Negotiating with China Through Allies

Negotiating with China through Allies

SHLOK GOYAL

President Donald Trump and the US Department of State have taken a sledgehammer to a task requiring a screwdriver in the ongoing trade war with China. In the process, the administration may have alienated allies, hurt domestic households, and damaged institutions it took the United States decades to establish. Furthermore, these tari!s are unlikely to resolve the primary issues concerning intellectual property the" and controls on foreign #rms. $e United States can resolve the crisis by eliminating all new tari!s on its allies and coordinating with them to pressure China multilaterally on its treatment of foreign #rms.

Working with other nations, the United States should retaliate not by imposing tari!s but by instituting controls on Chinese multinational #rms, a more signi#cant blow to China and one with little cost to American citizens. Furthermore, the United States should challenge China strategically instead of opposing all Chinese attempts to cra" partnerships around the world. Last, the United States should improve ties with Asian nations that can counter China’s in%u- ence in the region.

Origins of the Trade War: China’s Mercantilism $e origins of the trade war lie in China’s policies, that “encourage or require the transfer of American technology and intellectual property to enterprises in China,” according to the US Trade Representative.1 $e report claims that China violates Section 301 of the Trade Act of 1974 and asserts that such actions “may inhibit United States exports, deprive United States citizens of fair remuneration for their innovations, [and] divert American jobs to workers in China.”2 To bring China to the negotiating table over these issues, the Trump administration instituted $250 billion in tari!s, much of which has now been cut following phase one of a trade deal.

China has long adopted mercantilist policies that hurt Western #rms’ ability to compete with Chinese companies. Western economies like the United States have allowed Chinese #rms unfettered access to their nations even as China implemented numerous controls over Western #rms investing in China. Such access was granted with the notion that China would eventually converge to Western modes of capitalism and limited intervention, eventually forcing China to completely open its economy to outsiders.

1 Findings of the investigation into Chinas acts, policies and practices related to technology transfer, intellectual property, and innovation under section 301 of the Trade Act of 1974(163rd ed., Vol. 82) (United States., O&ce of the U.S. Trade Representative). 2 Ibid.

Shlok Goyal graduated from CMU in May 2020 with degrees in Econom- ics and in Statistics and Machine Learning, with a minor in Computer Science. While at CMU, he founded the Economics Research Club and was Finance Chair of the Student Senate. He also interned at the US State and Justice Departments as well as at the Federal Reserve Bank of New York, where he will be conducting economics research full-time.

41 Shlok Goyal

It does not appear that such openness is in China’s plans. Policies like “Made in China 2025” evince that China is bent on using state intervention to support domestic companies to the detriment of foreign !rms operating in China.3 While the mercantilist view is likely over- blown, China’s lack of respect for American !rms’ intellectual property has certainly been a hindrance to US economic growth and is likely to grow even more troublesome as Chinese !rms use American knowledge to lead the industries of tomorrow.4

"e causes behind this con#ict cut even deeper. "ey are borne out of frustration with Bei- jing’s increased role in the international order, as China builds new international institutions like the Asian Infrastructure Investment Bank (AIIB) and increases in#uence via initiatives like the Belt and Road and Military-Civil Fusion initiatives. Beijing’s military overtures in the South China Sea and its disregard for the liberal ideology the West has long promoted all threaten Washington’s standing.

Chinese Investment in Future Technologies China has dramatically increased investment in what it views as technologies of the future such as arti!cial intelligence (AI) and robotics. Undoubtedly, China has accelerated its innovation by prying technology from American corporations.5 However, China’s strategy has begun to change. Chinese !rms have stolen the technology they needed. Now their focus is on surpassing the US in terms of innovation. Recently, for example, the Chinese government announced that it planned for China to be the world’s primary hub for AI.6 China is making the investments required to make this dream a reality. Not only did China’s AI industry grow 67 percent last year, the country now publishes more research papers on AI than any other nation.7

While it is important to restrict China’s access to technology patented by American !rms, the Trump administration must realize that China is willing to negotiate on this issue because it has already exploited American innovation. China is now prepared to take the title of most innovative nation away from the United States. "e silver lining for the United States is that as the current leader in AI it has bene!tted from increased Chinese investment since advance- ments in the !eld are generally widely shared.8

While the United States negotiates for an end to China’s mercantilism, the Trump administration must recognize the shi$ in its relationship with China. If the United States were to limit Chinese access to start-ups, it could be a signi!cant blow to Chinese ambitions of becoming a leader in AI. Such a policy would have worse consequences for business formation in the United States, however. Already, the current administration’s crackdown on Chinese invest-

