multilateral and bilateral trade and investment agreements around the world, both Republicans and Democrats in the U.S. have grown allergic to such arrangements.
“The Chinese believe deeply in the significance of the correlation of forces, and they believe that correlation at the moment is in their favor,” says Stephen Hadley, former national security advisor to President George W. Bush. If the U.S. fails to alter that Chinese conviction, it won’t regain the leverage needed to deal with Beijing.
“The most important missing element in changing that Chinese calculus is a trade strategy,” Hadley says, one that could rally global allies, provide American jobs and growth, and counter escalating Chinese efforts to organize the world economy around itself.
Former U.S. Secretary of State Madeleine Albright once called the U.S. the world’s “indispensable country,” but Xi is now positioning China as the world’s “indispensable economy.”
By 2018, 90 countries in the world traded twice as much with China as with the U.S. By 2019, China surpassed the U.S. as the largest global recipient of foreign direct investment. The underlying message now is that China’s market is so large, its liquidity so deep and its post-Covid-19 rebound so dramatic (up 18% in the first quarter), that no reasonable country can resist its embrace.
“In this age of economic globalization, openness and integration is an unstoppable historical trend,” President Xi said this week to the Boao Forum for Asia. Without mentioning Washington by name, he said that “attempts to ‘erect walls’ or ‘decouple’ run counter to the law of economics and market principles. They would hurt others’ interests without benefiting oneself.”
It is far too easy to punch holes in Xi’s statement: China remains rife with market protections, and state intervention at home and abroad is growing. Intellectual property theft and cybercrimes continue.
Yet without a modern, forward-looking trade strategy, the U.S. enters this global punch-up with one arm tied behind its back.
“The U.S. and China are engaged in a strategic competition that will determine the shape of global politics this century,” wrote Hank Paulson Jr., the former U.S. treasury secretary, in The Wall Street Journal. “But when it comes to trade, a critical dimension of that competition, America is ceding the field.”
That undermines early wins in the emerging Biden approach to China.
First, Biden has profited from a bipartisan consensus, rare these days in Congress, about the urgency of rising to the Chinese challenge.
Second, Biden has begun to rally friends and allies in Asia and Europe, who share his concerns about China.
Biden in March convened the first-ever leaders meeting of “the Quad,” including the U.S., India, Australia and Japan, constructed to balance China in the region. To address China’s vast vaccine diplomacy, the countries agreed to distribute a billion doses of vaccines by 2022.
Last week, Biden welcomed Japanese Prime Minister Yoshihide Suga as the first head of government to visit Washington. Their joint statement didn’t mention China, but it did pledge “that free and democratic nations, working together” could act to resist “challenges to the free and open rules-based international order.” They also spoke of ensuring peace across the Taiwan Strait, which is the first mention of Taiwan by a Japanese prime minister in a joint statement with a U.S. president since 1969.
And for the first time ever, the EU on March 22 imposed economic sanctions on China over human rights violations in the autonomous region of Xinjiang, acting alongside the U.S., Canada and the United Kingdom.
Third, the Biden administration’s $1.9 trillion Covid-19 stimulus plan and pending $2.3 trillion in infrastructure-related investment will improve U.S. competitiveness through investments in human capital, physical infrastructure and advanced technology.
The problem is that the same bipartisan consensus in Congress regarding the Chinese challenge is matched by a bipartisan allergy to the sorts of multilateral and bilateral trade and investment deals required to address Beijing’s momentum.
Last November, China was one of 15 Asia-Pacific countries, accounting for 30% of global GDP, that signed the Regional Comprehensive Economic Partnership, or RCEP. It was the first free-trade agreement of China with U.S. allies Japan and South Korea, creating history’s largest trading bloc.
China has also expressed interest in joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, CPTPP. That was the trade agreement signed by 11 countries after the Trump administration withdrew from the effort as one of its first acts of government.
Should the RCEP agreement go into force, which is likely before January 2022, and if China is able to join the CPTPP, the international trade deal game in Asia would be largely over, and China will have won.
At the same time, China is moving ahead on other fronts.
In January, it closed the EU-China Comprehensive Agreement on Investments (CAI), much to the consternation of incoming Biden administration officials. (Completion of that agreement has stalled in the European Parliament due to new Chinese sanctions on the EU.)
But whatever happens in Brussels, most European countries are eager to close trade and investment agreements with China, which last year for the first time became the EU’s largest trading partner.
The real problem lies with Washington’s lack of alternatives — driven by the mistaken narrative within both parties that globalization has worked against American interests and jobs.
As the Republican Party morphed into the Trump party, it abandoned the type of free-trade policies that President Ronald Reagan embraced as “one of the key factors behind our nation’s great prosperity.”
While President Barack Obama negotiated the Trans-Pacific Partnership during his presidency, presidential candidate Hillary Clinton in 2016 opposed the agreement after having called it the “gold standard” only three years earlier.
“Both Democrats and Republicans are now advocating ‘a trade policy for the middle class,‘” writes the Peterson Institute’s Adam Posen in a compelling foreign affairs narrative debunking this approach. “In practice, this seems to mean tariffs and ‘Buy American’ programs aimed at saving jobs from unfair foreign competition.”
Instead, he writes, “Washington should enter into agreements that increase competition in the United States and raise taxation, labor and environmental standards. It is the self-deluding withdrawal from the international economy over the last 20 years that has failed American workers, not globalization itself.”
Instead, while the Biden administration has put its trade agenda on hold, China marches forward — closing the deals and setting the standards that will shape the future.
