Editor's Note

On November 13, 2020, the EAI and Brookings institution jointly held the 2nd online seminar of the series titled "Prospects for U.S.-South Korea Cooperation in an Era of U.S.-China Strategic Competition". In session 2: economy, energy, and environment, David dollar addressed that the US has the tools to restrict exports and impose tariffs on products that have obvious national security implications. We are striving for what Hank Paulson has called, “small yards with high fences.” In other words, define a small number of national security technologies that get serious restrictions, but otherwise allow trade, investment, joint research - all of the foundations of an open innovation ecosystem. The US needs to coordinate with alliance partners like South Korea on the definition of critical technologies and sanctions to protect them.

Quotes from the Paper

The problem

The U.S. and South Korea share a set of concerns with China’s trade and investment practices, which in many instances are outside the norms of advanced economies. China likes to think of itself as a developing country, based on its per capita GDP, but it is the second largest economy in the world and the largest trading nation so that the U.S. and its partners like South Korea would like to see it move quickly to advanced country standards. The specific policies in question include extensive non-tariff barriers such as arbitrary and changeable standards; restrictions on foreign investment in some sectors, particularly in services; poor protection of intellectual property rights; forced technology transfer through various coercive means; extensive role in the economy of state-owned enterprises that have favorable access to land and credit; and subsidies to develop specific technologies. The impact of these policies is to distort trade flows from what they would be in a more fully open environment. Bringing China up to advanced country norms would open new trading opportunities and raise American and South Korean incomes.

Specific objectives of the U.S. and South Korea in Dealing with China

We would like to see China move as quickly as possible to developed-country norms for trade and investment. Specific features of this could include stronger penalties for IPR violations; redress mechanisms for firms that feel subject to forced technology transfer or other types of coercion; disciplines on state enterprises; and changes in laws and policies to make R&D subsidies WTO compatible.  We will want to see this codified in various ways, and in particular to have provisions similar to KORUS.  An agreement with China could be codified in a bilateral agreement between the U.S. and China, similar to what was envisaged for phase 2 of a trade deal. Ideally, similar provisions will be brought into the free-trade agreement among Korea, China, and Japan. If these different agreements have consistent treatment vis-à-vis key issues, this can be an effective way to discipline Chinese economic behavior. Similarly, if China and the EU successfully conclude a bilateral investment treaty that addresses sensitive issues, that too would be supportive of integrating China into the global economic system. Changes in Chinese policies will have even more force if they are included in larger agreements, and eventually in reformed WTO rules. A Biden administration can be expected to operate in a more multilateral fashion compared to President Trump, and that is likely to be more effective at changing Chinese trade practices.

Recommendations

Negotiate away the import tariffs aimed at China in exchange for a phase 2 agreement that addresses the main structural concerns. The U.S. will have to be realistic; China is not going to completely change overnight and the U.S does not have that much leverage. But there are reformers in China who would like to make significant changes to non-tariff barriers, investment restrictions, IPR protection, state enterprises, and subsidies because these changes are needed for China to sustain reasonable growth. So, significant advance is possible. 

Author’s Biography

■ David Dollar is a senior fellow in the John L. Thornton China Center at the Brookings Institution and host of the Brookings trade podcast, Dollar&Sense. He is a leading expert on China's economy and U.S.-China economic relations. From 2009 to 2013, he was the U.S. Treasury’s economic and financial emissary to China, based in Beijing, facilitating the macroeconomic and financial policy dialogue between the United States and China. Prior to joining Treasury, Dollar worked 20 years for the World Bank, serving as country director for China and Mongolia, based in Beijing (2004-2009). His other World Bank assignments focused on Asian economies, including South Korea, Vietnam, Cambodia, Thailand, Bangladesh, and India. Dollar also worked in the World Bank’s research department. His publications focus on economic reform in China, globalization, and economic growth. He also taught economics at University of California Los Angeles, during which time he spent a semester in Beijing at the Graduate School of the Chinese Academy of Social Sciences in 1986. He has a doctorate in economics from New York University and a bachelor's in Chinese history and language from Dartmouth College.