From Defensive Cooperation to Balanced Cooperation: The United States' Trade Offensive and China's Response

EAI China Studies Panel Report No. 4

Author

Jeong Hwan-woo (鄭煥禹)_ Senior Researcher, Korea Institute for International Economic Policy (KIEP). He holds a Ph.D. in Political Science (major in Chinese Politics) from Hankuk University of Foreign Studies. He has served as a researcher at the Institute of Foreign Affairs and National Security, a visiting scholar at Nanjing University and the Shanghai Academy of Social Sciences in China, and a standing researcher at the Institute for Asia-Pacific Studies, The Catholic University of Korea. His main research areas include China's trade policy and trade relations, Sino-US trade relations, China's political economy, and Korea-China trade relations. He is also a member of the secretariat for the "China Forum." His recent publications include "China Trend 2010-2011" (co-authored, 2010), "New Frontiers in Chinese Foreign Policy Research" (co-authored, 2008), "Globalization and Catch-up Strategy: Achievements and Limitations of China's (New) Industrial Trade Policy Through the Lens of the Automobile Industry" (2009), and "The Dilemma of Overambition and Realistic Constraints: China's FTA Experience" (2008).

I. Introduction

A few days before President Hu Jintao's visit to the United States in January 2011, Secretary of State Hillary Clinton emphasized in a special lecture at the State Department that "we are both deeply invested in the current order and can gain more from cooperation than from conflict" (Clinton 2011). A few days later, during his visit to the United States, President Hu Jintao responded at a joint press conference with President Barack Obama by stating, "We have agreed to advance a positive, cooperative, and comprehensive U.S.-China strategic economic dialogue, and we have agreed to work to build a cooperative relationship between the two countries that benefits the peoples of both countries and the world through a cooperative relationship based on mutual respect and reciprocity" (Obama and Hu 2011).

Judging by the atmosphere at the time, the United States and China seemed to be on the same boat, bound by a common destiny. However, within a few months, the U.S. Congress passed a bill designating China as a currency manipulator, which was met with strong opposition from China, followed by sharp exchanges over China's currency during the U.S.-China Strategic and Economic Dialogue. Optimism and pessimism coexist regarding the future of U.S.-China relations. Generally, among foreign policy and security experts, pessimism seems to outweigh optimism, while in the economic and trade sector, optimism appears to be the prevailing sentiment. However, upon closer examination, the economic and trade relationship is often not monolithic. For instance, while engaging in sharp debates over currency and fierce attacks and defenses regarding anti-dumping and countervailing duties, the two great powers continue to maintain strategic and economic dialogues.

How should we interpret the seemingly contradictory U.S.-China trade relations and China's trade policy toward the United States? It is not easy to gain a clear understanding of China's trade policy toward the U.S. China has never explicitly stated how it views the U.S. or what trade strategy it intends to pursue, and even if it has, declarations and rhetoric are often intertwined with actual actions. Furthermore, in many cases, national policies do not manifest as simple, binary policies of hostility (offense) or friendliness (defense), but rather appear as diverse and contradictory policies at first glance. In fact, trade policy is a highly dynamic and complex process composed of numerous policy packages (i.e., sub-policies) (Jeong Hwan-woo 2008, 177-178). Considering this complexity of trade policy and relations, this paper aims to argue that China's trade policy toward the U.S. has shifted from defensive cooperation in the early stages after joining the World Trade Organization (WTO) to balanced cooperation following the global financial crisis, by examining specific trade areas. In other words, China's trade policy toward the U.S. has shifted in method from defensive to balance-oriented, while in terms of objectives, it has been evolving towards expanding cooperation or joint management.

The sub-trade policy areas to be examined here are four: trade remedies, exchange rates, economic cooperation, and trade norms. By examining trade-related policies in detail, it may be possible to capture the complex dynamics unfolding behind phenomena that appear, at first glance, to be binary choices between conflict and confrontation.

