Journal

New Model of China-US Economic and Trade Relations: Cooperative Interdependence in the context of globalization

By Li Yong

“Ballast”, “propeller” and “anchor” are the key words frequently used to describe the role of China-U.S. economic and trade relations in the overall relationship of the two countries. Indeed, currently, China is the U. S.’s second-largest merchandise trading partner, its third-largest export market, and its biggest source of imports. In 2016, the trade between the two countries, totaling US$ 524.3 billion, is 209 times of that in 1979, when China and the U.S. established the diplomatic relations. Trade in services has exceeded US$110 billion in 2016, while two-way investments have amounted to over US$ 200 billion, according to China’s Commerce Ministry. 
 
In nearly 40 years of time, the bilateral economic cooperation have expanded from trading of goods in the early days of the reestablished diplomatic relations to cooperation in a wide range of areas today, such as agriculture, science and technology, energy, education, culture, tourism, environmental protection, and healthcare. 

Whilebring great benefits to both sides, the economic and trade relationship between China and the U.S. has not always been a smooth sailing as it grows more complex and interdependent and at times, is fraught with tensions. 

In the last 45 years since Nixon’s ice-breaking visit in 1972, China-U.S. bilateral relations witnessed 8 U.S. presidents, and all of them choose to stay on each other’s good side by exercising leadership and vision. No major disruptions have ever happened.

President Donald Trump has demonstrated similar vision to the other 8 presidents in his meeting with President Xi Jinping at Mar-a-Lago resort in early April this year. At the same time, though, President Trump has been out spoken about his attitudes towards multilateral rules and institutions in general, and the China-U.S. economic and trade relations in particular. That has injected a feeling of uncertainty about how he is going to shape the contour of U.S. trade with the rest of the world, including China. 

Xi-Trump summit: setting tones for a new start

With Donald Trump’s campaign rhetoric (including his tweets) overshadowing the China-U.S. relations, the summit meeting between President Xi and President Trump at Mar-a-Lago resort between April 6-7 turned out to have produced positive results in terms of advancing the bilateral relations in manageable direction. Although President Donald Trump has been the center of controversies in the U.S. on many domestic and international issues, his attitude, effort and vision in handling the China-U.S. bilateral ties so far deserve positive evaluation. What is also worth noting is that the U.S. State Secretary Tillerson’s visit prior to President Xi’s visit to Mar-a-Lago affirmed China’s “non-conflict, non-confrontation, mutual respect and win-win cooperation” principle for establishing new model relations between the great powers, and that was taken as a sign of goodwill before the two presidents met.

The summit distinguishes itself from the previous ones by achieving at least 6 key results that can be viewed as the new starting points and basis of future China-U.S. bilateral interactions: 

1) the chemistry between the two leaders was positive;

2) the discussions between two Presidents were based on mutual respect and results-focused; 

3) both sides agreed to elevate existing bilateral talks to a higher level; 

4) a new high-level framework for talks was established, which includes four pillars, namely, the diplomatic and security dialogue, the comprehensive economic dialogue, the law enforcement and cyber security dialogue and the social and cultures issues dialogue; 

5) the summit set a very constructive tone for the bilateral relations going forward. 

6) the recognition by the U.S. of the importance of China’s Belt and Road Initiative and attendance of China’s Belt and Road Summit in May 2017.

100-day plan: symbolization of growing rapport

The China-U.S. Comprehensive Dialogue, one of the new pillars of high level interactions overseen by the two Presidents, had its first meeting during the summit, and one of the most significant fallouts was “the 100-dayplan”, which was proposed by the Chinese side as an expression of China’s willingness to work with the U.S. on resolving issues in bilateral economic and trade relations. The plan was seen as the most significant progress made by the two countries to begin the effort to deepen the economic and trade cooperation. 

On May 12, the two sides reached an agreement addressing issues in 10 areas including agricultural trade, financial services, investment, and energy, which were called initial results of the 100-day plan. 

As concrete progress is made in implementing the actions under the 100-day plan, the two sides have begun examining a one-year plan to “further solidify actions in promoting U.S. - China economic engagement and cooperation”, which will focus on trade, investment and other economic opportunities between both countries. 

