The U.S.-China Trade War Has Become a Cold War



Yukon Huang | Carnegie Endowment for International Peace

What began as a trade war over China’s unfair economic policies has now evolved into a so-called cold war propelled by differing ideologies. U.S.-China bilateral relations took a nosedive in 2018 when then U.S. president Donald Trump’s obsession with trade deficits led him to impose punitive tariffs on China. The tariffs were followed by restrictions on both China’s access to high-tech U.S. products and foreign investments involving security concerns and by allegations of unfair Chinese commercial practices.

Despite pleas from the U.S. business community to ease tensions, U.S. President Joe Biden so far has amplified his predecessor’s policies by strengthening anti-China alliances and implementing additional sanctions. Biden now characterizes the U.S.-China conflict as “a battle between the utility of democracies in the twenty-first century and autocracies.”

But the logic underpinning the U.S. trade war was flawed, and the more recent, politically driven restrictions are counterproductive given the damaging long-term economic consequences for both sides. Nonetheless, there have been few signs to date that Biden is likely to change course. In the meantime, then, Europeans may be in a better position for productive give-and-take discussions with China on economic policymaking.

Misguided U.S. Trade Policy

The Trump administration’s initial mistake in launching a trade war was to assume that U.S. trade deficits—which occur when a country imports more than it exports—were inherently bad and that China was to blame.

However, trade deficits are not a good indicator of the state of the economy, and U.S. trade balances largely are driven by soaring U.S. federal budget deficits, which have little to do with China. The irony is that three years after Trump’s tariffs were initiated to fix the U.S. trade deficit, bilateral trade between the United States and China has now rebounded to all-time highs, China’s trade surplus has increased, and the U.S. deficit has gotten worse.

Trump also echoed popular but misguided sentiments that U.S. firms had been overinvesting in China, resulting in a loss in competitiveness. But over the past two decades, only 1–2 percent of annual U.S. foreign investment has gone to China. By contrast, the EU, which is comparable to the United States in its economic size, has invested roughly twice as much as the United States has annually. The concern should be why the United States invests so little in China rather than so much.

China’s Intellectual Property Safeguards

China’s alleged failure to protect intellectual property rights is also mischaracterized. At the extreme, China is accused of stealing foreign intellectual property, especially technology. But after accounting for the size of China’s foreign transactions and research activities, such events may not occur unusually often or are possibly exaggerated.

Further, China’s patent courts have matured in dealing with this problem—foreign plaintiffs are now more likely to win their cases than domestic firms. In addition, theft is becoming less of a concern as payments for royalties and licenses by Chinese firms, according to one think tank scholar, have grown almost by a factor of four in the past ten years, making China the second-largest payer of such royalties globally.

The reality is that it takes generations to develop a sound regime for intellectual property rights, as was the case for the United States. The foundation of China’s system was laid only two decades ago with reforms that accompanied China’s 2001 accession to the World Trade Organization. Progress has been notable in recent years as evidenced by the findings of the “2020 Business Climate Survey” by the American Chamber of Commerce in China; the survey indicated that nearly 70 percent of surveyed U.S. firms in China felt that China’s enforcement of intellectual property rights had improved, compared with only 47 percent in 2015.

China’s Protectionist Policies

But there are also credible concerns that China’s investment policies treat foreign firms unfairly. One complaint is China’s use of subsidies. All countries provide subsidies to domestic companies and households, such as U.S. support to farmers, tax deductions to households to encourage clean energy use, and incentives to companies like Amazon to relocate. But in China, subsidies tend to be more focused on using the country’s banks and equity markets to support high-tech firms and strategic industries.

The U.S. government could choose to pressure China to better align its subsidy policies with Western norms, but instead, the Biden administration is copying China’s playbook by proposing its own subsidies to promote strategic industries.

China’s protectionist tendencies are also evident from the requirement that foreign firms form joint ventures with domestic Chinese firms as a condition for market entry in some economic sectors. This stipulation has been widely cited as a means of promoting so-called forced technology transfer, where foreign firms pass new technology on to their Chinese partners as a condition for being able to invest and produce in China.

But these Chinese requirements, too, have seemed to get less stringent in recent years, as exemplified by major foreign investments in chemical manufacturing (BASF), auto manufacturing (Tesla), and finance (BlackRock). These foreign companies have been allowed for the first time to enter key sectors without a Chinese partner.

China’s willingness to drop the joint venture requirement featured prominently in the EU-China Comprehensive Agreement on Investment negotiated in December 2020 (which has not yet been ratified). This experience suggests that policy differences can be addressed through consultations if both sides are willing to compromise.

Building Better Bilateral Relations

The key to more harmonious economic relations is recognizing that a more developed China need not threaten the well-being of the West. The United States, Europe, and China have different comparative advantages, which are reflected in the composition of their exports. Europe specializes in high-end consumer goods and machinery; the United States in agricultural products, high-tech components, and services; and China in basic manufactured consumer goods and inputs. All sides can continue to prosper by operating under a rules-based international trading system.

U.S.-China tensions, however, are now being driven less by economic realities and more by great power rivalry and nationalism—factors exacerbated by mutual mistrust over each other’s strategic intentions. In describing the United States’ multifaceted relationship with China, the Biden administration has emphasized the need to “compete, confront, and cooperate” all at the same time. But as Chinese President Xi Jinping stressed at the 2021 World Economic Forum, “competition is for pursuing excellence—not killing off a rival.”

Punitive trade measures have had little effect in terms of altering economic outcomes, and the experiences of countries worldwide show that sanctions generally do little to get governments to change their core beliefs. Instead, there is more to be gained from leveraging China’s dependence on a rules-based international trading system as the country seeks to become a more prosperous and modern nation.

Practical Steps Forward

The challenge now is to move away from a self-defeating cold war by working within the international economic system to arbitrate and moderate tensions. The initiative for such an undertaking may need to come from Europe, given that Republicans and Democrats in the United States are united in their hardline approach toward China.

Europe and the United States may have similar objectives in dealing with China, but Europe is more economically integrated with China in terms of investment and trade flows. Because of this, the competitive aspect of their relationship offers more potential for mutual benefit. Moreover, Europe is neither as preoccupied with great power politics nor as dependent on technological advantages as the United States, making the bloc more open to compromise.

If the United States wants to preserve its technological and moral authority, it must first deal with economic and political weaknesses at home. Bemoaning China’s unfair policies and its authoritarian regime will not solve this problem. Instead, the United States should focus on strengthening its own economic competitiveness, forging internal political cohesion, and working with European and Asian partners to build enduring international institutions.

Yukon Huang is a senior fellow in the Carnegie Asia Program, where his research focuses on China’s economy and its regional and global impact.

Carnegie does not take institutional positions on public policy issues; the views represented herein are those of the author(s) and do not necessarily reflect the views of Carnegie, its staff, or its trustees.

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