3 Daniel Rosen, “Is a trade war the only option?” Foreign A!airs, March 20, 2018, https://www.foreigna%airs.com/articles/china/2018-03-20/ trade-war-only-option. 4 Eswar Prasad and Shang-Jin Wei, “"e Chinese approach to capital in#ows: patterns and possible explanations,” China, Asia, and the New World Economy, February 21, 2018, https://www.oxfordscholarship.com/view/10.1093/acprof:oso/9780199235889.001.0001/acprof- 9780199235889-chapter-11. 5 Lingling Wei and Bob Davis, “How China systematically pries technology from U.S. companies,” Wall Street Journal, September 26, 2018, https://www.wsj.com/articles/how-china-systematically-pries-technology-from-u-s-companies-1537972066. 6 Amy Webb, “China is leading in Arti!cial Intelligence--and American businesses should take note,” Inc. Magazine, September 2018, https:// www.inc.com/magazine/201809/amy-webb/china-arti!cial-intelligence.html. 7 Charles Jennings, “We can’t let China become the global leader in arti!cial intelligence,” Los Angeles Times, March 4, 2019, https://www. latimes.com/opinion/op-ed/la-oe-jennings-china-arti!cial-intelligence-20190304-story.html. 8 Tim Hwang and Alex Pascal, “Arti!cial Intelligence Isn’t an Arms Race,” Foreign Policy, December 11, 2019, https://foreignpolicy. com/2019/12/11/arti!cial-intelligence-ai-not-arms-race-china-united-states/.

42 Negotiating with China through Allies

ment in technology-related areas caused such investment to fall by 79 percent last year.9 America derives its global strategic leadership from its economic leadership, which comes from its technological leadership. It must take care not to sacri!ce its leadership in AI to China lest the United States !nd its bargaining power over other nations limited in the future.

As China becomes increasingly responsible for the world’s innovative output—it is expected to be the largest originator of patents by 2020—it will likely demand stronger intellectual property rights worldwide to protect its inventions.10 Agreeing on stricter enforcement of patent law should be a straightforward measure, one on which both sides can agree.

!e Rise of the Rest: China’s Growing In"uence China is gaining increasing in"uence in parts of the world neglected by US foreign policy such as Africa. While the Trump administration le# the position of Assistant Secretary of State for African A$airs vacant for a year-and-a-half and has yet to appoint ambassadors in many African nations, China has made signi!cant investments in the region, both building relationships and infrastructure.11 Worse, China is exporting its authoritarian model to these nations, countering the Western liberal order.12

Chinese investment in the region has forced the United States to look toward the region as an area they must again increase ties with, but America’s leaders are doing so primarily to contain China.13 African leaders can sense that their renewed importance is due solely to their partnership with China and they are unlikely to sacri!ce a relationship between equals as they cur- rently enjoy in favor of the subordinate relationship they had with the United States.

%e trade war has further exacerbated African leaders’ worries that the United States will be an unreliable partner in the future. %e United States has long assumed its wide-ranging in"uence a#er the Cold War’s conclusion, but decisions like the imposition of tari$s may push other nations into closer ties with China, a nation with a more predictable foreign policy. %e United States needs to re-establish its relationships with African nations and develop a long-term vision for its partnership with the region. Increased economic ties with the United States will give African nations an outlet in case Chinese demands become su$ocating, further diminish- ing Chinese power worldwide and maintaining American hegemony. Other nations have come to realize that China imagines a colonial relationship with them and will prefer American leadership, if it exists.14

