Eagle and Dragon – the US and China Trade Relationship

Introduction

Since 1972 – the time of normalization of bilateral ties between the United States and China – the relations between these two countries have gone through different complex periods, with evident “economization” of the strategic agenda. After the cooling of relations in 1989, the role of a “lifeline” for the development of the PRC was played, first of all, by economic interaction. In particular, it included the conclusion of a bilateral agreement with the United States and China’ entry into the WTO. Today, the fierce trade war between the United States and China is affecting all international trade, becoming one of the main reasons for the slowdown in global GDP growth. In these circumstances, it seems appropriate to study the best practices and challenges of the 1999 US-China bilateral agreement in the conditions for China’s accession to the WTO.

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Reasons and Conditions for China’s Accession to the WTO

One of the most important aspects of trade and economic relations between China and the United States was the problem associated with the entering of the PRC to the WTO. It was viewed by the Chinese leadership as one of the most important issues in the country’s foreign economic policy, conditioned by the tasks of China’s integration into the international division of labor as a full member of international economic relations. The implementation of an open foreign economic policy in the 80s-90s provided for the preferential orientation of trade and economic ties to the United States and other industrially developed countries of the West (Devereaux and Lawrence 2004). This, in turn, required the development and diversification of the export base, increase foreign exchange earnings. However, Chinese companies in many cases were not given the opportunity to defend their interests in a fair manner. WTO accession was seen by the Chinese government as a kind of starting point from which, based on generally accepted rules, norms and procedures, a more active integration into the global economy should begin (Lardy 2001). At the same time, it became possible to effectively protect the interests of its exporters within the framework of using the WTO legal framework.

Analysis of Chinese-American Agreements

China signing a bilateral agreement with the U.S. after thirteen years of difficult negotiations was a key stage in working out the conditions for joining the organization. As a result of the negotiations, the parties achieved the necessary mutual concessions and obligations related to the protection of the interests of their producers, exporters, consumers and investors. The signing of the agreement significantly accelerated the process of China’s accession to the WTO (Lardy 2001). However, due to the fact that the United States plays a largely decisive role in the global trading system, bilateral negotiations with American representatives were most difficult. They discussed the difficult concessions for the PRC on access to the Chinese market for American goods and services, as well as the timing of the fulfillment of obligations assumed upon joining the WTO. Negotiations with the United States covered almost all areas regulated by the rules and provisions of the WTO and included the problems of trade in industrial and agricultural goods, services, protection of intellectual property rights, investment regime.

One of the most difficult issues in the bilateral talks was the issue of granting China a normal trade regime on an ongoing basis. According to the rules of the WTO, each member of the organization must provide all other members with the best trade regime acting to any other country-member. In fact, it means normal trading regime on an ongoing basis (Devereaux and Lawrence 2004). However, in trade relations with the United States, the issue of granting this regime on a permanent basis was complicated by the retention of the Jackson-Vanik amendment to the American trade law of 1974.

The amendment provided for the need for annual consideration by Congress and further approval by the President of the issue of prolongation of the most favored regime in relation to countries with non-market economies. In the 1980s, the US Congress almost automatically extended this regime for China (Wang 2013). In the 90s (after the suppression of the student movement in Beijing in June 1989), annual fierce discussions were held in Congress about the advisability of granting this regime to China. During the final stage of the Chinese-American negotiations, the opinion about the impossibility of providing China with a normal trade regime on a permanent basis, despite the WTO rules, began to prevail in the US Congress.

The Chinese side posed the question in the following way: does the United States want to maintain normal trade relations with China on a long-term foundation (Devereaux and Lawrence. 2004). If so, the United States should approve a bilateral agreement with China on the WTO and provide a normal trade regime on an ongoing basis. Otherwise, the United States will not be able to take advantage of the PRC’s obligations related to the opening Chinese market for the import of American goods and services, including financial services and telecommunications. As a result, the positions of American companies in the Chinese market will be weakened in favor of other WTO member countries, and the whole complex of bilateral relations may be complicated.

