Trade War in the Offing?

I was on BBC Monday, talking about the latest trade spats developing between the U.S. and China.  Over the past few weeks, the U.S. imposed two distinct sets of retaliatory tariffs on Chinese-made solar panels (and just today, followed up with similar sanctions on Chinese-made wind-turbine towers).  Last Friday, China struck back by asking the World Trade Organization (WTO) to look into whether U.S. “green energy” subsidies and other initiatives violate international trade rules.  These moves come on top of a series of disputes over the past few years involving products ranging from tires to raw earth to steel tubes to chickens.  You can watch my short interview on BBC here.

The first point I made on BBC is that, so far, the areas of dispute — and there have been many — only cover a small portion of US-China trade.  In fact, that trade has been growing, not shrinking, in both directions.  So we can’t really talk about a “trade war” breaking out, at least not yet.  (If that U.S. Congress passed, and the President agreed to, across-the-board trade sanctions against Chinese goods to retaliate for China’s currency policy, THAT would be a trade war.)

What these moves do signify is high-level (and high-stakes) signalling taking place between China and its major trade partners — not just the US, but Europe and Japan as well.  China wants to develop what it sees as key industries by giving Chinese companies a leg up in both the Chinese and global market.  Its trading partners don’t want to see their firms placed at a disadvantage, and in several cases have challenged Chinese policies.  China is challenging them right back, arguing that those countries do the same thing, and that people who live in protectionist glass houses shouldn’t throw stones.  If they do, China can match them “tit for tat.”  (A similar battle involving cross-accusations and threats between the EU and China began unfolding this week — you can read about it here).

There’s a critical difference, though, between China and its trade partners.  They all may both have policies that can be called protectionist, but they come from different starting points.  In the U.S., trade restrictions and subsidies tend to be the exception to the rule, and when they do occur, are usually transparent.  There’s a public approval process and an overt policy that can be challenged at WTO.  In China, restrictions and subsidies are pervasive, due to the large state role in the economy, and often hard to pin down.

When Chinese supplies of rare earth minerals to Japan were disrupted, apparently due to a diplomatic flair-up over contested islands, it wasn’t clear who gave the order or how.  In fact, China’s Commerce Minister explicitly denied that any “embargo” was even taking place.  When Hu Jintao promised President Obama, during his January state visit, that China would scrap its “indigenous innovation” catalogs intended to push government offices and state-run companies to buy domestic Chinese products, it wasn’t clear (and still isn’t) whether China had truly abandoned the animating principle behind the policy or had merely shifted to using other, less obvious approaches to achieving the same goal.

As a result, there’s growing discussion among U.S. officials and trade experts about whether the WTO framework is at all suited to tackling the issues that really matter when it comes to trade with China.  WTO is a rule-based system that does a reasonably good job at striking down overt actions or practices that violate trade agreements.  If the real problem is that a nation’s court system is rigged in favor of state-owned or state-championed companies; that laws that are on the books aren’t enforced, or are enforced unevenly; that business executives are rewarded for pursuing the government’s policy goals, even at the cost of profits; that licensing, investment approval, and other procedures are used to extract commercial concessions such as the transfer of critical technologies — all of these deeply entrenched issues, and more, are beyond WTO’s scope.  Yet they determine the “terms of trade” between the U.S. and China far more than the explicit trade policies WTO is designed to adjudicate.

I’m not saying that U.S. negotiators have any clear alternatives in mind.  There’s no obvious approach that would work “better” than WTO, which is why the WTO framework remains the focus point of recent trade disputes.   But the real dispute — about what constitutes an “even playing field” — goes far deeper, and will continue to be a source of conflict.