One-year plan and beyond: managing differences and removing political biases

While general spirit of 100-day plan should be continued, additional efforts will be required to manage the differences and biases that exist as a part of the political and economic realities that both countries will have to deal with going forward. In economic and trade fields, there are differences in ways how issues are identified, conceptualized, interpreted and delineated, and in the perspectives in which both sides prioritize and approach them.  

On the part of U.S., the issue of trade imbalance will continue to top the list of issues that the U.S. wants to resolve. Other things on the U.S. agenda of future discussions could likely include cyber-security, excess capacity, SOEs and export subsidies, market access, IPR protection, fair trade, reciprocity, etc.. All of those are considered to be “unfair” to American businesses and industries. 

China, on the other hand, desires progress on U.S.’ honoring of Clause 15 of China’s WTO Accession Protocol regarding the use of “surrogate” to establish “fair value” for Chinese products, controls on U.S. exports of high-tech products, secretive security reviews of Chinese investments by CFIUS, BIT negotiation, China’s participation in the U.S. infrastructure projects, to name a few. Specifically, anti-dumping, countervailing measures being taken against Chinese products, the security investigations on imports from 16 countries including China and recent proliferation of national security threat into the investment area have all caused concerns. 

In a broader sense, the differences between the two countries are rooted and embedded in the differences of population size, geographical location, natural endowment, history, culture, political system, economic management, social governance and structure, and level of development. As such, the world views of the two countries are different.

Politically, the two largest economies are under two different political systems. The ideological difference has given rise to biases about what China has been doing in dealing with the economic and trade relations with the U.S. and the tendency of politicizing economic and trade issues in the U.S. 

In the eyes of some American, China’s success as a communist country itself undermines or poses threats to the U.S.’ global primacy and dominance, and therefore, the U.S. economic engagement with China, as they see it, has created social and economic dislocations, resulting in job losses, weakening competitiveness of U.S. industries and slowing the U.S economic growth. Factors such as China’s low labor costs, complementary nature of the two economies, globalized supply and industry chains, level of development that has determined China’s position at the lower end of the global value chain, are not quite apprehended as the basis of economic engagement and cooperation, but construed as sources of vicious competition and factors of so-called “unfair” trade practices. 

With China being demonized, the calls for tough retaliation on China’s economy seems to be part of the political correctness, and China-bashing in political campaigns are seen as a necessity to win populist favor. 

The political circumstances in the U.S. have reaffirmed the Chinese concerns that the U.S. might adopt “two-faced” approach in dealing with China. While publicly supporting the idea of seeking win-win resolution of the bilateral trade issues, the U.S. lashed out “national security threats” to target at Chinese products such as steel and aluminum imports. The probe will also be “extended to other fields such as semiconductor and shipbuilding”. The probes have invoked Section 232, a portion of a Cold War-era law-Trade Expansion Act of 1962, and sparked concerns that the use of national security could be abused not just as a tool of trade protectionism, but also a geopolitical countermeasure. 

The national security scrutiny has proliferated into investment area. New York Times reported on Reuters’ interviews with officials on Chinese investments in Silicon Valley, saying that “The United States appears poised to heighten scrutiny of Chinese investment in Silicon Valley to better shield sensitive technologies seen as vital to U.S. national security”. The report further disclosed that “Senator John Cornyn, the No. 2 Republican in the Senate, is now drafting legislation that would give CFIUS far more power to block some technology investments (from China)”. 

The Chinese government is strongly against politically driven trade and investment barriers, and advocates that “cooperation is the only right choice for China and the U.S.”. At the same time, China will face up the elements of discord with efforts to build mutual trust based on mutual respect, expand the common ground to seek win-win solutions, manage opportunities to promote mutual success and strengthen a stable China-U.S. economic cooperation that will help boost the global economy. 

In drawing up the one-year plan, both China and the U.S. will need to make efforts to build consensus on how the trade and investment issues are resolved in the best interests of both countries, and make sure that no preoccupied politically-driven agendas and protectionist assumptions are built into the process when discussing solutions. 

