The most important bilateral relationship in the world today is off to a rocky start in 2018, and this may have both significant and unexpected implications for U.S. business. Concerns about a U.S. trade war with China have been escalating, fueled by an exchange of tariffs and other threats by Washington and Beijing.
The Trump Administration began using tougher rhetoric about the bilateral trade relationship just over a year ago, following up on campaign promises. Two main issues are at stake. First, Americans have real concerns about the growing bilateral trade imbalance (last year China sold the United States $505 billion in goods to our $130 billion). Second, U.S. business is burdened by forced technology transfer, Chinese government subsidization of competitors, intellectual property theft, and other policies in China that tilt the playing field against U.S. companies.
Trade tensions escalated significantly this month when the White House moved forward with punitive tariffs of 25 percent on $50 billion worth of imports from China, aimed at goods that "contain industrially significant technologies." The White House said U.S. customs agents will begin collecting the duties on July 6. China promised it would proceed with its own tariffs on $50 billion in American goods, including cars, planes and farm products.
The administration also said that the United States would continue to pursue a trade case it filed against China at the World Trade Organization involving intellectual-property rights. The U.S. trade representative's office is putting together a fresh trade complaint arguing that Beijing unfairly restricts U.S. trade in high-tech services.
Many longtime observers are concerned we've begun to enter a full-out trade war. There are further concerns that the tactics being employed by both governments are only exacerbating trade tensions. So how should U.S. businesses think about these developments, and what should we expect from our government? A few observations and suggestions:
1. What does success look like for the United States? Is it merely getting China to buy more U.S. goods to reduce the trade deficit, or do we also need meaningful progress on the core issues facing U.S. businesses in China on intellectual-property theft, forced tech transfer, domestic protectionism? U.S. business leaders need to work with the Trump Administration to clarify their objectives and goalposts.
2. On the trade deficit, many of our states in the Midwest are net exporters to China. One third of Iowa soybeans are exported to China, and Iowa exported $11 billion worth of agricultural products last year. China is Minnesota's top export market for agriculture products. Agriculture trade between China and our Midwestern states added up to almost $4.5 billion in 2017. We need to ask our political leadership to ensure that leveling the playing field for U.S. companies in China doesn't harm the great success of many of our Midwestern companies.
3. On trade and investment barriers, factors unique to the China market make it difficult for Western companies to succeed. In exchange for market access, U.S. and other foreign companies often make concessions in technology transfer or other services. They also have to deal with selectively enforced security regulations and procurement mandates, and a heightened risk of intellectual property and trade secret infringement. The United States should seek reciprocal market access and remove the above trade and investment barriers to truly even the playing field for U.S. business.
4. On national security, we should not link trade with national security issues (i.e., progress on North Korea, which may be fleeting, should not come at the expense of progress on trade).
5. Unilateralism is not a winning strategy. If the U.S. is serious about making lasting progress on these issues, it needs to work with other countries in Asia and Europe to press adherence to principles of free, fair and reciprocal trade with China, rooted in adherence to WTO rules. The business community needs to do a better job advocating for U.S. participation in multilateral, rules-based organizations, including revisiting our joining the Trans-Pacific Partnership.
6. Effective engagement. U.S. business leaders need to engage with our government at all levels to help ensure negotiations with China do not deteriorate into more harmful adversarial exchanges, wasting time and opportunities. Close and effective engagement between our two countries is essential for successful long-term cooperation and problem solving.
These are not easy issues to resolve. There will always be work to do to deepen the relationship and make it balanced for both countries. All the more reason we in the business community must engage with our elected leaders to make sure our relationship with China stays on track.
Robert Oberlies is a partner at Fredrikson & Byron and leads the firm's China practice and co-chairs the firm's Cross-Border M&A practice. He can be reached at roberlies@fredlaw.com.