!e Trade War’s Impacts International Institutions Need Updates

9 Rebecca Fannin, “China to US tech investment plunges 79% to lowest level in 7 years amid DC crackdown,” Forbes, January 21, 2019, https://www.forbes.com/sites/rebeccafannin/2019/01/21/china-to-us-tech-investment-plunges-79-to-lowest-level-in-7-years-amid-dc- crackdown/#590689c61964. 10 Kevin Lu, “%e pieces are in place for a grand bargain with China,” Foreign Policy, November 28, 2018, https://foreignpolicy. com/2018/11/28/the-pieces-are-in-place-for-a-grand-bargain-with-china/. 11 Lina Benabdallah, “Spite won’t beat China in Africa,” Foreign Policy, January 23, 2019, https://foreignpolicy.com/2019/01/23/spite-wont- beat-china-in-africa/. 12 H.R. McMaster, “How China Sees the World,” !e Atlantic, May 2020, https://www.theatlantic.com/magazine/archive/2020/05/mcmaster- china-strategy/609088/. 13 John Bolton, Remarks by National Security Advisor Ambassador John R. Bolton on the Trump Administration’s New Africa Strategy, Speech presented at %e Trump Administration’s New Africa Strategy in Heritage Foundation, Washington, DC, December 13, 2018, https://www. whitehouse.gov/brie!ngs-statements/remarks-national-security-advisor-ambassador-john-r-bolton-trump-administrations-new-africa- strategy/. 14 H.R. McMaster, “How China Sees the World,” !e Atlantic, May 2020, https://www.theatlantic.com/magazine/archive/2020/05/mcmaster- china-strategy/609088/.

43 Shlok Goyal

!e rise in Chinese power is more apparent in Asia. Economic security has increasingly been binding the continent together with a $19 trillion regional economy in which 53 percent of trade occurs within the region itself.15 It is unsurprising, then, that numerous institutions have arisen to link nations in the region. !e United States has criticized the AIIB and the Belt and Road initiative as evidence of China subordinating nearby nations.

However, many of America’s allies and China’s harshest critics like Australia, India, Japan, and Vietnam are members of the Regional Comprehensive Economic Partnership (RCEP), China’s version of the Trans-Paci"c Partnership (TPP). India, skeptical of China ever since the Sino-Indian War, is a founding member of the AIIB. !e idea of an Asian monetary fund like the AIIB was "rst proposed by Japan. !e iand Road Initiative, meanwhile, is an outgrowth of consistent investment in Asia, whether it be Japan’s funding of India’s Delhi-Mumbai Indus- trial Corridor or former US Secretary of State Condoleezza Rice and the World Bank’s push for greater development of roads and power lines in South and Central Asia.16

It appears that American opposition to such institutions is predicated on the idea that any multilateral institution spearheaded by China is inherently bad. But most Asian nations are perfectly content to cooperate economically with China while warily watching its foreign policy. Furthermore, Asian nations are unwilling to subject themselves to America’s whims. Washington, for example, refused to bail out !ailand during the Asian "nancial crisis of 1997-98. Additionally, the United States refused to ratify the TPP as part of President Trump’s trade war.17 US trade actions have further demonstrated to Asian nations the unpredictability of relying on a disinterested nation across an ocean.

Similarly, America’ opposition to the AIIB only damaged its own reputation as even close allies like Canada, the United Kingdom, Israel, and the Republic of Korea signed up.18 Instead of alienating China, the United States’ knee-jerk opposition to a China-led institution only served to alienate America, particularly since the United States o#ered no alternative. It is reasonable for Asian nations to seek closer economic ties within the region, similar to what the United States has with Canada and Mexico.

In the past, the United States favored China peacefully joining existing institutions. Yet these institutions favor Europe and the United States over emerging economies. China is argu- ably the second-most powerful country in the world yet the United States de facto selects the World Bank president and Europe selects the International Monetary Fund leader. China and India, the largest and third-largest consumers of energy are not even members of the Interna- tional Energy Agency.19

!is imbalance re$ects the fact these institutions were created a%er World War II by the United States and its allies. As a result, small European nations get outsized weight and ris- ing nations like China are de-emphasized. China must therefore pursue its own multilateral initiatives lest the West turn against China, as the trade war shows is possible, as well as to gain

15 Evan Feigenbaum and Robert Manning, “A tale of two Asias,” Foreign Policy, October 31, 2012, https://foreignpolicy.com/2012/10/31/a- tale-of-two-asias/. 16 Evan Feigenbaum, “China and the world,” Foreign A!airs, 96(1), January/February 2017, https://www.foreigna#airs.com/articles/china/2016-12-12/china-and-world. 17 Ibid. 18 Ibid. 19 Ibid.

44 Negotiating with China through Allies

leverage in order to democratize existing international governance.

!e United States’ tari"s have already damaged institutions more than anything China has done. For example, the United States justi#ed tari"s on allies like Canada, Mexico, and the Eu- ropean Union as necessary for national security.20 It further argued that the WTO, which bans such tari"s, has no authority to review the matter since only the United States can identify which issues are essential for national security.21 In $agrantly violating the WTO’s rules, the United States has demonstrated the inability of the WTO to enforce any of its policies. Un- surprisingly, then, other countries also broke the rules by instituting retaliatory tari"s on the United States. With the WTO unable to punish any of these nations, it is only a matter of time before the WTO’s guiding principle of free trade is discarded. !e resulting increased protec- tionism will hinder attempts at international cooperation.