Any attempts to go in opposite directions or forcefully impose unfair measures against Chinese products and investments on grounds of national security threats would have disruptive impact on the bilateral efforts to engage each other, and negative spillover into the world economy. China and the U.S. can work together on differences, but both cannot afford to see the differences being distorted by biases. 

Protectionism and unilateralism: Pandora’s Box

Since the Sub-prime crisis in the U.S. in 2008, the world has been suffering from the consequences and faced with challenges never seen before. The sluggish global economic performance has prompted some countries to change their free trade policies, triggering the rise of nationalism and parochial protectionism that makes free trade conditional and secondary. According to the WTO Report on trade-restrictive measures of G20 countries, while a total of 145 new trade-restrictions were introduced in these countries between October 2015 and May 2016, the average number of such measures applied per month since 2009 recorded its highest level (about 21) during this period. G20 economies have introduced 1,583 new trade restricting measures and removed just 387.Free trade, the principle and flag that have been upheld for decades has now been under attack and in crisis.

There have already been worrying signs that the U.S. is poised to move away from its past advocacy of free trade and the multilateral trading system. The U.S. opposition to the wording on “fighting against protectionism of any form” in the G7 and G20 joint statements provided evidence of that poise, and once again, at the APEC forum in Hanoi this May, the disagreement by the U.S. on the use of anti-protectionism language failed the forum’s effort to renew the commitment of opposing trade protectionism. The redirected focus on “fair” and “reciprocal” trade has brought “U.S. standards” to the fore of the multilateral and plurilateral platforms to justify American-standard free trade. 

Bilaterally, the U.S. policymakers cry foul about the China using its unilateral standards postulating “unfair practices”, while at the same time, unfortunately, adopt trade policies that distort trade to protect domestic interests. One example is America’s continued use of surrogates on the basis so-called “non-market economy methodology” when determining whether Chinese goods are being “dumped” into the U.S. market at “unfairly” low prices. 

To be sure, the “surrogate” practice was the result of the negotiation 15 years ago, although illegal under WTO rules. However, the agreement, as stipulated in the China WTO Accession Protocol, was that it should end, no matter what, 15 years later. 

The insistence that China is not a market economy and hence surrogate will continue to be used is, however, a hangover from political biases, and the mystical formula only allows U.S. officials “discretion” to impose punitive tariffs high enough to protect domestic industries. This is unfair and discriminative to Chinese imports. China sees Free trade as the foundation of economic globalization and an input of the multilateral trading system. Restrictions on free trade on the ground of fair trade could generate unfair outcomes. Fair trade must be embedded in free trade.

While blaming China for subsidizing SOEs and exports, the U.S. has never stopped its spending on subsidizing its industries, such as agriculture, oil and energy, can corporations. Five corporations, according to Washington Post, have achieved a trifecta, ranking among the 50 largest recipients of three kinds of funds: state subsidies; federal grants and tax credits; and federal loans, loan guarantees and bailout assistance. 

Fairly speaking, it is hardly possible to define “fairness” of trade, and in history, the U.S. has abusively used the so-called fair trade standards to unfairly lock foreign competition out of the door. James Bovard, a Cato Institute associate policy analyst said in his policy analysis: The "crime" of dumping results solely from applying different tests of fairness to U.S. and foreign prices. The Treasury Department, in a 1957 report on dumping, defined "fair value" for foreign prices: "the word 'fair' as used here simply means what one ordinarily conceives of as the 'fair market' value--what a willing buyer will pay a willing seller." But U.S. anti-dumping law rejects voluntary agreement as the measure of fairness of U.S. prices for imported products. The U.S. price of an imported product is "fair," not according to whether a foreign seller and American buyer voluntarily agree, but according to whether the foreign company can pass dozens of arbitrary tests imposed by the U.S. government.

In the same analysis, he cited a few examples of U.S. anti-dumping cases using self-judgments (See the box below). 

