Tariffs Won't Stop China's Mercantilism. Here Are 10 Alternatives.
The Trump administration should be commended for recognizing at long last that the U.S.-China trade and economic relationship has become inequitable and unsustainable.
Goosed by rampant and unrepentant mercantilist policies specially tailored for innovation-driven industries — including massive subsidies, forced technology transfer, pilfering of intellectual property, and denial of access to Chinese markets — China runs a $350 billion-plus trade surplus with the United States. It has also misappropriated hundreds of billions of dollars more in intellectual property and is on a concerted campaign to unfairly take over a host of advanced industries in which the United States specializes. The administration is entirely justified in calling China to task and saying, “enough is enough.”
It has proposed three major steps: a WTO case regarding forced IP licensing, restrictions on Chinese investment into the United States, and, of course, tariffs. The first two are unequivocally good. However, the tariffs, though the easiest remedy to apply from a technical standpoint, are not a preferable option.
The $50 billion in tariffs that the administration announced last week on 1,300 tech-based Chinese exports have already produced a tit-for-tat response from China ― $50 billion in tariffs on U.S. goods ranging from airplanes and cars to soybeans. In response, President Trump has said he would consider tariffs on an additional $100 billion of imports. This is a worst-case scenario, as it would likely raise prices on a far wider range of information and communications technologies. As the Information Technology and Innovation Foundation explained in a recent report, this would undermine U.S. productivity, costing the U.S. economy up to $330 billion over 10 years.
Moreover, Chinese President Xi Jinping sits in a much stronger position to survive a long-term trade war, should one emerge. China’s authoritarian political system, broad control of key sectors of the economy, and the inability of its civil society to protest tariffs mean he can press forward without fearing domestic repercussions. Perhaps China will cave in first to Trump’s threats. It should, given that it has been violating the letter and the spirit of the WTO’s rules for over a decade, costing millions of U.S. jobs as a result. To be clear, retaliatory Chinese tariffs are entirely unjustified; America’s actions are a response to China’s already unfair trade practices. China shouldn’t get to “cheat” twice.
But while China’s mercantilism needs to be brought to an end, it is unlikely that tariffs will do the trick. The reality is that China’s innovation mercantilism, while overt, is sophisticated and nuanced. If the United States wants to dismantle the Chinese industrial policies threatening our economic well-being, it must be prepared for fierce resistance and formidable countermeasures. Therefore, the administration should consider bringing to bear more potent tools that would inflict costs on China, not on American businesses and consumers. Applying such tools would be more likely than tariffs to bring China to the table in a mood to bargain.
Accordingly, here are 10 non-tariff responses for the administration to add to its arsenal:
1. Instruct the U.S. Trade Representative (USTR) to bring a WTO case against China over its ongoing failure to publish thousands of trade-related final measures, including subsidies, in a single official journal as it’s required to do under WTO rules. One reason it’s been difficult to bring subsidy cases against China at the WTO is that China fails to properly publish its subsidies. Getting the WTO to enforce China’s publication requirements would make it possible to bring additional WTO cases for subsidy or other violations, such as forced IP or technology transfer.
2. Support legislation, currently being considered in Congress, to reform the Committee on Foreign Investment in the United States (CFIUS). This inter-agency committee reviews transactions that could give control of a U.S. business or technology to a foreign entity. It needs to be reformed to reflect the realities of state-led capitalism.
3. Ask Congress to reform U.S. antitrust law. State-sponsored or directed pricing behavior by foreign enterprises in the U.S. market should no longer be exempt from U.S. antitrust law. And the so-called “act of state” doctrine, whereby Chinese companies claim an exemption for their pricing behaviors under the Foreign Sovereign Immunity Act, should be brought to an end.
The administration should also task the Justice Department to consider subsidies for Chinese companies a basis for antitrust cases. Further, the administration should eliminate a regulation that exempts mergers involving Chinese state-owned enterprises from having to be announced in accordance with U.S. antitrust law.
4. Utilize existing Treasury Department authorities to sanction Chinese companies benefitting from stolen IP or coerced technology transfer. Chinese firms that are stealing IP should be banned from accessing the U.S. banking and financial system.
5. Deny Chinese-headquartered enterprises access to listing on U.S. stock exchanges if they fail to provide financial statements in line with generally accepted accounting principles.
6. Build an “inspection wall” against counterfeit and pirated Chinese goods, with the goal of stopping them all. China accounts for 87 percent of counterfeit goods seized each year, with costs estimated to be between $30 and $40 billion.
7. Continue refusing to recognize China as a market-based economy for WTO purposes.
8. Suspend scientific and other technical cooperation with China.
9. Task USTR with developing WTO “non-violation nullification and impairment” claims that would assert the United States is being denied the benefits of reasonably expected market access. The claims can contend that China’s manifold mercantilist policies undercut and undermine the benefits and rights the United States thought it was getting when it assented to China joining the WTO.
10. Build a broad alliance with like-minded allies ― including Japan, Korea, European, and Commonwealth nations. President Trump has made it clear that he doesn’t want U.S. allies to free ride on U.S. military strength. Yet, when it comes to trade, the United States is bearing the burden, including the economic costs that come with tariffs. The president should make it clear that this is not acceptable and ensure our allies join us in concertedly and collectively contesting unfair Chinese trade practices that hurt the whole global trading system.
The intent behind these measures is not to punish China for the sake of it, but to ensure that trade and economic relations move forward on a fair and equitable basis in accordance with WTO rules. The goal is not a trade war ― the United States already has been on the receiving end of a one-sided war for 15 years ― but a negotiated solution that rolls back China’s unfair trade practices. If that’s to succeed, the United States must enroll like-minded allies in this cause and use a broader set of tools that more precisely target China’s unfair trade practices and the companies that benefit from them.
Stephen Ezell is vice president for global innovation policy at the Information Technology and Innovation Foundation, the leading think tank for science and technology policy.