After months of saying that they are reviewing their China trade policy, the Biden administration has, through a speech by U.S. Trade Representative Katherine Tai at CSIS, an interview with Tai on CNBC, and remarks made on background by senior administration officials, offered some details on the direction they plan to go. Four key aspects of their agenda are: 1) Enforcement of the U.S.-China Phase One trade agreement; 2) restarting the Section 301 tariff exclusions process; 3) reengaging with senior Chinese trade officials; and 4) working with allies on the trading system in general and on an approach to China. To some extent, the Biden administration's statements seem like a continuation of the existing U.S. trade policy towards China (although Biden administration officials emphasized that they view the Trump administration's approach as flawed and their approach would be different in important ways). However, they could be taken as a tentative, though belated, first step towards a post-Trump U.S. trade policy towards China.
The Big Picture
To begin her remarks, Tai stated that she would be “lay[ing] out the starting point of our Administration’s strategic vision for realigning our trade policies towards China." In terms of the big picture of the policy as laid out by Tai and other Biden administration officials, two key takeaways are: 1) They will be trying to engage with China in a positive manner but they have real concerns and are prepared for conflict; and 2) they view the previous administration's approach as flawed but are not abandoning its basic structure and architecture, which means the Phase One agreement remains the primary framework for the U.S.-China trade relationship.
The terms of engagement with China
The Biden administration's remarks send mixed signals to China on how the administration views the U.S.-China trade relationship. In her CSIS speech, Tai offered up some tough-sounding statements such as this one: "Beijing has doubled down on its state-centered economic system. It is increasingly clear that China’s plans do not include meaningful reforms to address the concerns that have been shared by the United States and many other countries."
At same time, she referred to the idea of a "[d]urable coexistence" between the countries, and seemed to reject the idea of "decoupling" that some people have put forward:
"I know there's a lot of talk about decoupling. I think at the end of the day, I still don't have necessarily a good understanding of what everybody means, if we've got a common definition of decoupling. I think that the concern, maybe the question, is whether or not the United States and China need to stop trading with each other. I don't think that's a realistic outcome in terms of our global economy. I think that the issue perhaps is, what are the goals we're looking for in a kind of recoupling. How can we have a trade relationship with China, where we are occupying strong and robust positions within the supply chain, and that there is a trade that's happening as opposed to a dependency."
She also noted at one point that "[o]ur objective is not to inflame trade tensions with China."
In their background remarks, senior Biden administration officials offered a similar set of mixed messages. They said their "objective is not to escalate trade tensions with China"; however, "where China continues to pursue its unfair and coercive practices, we will use the full range of our tools to help ensure that the US-China trade relationship works for American workers, our industries, and our supply chains.” And while "the Biden Harris administration has wanted to stabilize this relationship by taking the time to thoroughly conduct this review," in terms of possible responses they "want to have a really deep arsenal to address the consequences of industrial policies that China has adopted to give itself a competitive advantage, so truly nothing is off the table."
China's response to all of this will be a key factor in how the relationship evolves, as Biden administration officials themselves noted: "We will see how China responds to what Ambassador Tai will detail tomorrow, and we will adjust accordingly." And as Tai put it in her CSIS remarks: "how we proceed from here is going to involve … how much traction we get with China.” And along the same lines, in the CNBC interview she said, “I think that [what can be accomplished] will be informed by the tone and tenor of the conversations that we have with China."
Phase One and the legacy of the previous administration
Perhaps aware of the criticism they have been getting, the Biden administration officials took great pains to distinguish their approach from that of the Trump administration. They stated that "our objective is not to … double down on the previous administration's flawed strategy," and that "[t]he decision to be more deliberative and bring long term thinking into our approach was critical, and a sharp departure from the last administration." More specifically, they noted that "our objection to the previous administration's approach was that it did not build on our strengths and did not really use our leverage to good effect," including failing to "mak[e] the investments at home that we needed to be able to outcompete China" and to "align with our allies and partners rather than being at odds with them." The previous administration's approach was "really at times chaotic, including hurting select sectors of the American economy and really not targeted at the primary concerns that we have with China's larger structural policies." One particular point they emphasized was that "[w]e're putting an end to the previous administration's approach of fighting with our allies and weakening the alliances we've long had."
