Recently, China Trade Monitor had the honor of sitting down with Scott Kennedy, senior adviser and Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies (CSIS), a think tank based in Washington DC. During the interview, Kennedy talked about both U.S. trade policy on China and the thought process of the Chinese government when it comes to bilateral relations. This piece will be the first part of the interview, with a focus on the policy-making of the U.S side.

CTM: I'm sure you've heard people say that the Biden administration trade policy is kind of a continuation of the Trump administration trade policy. But I think that one noticeable difference between the two administrations in their China trade policy is that the Biden ministration has put a greater emphasis on working with allies. And so we've got these two big negotiating frameworks out there, the TTC and the IPEF. So two questions related to those: Do you expect these negotiations to lead to any outcomes with significant economic impact? And how do you see China reacting to US efforts to do things in the TTC or to create the IPEF?

Kennedy: Well, I guess maybe we could at some point go back to talk about the premise of the question, and the extent to which the Biden administration is similar or different from the Trump administration. There were three Trump administration eras and the Biden administration looks a little bit like one of them, the last one.

But in any case, you're right that there is this difference in terms of focusing on negotiating with allies, and developing rules of the road with allies, in terms of trying to strengthen the international rules-based order and reduce the negative consequences of having a non-market economy as large as China's that also carries with it national security concerns, and disrupts that international order. And so, I think they're using a variety of mechanisms to expand coordination and consultations with allies in Asia and Europe. The TTC with the EU, and IPEF with the countries in the Indo-Pacific, are two of those elements. There are others as well.

My sense is that these various arrangements are more about setting standards and coordinating policies that meet at the intersection of trade, investment, national security, and other issues that are not part of the basket of arrangements that are about trade liberalization, and expanding market access in any direction. And so, the type of outcome for these won't be measured in how much more trade and investment they generate or the contributions to GDP, but to what extent do they build a bulwark for a rules-based order that allows a more resilient globalization that deals with a variety of issues that are non-commercial in nature.

The TTC is not a straightforward negotiating body that sets an agenda, it is now negotiating, and is dealing with issues as they come up and handling them. The IPEF is more of a straightforward negotiation, where there was commitment to start a negotiation over a commonly agreed upon agenda with a timeline, and it looks like they are on schedule to try to reach some sort of agreement on the four issue areas that IPEF oversees, sometime probably in early 2024. But again, the overall agenda that the Biden administration is proposing is not about expanding trade, but it's about making the type of globalization more resilient.

CTM: And does that affect how China reacts to all this? Are they less concerned because it's more about these non-trade liberalization issues? Are they worried about this? Are they just sort of waiting and seeing what comes of it?

Kennedy: I think the Chinese are deeply concerned because many of the rules and standards that are being established and expanded either directly or indirectly restrict China's engagement in the global economy in one way or another. Some of these involve restrictions in terms of doing business with China and advanced technologies. Some of them are about adjusting supply chains because of the desire to reduce the concentration of the sources of supply or markets. Most of those adjustments involve a net reduction in levels of connectivity with China, even if that's not the explicit purpose of any one measure. But if China's the largest source of APIs [active pharmaceutical ingredients], for example, or the chemicals that go into APIs, one policy is, how can we diversify the source of chemicals that go into APIs, and that means China being less central in that business. So the Chinese are deeply concerned about that. And so, they've attacked these various initiatives as inconsistent with the norms of the WTO, [as] protectionist, and they have filed cases at the WTO to defend their interests. In addition, they have ramped up diplomacy with countries in the Asia Pacific and in Europe to try and avoid being isolated and cornered. The stakes are high. Even though these various agreements are not about trade liberalization explicitly.