Box: U.S. trade policies in history have become a travesty of fairness

 Commerce sometimes penalizes foreign companies for selling different products for different prices. In 1984 an Italian company was convicted of having a less-than-fair- value margin of 1.16 percent on its sales of pads for woodwind instruments. Commerce compared the price of a smaller woodwind pad sold in the United States with that of a larger woodwind pad sold in Italy. Since the smaller pad sold for less than the larger pad, the Italian company was dumping. In a brief defending its action to the Court of International Trade, the U.S. government admitted that it had not compared the sales price of identically sized pads--and then claimed that Commerce has unlimited discretion to accept or deny comparisons of that sort.

 Commerce convicted a Brazilian company for selling its frozen concentrated orange juice for l.96 percent less than fair price. The United States has a 40 percent tariff on orange juice, so Commerce subtracted 40 percent from the Brazilian company's U.S. sale price before comparing it with the Brazilian price. The Brazilian government imposes a3.5 percent export tax on orange juice, and shipping and insurance costs probably added at least another 2 or 3 percent. Thus, Brazil was selling orange juice for at least 45 percent more in the United States than in Brazil. But the Commerce Department still considered the U.S. price unfairly low.
 In early 1988 the newsletter Inside U.S. Trade reported: "The Commerce Department is trying to cajole industries into filing dumping cases against Japanese imports for products that it feels are being sold at prices that do not sufficiently reflect the recent appreciation of the Japanese yen, according to many sources including Commerce officials. Commerce has been unofficially compiling a list of products suspected of being dumped by Japanese companies." One Commerce official declared that the agency was "trying to force Japanese concessions on contentious trade issues--such as restrictive bidding on construction projects and agricultural quotas--by 'creating an anti-Japanese climate.'"

 In a Japanese TV case, one company had its dumping margins increased because it donated unsold television sets to charity. Commerce assessed the firm as if the television sets had been "sold" for $Book.info$ in the U.S. market--the ultimate act of unfair trade. Companies have also received higher dumping margins for selling TVs to employees at a large discount and for selling damaged or defective televisions at a markdown.

Source: Cato Institute Policy Analysis No. 164:The Myth of Fair Trade November 1, 1991

Another protectionist measure that is typical of self-judgment and self-imposed-standards is the invoking of “national security” against foreign imports and investment, including Chinese ones. The intention behind is a) to take advantage of the WTO loophole of “national security exception”, which should otherwise be exercised in good faith but not abused to endanger the bases of WTO rules, and b) a unilateral action that tries to rationalize protectionism. This is not fair, and dangerous, too, as it will trigger off retaliatory responses from other countries. Between China and the U.S., the abusive use of Section 232, whether it will result in higher tariffs or restrictive measures, could well undermine the foundation of agreements that both side wish to achieve in addressing trade imbalance issues. 

Another flag of “fair” trade the U.S. is waving is “reciprocity”. 

ArticleXXXVI (8) of GATT 1947 established the principle of non-reciprocity, stating that "developed contracting parties do not expect reciprocity for commitments made by them in trade negotiations to reduce or remove tariffs and other barriers to trade of less-developed contracting parties."Non-reciprocity is one of the principles that constitute the pillars of the multilateral trading system as embodied in GATT and its successor WTO. Countries at different levels of development have different priorities and needs, and these must be accommodated if the multilateral trading system is to serve all its members. Unilateral enforcement of reciprocal trade does not conform to WTO rules.

China is taking notice of the “reciprocity” tendency being mulled in some developed countries in relation to their trade and investment relations with China. China is also aware of the policy options by the U.S. of reciprocal tax or tariff. 

What needs to be clear is that China is still a developing country, although its aggregate size of GDP is the second largest in the world, and China’s per capita GDP is still in the lower ranking of around 80th, while having 70 million people in extreme poverty. In addition, the WTO works according to the “most-favored nation” principle, and the current status of China as a member of WTO is the result of the agreements with other members approving China of its accession, and any change of the status quo would require legitimate processes under the WTO framework, not unilateral actions. 

The WTO is the legitimate organization to work out a multilateral agreement on reciprocal trade that is accepted and recognized by the all members including developing contracting countries.

