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Protectionist trade policies started by Donald Trump and carried forward by Joe Biden have weakened the ability of U.S. companies to defend themselves in China and elsewhere in Asia. New research shows this is another example of how America First trade policies have put Americans and U.S. companies last.
“China’s regulatory crackdowns have affected U.S. and Chinese companies, but protectionist trade policies implemented by the Trump administration and continued by the Biden administration have severely restricted the ability of the U.S. government to protect U.S. businesses in the Chinese market,” writes Henry Gao, a leading trade expert and an Associate Professor of Law at Singapore Management University, in a new study for the National Foundation for American Policy. “Unless the U.S. government changes course, American companies will be increasingly less able to address perceived wrongs in Chinese government policies and will be placed at a significant economic disadvantage in much of Asia.”
In 2021, China enacted a series of regulatory “crackdowns.” Those included suspending Ant Financial’s Initial Public Offering (IPO), investigating Alibaba for antitrust violations and Didi for cybersecurity, imposing new restrictions on computer games and prohibiting private tutoring businesses. Gao points out, “While these regulatory actions wreaked great havoc in the market, people normally assumed that they only affect China’s own companies and fail to appreciate the wider implications for foreign businesses.”
Gao explains that foreign companies, including many U.S. companies, have many interests that can be harmed by the Chinese government’s tighter regulatory policies. These include investment interests, such as forced divestment of a previously legal sector or companies facing a new ban on foreign investment in a sector. U.S. suppliers to Chinese companies may also bear significant trade or transaction costs in a more tightly regulated sector.
Governments normally protect the interests of their country’s companies, and providing such protection was a primary reason the Trump administration cited for launching the trade war against China. The Trump administration’s 2018 Section 301 report about China cites the Chinese government’s regulatory policies and other practices to justify U.S. government tariffs on imports from China.
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“Even though in recent years many U.S. policymakers have said trade actions taken against China were due to China’s treatment of U.S. companies, U.S. protectionist policies have limited the ability of the U.S. government to respond to Chinese government policies that affect U.S. companies,” according to Gao. “America First trade policies have limited the U.S. ability to seek redress, change or encourage improvement in Chinese regulatory policies that may harm U.S. firms.
“Even if the United States were to overcome several hurdles and win a case against China in the World Trade Organization (WTO), it still would not be able to enjoy the fruit of its success due to the paralysis of the WTO Appellate Body, thanks to the persistent blockage of the launch of the appointment process for its judges by both the Trump and Biden administrations. Simply put, even if China loses the case, it could simply ‘appeal into the void’ and turn the hard-won victory of the U.S. into a ‘waste paper,’ leaving the U.S. with no recourse.”
Gao notes there are other problems with the U.S. approach. “In addition to the irrational blockage of appointments to the WTO Appellate Body, there are at least two other strategic blunders over the past five years that, if rectified, could have put U.S. firms in a better position. The first is the Bilateral Investment Treaty (BIT) negotiation between the U.S. and China, which was launched in 2008 and suspended indefinitely when Trump came into office in 2017. The other is the Trans-Pacific Partnership (TPP) Agreement, which again saw Trump pulling out of the deal when he entered the White House. Both agreements include several useful features for U.S. investors.
“First, there are market access commitments which open up more sectors to U.S. investors,” writes Gao. “More importantly, such investment agreements typically include mechanisms to prevent back-tracking of commitments, such as standstill obligations, which serve to make sure that a Party would not retreat from existing commitments and bind liberalizations at the status quo levels; and ratchet provisions, which goes a step further by binding Parties to any autonomous liberalization they might introduce in the future. As several of China’s regulatory crackdowns involve banning previously permitted business activities, these two provisions would come handy.
“Second, such agreements typically include substantive obligations protecting the interests of foreign investors, such as minimum standard of treatment or fair and equitable treatment, which could provide useful to the foreign investors dealing with such arbitrary and hapless crackdowns. In particular, these agreements require compensation be paid to foreign investors in cases of expropriation, which covers not only direct nationalization of investment but also indirect expropriation such as regulatory actions which render investments worthless, which is exactly the type of scenario we have here.
“Third, and most importantly, both agreements would include Investor-State Dispute Settlement (ISDS) mechanism, which allows affected foreign investors to seek independent arbitration against the Chinese government. In such arbitrations, investors typically stand a much better chance of getting due compensation than in national courts of the host countries.”
Gao recommends the United States return to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP, the successor to the TPP). That would give the United States and U.S. companies leverage when China also joins the agreement and engages in regulatory crackdowns. Gao warns that time is running out. “But the U.S. needs to do this fast, as China has already submitted the application to the CPTPP, and it is a very serious bid. The United States has a narrow window of opportunity of two to three years before China’s application goes through, but should it procrastinate further, it would be extremely hard, if not impossible, for the U.S. to get in after China’s accession is done as China will sure demand its pound of flesh, just like what the U.S. did in China’s WTO accession process.”
Richard Haass, president of the Council on Foreign Relations, echoes Gao’s concerns. “U.S. trade policy has been shaped by similar forces, demonstrating further continuity between Trump and Biden,” writes Haass in Foreign Affairs. “The latter has avoided the hyperbole of the former, who savaged all trade pacts except for the ones his own administration had negotiated. . . .But the Biden administration has shown little, if any, interest in strengthening the World Trade Organization, negotiating new trade accords, or joining existing ones, including the successor agreement to the TPP, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPTPP, despite the overwhelming economic and strategic reasons for doing so. Staying outside the agreement leaves the United States on the sidelines of the Indo-Pacific economic order.”
Gao is hopeful, if not optimistic, since he notes that international trade and investment agreements provide ways to address another country’s problematic regulatory practices. “Unfortunately, many of these tools are not available to the United States, largely because the U.S. has clipped its own claws under the Trump administration by withdrawing from international agreements which were designed to tackle exactly such problems,” concludes Gao. “It is puzzling that the Biden administration, with its professed affinity to multilateralism, would continue to stay away from international rulemaking efforts. With China’s recent regulatory crackdowns, a new sense of urgency is created for the U.S. to return to the international rulemaking arena.”