Don't Antagonize China Over IP Theft

The U.S. is on the wrong route to freer trade with China. Thanks to the persistent problem of intellectual property theft, the Trump administration is considering altering the way trade negotiations with China are done. Instead of working through the World Trade Organization (WTO), the administration is looking at two options: Section 301 of the Trade Act of 1974, and the International Emergency Economic Powers Act (IEEPA) of 1977.

Section 301 allows the president to obtain the removal of a foreign government policy that violates an international trade agreement or is “unjustified, unreasonable or discriminatory.” In principle, the United States Trade Representative (USTR) can start an investigation to determine whether such action is necessary. But the use of such strategies for trade negotiation dissipated after the establishment of the WTO in 1995. The only recent instance of the USTR using Section 301 was in 2010, after a petition from the United Steel Workers Union, which said China violated WTO commitments in regard to trade-distorting regulations and subsidies. But because China is in the WTO, negotiations had to go through the WTO regardless.

Trump could direct the USTR to initiate another investigation of China, which would result in another WTO dispute or unilateral retaliation from the U.S. This could be useful for leverage: using archaic leftovers in the U.S. code may erode Washington’s reputation as a trade negotiator, and continue to push economic relations with China in the wrong direction. If American trade relations with China deteriorate, the impact on the U.S. and world economies could be enormous. of dollars’ worth of goods are traded between China and the United States each year; any disruption to economic flows would interrupt buying and selling, prevent key investments, and raise prices. This would spell disaster for American and Chinese companies, citizens, and overall economic growth.

America’s withdrawal from the Trans-Pacific Partnership and lack of unified direction is threatening our nation’s our nation’s economic hegemony. Circumventing the WTO on Chinese issues will only exacerbate this problem. Chad P. Bown of the Peterson Institute for International Economics explains in a recent article that using Section 301 would make the U.S. “judge, jury, and executioner” on disputes. This would alienate trading partners and unravel years of WTO negotiations. 

The Trump administration’s rhetoric projects an image of hostility on an issue where toughness would suffice. It is true that U.S. business have been complaining about Chinese business practices, but even they disagree with using Section 301. William Zarit, chairman of the American Chamber of Commerce in China, said: “AmCham is aware that 301 is in the U.S. government trade remedy toolbox, but AmCham has not recommended it be used.” The administration and the chamber must ensure they stay on the same page on negotiations, in order to encourage cooperation, rather than recklessness. 

The Trump administration’s concerns are not unfounded. IP and market access in China is a persistent issue with American companies. However, there are more important goals to aim for, such as fixing the China-U.S. trade deficit and currency manipulation. Derek Scissors of the American Enterprise Institute explains that “a trade deficit does not mean America lost jobs…A look at the trade deficit and unemployment from 1975 to 2015 does not show a statistically significant relationship.” He continues: 

the exchange rate does not have anything like the relationship with the U.S. labor market that protectionists believe. Employment conditions in the U.S. improved immediately after the PRC’s large 1994 devaluation, contrary to what currency critics would insist. 

Although the promise to “fix” the trade deficit may have won votes on the campaign trail, the administration must now shift gears to more mainstream economic models for international trade policy. 

The U.S. and China held talks in July that were notably unproductive. Things might have been otherwise had the talks not been so focused on unimportant concerns such as reducing the trade deficit (the only thing the two nations agreed to do). This was what happened in earlier talks, as when China allowed for more U.S. beef and natural gas imports and the U.S. allowed for imports of cooked poultry from China. Going forward, the U.S. should continue to focus on freeing up Chinese financial markets as well as regulatory barriers in agricultural and industrial sectors. 

While not perfect, the WTO has a decent track record for dispute settlement. Understanding our partners rather than alienating them is a better path forward on trade. As Simon Lester and Huan Zhu of the Cato Institute put it: if China feels “disrespected or embarrassed, [it] may have less incentive to work with the United States. By contrast, if the United States takes a positive and constructive approach, the Chinese will be more likely to engage in negotiation and concede.” They also note that He Liu, President Xi’s top economic advisor, is an advocate for further trade liberalization. With more negotiation and less provocation in coming months, we’ll likely see reductions to trade barriers.

By contrast, pursuing unproductive goals with outdated statutes will only increase hostilities and harm U.S. businesses. Instead of chancing a trade war and further eroding the reputation of the U.S., the administration should take steps toward trade liberalization, thereby spurring economic growth.

Andreas Elterich studies economics and computer science at American University. Previously, he interned at Young Voices, the Cato Institute and the International Trade Administration.