Alienating Existing Allies In terms of pressuring China to change its mercantilist policies, the trade war appears to have succeeded given the new deal. However, tensions regarding Huawei technology and China’s inability to ful#ll its obligations due to the coronavirus threaten to scuttle the deal before it ever really gets going.

If these changes force the United States and China back to the negotiating table, uncertainty could further weigh on American allies. !e upcoming US presidential election will add to that uncertainty. Coming on the heels of a slew of renegotiations with allies, such as with Canada and Mexico and with the Republic of Korea, American so% power is slowly eroding.22 !e administration ended up imposing tari"s on many of its allies. !e share of imports af- fected by tari"s has risen more for trade partners like Canada and Mexico than for China.

While con$ict with China was perhaps necessary, con$ict with US allies was not. Since American trade with allies is substantial, tari"s could have drastic negative economic consequences. !ere is little to be gained from alienating our allies while #ghting a common enemy: China’s mercantilist policies. For much of the #rst two years of his tenure, President Trump has weakened America’s alliances, imposing tari"s on Europe, Japan, Canada, and the Repub- lic of Korea, while pulling out of the Paris climate change accord, Iran sanctions deal, and the TPP.23 America’s allies have grown used to reshaping trade agreements and increasing military cooperation amongst themselves, as America becomes a less reliable partner.

According to a top Chinese military o&cial, “[a]s the [United States] retreats globally, China shows up.”24 By instituting protectionist policies and displaying a disdain for international cooperation, the United States is creating a power vacuum that China is all too eager to #ll. Regaining the support of its allies will be crucial to America’s hopes of thriving in a post-hegemonic multilateral world order. Otherwise, China will be poised to reshape the international system to its preferences rather than having to adapt to one created by the United States.

20 Philippe Legrain, “Build the wall—to keep out the BMWs and Benzes,” Foreign Policy, February 22, 2019, https://foreignpolicy. com/2019/02/22/build-the-wall-to-keep-out-the-bmws-and-benzes-trump-german-cars-trade-war-tari"s-auto-industry/. 21 Arvind Panagariya, “!e trade war has claimed its #rst victim,” Foreign Policy, October 19, 2018, https://foreignpolicy.com/2018/10/19/the- trade-war-has-claimed-its-#rst-victim/. 22 Douglas Irwin, “Understanding Trump’s trade war,” Foreign Policy, 2019, https://foreignpolicy.com/gt-essay/understanding-trumps-trade- war-china-trans-paci#c-nato/. 23 Chad Bown, “Why the U.S. needs allies in a trade war against China,” Harvard Business Review, December 11, 2018, https://hbr. org/2018/12/why-the-u-s-needs-allies-in-a-trade-war-against-china. 24 Ivo Daalder and James Lindsay, “!e committee to save the world order,” Foreign A!airs, 97(6), https://www.foreigna"airs.com/articles/2018-09-30/committee-save-world-order.

45 Shlok Goyal

Domestic Discontent Furthering the trade war will lead to higher prices and job losses in the United States, sowing the seeds for discontent. By some estimates, the steel and aluminum tari!s alone would lead to half a million jobs lost, resulting in eighteen fewer jobs for every job created by the tari!.25

"is could weaken American foreign policy as tari!s become politically unfeasible and future leaders would be unable to threaten wayward nations with economic action as our enemies realize the inability of the United States to follow through on economic threats. "is is especially problematic as economic tools like sanctions have become an increasingly important mecha- nism of foreign policy and if domestic appetite for such action diminishes, then international aggression might increase. Mimicking Chinese controls in the United States for Chinese #rms could do more to pressure China into conforming with American demands than tari!s, while limiting the damage to consumers at home.