At the same time, Tai seemed sensitive to how this criticism might come across, and in response to a question seemed to tone down the criticism a bit: "I don't think it's fair to say that I've characterized the previous administration's efforts as failed. What I would say is that, that hasn't gotten us to where we need to go." And ultimately the policy she articulated relies on the Trump administration’s Phase One agreement as the basic framework: “I think that the structure, the architecture of this agreement, is where we have to start, ... .”
In her speech, Tai offered a broad outline of how the Biden administration would approach things with China:
- "First, we will discuss with China its performance under the Phase One Agreement. China made commitments that benefit certain American industries, including agriculture, that we must enforce."
- "Second, we will start a targeted tariff exclusion process. We will ensure that the existing enforcement structure optimally serves our economic interests. We will keep open the potential for additional exclusion processes, as warranted."
- "Third, we continue to have serious concerns with China’s state-centered and non-market trade practices that were not addressed in the Phase One deal. As we work to enforce the terms of Phase One, we will raise these broader policy concerns with Beijing."
- “Finally and critically, we will continue to work with allies to shape the rules for fair trade in the 21st century, and facilitate a race to the top for market economies and democracies.”
On the first point, Tai stated that the administration “must enforce” China’s commitments under the Phase One deal and “there are things that appear that [China has] not done.” Tai said that USTR intends to “have really honest conversations with China about all of the elements of the Phase One agreement.” The agreement has a chapter on dispute resolution, which could be a platform for such conversations (see the text of this chapter reproduced at the end of this piece). However, as discussed below, whether this particular set of dispute resolution provisions would be effective as an enforcement tool remains to be seen.
With regard to the tariff exclusions process, the current exclusions were extended and will expire on November 14. In the meantime, USTR is in the process of reviewing public comments for the next step. It has been a challenge to run this process in a fair and efficient way, and the Biden administration may struggle here.
On the third point, Tai later elaborated by saying that: "And we will also directly engage with China on its industrial policies." The scope of such engagement could be broad. Tai mentioned that “[t]here are a number of sectors and areas in our economy, where we can no longer just wish for the best. We've actually got to do something, and address [China’s industrial policies].” As far as where the conversation could happen, Article 7.2 of the Phase One agreement talks about “high-level engagement” and in this context refers to “arrangements for future work between the Parties.” It is not clear whether this formal structure could or should be used here. Ideally, there would be some transparency in the discussions taking place in this context, but the agreement does not provide for that and the public may not get much of a sense of what is happening. The conversation could also happen outside of the Phase One architecture. To address China’s industrial policy and non-market trade practices, “we will use the full range of tools we have, and develop new tools as needed,” Tai said, which suggests that there are other possible avenues.
Finally, the Biden administration repeatedly emphasized its efforts to work with allies, both in general and on issues related to China. In her speech, Tai said that "we will continue to work with allies to shape the rules for fair trade in the 21st century, and facilitate a race to the top for market economies and democracies"; that "we will work closely with our allies and like-minded partners towards building truly fair international trade that enables healthy competition"; and "I have been working to strengthen our alliances through bilateral, regional, and multilateral engagement. And I will continue to do so."
Other administration officials noted that "we have actually extensively discussed with our allies, what our overall strategy with China is going to be," and that "[w]e're putting an end to the previous administration's approach of fighting with our allies and weakening the alliance's we've long had."
The recent U.S.-EU Trade and Technology Council meeting, the resolution of the Boeing-Airbus subsidy dispute, and efforts to resolve the conflict over the Section 232 steel and aluminum tariffs are all examples of these efforts.
The Problem with Enforcing the Phase One Deal
A key aspect to the Biden administration's new approach is enforcement of the Phase One trade agreement. According to senior officials, "President Biden does think it's important that China live up to its commitments and promises, and that includes the promises that China made in the Phase One deal that have benefited American workers, farmers and manufacturers." These promises will be enforced: "what we're announcing right now is the intention to engage China on Phase One commitments. There are clearly areas where those commitments have not been met; the first step is to engage China on those commitments, to try and get the benefits that were promised to our stakeholders under the agreement."
