Rules and International Trade

Stephen DeAngelis

December 12, 2006

This week high-level delegations from the United States and China will meet to discuss strategic trade relationships. On the cusp of these discussions, Treasury Secretary Henry Paulson wrote an op-ed piece in the Washington Post about what he hopes to accomplish [“A Broad Dialogue with China,” 11 December 2006]. The most important statement in his piece reads: “A market-based economy in China, with sustainable economic growth and full participation in rules-based international trade, is in our best interest — and in the interest of the Chinese people.” Even conservatives who believe that U.S. participation in international organizations robs it of some of its sovereignty must admit that a world without rules would be a world filled with chaos. Paulson writes:

Managing our economic relationship with China to ensure both nations benefit is vital to our nation’s future prosperity. … Since 1980 China’s share of the world economy has more than quadrupled. The United States and China now account for almost half of global economic growth. And bilateral trade between our two nations grew by a factor of five over the past decade. Beyond the numbers, the U.S.-China economic relationship epitomizes both the opportunities and challenges of globalization.

During the Cold War, the Soviet Union tried to maintain an alternative economic system that complicated international trade and contributed to corruption and criminal activity. Getting China and Russia to abide by the rules used by the rest of the developed world is a major step forward in promoting global peace and prosperity. Full compliance won’t be easy, since it means changing decades of business practices and accepted social norms that have included bribery, payoffs, and disregard for patents and other intellectual property. Nevertheless, the course is the correct one. Paulson lays out his objectives this way:

My colleagues and I will meet with Chinese leaders in Beijing for discussions in three areas: maintaining sustainable growth without large trade imbalances; continuing to open markets to trade, competition and investment; and improving energy security and the environment. China is at a crucial juncture. Decisions it makes in the next few years will have long-lasting effects around the world. The United States and China each have a vision of how our relationship will evolve, and in many respects our visions are similar. We both want strong commercial ties that produce benefits for workers and consumers in America and China. We both want China to grow in a way that is sustainable economically and environmentally and that contributes to global prosperity. We both want China to be a responsible stakeholder in the global economy and in multilateral institutions. We do have our differences. The United States believes China can do more to reduce its trade surplus. We are encouraging China to introduce greater flexibility for its currency, consistent with economic fundamentals. And China needs to do more to protect intellectual property rights. Our goal is to advance our common interests and find solutions to issues that strain our relationship. The United States and China are engaged in dozens of bilateral negotiations at multiple levels. This has produced positive outcomes, but it can be difficult to address issues that cut across numerous sectors and areas of responsibility. The dialogue will allow us to meet with several Chinese leaders at once and begin to address important issues comprehensively.

There are certainly many issues to discuss, but the more China and the U.S. talk and the more they strive for common goals, the less China will look like an adversary. It will certainly remain an economic competitor, but we will have to get used to that whether our security relationship is friendly or adversarial. Paulsen concludes his op-ed with a more detailed list of issues to be addressed:

For instance, transparency and respect for the rule of law are core principles that affect all economic policy and trade issues. Commitments to these principles are essential to China’s maintaining the confidence of international businesses and of its own investors and entrepreneurs. Working on these principles across government ministries can enhance our ability to reach agreement on a number of key issues that we negotiate ministry-by-ministry. One of the most important topics for discussion is how to help China manage its transition to freer, more open markets, including capital markets. Every strong, vibrant economy in the world has open, competitive capital markets that attract investment and allocate resources to their most productive uses. Such markets will contribute to sustained economic growth and boost job creation in China. And strengthening and reforming financial markets will ultimately allow the Chinese to freely float their currency. The Chinese government is committed to creation of a social safety net, including health and retirement programs that will contribute to balanced growth by giving Chinese workers and families the confidence to spend more. China’s high saving rate is a major contributor to the country’s large global trade surplus. Increasing consumption in China will benefit U.S. and other exporters. Energy is an issue with far-reaching effects. Both the pattern of China’s growth — with its heavy dependence on industry — and low domestic prices for energy have led to rapidly increasing energy use by China. Unfortunately, because of technological and infrastructure challenges, much of that energy is produced from sources that generate high levels of pollution. This harms the air and water we all share, and creates health problems for Chinese citizens. Through the Strategic Economic Dialogue, we can work with China’s leaders to help it achieve more environmentally and economically sound growth and constructive engagement with the global energy market. This is a pivotal moment for China and for our relationship with that country. By engaging Chinese leaders with an eye to producing long-term benefits for our two nations, we can build a productive and prosperous partnership for the 21st century.

Although Paulson is trying to establish a positive tone as the talks begin, a report by Susan C. Schwab, the United States trade representative, is bluntly critical of China’s efforts to abide by WTO rules [“Before Visit to China, a Rebuke,” by Steven R. Weisman, New York Times, 12 December 2006].

While praising China for making progress in some areas, the report said that the country’s efforts in other crucial areas had recently stalled, despite repeated promises from Beijing. It cited continued limits by China on sales of financial services by foreign banks, including credit cards, and limits on some sales of farm goods. It also accused China of engaging in counterfeiting or piracy of software, videos, pharmaceuticals and other goods, sometimes with open encouragement of Chinese officials, and of failing to stiffen punishments on those engaging in these practices. The report said that “some Chinese government agencies and officials have not yet fully embraced the key W.T.O. principles of market access, nondiscrimination, national treatment and transparency.” China announced Monday that it would begin to take formal steps to allow foreign banks to offer some retail banking services, like credit cards, and to buy shares in domestic banks. But the announcement came too late to affect the report’s overall conclusion that the Chinese have fallen short in meeting their trade promises. Much of the report echoed criticisms of China’s trade and economic practices long heard from Bush administration officials and even more loudly in Congress. But
the report was likely to roil the atmosphere this week as Treasury Secretary Henry M. Paulson Jr. engages in a high-level effort to get China to cooperate on these issues.

Despite the report, let’s hope the talks begin a productive dialogue that sets the stage for further peaceful and civil exchanges. We’ve come a long way since the ping-pong diplomacy of the Nixon era and we need to secure China as a partner while we are still in a position to bargain from strength. This could be the start of a new era and new framework for peace — a topic I recently addressed in a Philadelphia Inquirer op-ed piece [A New Global Framework].