Second Thoughts on Trade With China
Inviting Beijing into the WTO seemed like a win-win. It didn’t turn out that way.
U.S. Trade Representative Robert Lighthizer in Hanoi, May 21. Photo: Hau Dinh/Associated Press Some policies undertaken with the best of intentions don’t work out as expected. In March 2000, President Clinton (for whom I worked during his first term) said of China’s accession to the World Trade Organization: “Economically this agreement is the equivalent of a one-way street. . . . It requires China to open its markets . . . to both our products and services in unprecedented ways. All we do is to agree to maintain the present access which China enjoys.”
The gains would be more than economic, he added: “By joining the WTO, China is not simply agreeing to import more of our products; it is agreeing to import one of democracy’s most cherished values—economic freedom.”
In his remarks later that year, when Congress effectively ratified China’s entrance into the WTO, President Clinton predicted that “10 years from now we will look back on this day and be glad we did this.” He was not alone; I could fill this column with optimistic predictions from senior officials of both political parties.
Ten years later, the U.S.-China Economic and Security Review Commission convened to examine the effects of this momentous agreement. In lengthy testimony, Robert Lighthizer, a Reagan administration trade official who now serves as President Trump’s U.S. trade representative, argued that this policy had failed in virtually every respect. Mr. Lighthizer attributed part of the blame to our underestimation of the extent and persistence of China’s mercantilist practices. But more fundamentally, he argued that the very structure of the WTO cannot accommodate countries that deploy large state sectors to advance their national interest at the expense of others.
Although Mr. Lighthizer is a long-term China hawk, developments in the seven years since he testified have led officials on both sides of the aisle to similar if more nuanced conclusions. Now the Trump administration is determined to press the issue. But to make progress toward a solution, the administration must focus on the core of the problem.
Currency manipulation to promote exports is yesterday’s issue. Much of the damage China has inflicted on the U.S. manufacturing sector will be hard to reverse, even with the aggressive use of existing antidumping statutes.
It is China’s techno-nationalism that poses the greatest threat to our future. In 2006 the Chinese government adopted a long-term plan to promote what it called “indigenous innovation.” As James McGregor, a leading expert on the Chinese economy, writes, China’s leading-edge firms were directed to obtain technology from their multinational partners through “co-innovation and re-innovation based on the assimilation of imported technologies.”
In practice, this meant giving American firms an offer Don Corleone would have recognized—either to “share their technologies with Chinese competitors—or refuse and miss out on the world’s fastest-growing market.” China’s ultimate goal is to use forced technology transfer to replace the U.S. as the world’s leading economy.
The Obama administration recognized this problem. In a November 2015 speech, Robert Holleyman II, then deputy trade representative, declared that China “continues to adopt measures to promote indigenous innovation that contradict its stated commitment to promote intellectual property protection and enforcement.” Earlier this year, as the Trump administration was getting under way, research centers in Europe and the U.S. issued scathing critiques of China’s signature technology initiative, “Made in China 2025,” which calls for Chinese companies to produce 40% of the components and materials in the manufacturing chain by 2020, and 70% by 2025. In the view of its foreign critics, says Mr. McGregor, this is a “protectionist blueprint aimed at gutting high-end manufacturing in the United States, Europe, Japan, and other developed economies.”
Existing legal tools may not suffice to end these discriminatory practices. Although the WTO prohibits mandatory technology transfers, the Chinese government’s position is that trading technology for market access is purely a business decision. Protectionist government purchases are a key part of China’s strategy. When China entered the WTO in 2001, it promised to sign the Government Procurement Agreement, which requires government purchases to be made on a nondiscriminatory and transparent basis, “as soon as possible.” Sixteen years later, this has not happened.
As a first step, the Trump administration should demand that the Chinese government sign the GPA without further delay. But down the road, the administration may be forced to ask Congress for additional authority. If turning over our technological crown jewels to a foreign power is against the national interest, then our government should have the power to prevent it. But wielding this power without blowing up the international trade regime will not be easy.
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