The Elusive ‘Better Deal’ With China

By letting the country into the World Trade Organization back in 2001, Washington laid the groundwork for the tensions roiling relations with Beijing today.

Director-General of the World Trade Organization Roberto Azevêdo shakes hands with Chinese President Xi Jinping on a red stage in front of several countries' flags at the G20 Summit in 2015.
Chinese President Xi Jinping and Director-General of the World Trade Organization Roberto Azevêdo at the G20 Summit in 2015 (Lintao Zhang / Getty Images)

These days in U.S.-China trade relations, confrontation is the governing principle. In an effort to challenge China’s growing global economic clout, Donald Trump’s administration has, to date, levied around $37 billion in tariffs on Chinese products and threatened to expand these measures to cover all $504 billion in U.S. imports from China. While the measures may help reduce the trade deficit between the countries and provide temporary comfort to U.S. workers, they offer little in the way of creating a more equitable and sustainable trading relationship.

Confrontation hasn’t always been the go-to option for the United States and China, though. While the election of Trump played a key role in shaping the current conflict, his rise is only a bookend in a story that really began back in 2001, with the decision to bring China into the World Trade Organization (WTO). In joining the WTO, China committed to lowering its trade barriers and following a standard set of international-trade practices required by the club of trading nations, including agreeing not to subject foreign goods to costly regulations or taxes. In 2001, President Bill Clinton remarked that, in economic terms, the U.S. decision to accept China’s entry into the WTO, by extending it preferential treatment, was the equivalent of a “one-way street,” with American workers, consumers, and investors being the biggest beneficiaries.

Yet things didn’t go entirely as planned. During China’s first decade in the WTO, its exports to the United States greatly outpaced its imports from the United States, ballooning the bilateral deficit. The unbridled access to Chinese markets promised to U.S. companies never materialized, nor did a surplus of high-paying jobs suddenly appear across America. For many in the Trump administration, especially people like the economic advisor Peter Navarro and U.S. Trade Representative Robert Lighthizer, the decision to bring China into the WTO sold average Americans out to U.S. political and business elites.

The reality is, of course, more nuanced. But the imperfect promises and unaddressed legacies of China joining the WTO inform where we’re at today.

In retrospect, the United States wasn’t ready for the dislocation caused by the unprecedented scale of China’s economic rise. Smaller than France in 2001, China is now the world’s largest economy by some measures, and its preeminent trading power. Economists now acknowledge that the confluence of two factors—China’s rapid economic rise, and increased American exposure to Chinese exports that followed its membership in the WTO—adversely affected the employment and wages of many American workers in the early 2000s. A landmark study by the MIT economist David Autor attributed the loss of 985,000 manufacturing jobs in the United States from 1999 to 2011, or about 20 percent of the total job losses in the sector during this period, to the so-called China shock of exposure to increased competition from China. Those who support the 2001 decision suggest that attempts to keep China out of the WTO would have likely delayed rather than prevented these adverse effects. With its vast supplies of cheap labor, China had ready-made advantages when it came to churning out low-cost manufactured goods for export.

While U.S. policy makers missed the mark on China’s staggering rise, they also overestimated the extent to which its exposure to global competition through the WTO would force it to reform its economic system. Today, achieving fair trade with China means addressing the single most prominent feature of its economy: the deep connection between the ruling Communist Party and commercial institutions, like banks and other state-owned enterprises. When state-run banks in China provide below-market-rate loans to companies controlled by the government, this acts as an implicit subsidy to those firms’ goods.

In pushing for China’s economic integration with the West, successive U.S. presidents believed that competition would naturally obviate the challenge posed by these sorts of economic distortions. Competition, so the logic went, would force Chinese firms to privatize, become more efficient, and compete on a level playing field with their American counterparts. In reality, China has embraced a sort of à la carte globalization, adopting the rules and standards it finds most useful—like the ability to expand its companies and investments abroad—while discarding those that threaten its unique political and economic model, such as allowing foreign firms to invest and operate freely in China.

In fact, China’s political leadership has actually taken steps to reassert Communist Party control over the economy in the years since it entered the WTO. Beginning with the presidency of Hu Jintao in 2003, the leaders of China, breaking with decades of reform, increased government control of the economy. No longer would Beijing continue its privatization push; instead, it created a special party-controlled council to oversee the country’s state-owned commercial giants. That has continued under current President Xi Jinping, who views the Communist Party as central to maintaining economic stability and enabling China to dominate the technology-driven industries of the future.

Because Washington believed China’s economic opening would naturally lead to deeper, friendlier ties, it failed to take steps that could have forestalled a more disruptive confrontation with Beijing down the road. Numerous bilateral forums for dialogue failed to make major breakthroughs, and the WTO’s built-in mechanism for settling disputes between members provided little redress for U.S. concerns about China’s failure to live up to many of its major commitments. It now looks like a complex web of rules and procedures is no longer enough to maintain a harmony between the world’s two largest economies.

President Trump is committed to getting a “better deal” for the United States. But the real challenge for both the United States and China is forging a new global consensus around best practices for trade in the 21st century. That means updating trade rules to deal not only with the flow of goods across borders, but also with the increasing flow of the data associated with e-commerce, artificial intelligence, and other new digital technologies, as well. It also means seeking clarification from China on whether its model of state-led capitalism can comfortably continue to exist within a fair, transparent, and market-based trading system. But to achieve this goal, America must first reckon with its original sins at the WTO.