Reality check: Trade with China creates more jobs than less

In public debates on the trade issueswithChina, the focus has almost exclusively been on the “staggering” size and growth of imports from China, the trade deficit the U.S. has with China and the perceived threats to American workers and manufacturers. That has fanned up anti-China sentiments in American public, and undermined the basis of trust between the two peoples. 

The truth, however, has never been talked about or told to the public.

First, import does not directly cause job losses. 

Back in 1998, in his testimony before Subcommittee on International Economic Policy and Trade, Committee on International Relations, U.S. House of Representatives on the growing U.S. trade deficit, Daniel Griswoldof CATO Institute made the following statement: “No aspect of American trade is talked about more and understood less than the trade deficit. It has been cited as conclusive proof of unfair trade barriers abroad and a lack of competitiveness among U.S. industries at home. It has been blamed for destroying jobs and dragging down economic growth. None of these charges are true”. He cited savings and investments as the underlying causes of trade deficit. 

Daniel Griswold’s analysis has proved true even until today. Between 2010 and 2015, for example, the number of U.S. manufacturing jobs rose by 6.8% even though U.S. imports from China increased. On June 2 this year, the U.S. Commerce Department posted a brief on trade titled: “Trade with China Continues Trend While Comprehensive Economic Dialogue Hopes to Balance Deficits”. It says: “The trade deficit widened month-to-month with China from 24.6 billion in March to 27.6 billion in April. At the same time, the Labor Department reported a 4.3% unemployment rate in May, the lowest record since 2001, with 6 million job openings unfilled. 

There are a lot of research and analysis about the relationship between trade and employment. However, the two most important factors have been identified as key causes of job losses, namely, adjustment of industrial structure and technological advances. 

Second, trade creates jobs.

The U.S. International Trade Administration released a study earlier 2017, showing that U.S. exports in goods and services created 11.3 million jobs, among which China contributed 601,000 jobs in merchandise trade and 309,000 in service trade. 
U.S. Data: Jobs supported by exports

Another research conducted by Oxford Economics commissioned by the U.S.-China Business Council reinforced the point, but further explained that the jobs supported by US exports to China could reach about 1.8 million in 2015 if the U.S. products embedded in the exports of other countries to China are factored in. When trade is combined with China’s investments in the U.S., the total jobs supported by the U.S. relations with China was 2.6 million. 

Imports from China create jobs, too, as they contain “Made-in-U.S.” contents and they are created in the design, engineering, wholesale and retailing, marketing and logistics of the imported products within the U.S.. As indicated by a report prepared by Trade Partnership in 2014, “Of $1.85 billion in products imported in 2009, $464 million of the value was American and 10 million U.S. jobs, or 11.2 percent of U.S. employment, were sustained by global supply chains in 2008.” 

Deficit: Statistics obfuscating the real situation

It is imperative to recognize the fact that the two countries have developed a complex, broad-ranging and deeply intertwined economic relationship, in which one is part of another, and trade between the two countries have generated huge benefits that are shared rather than a story of one side gaining over the other, as the U.S. deficit number with China might have suggested. 

The U.S. side has recorded a deficit of US$ 347 billion for 2016. The “Research Report on the China-U.S. Economic and Trade Relations” (hereinafter referred to as “the Report”), launched by The Chinese Commerce Ministry on May 25, analyzed the deficit as reported by both the Chinese Customs and the U.S. Customs, saying: “the size of the deficit has been exaggerated”, and “the difference is US$112 billion” between the China- and U.S.-reported numbers. The statistical discrepancies that exist in the two different statistical systems were recognized by both sides, and joint studies have been done on the statistical differences since 1994. The results indicated that “the deficit figures released by the US from 2008 to 2014 were over-reported by an average of 19%”. 

The Report attributed the causes of statistical discrepancies to factors such as methodological differences, entrepot trade and re-export. 

If China’s trade deficit with the U.S. in service trade and the amount of processing trade (exports by foreign invested enterprises in China with imported contents) were deducted, as the Report suggested, the size of deficit could well be more than halved to an estimated US$ 164.8 billion. 

