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Its success in bringing China into the World Trade Organization in 2001 was a major accomplishment of the Clinton admi- nistration. Laura D’Andrea Tyson, who chaired the Council of Economic Advisors as well as the National Economic Council during the administration’s first term, illuminates the evolving relationship between two very different major trading partners.

Laura D’Andrea Tyson S. K. and Angela Chan Chair in Global Management, , University of California, Berkeley

NOT A ZERO-SUM GAME CREDIT SUISSE SALON —23 Photo:Edward Caldwell CREDIT SUISSE SALON —24

Giselle Weiss Could you describe for us the state of trade relations between China and the US when you joined the Clinton administration in 1993? Laura D. Tyson At the beginning of the Clinton presidency, China was not a prior- ity in US trade policy. China was not yet our third-largest trading partner. The administration was focused on completing NAFTA (the North American Free Trade Agreement), on bilateral negotiations with Japan to improve market access there, and on completing the Uruguay Round of multilateral trade talks. There was certainly attention paid to China on trade issues like intellectual property protection for US products sold in China. But much of the discussion in the US revolved around whether we should condition our trade relationship with China on its human rights record and on our national security concerns. That discussion obviously changed. Laura D. Tyson President Clinton’s economic team recognized that China was be- coming a major player in the global economy and that the US had a growing inter- est in opening China’s market to US exports and encouraging China to adhere to global trading rules. The team argued that the US should delink the issue of trade from human rights because unilateral trade sanctions would not be effective in improving human rights in China, but would, rather, disadvantage the US vis-à-vis China’s other trading partners. We argued that the US should not use trade as a negotiating tool to pursue our other national interests with China. Instead, our trade negotiations with China should focus on our trade issues, like intellectual property protection and barriers to US exports in China. What were the key elements of the Clinton administration’s policy of “constructive engagement” toward China? Laura D. Tyson From late in the president’s first term and throughout the second term, the administration took the position that the US should engage the Chinese on trade and global economic issues rather than seek to contain China’s rise and react to it as a competitive threat. This change in perception was the first step. A number of strategic moves followed from that: regular approval of most- favored-nation status for China; negotiations with China on a broad bilateral trade agreement; a state visit by the president to China; supporting China’s accession to the World Trade Organization (WTO); and according China permanent most- favored-nation status. All of these moves were major components of our “construc- tive engagement” approach in the area of trade and global economic relations. What were the major challenges from the Chinese side? Laura D. Tyson China was interested in membership in the WTO, but the US required that China make significant market-opening changes before its membership was approved. China proved to be a tough negotiator, arguing that it was still a devel- CREDIT SUISSE SALON —25

oping country and, consequently, that it needed a long transition period to dis- mantle policies that protected its market and promoted its exports. China prevailed on this point. But nonetheless, if you look at what the Chinese ultimately commit- ted to do in their WTO accession agreement, it was very significant in terms of changes to their own economy. In 1997, you wrote an editorial in the “New York Times” in which you said that China was poised to be the US’s no.1 trade headache. Based on the complaint the US just lodged against China with the WTO over cars, that would seem still to be the case. Laura D. Tyson There have always been people in the US who view our trading relationship with China not just in terms of competitive challenges or opportunities but in terms of our national security: What are China’s interests in the Asia region? How much influence does it want to exert ? How worried should we be? And then, of course, the human rights question has always been there. In 1997, it was clear that those issues weren’t going to go away. By the same token, it was also clear

“China is now likely to increase its outward FDI by USD 1 to 2 trillion by 2020. And the US can benefit by winning a sizable share of those significant flows.”

that China was poised to become a very significant force in the global economy and that our trade with China was growing rapidly. I felt at the time that it was important to bring China into the WTO to have a mechanism for adjudicating trade disputes. And now? Laura D. Tyson China is our third-largest trading partner and our fastest-growing export market. But we also have a persistent and significant trade deficit with China. Those two facts alone suggest to me that we are going to have frequent trade disputes with China. We refer these disputes to the WTO, which I think is the appropriate thing to do. We also have regular high-level bilateral trade dia- logues with China, which provide a forum in which each side has the opportu- nity to identify and address areas of contention. What is the risk of a major trade dispute degenerating into a protectionist spiral? CREDIT SUISSE SALON —26

Laura D. Tyson There’s always a risk. Both countries have a huge amount to lose from such a spiral, whereas both enjoy large benefits from their trade with one another. Now, obviously, there are many people who might disagree with that statement in the US. But my view as an is that the trade relationship is beneficial to both sides, and that getting into a tit-for-tat protectionist spiral would cost both dearly. I think that the trade negotiators and leaders on both sides recognize that. You just wrote a commentary for Project Syndicate on the DGPGƟVUQH%JKPGUGHQTGKIPFKTGEVKPXGUVOGPVKPVJG75 Laura D. Tyson Foreign direct investment (FDI) is good for both the source and recipient countries. That has been demonstrated in China’s history of development over the past 25 years. China has been the recipient of major inflows of FDI that have brought not just money but expertise and technology. The US, too, has always been a major magnet for FDI inflows from around the world. So far, China has remained a small source of FDI outflows, but the situation is changing rapidly. Today, I think China is poised to become a significant investor around the world. And the US is an attractive investment opportunity for Chinese investors. You also say it’s an attractive opportunity for the US. Laura D. Tyson Foreign firms in the US account for 5% of private sector employment, 17% of manufacturing jobs, 21% of exports, and 14% of research and development – that last number is a really interesting one. And so far most of the FDI flows into the US have come from the developed countries, particularly from Europe. But China is now likely to increase its FDI outflows by USD 1 t o 2 trillion by 2020. And the US can reap significant benefits by winning a sizable share of those flows. Putting the US trade relationship with China in a historical perspective, what do you see? Laura D. Tyson A more developed Chinese economy with higher income and high- er per capita consumption is good not just for the Chinese, but for China’s trading partners. At the same time, China is a socialist market economy, and many of the policies that play a prominent role in China’s development strategy – and that are at the center of US-China trade frictions – are inadequately covered by the WTO. So bilateral trade friction between the US and China will continue. China is also not a democracy, and human rights concerns continue to complicate economic relations between the US and China. Finally, China is a rising global political and military power, and that poses national security risks for the US. So the US-China relationship will be compli- cated even as it continues to evolve. And as it evolves, it will reflect all of the op- portunities and challenges associated with the rise of a major power of a different sort in the world. Ƌ