So far, though, the administration has not provided much in the way of details of the specific areas of enforcement. That makes it difficult to evaluate the likelihood of success here. When pressed after the CSIS speech, Tai did not seem willing to offer any clarity:
Q: Are there particular points you want to, things [that China has] not done that you want to focus on?
Tai: I think that the question is, there are things that appear that they have not done.
Q: Such as?
Tai: I have not had the conversation with them around whether they have tried to do it, or ... what the intervening concerns are. So let me put it this way. I think that we are going to have, have to have, really honest conversations with China about all of the elements of the Phase One agreement. These are commitments that China made. They are commitments that our businesses and workers in certain sectors have looked to, and we will have to address where this relationship goes from this starting point.
With regard to the substantive obligations in the Phase One agreement, they can be grouped into two broad categories: Purchase commitments for specific products, and substantive obligations related to structural issues in the Chinese economy.
The purchase commitments have often been criticized as ineffective in general, and set at a level here that China could not possibly meet. Tai was asked specifically about the purchase commitments, and offered the following thoughts:
"I guess managed trade is one way you could describe the purchase commitments. What are my views on it? I'm a tremendously practical person. There are commitments that have been made. That means that there are commitments that we have to seek follow through on. I think that when you talk about managed trade, just to break it down, it is a different model for managing a trade relationship than the model that we've pursued before which was … let's seek market access, and then ... let the chips fall where they may. I guess what I would say is ... channeling my inner pragmatism, this is the arrangement that we have now, it is an arrangement that has evolved out of a frustration with the previous model. And so the question that I bring to this issue that you've presented is not, ideologically, how do I feel about it, but what is actually going to present results, and what is actually going to be effective, and I think that this conversation around the purchase commitments that we're preparing to have is going to be directly informative to determining how effective this is at this point in time for the challenges that we have in this relationship."
In response to questions, senior administration officials indicated that both kinds of obligations are on the table for enforcement: "We intend to raise all elements of Phase One with China where we think they have not lived up to their commitments. We're not going to shy away from that, we want to make sure that we're discussing kind of the full breadth of obligations there. The engagement with China will determine which ones become the focal point of discussions, … ."
Given the problems noted earlier with regard to purchase commitments, however, it is not clear how China's failure to comply could be addressed, and what the value of these commitments might be going forward.
The bigger compliance concern is the structural rules, such as on forced technology transfer, for which there are detailed provisions and genuine concerns about China's practices. If these obligations could be enforced, the Phase One agreement could be valuable.
The problem with enforcing these kinds of rules under the agreement is that its dispute resolution section does not have the traditional neutral adjudication mechanism found in most trade agreements. Trade enforcement typically works as follows. If one government thinks another is not complying with the obligations in a trade agreement, the complaining government can raise its concerns through a request for consultations. If the consultations do not resolve the issue, the complaining government can ask for a neutral panel of experts to consider whether the other government's actions violate the terms of the agreement. That panel will issue a ruling on the legal question of whether the respondent government is in compliance.
The WTO has the most advanced version of this process, with 606 complaints since it was established in 1995, and hundreds of panel reports and appellate reports reviewing those complaints. During her speech, Tai noted that over the years, the United States “brought 27 cases against China ... . We secured victories in every case that was decided.” (Currently, the United States has blocked appointments to the WTO's Appellate Body, which has caused problems for dispute settlement.) Bilateral and regional trade agreements have their own version of panels, without appellate review.
The neutral adjudication provided through this kind of process helps with enforcement of these agreements. One government's view that another is in violation is not seen as objective: It is simply the position of that government, rather than an impartial conclusion. An unbiased adjudicator, by contrast, has the credibility to determine whether a violation exists. This process helps bring the rule of law to international trade disputes.