Processing trade, also known as intermediates trade (parts and materials imported to make products for export), is a factor of distortion. Export-oriented multinational firms source goods from multiple countries and China is often the final point of assembly. When a finished product is exported to the U.S., the total value is recorded as China’s export, while, in fact, the actual value added in China is only a small fraction. 

The most cited example of iPhone assembly in China has illustrated the statistical distortion. In 2009, the export of an assembled iPhone was declared at the U.S. Customs at its full manufactured value, US$ 179, but majority of its contents, 96.4%, came from non-Chinese origins, or, in other words, was made in other countries including the U.S., while Chinese value added in the phone was only 4.6%. The total trade value the U.S. had with China, however, was accounted for at the shipping price of US$179 per unit, which is obviously not a fair calculation. To put it in perspective, China exported 11.3 million iPhones to the United States with a total export value at $2.0 billion. Considering the input from the U.S.(at $121.5 million),the U.S. trade data would put China’s trade surplus in iPhone trade with the United States at $1.9 billion, contributing 0.8% of U.S.’ total trade deficit. But that number could fall to $73.5 million if that trade was measured according to the actual value-added that occurred in China. The iPhone example demonstrates that the rapidly changing nature of global supply chains has made it increasing difficult to interpret the trade data as they appear to be.

A Deutsche Bank analysis indicated that if foreign contents are factored in, China’s real share in the USA trade deficit will come down significantly, from nearly 50% to about 16%, which compares to 13% contributed by Japan and 11% by Germany. This analysis is done in the context of globalized supply chain, and supports the view of “made in the world” by WTO, who has a statement saying: More and more products are “Made in the World” rather than “Made in the UK” or “Made in France”. 

When media are shouting out: 100-day plan is “not enough to wipe out the deficit”, the trade officials at the two sides of the table should be clear about at least two things: 1) the deficit the media talked about is not what the real situation is, and 2) there are significant American benefits and therefore, American interests, in China’s exports to the U.S.. 

Globalization: driver and basis of China-U.S. cooperative interdependence

Reflecting on the development of China-U.S. economic and trade relations, economic globalization has been primarily the driving force. The interdependence as it is today is a natural result of international division of industries as well as optimal allocation of resources against the backdrop of economic globalization. 

According to the previously mentioned report by the Chinese Ministry of Commerce (again referred to as the Report here blow) on China-U.S. economic and trade relations, the China-U.S. community of common interest is reflected in the benefits of the trade each of the two economies have enjoyed. 

For China, the U.S. is one of China’s largest export markets, providing huge external demand for Chinese exports. According to the Report, the share of China’s merchandise exports to the U.S. has remained above 16% of China’s total trade from 2008 to 2016. 
China’s exports have provided low cost products that reduce American household spending, particularly for blue collar families, and inflation as well. This is evidenced by the study by Oxford Economics and shown in the chart below.

Chinese exports also complement U.S. industries as part of the global value chain. The Oxford Economics’ research also suggested that American businesses performed well in areas where China’s exports also grew rapidly (see table below), an indication of complementarity between industries of the two countries. 

The U.S. is China’s second largest service trade partner, and the total value of service trade between the two countries was US$118.13 billion in 2016, with China running a deficit of US$55.4 billion, according to the Report. This represents a 4.7% increase over the previous year, and 18% of China’s total service trade. The two countries have strong complementarities in service trade, typically, in the area of technology and culture. The technology contracts from the U.S. in 2016 amounted to US$9.64 billion, while at the same time, the U.S. sold 51 films to China, bringing home nearly US$16 billion. 

The U.S. have benefited from its trade with and investments in China. The U.S. exports to China have increased 500% over the period from 2001 to 2016, while its growth export to the world in the same period was only 90%. China is America’s number one market for airplanes and soybeans, number two for automobiles, integrated circuits and cotton (see the table below for more details). 

Meanwhile, economic globalization has allowed companies such as Apple, to innovate, develop and engineer their products at home and expand their abilities to source some of their production in low-cost countries, such as China, all of which have enabled American firms to become a highly competitive and profitable as well as sources for high-paying jobs in the U.S.

