With China, U.S. Needs to Verify But Trust

(Bloomberg Opinion) -- With high-stakes trade talks set to resume in Washington on Wednesday, U.S. officials say any deal with China hinges on how it can be enforced. That is indeed a key issue. But to have any hope of success, the U.S. can't be entirely worried about whether China might cheat. It also needs to consider what conditions would best encourage Beijing to comply.

There's good reason to mistrust any proffered Chinese concessions. China has reneged on or ignored all too many past promises, including obligations it undertook when joining the World Trade Organization. Simply having the right laws on the books — forbidding, say, the forced transfer of technology from foreign companies — means little; pressure is typically applied through more informal channels. Then, too, local officials can pursue policies even more diligently than the central government necessarily intends, as they have in handing out billions in subsidies to favored industries as part of the “Made in China 2025” plan.

On the other hand, if the U.S. were simply to leave open the threat to re-impose tariffs if it decides that China isn't living up to its pledges, it would impose intolerable uncertainty on American businesses, many of which are already holding off on investments because of current tensions. Perhaps that's what administration hawks who want to decouple the U.S. and Chinese economies hope to see. That doesn't mean it should be official policy.

U.S. negotiators need, first of all, to enter this set of talks with sensible priorities. To this point, too much emphasis has been placed on shrinking the bilateral trade deficit. China can seek to do this easily enough — reports suggest it's already offered to buy $1 trillion worth of American goods — and whether or not they're fulfilling their pledges will be readily apparent. But narrowing the trade deficit will do little to address the more important challenge of helping U.S. businesses compete fairly in China.

To support the structural reforms needed to expand market access for U.S. firms, protect their valuable intellectual property, and level the playing field in China, the U.S. should try to use the Chinese system to its advantage. Negotiators should press China not only to draft broad new laws but also issue specific regulations and administrative guidance so that local officials are absolutely clear about their intent. The government could add teeth to its edicts by adding compliance to the list of criteria used to judge whether local Party cadres are promoted or demoted, even to whether they're investigated by the feared anti-corruption commission.

Where there is evidence of backsliding, the U.S. should look for ways to apply pressure in concert with other nations; that traditionally has led to a better result than when the U.S. has acted alone. In the past, after losing cases at the World Trade Organization, Beijing has in fact shifted course. And existing WTO rules on subsidies, forced technology transfer and related issues give the U.S. and others plenty of room to bring fresh claims. Where WTO rules are vague, a deal between China and the U.S. could flesh them out; where they're nonexistent or inadequate, the U.S. should work with partners in Japan and the European Union to write new ones.

A bilateral deal could be modeled after the investment treaty that the U.S. and China had been negotiating before Donald Trump became president. It would ideally allow for some form of investor-state dispute settlement mechanism, using independent arbitrators, to hold China to account faster than the WTO can. While the Trump administration dialed back such protections in its new free-trade agreement among the U.S., Canada and Mexico, thereby forcing companies to rely more on domestic courts, that approach may not be ideal for disputes with China.

Of course, the U.S. may want to reserve the right to respond unilaterally to some instances of intellectual property theft — by barring offending Chinese companies from the American market or even cutting them off from the American banking system. To justify such tough actions, though, the U.S. would need to strengthen the U.S. Trade Representative's ability to detect and document violations, while establishing a forum where U.S. companies could make their complaints without fear of retaliation by China.

No deal is going to address all of Washington's complaints fully. The best the U.S. and China can hope for is to find early opportunities for the latter to show its sincerity, to build the goodwill to tackle more difficult issues. The U.S. also has a responsibility to strengthen its own competitiveness, which will require balancing restrictions on Chinese access to U.S. technologies with its traditional openness to people and ideas that can help spur innovation. Allowing the talks to fail, and fostering open-ended trade conflict with China, would only weaken both countries, and the global economy as well.

Editorials are written by the Bloomberg Opinion editorial board.

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