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The American side, in turn, was well aware of the bilateral agreement importance. By the end of the 1990s, trade with China provided employment in the United States for more than 200,000 people, and with re-export trade through Hong Kong, this number reached 400,000 (Freeman 1995). The agreement with the PRC opened the way for US companies to become more active in the Chinese market, including US small businesses that were underrepresented in China (Autor, Dorn, and Hanson 2013). The PRC entering into the WTO on favorable terms for the United States, the organization of a mechanism for monitoring China’s fulfillment of its obligations began to be considered by the American government as one of the most important priorities of the US foreign economic policy. Taking into account these circumstances, the US Congress in 2000 made a decision to grant China a regime of normal trade relations on an ongoing basis after China’s joining the WTO.

As a result, the United States was deprived of one of the strongest levers of unilateral pressure on China, which was used in the 90s not only for economic, but also for political purposes. However, the result of many years of Chinese-American negotiations was the development of a large number of obligations that China must fulfill in order to join the WTO. The bulk of these commitments were included in the final protocol of the WTO working group on China in 2001. In turn, China has achieved WTO membership as a developing country with corresponding advantages (Lardy 2001). This presupposed a transitional period with stage-by-stage liberalization of foreign economic activity and bringing national legislation in line with WTO norms while maintaining certain privileges in the field of state regulation and subsidies. Moreover, in the course of bilateral negotiations, important agreements were reached on the liberalization of the activities of American companies in the Chinese insurance market. China should have allowed foreign insurance companies to expand their activities, including work in the previously prohibited for foreigners area of health insurance.

It is necessary to note the bilateral agreements on the expansion of activities in the Chinese market of foreign companies specializing in the provision of professional services. They include the activities of legal, audit, engineering, architectural firms, consulting in the field of management, and so on (Wang 2013). Serious agreements were also reached on the liberalization of the activities of American companies specializing in tourism. Over the next five years, China should have lifted most of the restrictions on the local market for foreign tour and hotel operators.

The signing of a bilateral agreement with the United States has significantly accelerated China’s achievement of agreements with the European Union and final agreement with the WTO working group on the terms of joining the organization. China’s accession to the WTO on the terms worked out during negotiations with the American delegation and the Working Group should bring significant economic benefits to both China and the United States. New opportunities also opened up in deepening bilateral dialogue on political and security issues. At the same time, the entry of the PRC into the global trading system undoubtedly created serious difficulties for both countries (Rosen 1999). For the Chinese leaders, the main problem was related to the need to deepen reform measures in a number of key sectors of the economy, which required increased attention, above all, to the social costs associated with the implementation of reforms.

By signing the agreement with the PRC, the American side counted on reducing the deficit in trade with China. It should have been due to an increase in exports to China of US industrial, agricultural goods and services (Men, Schunz, and Freeman 2019). On the other hand, the Americans were in danger of an increase in the influx of goods produced by the most competitive sectors of the Chinese economy into the American market, which would inevitably increase the pressure on the US government from domestic producers. It, in turn, could undermine US support for further Chinese reforms and weaken bilateral cooperation on a range of political and security issues. There was a possibility of another cyclical decline in the development of bilateral relations; the arguments of those inside American circles who advocated the development of close Chinese-American relations could be in doubt.

A key element of this debate could be statements of lost confidence, claiming that Chinese leaders are unable to fill their most important commitments with real content. This, in turn, would lead to a decrease in confidence in China from the US business community and the search for alternative partners in trade and investment projects. This trend has potentially strengthened the positions of those American circles that advocate increased protectionism and do not want to comply with the provisions of the agreement.