As revealed by the Report, the revenues by American-invested enterprises in China reached an estimated total of US$517 billion in 2015, with total profit over US$36 billion. 

Most of the American-funded entities are operating well in China

 General Motors sells a car every 8 seconds
 Ford sells a car every 25 seconds
 McDonald’s sells 1600 hamburgers every minute
 Starbucks opens a store everyday
 American banks, insurance companies and securities firms made an aggregate revenue of US$48 billion in 2016
 American firms providing legal, accounting and consulting services had a total revenue of over US$19 billion

China offers great potential and realistic opportunities for American companies. The interdependence between the two economies is not hear-say. An analysis by MSCI and Morgan Stanley Research shows that the U.S. listed companies with revenues of more than 10% from China account for 9.7% of the MSCI index. Bloomberg reflected the picture in an analysis that was quoted by the Economist magazine as in the chart below. 

The interdependence is also reflected in China’s holding of American treasury bonds, which stood at US$1.27 trillion by end of 2015. China’s holding of U.S. treasury bonds in its current magnitude far exceeds the merchandise trade deficit, and has contributed to the financial stability of the U.S. economy and its economic growth. 

The above is just an account of some of the many benefits that both countries have attained from the bilateral economic and trade cooperation a demonstration as well of China-U.S. economic interdependence. The key message here is that China appears to be the country that has recorded the trade surplus, but the components of the U.S. deficit involves stakeholders of different countries (including the U.S.) along not just the supply chain, but also the value chain. 

As many would reasonably understand, economic globalization has tied up almost every country in the world in one kind of global supply/value chain or another, provided robust momentum for the world economic growth, facilitated the flows of commodities and investments, and promoted the advancement of science and technology, human civilization and people to people exchanges around the world. It is a reality of the global economy that each country has to face and it is not a matter of choice. 

Economic globalization was “Made in the America”, and the U.S. has been the biggest beneficiary of economic globalization. China, as a late comer, have also benefited from economic globalization by its comparative advantages in factors of production and active response to globalization by participating in cooperation across industrial chain and supply chain in the world. 

The economic and trade engagement between China and the U.S. has developed in the process of economic globalization, so have the disagreements and disputes. The way the two countries deal with their cooperative interdependence and resolve their issues will have global impacts, which will also shape the contour and trajectory of future globalization process. 

WTO: the core of multilateral trading system

China’s accession to the WTO has made China’s economic convergence and integration with the rest of the world possible and enabled China to learn to comply with multilateral trading rules. China has fulfilled all its WTO obligations and commitments as required and agreed upon. At the same time, China has played a constructive role in and made contributions to the effective functioning of the WTO and its continued evolution. 

In the past 15 years, and under the framework of the WTO, China and the U.S. have joined hands in the promotion of trade liberalization and facilitation, while seeking to resolve bilateral trade frictions and disputes following the WTO rules and regulations. The two countries have also worked together to respond to new challenges in global trade realm in an effort to construct a new system of rules and regulations governing the global trade.
 
In its over 70 years of history, the multilateral trading system as represented by the WTO and its predecessor GATT has played an irreplaceable role in pushing forward global trade liberalization and facilitation, promoting the economic and trade growth of all member countries and territories, fighting against the shocks of economic and financial crises, and contributing to the welfare of the peoples in the world. 

China firmly supports multilateral trade mechanism as a major channel to boost global economic development and resists all forms of protectionism. China believes that trade should not benefit just a small minority of people, rather, trade should bring benefits to a much larger majority. 

While promoting an open, transparent, inclusive and nondiscriminatory multilateral trading regime, China envisions multilateral endeavors to make a “bigger pie” of multilateral cooperation so that it will contribute to the economic growth of all nations, putting global development on track of better equilibrium. China hopes to work with the U.S. on the improvements of the multilateral trading system. 
Abandonment of WTO rules of the multilateral trading system to pursue bilateral talks would lead the world economy into a dangerous “beggar-thy-neighbor” and “zero-sum game” plight. If the rules of the multilateral regime are not strictly observed, the world trade will once again plunge into a disorderly era characterized by competition among the powerful, in which the law of the jungle will prevail, resulting in shrinking trade and investment flows, which will negatively impact the progress of world economic recovery and eventually the self-interests of those who fail to comply. 

