China Expert Says International Trade Defense Coalition Needed

Princeton University professor Aaron Friedberg, who serves on the U.S.-China Economic and Security Review Commission, says his recent Foreign Affairs essay on addressing Chinese exporting ambitions is an effort to put forward a vision of what "we want the global economy to actually look like," something he says has been missing in the piecemeal efforts of Section 301 tariffs, EU trade defenses and anti-coercion instruments and other reactions to Chinese nonmarket overcapacity.

"What's happening now, we’re sort of making it up as we go along, even in the U.S. case," he said in a phone interview.

Friedberg, whose essay is not part of his work advising Congress on the commission, said the old vision was "very few barriers to global flow of goods and capital" and rules on nondiscrimination, disciplines on industrial subsidies and other trade rules to allow free trade to allow globalization to benefit many countries.

But, Friedberg said, since China joined the World Trade Organization but didn't turn away from a government-led economy, and WTO cases and dialogues didn't change that path, more politicians around the world are recognizing that the old approach didn't work.

"I think that many people are still sort of hoping that we could put the toothpaste back in the tube," he said, but he said there is at least an agreement on the dangers posed by Chinese ambitions to leapfrog the U.S. in the technologies of the future, and an awareness that they have already done so in electric vehicle and EV battery designs.

What Friedberg said should happen is that major economic players -- including the EU, the U.S., the U.K., Canada, Australia, Mexico, Japan, South Korea and Turkey -- should form what he calls a trade defense coalition, and agree to coordinate barriers to their markets for Chinese exports in "specific product categories that are critical to national defense or essential to the functioning of modern economies and societies and are vulnerable to supply dominance by China."

Friedberg said they could use import quotas, bans on certain goods on national security grounds, or safeguards. But he said the most important mechanism would be tariffs for those product categories -- even if there isn't significant domestic production in those areas.

"It’s not necessary [that] everybody do the exact same things," he said.

Friedberg said convergence in response to China's distortions of the market is already happening, such as creating inbound investment screening in the EU.

"That may be okay and that may be the best that you can hope for," he said. "What this piece describes is still way out in front of where we are, and I don’t know if we’re ever going to get there," he added.

But Friedberg said he thinks more deliberate coordination would be most effective.

"How do you do this when there are all these different interests and different political systems? That’s obviously a huge can of worms. I don’t want to pretend it’s not," he said.

Even within a country, it can be tricky to decide what products are "essential to the functioning of modern societies" without being influenced by lobbying by domestic manufacturers who might not be as cost competitive in that category as manufacturers in, say, India, or Turkey, he acknowledged.

"I used to be allergic to the concept of economic security because 10 or 15 years ago, it seemed to be a code word for special pleading -- maybe it didn’t mean anything," said Friedberg, who worked in Dick Cheney's office advising on national security during the George W. Bush administration. "But I’m more persuaded it means something now."

Friedberg also suggested that countries hiking tariffs on Chinese goods in certain categories also would need to impose tariffs on goods that were assembled in other countries, with enough sophistication to qualify for that country of origin, but are still dependent on advanced Chinese components. He said the trade defense coalition should require manufacturers to trade their supply chains and calculate how much of the value of the finished good came from China. Then, he said, the countries should tariff that Chinese content.

He acknowledged that this, too, would be difficult to design and implement, though he noted that auto rules of origin in U.S. trade deals shows it can be done.

But for a car made in Mexico, if a company decides it's too expensive to document all those regional value figures, they can just choose to pay the 2.5%. How high would a tariff on Chinese content have to be to change companies' behavior?

Friedberg said that presumably, disincentives "would have to be pretty stringent."

"It’s a question as a practical matter what it would mean to scale that [supply chain tracing] up, to broaden that process and to deepen it and what the costs would be and who would bear the costs," he said.

"I don’t claim to have thought this part of the thing through fully, but I’m hoping to bring some folks together" to talk about how realistic it would be to implement it, he said.

"People were quick to be dismissive of proposals that would be very difficult to implement, but they don’t have anything better to offer," he said. He said those who say that Chinese manufacturing dominance is too far gone, and that the costs of restructuring the global economy are insurmountable have a point -- but so do those who say that Chinese plans to create choke points for critical goods is a huge problem.

Any trade defense requires trade-offs, he said, and he noted that the Biden administration has been willing to tell U.S. semiconductor companies that they cannot sell as much to China as they once did. He said the administration was able to mute some criticism by getting Japan and the Netherlands to go along with export restrictions on advanced semiconductor manufacturing equipment.

He called it "a partial success," but said that even this example, where there were only a few players to coordinate, "was very hard work."

He wrote in the Foreign Affairs essay: "In the United States and other developed countries ... this kind of coalition will be a tough political sell. Although it would generate good new jobs, its creation would likely spur inflation, and major multinational corporations would feel the pain of China’s retaliation."

That could come either by Beijing cutting imports from the coalition countries "or threatening to limit their access to the supply chains it dominates. But because the countries that would make up the coalition will continue to be the major source of global demand, they will not lack for leverage," he wrote.

He said to make it more politically possible, the coalition could start with just a few industries, which should be at the higher end, or perhaps just autos and auto parts would be the most logical place to start.

Even if this trade defense coalition came to be, Friedberg said, there could be some low-price inputs that China is still the best or only source for, but if it worked, that would start to change gradually.

He said it would make sense for the countries in the coalition to lower barriers to goods in these protected categories for the other countries in the coalition, but said there are political obstacles to that happening.

"Anything that smacks of greater market access is going to face resistance in Congress. I acknowledge that," he said. "There’s a bigger, longer term problem here that has to be addressed."

Friedberg said he thinks policymakers, in reacting to China's threat, don't always act logically. He said he thinks the EU is making a mistake putting such a low countervailing duty on Teslas made in China. But at the same time, he thinks Congress should have welcomed the technology transfer CATL was offering Ford in licensing its battery designs for Ford to make in a Michigan factory, as long as that made it more likely Ford could develop advanced battery designs down the road.

"After having been asleep at the switch for as long as we have, we have many different people trying to hit different buttons; not all of it makes sense. Some of it is reflexive and not strategic," he said.

In the essay, he noted that Donald Trump promised, if he becomes president again, he would impose high tariffs on all Chinese exports to the U.S. and some tariffs on allied countries' exports.

"But unilateral U.S. tariffs cannot solve the larger problems posed by Beijing’s distortionary trade and industrial policies. Building a dam solely around the American economy would reduce its competitiveness and deflect the impending flood of Chinese exports into other markets," he wrote.

In the interview, he said the latter action "would antagonize exactly the people we need to work with," just as Section 232 tariffs did.

He said he sees his proposal as a middle way between what "the current administration is trying to do, which is arguably too narrow, and what Trump says he wants to do, which is too broad and is self-defeating."

Friedberg said he had not shared the essay yet with fellow commissioners, but would be doing so, and said it's possible the commission could examine whether this is an approach they would recommend to Congress. "I’ll be interested to see if my colleagues are interested in some of my ideas," he said.