In contrast to neutral adjudication, the Phase One agreement does not have the typical adjudication mechanism, but rather has a mechanism under which either side can determine on its own if the other is not in compliance, and can then -- after a consultations process -- take what it considers to be appropriate action in response (most likely, this will take the form of tariffs). The Trump administration may have seen this as a tough enforcement mechanism, because it would be a quick way for the United States to impose tariffs. The problem is, if China believes it is in compliance, but the United States does not, these unilateral tariffs may not induce China to take any action to come into compliance. That is especially true in a situation like the current one, when significant tariffs are already in place. By contrast, when there is a ruling by a neutral adjudicator that China is not in compliance, China might take some action. It has done so in response to WTO rulings, and it might do so in the context of Phase One disputes as well.
Nevertheless, the Biden administration appears to want to give the Phase One deal's dispute provisions a try. If this is their plan, it could be helpful if the administration were transparent about its actions. The agreement itself does not offer guarantees of transparency (which is an additional problem with the approach to dispute resolution taken here). However, the Biden administration could push for more of the details related to its complaints about Chinese trade practices to be made public. For example, if the administration files a "Request for Information" under Article 7.3, it could make that document publicly available. The situation relating to an "Appeal" made in writing under Article 7.4, paragraph 1 is more complicated. This provision states that "[t]he Appeal and any information and matters related to it are confidential and shall not be shared beyond the Bilateral Evaluation and Dispute Resolution Office, absent the agreement of the Parties." While the default approach to these appeals is confidentiality, there is the possibility of transparency if the parties agree. The United States has traditionally pushed for more transparency in trade disputes, and could follow the same approach here.
The Biden administration's announcements on its China trade policy probably could have come a lot sooner. However, the administration was caught up with various domestic policy issues; it is still in the process of getting its full USTR team in place; and it has a difficult task in formulating a coherent and effective policy in this area. The pressure from various sources to do or say something may have pushed them to offer the general outlines of the policy described above. What we heard from Katherine Tai and other officials are the first tentative steps towards a policy that will continue to be fleshed out over the coming months and years. The immediate step appears to be that the Biden administration will raise these issues with China, and see how China reacts. It is that reaction that may determine the next steps the Biden administration takes in this area.
CHAPTER 7 BILATERAL EVALUATION AND DISPUTE RESOLUTION
Article 7.1: Bilateral Evaluation and Dispute Resolution Arrangement
1. To ensure prompt and effective implementation of this Agreement, the Parties establish the following Bilateral Evaluation and Dispute Resolution Arrangement (the “Arrangement”).
2. The purpose and mandate of the Arrangement are to effectively implement this Agreement, to resolve issues in the economic and trade relationship of the Parties in a fair, expeditious, and respectful manner, and to avoid the escalation of economic and trade disputes and their impact on other areas of the Parties’ relationship. The Parties recognize the importance of strengthened bilateral communications in this effort.
Article 7.2: Arrangement Structure
1. High-level Engagement. The Parties shall create the Trade Framework Group to discuss the implementation of this Agreement, which shall be led by the United States Trade Representative and a designated Vice Premier of the People’s Republic of China. The Trade Framework Group shall discuss (a) the overall situation regarding implementation of this Agreement, (b) major problems with respect to implementation, and (c) arrangements for future work between the Parties. The Parties shall resume macroeconomic meetings to discuss overall economic issues, which shall be led by the United States Secretary of the Treasury and the designated Vice Premier of the People’s Republic of China. Both Parties shall make every effort to ensure that meetings of the Trade Framework Group and the macroeconomic meetings are efficient and oriented toward solving problems.
2. Daily Work. The Arrangement shall include a Bilateral Evaluation and Dispute Resolution Office for each Party.
(a) For the United States, the Bilateral Evaluation and Dispute Resolution Office shall be headed by a designated Deputy United States Trade Representative. For China, the Bilateral Evaluation and Dispute Resolution Office shall be headed by a designated Vice Minister under the designated Vice Premier.
(b) Each Party shall designate an official (the “designated official”) to assist in the work of the Arrangement. By the date of entry into force of this Agreement, each Party shall provide the contact information of its respective designated official. Each Party shall update such information as necessary.