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The implications that arose should not be either minimized or exaggerated. China’s accession to the WTO, despite all the resulting difficulties and problems, marked a new stage in the development of the country’s economic relations with the outside world. The open foreign economic policy proclaimed by the Chinese leadership in the early 1980s was replaced by the policy of integration into the global market economy. Chinese-American relations entered a new phase of development – the parties’ use of generally accepted “rules of the game” improved the conditions for the activities of Chinese companies in the USA market and American companies in China. The use of a more preferential trade and political regime in relations with the United States allowed China to increase the volume of exports of goods that are competitive in the world market. In addition, the predominantly bilateral focus of Chinese-US relations has transformed into a multilateral one.

However, the Americans’ calculations on the benefits of China’s accession to the WTO were largely exaggerated, and Chinese exports grew faster than imports. On the whole, an interesting situation of mutual US-Chinese claims within the WTO was developing. The United States blamed China for the absence of a market economy. The PRC initiated WTO cases against the United States due to its continued treatment of China as a non-market economy, which gave the United States more freedom to impose anti-dumping and countervailing duties on Chinese goods in some sectors. Over 18 years of WTO membership, China has participated in 20 disputes as a plaintiff. Among the 20 cases China filed with the WTO, 15 were addressed to the United States as a defendant, with a third of them related to the current US-China trade war waged since the beginning of 2018 (Lau 2018). Trump’s presidency has ushered in a new phase in relations with Beijing.

In May 2019, another escalation of the conflict took place, when Trump accused China of trying to revise the terms of the trade agreement reached during several rounds of negotiations, as well as of wanting to postpone its signing altogether. As a result, additional duties on $200 billion worth of Chinese goods were raised from 10% to 25% (Men, Schunz, and Freeman 2019). China’s retaliatory measures began to take effect on June 1, 2019. At the moment, trade and economic ties between China and the United States have reached the highest level of tension since the establishment of their diplomatic relations.

Conclusion

The development of the situation in the world in the 21st century will largely depend on how the relations between the two largest states – the United States, retaining the positions of the most powerful power in the world, and the rising China, gaining one position after another – will develop. The question arises: will the world witness the growing confrontation between the two giants, or will these two countries join forces in building a world order that suits them.

Today, both the United States and China are suffering multibillion-dollar losses due to the trade war. The United States has been a major advocate and defender of globalization and free trade for several decades. They stood at the origins of large international organizations, such as the WTO, the IMF, and largely controlled their activities. However, as China strengthened, the US’s leading position in the world economy began to weaken. Due to this, Trump’ slogans about the revival of national production, which he put at the forefront of his election program, were supported by the middle class and small business, as well as representatives of traditional industries. At the same time, reform of the WTO in the next few years is unlikely possible. Therefore, it seems expedient to use the positive experience of bilateral negotiations between the United States and China at the end of the last century and refract them in accordance with today’s country and global economic and geopolitical realities.

References

Autor, David H., David Dorn, and Gordon H. Hanson. 2013. “The China Syndrome: Local Labor Market Effects of Import Competition in the United States.” American Economic Review 103 (6): 2121-2168.

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Devereaux, Charan, and Robert Lawrence. 2004. The Eagle and the Dragon: The November 1999 US-China Bilateral Agreement and the Battle Over PNTR. Harvard Kennedy School.

Freeman, Richard B. 1995. “Are Your Wages Set in Beijing?” Journal of Economic Perspectives 9 (3): 15-32.

Lardy, Nicholas. R. 2001. “Issues in China’s WTO Accession.” Brookings, Web.

Lau, Lawrence J. 2018. The China-U.S. Trade War and Future Economic Relations. Hong Kong: The Chinese University Press.

Men, Jing, Simon Schunz, and Duncan Freeman. 2019. The Evolving Relationship between China, the EU and the USA: A New Global Order? NY: Routledge.

Rosen, Daniel H. 1999. “China and the World Trade Organization: An Economic Balance Sheet.” Peterson Institute for International Economics. Web.

Wang, Dong. 2013. The United States and China: A History from the Eighteenth Century to the Present. Lanham, MD: Rowman & Littlefield Publishers

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