Related Articles Commentary Paper SIIS Report
Oct 30 2017
Changes in Global Trade and Investment and Implications for China-U.S. Economic Relations
By Xue Lei

Changing landscape of global trade and investment

The deepening of economic globalization has been a result of rapidly increasing global trade and investment flows. Before the 2008 Global Financial Crisis, global trade usually grew at twice the speed of global GDP growth, which had made global trade the “engine” of the world economic growth. In the meantime, the closer linkages between trade and investment also have made the two issue areas become more and more inseparable from each other, with China’s accession to the WTO as a path-breaking moment for global trade and investment flows. The global relocation of production networks by multinational companies and China’s role as a global manufacturing hub had led to a dramatic change of direction for trade and investment flows. However, with the world economy entering into the post-crisis era and China undergoing domestic economic transformation, such trading and investment patterns can no longer be sustained. What’s more important, the transformative and disruptive power demonstrated by the new technologies has fundamentally changed the transnational exchange of goods and services. A reflection on the modes and rules relating to global trade and investment for the future is desperately needed.

Changing nature and pattern of global trade

The pattern of international trade in today’s world has changed dramatically from the era of merchandise trade in the 20th century, to the era of services trade and digitalization in the 21st century, in particular in terms of the ways trade goes across borders. And it has brought great challenges to traditional ideas, norms, and rules relating to international trade and investment. Just takea look at trade in services:when the General Agreement on Trade in Services (GATS) came into effect in 1994, one of the four modes of trade in services, “cross-border provision of services”, had not been given much attention. Now it has become a major mode in delivering services in global trade. According to the statistics of the United States Department of Commerce, in 2014 digitally delivered services accounted for over half of U.S. trade in services.  The digitalization of international trade has provided us with great opportunities and potential. Yet in the meantime, it also brings great challenges to traditional understanding and concepts of trade issues as demonstrated in many WTO agreements, with the GATT regulating merchandise trade mainly concerned with border tariffs, fees, and measures taken by product-import countries. Now the focus has been shifted to policy areas beyond or behind borders, which usually fall into the category of “WTO-plus” issue areas such as investment, competition policy, government procurement, labor standards, and e-commerce.  In many cases, the evolution of technology has made it difficult to distinguish between imported products and domestic production, for instance the use of 3D-printers to make products. This has also called into question the current statistical system used in measuring international trade volumes. There isan increasing need for correctly calculating the trade flows in the digital age so as to keep us better informed of the general trend of trade flows.

Newly-found attractiveness of investment agreements

With more and more trade going beyond or behind borders, trade negotiations also have to follow up with relevant rules applicable to the new situation. This needs to touch more upon domestic legislation and regulations, with market access and domestic rules becoming the priority issue to be addressed in trade and investment negotiations. Thus investment rules have been injected with a certain kind of new life. As the UNCTAD suggests, “Investment rules and regulations designed for the physical economy may need to be reviewed in light of new digital business models. This is most relevant in sectors such as retail, media and consumer finance.”  One vivid example is the focus of discussions and debates in relation to the negotiation on the Trans-Atlantic Trade and Investment Partnership (TTIP) between the U.S. and the European Union. It has become a process endeavoring to achieve harmonization of domestic regulations and rules for the two major economies, with the debates surrounding the inclusion of an investor-state disputes settlement provision in the draft agreement unexpectedly reaching a boiling point. The considerations behind such debates have been well demonstrated by the fear of undue interference of third party non-stakeholders in the policymaking of domestic authorities.

