President Biden’s candidate for U.S. Trade Representative Katherine Tai testified yesterday at a confirmation hearing before the Senate Finance Committee. (Tai is very likely to be confirmed, and the hearing was not particularly controversial). Many of the questions posed to him focused on the specific business interests of senators’ voters, but there were also broader systemic questions, including a few on China. In this article, I’ll mention two questions about China’s trade issues where I found Tai’s answers interesting (once in a good way, once in a bad way).
First, Senator Bennet from Colorado asked the following question (starts at 2:34:43)
President Trump has taken a self-sufficient approach…, launching worldwide trade wars that have alienated our allies and undermined an effective global response to China.
At the same time, China was investing strategically in Mediterranean and African countries, expanding its reach in the South China Sea region and in the One Belt, One Road initiative. While China is an important market for agricultural products… they have not honored their agreements.
How will you work with your partners and allies, and the administration at large, to hold China accountable for its mercantilist and predatory practices? I should say the Chinese Communist Party, not the Chinese people, but the Chinese government. You mentioned earlier in a response to one of my colleagues that former trade ambassadors had taken a well-worn path, somehow expecting China to somehow adopt our economic system. This clearly will not happen. What tools are available to us, and maybe even beyond business tools, to be able to push back and ensure that we continue to lead?
Here is Tai’s response:
Again, I believe this is among the most important issues that we, collectively, as officials of the US government, will have to resolve. …
I guess there are two ways I could think of it. First, rules that China has clearly signed and accepted. Perhaps these are agreements he has made with trading partners. It may be the rules of the WTO. So rules that they adopted as a member of a larger organization. And when we are in this area, we designed to use application tools to engage with the Chinese and empower them. You promised to do X, you have to deliver on X.
There are also a lot of areas that are gray areas, where the rules aren’t clear or where we don’t have any rules yet. And I think in this area, in terms of working with others, we have a few options. The first is that we are creating and crafting new rules to address gray areas. On the other hand, I think it also gives us plenty of opportunities to think strategically about how to respond to the strategies that China is pursuing.
This combination of enforcing existing rules and negotiating new rules is quite close to what I argued with my colleagues Jim Bacchus and Huan Zhu in this article. It might not attract attention like former President Trump’s tariffs and tariff threats, but it might actually work to push China to liberalize a little more than it did in the past. as part of its membership of the World Trade Organization. (Trump’s tariffs, on the other hand, haven’t had much of an impact on Chinese business practices.)
Second, Senator Casey of Pennsylvania asked the following question (begins 03:03:52):
Let me turn, second, to China. … We face a myriad of challenges with regard to the Chinese government, in particular. We need to engage in coordinated efforts to address a number of issues. Market distortions are one of them. Second, the subsidies. And third, the anti-competitive behavior that the Chinese government engages in. Through our trade subcommittee in the finance committee of the last Congress, Senator Cornyn and I are working on a range of questions posed by the Chinese government, including the Belt and Road initiative, censorship extraterritorial and market access problems. These are of course cross-cutting issues, which will require both coordination and cooperation. You have… significant experience in this regard. Can you discuss your observations regarding the evolution of tactics and strategy employed by the Chinese government in the trade and economic space, and how the USTR can work in coordination with the interagency to combat some of these efforts? to support national production and competition?
Here is Tai’s response:
I have watched the hearings that you and Senator Cornyn have organized here at the Senate Finance Committee, and have appreciated the level of expertise and interest you have shown in our issues and challenges in trade and competition in China.
… I think what I would say is that, in terms of the nature of the Chinese challenges, I think it’s clear that when we Americans, with our economic traditions, look at the Chinese economy, what we see is an extremely formidable competitor, where the state is able to run the economy almost like a conductor with an orchestra, whether through companies that are officially owned by the state or simply companies that are part of the Chinese economy. I think traditionally in our system we’ve had a lot of faith in the free market, the invisible hand that Adam Smith described, to try in terms of market forces to take care of our economy and global competition. And I think what the last few years have taught us is that we have to rethink the way we conduct our economic activity, our cooperation and our trade policies, not to become China, but how to be true to ourselves- same and our traditions and be more strategic, knowing the quantity, strategy and ambition we are facing.
Regarding the behavior of the Chinese state “[ing] economics almost like a conductor, “there is a recent Foreign affairs article with a more nuanced view of how things work in China. (Here’s an interesting observation: “In a way, WTO membership reinforced the central government’s inability to prevent local governments from interpreting higher-level guidelines to serve their own interests.”) But more broadly, the question of state intervention in the economy is an area where the Biden administration makes me nervous. There are a lot of people in the administration who are skeptical of free markets and want to shift US economic policy towards more intervention. They don’t necessarily want to become China in terms of economic policy, but they want to go a bit in that direction. It won’t be the U.S. Trade Representative’s office leading the charge, as the responsibility rests primarily with other agencies, but Tai’s statement is another indication that various types of industrial policy are likely to be on the table. . I don’t think this will all work out as the promoters hope, but that won’t stop them from trying. Under the Trump administration, we have learned a lot of good lessons about tariff failure and protectionism. Under Biden, we can have the same with industrial policy.