Nothing makes for a sexier headline than war. Perhaps that’s why the media eagerly played up trade battles between China and the US this year, such as a September flare up when the US launched a WTO compliant over cheap Chinese auto exports. China fired back on the same day with its own WTO claims that challenged US tariffs on 30 products. The back-and-forth actions inevitably drove speculation that the world’s top economies could become locked in an escalating trade war.
In reality, the threat of a full-on trade conflict is negligible. Analysts agree that trade disputes are insignificant compared to the US$539 billion in goods and services that flowed between the countries in 2011. The world has not experienced a trade war since the Great Depression, and the creation of the WTO and numerous trade agreements makes it unlikely to happen again, as Edward Alden, a fellow at the US-based Council on Foreign Relations, wrote in an October article.
WTO complaints won’t boil over into a larger dispute, but neither are they effective in pressuring China to improve its trade practices. China continues to break trade rules by subsidizing domestic industry, shutting foreign companies out of certain sectors and allowing widespread intellectual property theft (see “Delay, distract and dominate,” page 24). To even the playing field, the US should go beyond the WTO and focus on a new framework: The Trans-Pacific Partnership.
Pivoting on trade
The US should continue efforts at the WTO to nudge Beijing toward compliance. To make broader progress toward free trade with China, however, the US may need to circumvent the international body.
The Obama Administration already took a step in this direction last year when it breathed new life into the Trans-Pacific Partnership, up until that point a largely theoretical framework for free trade. In November 2011, the US led eight other Pacific Rim nations – Singapore, Chile, Australia, Peru, New Zealand, Malaysia, Brunei and Vietnam – in agreeing to basic tenets to promote fair competition.
Last year’s TPP agreement was clearly drafted with an eye on China. The rules bring to mind some of China’s biggest problems by requiring high labor standards, environmental safeguards, intellectual property protection and – perhaps most pointedly – restrictions on state-owned enterprises.
The US stands to attract new TPP members by playing off regional disputes. The Diaoyu/Senkaku island dispute has chilled Sino-Japanese relations, giving the US a better opportunity to pull Japan into the partnership, with Prime Minister Yoshihiko Noda announcing in early November that Japan’s intention to join TPP talks.
In Southeast Asia, China aims to boost trade through agreements with the Association of Southeast Asian Nations (ASEAN). But with the South China Sea conflict complicating relations, the US may win more ASEAN countries to the TPP.
Bolstering the ranks of the TPP won’t be easy. Countries must be willing to negotiate on all protectionist measures, a tall order considering even the US and Canada shelter industries such as agriculture. Labor standards may be a hurdle for Southeast Asian countries, while Japan may bristle at the prospect of offering wider foreign access to its insurance, auto and beef industries. In addition, ASEAN and six other countries – China, Japan, India, Australia, New Zealand and South Korea – began initial talks for a rival trade bloc, called the Regional Comprehensive Economic Partnership, in November. That partnership could be worth US$17 billion in trade and appears to counter the TPP by excluding the US.
A stronger TPP would run the risk of alienating China. But as with the WTO, China may make sacrifices to gain a seat at an important table. The TPP should demand that China comply with trade rules upfront, rather than repeating the WTO’s mistake and creating timetables for reform that Beijing will later ignore. At the least, the partnership would give the US another weapon in its struggle to reform Chinese trade practices.
The best way to wage a war is not a good defense, but a good offense. The US should lead a modern version of a trade war that is fought through free trade, which benefits people everywhere, rather than through trade barriers that hinder them. Win or lose, that would be a war worth fighting.