(c) The Bilateral Evaluation and Dispute Resolution Offices shall (a) assess specific issues relating to implementation of this Agreement, (b) receive complaints regarding implementation submitted by either Party, and (c) attempt to resolve disputes through consultations. In carrying out its work, each Bilateral Evaluation and Dispute Resolution Office may consult with government agencies with relevant expertise.
Article 7.3: Requests for Information
A Party may request at any meeting, or prior to a meeting, information from the other Party regarding a matter relating to the implementation of this Agreement. The other Party shall provide a written response containing the requested information. In the event that a Party is not able to provide the requested information, the response shall contain a specific explanation of why the information cannot be provided within the time limit and the specific date when the information will be provided. Nothing in this provision shall obligate a Party to provide confidential information to the other Party.
Article 7.4: Dispute Resolution
1. Appeal. Where one Party (the “Complaining Party”) believes that the other Party (the “Party Complained Against”) is not acting in accordance with this Agreement, the Complaining Party may submit an appeal (“Appeal”) to the Bilateral Evaluation and Dispute Resolution Office of the Party Complained Against. An Appeal shall be in writing and shall contain sufficient information to allow the Party Complained Against to make a proper assessment of the matter. The Appeal may, but need not, include information that could identify any company at issue or business confidential information. The Appeal and any information and matters related to it are confidential and shall not be shared beyond the Bilateral Evaluation and Dispute Resolution Office, absent the agreement of the Parties.
2. Scope of Appeal.
(a) The dispute resolution process covers all matters that occur after the date of entry into force of this Agreement.
(b) Any measure, including an action, of a Party taken prior to the date of entry into force of this Agreement, which is maintained or continues to have effect after that date, is also subject to the dispute resolution process. For an Appeal of such a measure, the Complaining Party shall provide to the Party Complained Against an explanation of the continuing effect of the measure.
3. Assessment. The Party Complained Against shall carry out and complete an assessment of the Appeal. The Party Complained Against shall consider the facts, nature, and seriousness of the issues presented by the Appeal. After the assessment is completed, the designated officials shall begin consultations.
4. Dispute Procedures. Both Parties will attempt to resolve the Appeal in the most efficient manner using the following procedures:
(a) If the Appeal cannot be resolved by the designated officials, the concerns may be raised to the designated Deputy United States Trade Representative and the designated Vice Minister. If the Appeal is not resolved at the deputy or vice-ministerial level, the Complaining Party may present the issue to the United States Trade Representative and the designated Vice Premier of the People’s Republic of China.
(b) If the concerns of the Complaining Party are not resolved at a meeting between the United States Trade Representative and the designated Vice Premier of the People’s Republic of China, the Parties shall engage in expedited consultations on the response to the damages or losses incurred by the Complaining Party. If the Parties reach consensus on a response, the response shall be implemented. If the Parties do not reach consensus on a response, the Complaining Party may resort to taking action based on facts provided during the consultations, including by suspending an obligation under this Agreement or by adopting a remedial measure in a proportionate way that it considers appropriate with the purpose of preventing the escalation of the situation and maintaining the normal bilateral trade relationship. The Party Complained Against can initiate an urgent meeting between the United States Trade Representative and the designated Vice Premier of the People’s Republic of China before the effective date of the action to be taken by the Complaining Party. If the Party Complained Against considers that the action by the Complaining Party pursuant to this subparagraph was taken in good faith, the Party Complained Against may not adopt a counter-response, or otherwise challenge such action. If the Party Complained Against considers that the action of the Complaining Party was taken in bad faith, the remedy is to withdraw from this Agreement by providing written notice of withdrawal to the Complaining Party.
5. Notwithstanding the provisions of subparagraph 4(a), if either the United States Trade Representative or the designated Vice Premier of the People’s Republic of China considers that an implementation issue is a matter of urgency, either one may raise the matter directly at a meeting between them without prior discussions at lower level meetings. If such a meeting cannot be timely scheduled for this purpose, the Complaining Party may resort to taking action as provided in subparagraph 4(b).