II. Changes in U.S.-China Trade

Since the reform and opening-up, China has pursued an open strategy, often referred to as the "world's factory." This strategy involved attracting investment from East Asian newly industrialized economies such as Hong Kong, Taiwan, and South Korea, processing goods with China's inexpensive labor, and re-exporting them. Through this process, China aimed to achieve economic growth, earn foreign exchange, expand employment, and acquire technology. China was able to adopt the "world's factory" strategy due to its vast population, which provided abundant and cheap labor, and the Chinese government's open policies that ensured this labor could be stably and continuously integrated into the global economy. China's large rural labor force, which was both abundant and of good quality relative to its wage level, offered a significant competitive advantage compared to developed and newly industrialized countries struggling with high labor costs, and also compared to other developing countries with less abundant and lower-quality labor. The Chinese leadership, after carefully assessing its strengths (e.g., massive scale, abundant and quality labor, presence of overseas Chinese capital) and weaknesses (e.g., lack of capital and technology, political sensitivity), has consistently pursued a strategy focused on attracting foreign investment rather than driving exports.

The results were tremendous. In fact, until the late 1990s, while China attracted global attention, its actual position in the international economy was not particularly high. China's actual standing underwent a significant transformation after its accession to the WTO. First, trade volume surged. In 2000, the year before joining the WTO, China's share of global trade was only 3.7%, but by 2008, it had increased to 8.1%. During the same period, the U.S. share of global trade declined from 15.5% to 10.9%, and Japan's share fell from 6.6% to 4.5%. By 2009, China had emerged as the world's largest exporter (see Figures 1 and 2).

f2e34dd1a320d063

f2e34dd1a320d063

f2e34dd1a320d063

Source: Global Insights 2011. 10.

U.S.-China relations have paralleled this expansion of China's openness and its emergence in the international economy. Shortly after China declared its opening-up policy, in April 1979, U.S. Secretary of Commerce Juanita M. Kreps visited China and initialed the U.S.-China Trade Agreement. This agreement, which stipulated Most Favored Nation (MFN) status, was formally signed in July 1979 and entered into force in February 1980. For a considerable period thereafter, trade relations were handled based on non-trade factors such as foreign policy and security, or human rights issues, rather than on trade relations themselves. For example, in 1990, some members of the U.S. Congress argued for the minimal extension or conditional extension of MFN status, citing human rights issues. Amidst such ongoing scrutiny, President William J. Clinton announced in 1994 that MFN status would be extended through 1995 and that it would not be linked to human rights issues.

Trade relations between the two countries began to normalize around the time of China's accession to the WTO. In 1999, Premier Zhu Rongji visited the U.S., held talks with President Clinton, issued a joint statement on China's WTO accession, and signed a bilateral agreement on WTO accession in November. However, the U.S.-China trade relations at this time were by no means "normal." While the U.S. accepted China's WTO accession, it did not grant China Market Economy Status (MES) and established a safeguard mechanism, the Special Safeguard (SSG) measure, which allowed the U.S. to impose restrictions. While the U.S. intended this as a safety net, it inevitably created a perception of unequal treatment for China. Indeed, when the U.S. later launched trade offensives against China using these tools, namely anti-subsidy and special safeguard measures, China responded with extreme sensitivity and force.

Nevertheless, in December 2001, President George W. Bush declared Permanent Normal Trade Relations (PNTR) status for China, which took effect in January 2002. Subsequently, in December 2003, Premier Wen Jiabao presented five principles for U.S.-China economic and trade relations, to which President Bush expressed his agreement. Furthermore, both sides agreed to elevate the dialogue level of the U.S.-China Economic (Commerce) Joint Commission. Since China's accession to the WTO in 2001, trade between the U.S. and China has grown at an astonishing rate. In 2007, it increased 3.2 times compared to 2001. Consequently, the share of U.S.-China trade in the total trade of both countries has also rapidly increased. The proportion of China's imports in U.S. imports rose from 9.0% in 2001 to 16.5% in 2007... (continued)