Conclusion: Bigger vision and be SMART

As the Chinese saying goes, people with petty shrewdness attend to trivial matters, while people with vision attend to governance of institutions. 

For China and the U.S. to develop a new model of economic and trade relations, both countries need to have bigger visions that transcend the differences and problems that exist today. 

1. Both countries should evolve with the times in building new relationship with each other, and abandon old mindset that would hamper economic and trade cooperation. This should be the right starting point for the two sides to build trust and confidence.

2. Both governments should make efforts to develop new understanding and perspectives about each other's economic and trade initiatives, and take proactive actions to promote the cooperative interdependence. 

3. Both sides should realize that no-one alone can make the changes in the global trading system and unilateralism is not desirable for the world and not in our mutual interests.   

4. The two sides should look at each other in long-term perspectives, pursue opportunities of cooperation rather than erecting road blocks, and view our differences in political, social and economic systems as hybrid advantages in dealing with domestic and global issues. 

5. The policy-makers at both sides should realize that de-globalization is dangerous, disruptive and devastating, and strengthening and rebalancing the global economy in ways that avoid protectionism, facilitate reforms, reduce volatilities and eventually drive global growth will be good for all. 

6. The U.S. and China, along with other major nations, should be united in combating global challenges, addressing issues of common concerns, and finding cooperative solutions that can best enable opportunities of growth and drive inclusive development that all in the world can benefit.  

7. Revisit multilateral institutions as such that would enhance our ability to build consensus on new directions, manage sustainable interdependence in global trade and investment relations, strengthen regulatory coordination to prevent unexpected surprises, and seek reforming measures that eventually resolve long-term challenges.

In dealing with the trade problems between the two countries, both need to be SMART: 

 Sustaining a good, stable, mutually respectful and win-win bilateral economic and trade relations to avoid disruptive outcomes and pave the way to new model of China-U.S. economic and trade relations.

 Managing differences and abandoning political biases for mutual success through a trust-based platform of dialogues to seek productive and constructive solutions about future economic and trade relations  

 Attaining concrete breakthroughs with actionable plans a) to advance the mutual effort to narrow the gaps and seams in trade balances, with particular emphasis on removing export control restrictions on high-tech products; b) to continue the efforts to improve investment environments on both sides to facilitate U.S. investments in China and Chinese investment in the U.S., particularly the Chinese participation in the U.S. infrastructure projects, while at the same time, c) explore opportunities of cooperation under the “Belt and Road Initiative”.  

 Rebuilding the bilateral economic and trade relations by deepening communications, understanding and trust, coordinating regulatory policies to prevent unilateral actions, making explicit commitments to trade and investment liberalization, and developing institutionalized mechanisms such as BIT and other likely trade agreements to further advance the bilateral trade and investment relations to a higher level. 

 Treating the two-way trade and investments fairly and in compliance with existing rules-based multilateral systems to a) avoid diverging and protectionist trade policies that will obstruct normal trade and investment flows, and b) create an open, liberalized business environment that will allow the business communities in two countries to work together to contribute to mutual success.

Being SMART could also have global implications as two responsible stakeholders in the world: 

Sustained and stable China-U.S. economic and trade relations are going to contribute to global economic growth. 

Multilateral trading system should be viewed as a safeguard of the global trade flows and needs to be maintained as a central mechanism for enforcement of international trading rules and resolution of trade disputes. 

Achieving improvements in existing global systems instead of “abandoning or threatening to abandon the existing systems” to build a better rules-based international environment. 

Responsibilities for shared and inclusive growth in the context of globalization should be emphasized and responsible actions be encouraged. 

Trade and investment should be facilitated in a liberalized manner without protectionist and unilateral actions. 



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Li Yong is senior fellow and vice chairman, China Association of International Trade.

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