Recommendations Coordinate with Existing Allies on Containing China In negotiations, many credible threats are better than one. Instead of alienating its allies by imposing unnecessary tari!s, the administration should join with them in negotiating with China. "ese countries face many of the problems the United States does, such as intellectual property the$ and China’s %agrant violation of trade rules. Negotiating with allies will deepen America’s ties with them, convince them that the United States plans on multilateral decision- making in the future, and enable each nation to extract more concessions from China. Wash- ington should also work with allies to hamper China’s ability to steal intellectual property by developing an infrastructure to “protect sensitive and proprietary data.”26

"e Trump administration understands this need for coordination. "e US Trade Representa- tive has started meeting every three months with the European and Japanese trade ministers to cra$ new rules to resolve the mutual concerns regarding China’s actions. "is is a more feasible way to reach a satisfactory agreement than the unsuccessful bilateral negotiations the Obama administration attempted to engage in with China.27

If China eliminated its policies harming American #rms, it would also bene#t European and Japanese #rms while hurting Chinese companies dealing with those #rms. "us, China has more to lose than America stands to gain by rewriting these rules, making bilateral negotiations di&cult. However, China has less to lose than the entire world can gain from rewritten rules.28 "e United States can more feasibly get China to revise its policies if other countries joined the e!ort.

Last, committing allies to this cause will also sharpen the pain of tari!s on China. If multiple nations banded together to impose tari!s on Chinese goods, China would be le$ with two options. It could either retaliate against every nation, saddling its manufacturers with higher

25 Matthew Goodman and Eli Ratner, “A better way to challenge China on trade,” Foreign A!airs, March 22, 2018, https://www.foreigna!airs. com/articles/china/2018-03-22/better-way-challenge-china-trade. 26 H.R. McMaster, “How China Sees the World,” "e Atlantic, May 2020, https://www.theatlantic.com/magazine/archive/2020/05/mcmaster- china-strategy/609088/. 27 Chad Bown, “Why the U.S. needs allies in a trade war against China,” Harvard Business Review, December 11, 2018, https://hbr. org/2018/12/why-the-u-s-needs-allies-in-a-trade-war-against-china. 28 Mancur Olson Jr. "e logic of collective action public goods and the theory of groups, Cambridge, Massachusetts: Harvard University Press, 2012.

46 Negotiating with China through Allies prices in sourcing from and selling abroad, or it could skip retaliation and go straight to nego- tiation. !e latter is likelier and would enable engaging in a trade war without hurting domestic consumers.

Corner the Tiger: Strengthen Alliances with Asian Nations China’s primary rivals are the major powers in its region: Japan, the Republic of Korea, and India. !ese countries, along with the Philippines, Indonesia, !ailand, and Singapore in Southeast Asia, tend to be skeptical of China’s growing in"uence and worry about Beijing’s assertions of regional power. !us, American strategic alliances in the region remain strong, even as the Obama administration largely ignored the area—its “rebalance to Asia” strategy focusing on the Middle East instead—and the Trump administration terminated American participation in the TPP while threatening punishment for countries that are net exporters to the United States.29

!ese actions have created economic tension between the United States and nations in the region. Strategically, the hardline stance taken by the Trump administration is welcomed by many nations in the region worried about China’s growing power. Undoubtedly, China will only amplify its push to gain dominance in Southeast and East Asia. Already, China’s Belt and Road initiative and militarization of the South China Sea evince China’s broader goals for the region. Yet, the United States should largely let China increase its economic in"uence with other nations while o#ering US-based alternatives to Chinese proposals. Paradoxically, perhaps, the United States should reduce its own power in international institutions and make room for China and other emerging markets to have a greater say. Such an action would mitigate the need for Asian countries to join Chinese-led institutions, thereby maintaining America’s preferred liberal world order. Of course, this increased say should be used as a bargaining chip during trade talks.

Nations like Singapore and !ailand have already begun partnerships with India, Japan, and the Western European powers. It is unclear why the United States is not on that list since the Asian nations and the United States should want a closer relationship. Southeast Asian nations are hurt by the US-China trade war.30 By increasing security cooperation with countries like Indonesia, Malaysia, Singapore, and Vietnam and enlisting their support in negotiations with China to end China’s unfair trade practices, the United States could bolster its relationships in the region, act as a stronger counterweight to China in Asia, and more forcefully alienate China from the rest of the world.

Conclusion !e US-China trade war is the culmination of long-standing tensions between the two nations. !e United States could signi$cantly increase its bargaining power and standing in the international community by partnering with its allies and southeast Asian nations sharing similar concerns about China’s policies. !e United States has so far attempted to deal with China’s rise unilaterally. While in the past such unilateral negotiations could have worked because of America’s hegemonic status, in the new international order, it would best serve America to contain China’s rise via multilateral agreements.

29 “!e U.S.-Southeast Asia relationship: responding to China’s rise,” Council on Foreign Relations, Southeast Asia Program, May 23, 2018, https://www.cfr.org/report/us-southeast-asia-relationship-responding-chinas-rise. 30 Ibid.