CTM: Recently, you wrote a paper and then had an event where you and other scholars reviewed economic studies of the "China Shock." Given how firmly entrenched the current narrative in Washington, DC about trade with China is, how do you assess the chances that a reevaluation of the "China Shock" can contribute to a reconsideration of current US trade policy towards China?‌
Kennedy: I would say that the basic conclusion that we came to is that [with regard to] the studies about the effect of trade with China, Washington basically is cherry picking those studies to find those elements which are most useful to what policymakers wanted to do, which was to impose restrictions. And those studies largely found that expanded trade with China had cost American jobs in certain regions of the country in between 2002 and 2010 or so. There's disagreement over the net effect [but] everyone agrees some jobs were lost in certain places. But they also agree that since 2010, there's basically been no negative effect on American employment, including in manufacturing.‌
‌A significant portion of Washington really appreciates facts. And that has helped provide greater context for how some policymakers view the commercial relationship with China. And the argument that we need to restrict trade because it is costing jobs – I think that the study challenges that narrative. But I think the conversation in Washington today is less about the dollars and cents of trade, and more about the implications for national security, public health, the environment, non-traditional trade issues. And therefore the conversation has shifted, and arguments about the effects of trade on employment or wealth seem to be less central to what Washington is doing vis-a-vis its partners in the Asia Pacific with IPEF or Europe with the TTC. That said, there's obviously still some underlying conversation about this. Exhibit A is former US Trade Representative Lighthizer's op-ed in the New York Times, where he still argues, as a point that ought to be taken for granted, that trade with China is costing American jobs and hence the US needs to decouple because of that. So there's still more work to be done to directly engage all of Washington about those issues. And that's why working on China, there's plenty of opportunity to continue to engage people on China, because China is a complicated place and US-China relations are multi-dimensional, and there are lots of different points of view. So the chances that things will get boring are very low. ‌
CTM: So you anticipated my next question in your answer, which was going to be about security. So let me just go a little deeper into what I was going to ask. I read an op-ed recently ... making the case for the security concerns related to China, and [the author] said, "Well, we have to be reasonable about [security]. And so it can't be about bringing back toy manufacturing to the US because there's no security implications for that." And I guess my question is, do you think there are limits to the security argument? Once you go down the road of saying, "Well, China is a threat to US interests in all these different ways, and therefore we have to restrict these exports to China, or these investments in China," have we opened Pandora's Box [and] all of a sudden security swallows everything? Or can we keep it reasonably constrained to areas where at least most people agree this is a legitimate security concern?

Kennedy: I think the one of the biggest areas of debate is about the intersection of commerce and national security. And I think Washington has basically shifted its view about trade with China, having accepted a premise about the zero-sum nature of national security and commerce, without actually fully investigating the empirical reality of that relationship. So broadly speaking, there is a formula that has been accepted that is: first of all, there's a zero-sum relationship between national security and trade. And secondly, the more we trade with China, the greater the risk to our national security, and therefore the solution is to reduce that trade or commercial interaction, which will then increase our security. And the same applies to our allies elsewhere in the world. And I think that is the basic logic underwriting policy in Washington on China. It is not an explicit desire to decouple, but it is saying those areas which are sensitive, which touch upon national security, that's where we need less connectivity.‌
‌And I think that that assumption deserves to be analyzed more carefully than it has been so far. Yes, in a circumstance in which the US and China are national security rivals, where we could end up in a war with each other, or otherwise China could harm the United States or our allies, China poses a risk to national security risk to the United States. So yes, that is something that really needs to be understood. And as a result there are certain kinds of commercial engagement, technology exchanges, exchanges of people or things, where there needs to be restrictions. ‌
‌But there are also national security benefits to having a commercial relationship with China. And there is insufficient appreciation of that fact. Having a deep commercial relationship with China increases the cost to China of doing things that harm our national security. That is why China has sat on the fence over Ukraine, because it knows that if it faced the kind of sanctions that Russia has been hit with, it would destroy China's economy. That is the product of 40 plus years of commercial engagement with China. Interacting with China, even in advanced technologies, has helped China grow and advance and improve and in some areas gain on the US and the West. But in almost every single advanced technology sector, China's participation has also allowed the United States and its friends to remain at the top of these technology hierarchies, because international commerce and trade, particularly in technology, is not just a simple linear exchange of goods between equals. You get that mistaken impression by the use of the word supply chains. Like, we're all equal links in the chain. But the reality is these are ecosystems with participants having different levels of power. And the US and its allies have largely remained at the top of most of these hierarchies because the Chinese have participated in them. ‌
‌And in addition to that, Chinese participation affords us an amazing amount of information about Chinese capabilities. If China were to be expelled from these ecosystems, because of the national security risks, we would face a different national security risk, which would be China creating its own hierarchies, where they'd be at the top and where we would have much less information about what they are doing. There are a variety of other national security benefits from being connected to China in some way that need to be understood. So to me, it's not just a slippery slope that I'm worried about us going down. It's that we actually don't understand the overall relationship between national security and commerce in the first place. And therefore, we might be not only reducing our economic benefits by expanding restrictions, but we might also be harming our national security at the same time.