A top priority for the incoming US administration of president-elect Joe Biden will be deciding how to handle the conflict with China. What started as a trade fight morphed into a tech war and is now at an impasse. A new approach is urgently needed. It should have three major elements.
First, dialogue. The Twitter-driven policy bluster of the past four years of Donald Trump’s administration has no place in problem-solving between the world’s two largest economies. At the same time, it is fair to say that the periodic summits favoured by his predecessors — whether biannual (George W Bush) or annual (Barack Obama) — were not exactly successful either.
A better approach would be to establish a permanent secretariat that has full-time responsibility for all aspects of the US-China relationship — from trade and technology, to cyber security and people (including educational exchanges, visas and human rights).
Housed in a neutral jurisdiction and staffed by senior professionals from both countries, such a secretariat would be charged with data-sharing, joint research and joint policy white papers to support regular meetings between leaders of both nations. Under its auspices, implementation and monitoring of existing agreements would be jointly conducted, complete with transparent dispute adjudication.
Second, trade. Trade imbalances between nations do not occur in a vacuum. They are an outgrowth of macroeconomic saving problems. The US, with its chronic shortfall of domestic saving, ran merchandise trade deficits with 102 nations in 2019. China, with its chronic saving surplus, ran merchandise trade surpluses with 159 nations in 2018. For that reason alone the current approach to the US-China trade dispute is flawed, as are the tariffs that underpin it. There can be no bilateral fix for a multilateral problem. That has only led to trade diversion among trading partners — imposing higher costs on consumers and producers on both sides.
This approach — tariffs as well as the so-called Phase 1 deal on Chinese purchases of American-made goods — should be abandoned in favour of a saving agenda. The US should increase saving while China should reduce it. That will be harder for Washington than for Beijing, as US saving is now under acute pressure with huge Covid-19-related budget deficits.
That will require a polarised US Congress to commit to medium-term deficit reduction. Conversely, China needs to continue reducing its surplus savings — essential to fund a porous social safety net, temper fear-driven household saving and boost discretionary consumption. Saving rebalancing is essential to reduce trade imbalances between both nations and their trading partners.
Third, the Trump administration deserves credit for bringing the structural debate to a head. While the allegations it raised in 2018 about China’s intellectual property regime and forced transfer of technology by US companies were based on weak evidence, they underscored serious concerns about practices that were counter to the terms of China’s 2001 accession to the World Trade Organization. Unfortunately, none of these thorny issues has been addressed in the current approach.
There is a better way: to start by recognising that the so-called structural agenda is a stalking horse for far bigger aspirations shared by both the US and China — namely, improved access to each other’s markets in order to promote long-term growth. A bilateral investment treaty is a time-tested approach that both nations have long embraced as a means toward that end. The US has signed 42 such treaties, China has more than 100 in force. A decade of negotiations on a US-China treaty were abandoned by the Trump administration just when the finishing line was in sight. Going back to the table should now be an urgent priority.
An agreement of this kind would eliminate ownership caps on direct investments by multinational corporations in each market. That single provision would eliminate the joint-venture structure of cross-border investments, taking the thorny issue of forced technology transfer off the table. No JVs, no transfer of anything from one partner to another. A broad, enforceable treaty (its implementation falling under the purview of the secretariat outlined above) could also be used to address contentious disputes over IP rights, state-supported industrial subsidies and cyber security.
It won’t be easy for either nation to stand down. At first, small steps will be required to rebuild trust. But these are far preferable to staying the current destructive course.
The writer, a faculty member at Yale University and former Morgan Stanley Asia chair, is the author of ‘Unbalanced’
Source: Economy - ft.com
