Without Robust Trade Policy, U.S. China “De-Risking” Falls Short



Naomi Wilson | Information Technology Industry Council

As rumors percolate about possible new U.S. export controls and outbound investment restrictions targeting China, it’s a good time to take stock. Since 2017, the U.S. government has implemented a vast array of policy changes with the intent of diversifying supply chains, more effectively competing with China, and safeguarding national security. These policies – including tariffs, export controls, and chips manufacturing incentives – have had a significant impact on U.S.-China technology competition and have, in many ways, already achieved the U.S. government’s stated goals.

Companies and governments have made significant investments to diversify supply chains, and we can expect to see that continue in the coming years, as companies, suppliers, factories, and talent shift. A recent United Nations Conference on Trade and Development (UNCTAD) global trade report found a marked decrease in concentration of supply chains in and dependence on China from 2021 to 2023. This change corresponds with a concurrent increase in “friend shoring” and reliance on likeminded nations. However, emerging alternative markets will not be able to fully accommodate this desire to shift without a push from trade policy – something that has been notably absent from the Biden Administration’s repertoire.

Unfortunately, markets that could serve as new destinations for U.S. investment, exports, and supply chains – such as India, Indonesia, and Vietnam – are notorious for having some of the worst operating environments for business. Ensuring an open market and level playing field in these economies will facilitate continued supply chain diversification, while also putting pressure on China to address problematic trade policies and practices at the heart of USTR’s Section 301 investigation. Opening these markets further will require reducing tariffs, easing market entry requirements, bolstering IP protections, and providing for equal treatment for foreign companies, among others – all of which require trade negotiations.

The Biden Administration may have pronounced trade agreements passe, but the global picture (and U.S. allies) says otherwise. China maintains over a dozen bilateral and multilateral agreements worldwide, several of which were concluded within the past five years. In 2020, 15 countries, including China, concluded the largest multilateral trade agreement to-date, the Regional Comprehensive Economic Partnership (RCEP), representing nearly one-third of the world’s population and GDP. The agreement lowers or eliminates tariffs on goods and services and establishes rules on investment, competition, IP, and digital copyright. By contrast, the U.S.-led Indo-Pacific Economic Framework for Prosperity (IPEF) offers U.S. partners none of these benefits.

By emphasizing enforcement and “de-risking” without an equally robust trade policy, the U.S. government runs the risk of pushing supply chains too far without appropriately guarding against unintended consequences and facilitating a safe “landing zone” for reoriented supply chains. For example, the U.S. Commerce October 7 export controls rules on advanced chips clearly took allies by surprise, and the time required for Japan and the Netherlands to determine how and whether to align with the controls (the better part of a year) inadvertently opened a window for U.S. competitors to accumulate market share. In addition to working with industry to mitigate such negative impacts, the U.S. government should heed the cautions of Asia-Pacific allies not to “de-risk” too much or abandon free trade agreements – calls which have become increasingly public.

Though the Biden Administration has done much to reengage internationally, countries are no longer willing to bend to U.S. demands without getting something in return. For Asia-Pacific economies to truly serve as meaningful alternatives to China, with equally attractive markets and trusted suppliers, they need to be incentivized to improve their regulatory environments. This is the piece that the U.S. Administration needs to focus on if they are serious about competing with China. U.S. policymakers cannot afford to close the door on trade deals when the policy objectives of competing with China require greater market access elsewhere. These objectives are too important to rest on the hope that “frameworks” will accomplish the same ends.

Forging international trade deals with like-minded allies will also help press China to change its policies and practices – another stated objective of the U.S. government. As China’s domestic economy continues to navigate a rocky recovery, the Chinese government must recognize that they need to compete, in part by making the policy and regulatory environment more equitable. Chinese talent and companies are already “voting with their feet,” relocating talent, headquarters, and research and development centers outside of China – sending a clear signal to the Chinese government that they need a more hospitable place to do business, and China can no longer rely on its sheer market size to entice business and investment.

The policies this Administration enacts will have lasting effects, as will those it neglects. Trade policy must be considered as part and parcel of national and economic security. The U.S. government has implemented significant policy changes to better compete with China and protect national security, and we are now seeing the results. Favoring export controls and other enforcement actions will, of course, force systemic changes and achieve some of the U.S. government’s goals along the way. But, without a robust trade policy to develop an ecosystem of alternative markets, the longer-term outcomes will be much more uncertain and potentially unfavorable to U.S. economic prosperity and national security.

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