prevent others from benefiting from Chinese reform means that an America that goes alone will tend to underinvest in efforts to push for change.

Understanding the limits to negotiating alone is critical. Beijing recognizes that the U.S. doesn't have the stomach to put up a big enough fight on its own to fully play out a war of attrition. Why should American automobile workers in South Carolina have their exports shut out of the Chinese market due to Beijing's retaliation to Trump's tariffs when the main beneficiaries are car plants in Europe or Japan? American soybean farmers have noticed that this fall's tariff on their crop means China will switch to sourcing from competitors in countries like Brazil.

Even if the Trump administration feels emboldened to inflict the pain of tariffs on American consumers, the next president may not be. So, the Chinese can simply wait. The implication of Olson's free rider problem is that, just like Obama had insufficient leverage to get China to do structural change, Americans are likely unwilling to suffer the pain of President Trump's unilateral tariff war for long enough to get the job done.

Nor should they have to. China's biggest fear is one of collective action by the Europeans, Japanese, and Americans. Beijing will likely soon present Trump with a deal to simply agree to buy more American agricultural or industrial products, but not make much movement of reform. This offer will be tempting. Selling off the growing stockpile of American soybeans or the cars in the overflowing parking lots at the docks will appeal to an American president who has been interested thus far in deals in which only the Americans benefit.

But this would be short-sighted. China importing more agriculture or cars from America without reform may simply come at the expense of someone else. And that someone else may be exports from an ally like Europe or Japan. So not only would falling for the seductive but poisonous offer not fix the long-term problem with China, it would further weaken an already fragile trilateral partnership. It would also be China's way of buying itself out of the needed systemic reform from which the Europeans and Japanese benefit, too.

All of this does assume the Trump administration is serious about fixing the trade relationship with China. The next 90 days could also reveal whether its true intention is instead to limit China's rise based on some perceived national security or other non-economic concern.

Now, the first two years of the Trump presidency do make the likelihood of collective action seem remote. And yet, the opportunity to capitalize on the moment is now there for his taking. The failure to do so may be a waste of Trump's best, and potentially only remaining, opportunity on this issue.

Beyond making up with allies, a final potential attraction to such a plot twist would be the statement that Trump had learned from the failings of his predecessor. For the Obama administration did try to negotiate structural reform with China—but its ultimately unsuccessful attempts were carried out also almost entirely alone.

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