Changing political landscape for global rules governing trade and investment

At the international level, the multilateral trade system is faced with great difficulties in pushing forward new rounds of trade agreement negotiations. One of the reasons for the lack of progress lies in the substantial differences among the different trading groups, including the emerging role of middle-income developing countries such as China, India, and Brazil. For most developing countries, there have been feelings of frustration arising from the little achievements made under the Doha Development Agenda, which has been regarded as reciprocal benefits granted by the developed countries for their support in the establishment of the WTO. From the perspective of developing countries, the most urgent need is to fully grant the Quota-Free, Tariff-Free treatment to those least-developed countries, so as to make good use of the advantages of trade in promoting the industrialization process in those countries which has been crucial in meeting the poverty-reduction goals. The developing countries also insist on maintaining the current practices of reciprocity-based and single-undertaking in reaching new trade agreements at the WTO, which may give these countries more leverage in trade negotiations. Generally speaking, at the global level the multilateral trade negotiation process has encountered certain bottlenecks constraining its rapid development, which have shown few signs of relief in the near future. This has prompted the shifting of the focus to regional, sub-regional, mega-regional, or bilateral trade negotiations by the major economies and trading powers in the world.

At the domestic level, the benefits of free trade have not been distributed evenly across sectors and the countries. Actually, some non-trading sectors and disadvantaged sectors have suffered losses in the process of opening markets and importing competing products. The political dynamic behind the calculation of benefits and losses has caused the rising tide of political movements against free trade and globalization, with more governments taking policies reflecting more populist and protectionist thinking.

Prospect of U.S.-China Bilateral Economic Relations

As the two largest economies in the world, China and the U.S. are in different economic and policy cycles. China has entered into a stage of shifting from high-speed growth to moderate growth, as well as the structural transformation of its economy. In contrast, the U.S. seems to have entered another stage of robust post-crisis growth. Yet the recent stumble of the Trump administration in advancing its economic policy agenda has brought great doubt from the business community over whether the incumbent U.S. administration and the Republican-controlled Congress can really push forward pro-market tax, budget, and regulatory reform as promised in the presidential election campaign. The policy uncertainty has become one of the major factors with great potential to destabilize the world economy as well as China-U.S. economic relations. During the Mar-a-Lago meeting between President Xi and President Trump, both countries agreed to launch a “hundred-day plan” to oversee economic and trade issues in bilateral relations and address the existing imbalance in trade. However, with the recent national security reviews taken in the steel and aluminum sectors, it has been made clear that the U.S. administration prefers a heavy-handed interventionist policy to protect some domestic manufacturing sectors from international competition. Frequent trade frictions among the major economies may be a more plausible scenario in the near future. To better manage such critically important bilateral economic relations, we need to further clarify and address the following conceptual and institutional issues.

Misperceptions of Reciprocity and Trade Rebalancing

Since the 2008 global financial crisis, rebalancing has become a central topic in China-U.S. bilateral economic relations, with the huge trade imbalances and Asian economies’ savings glut in the U.S. capital markets often blamed as one of the causes that triggered the financial crisis. In the meantime, another concept has become more prevalent in both U.S. policy and business circles, i.e., reciprocity in bilateral economic and trade relations. Its major argument lies in the victimization of the U.S. as a losing party in bilateral economic relations with its concessions made not being rewarded with reciprocal benefits from the Chinese side. There are mainly two manifestations of this. One is mainly derived from the views of senior officials from the Trump administration who have an obsession with the trade deficits of the U.S. with its major trading partners. Another is concerned with China’s domestic policies on market access, innovation stimulation, etc. Multinational companies from the U.S. and Europe usually complain that their businesses have not received equal treatment in the Chinese market, with the American and European markets completely open to Chinese companies. However, just as German Chancellor Angela Merkel has said in response to the Trump administration’s criticisms of Germany’s trade surplus with the U.S.:“The fact that we have 10 times as much direct investment from Germany in the United States than there’s American investment in Germany has, of course, … a strong effect on the many jobs we create.”  Similar cases also happened in the Chinese market with many industrial sectors and consumer product market dominated by the brands of multinational companies from the U.S. and EU. This kind of monopoly status has often been ignored by people advocating for reciprocity in bilateral relations. Maybe we should go back to the basic economic theory of comparative advantage and make subsequent adaptions based on compromises achieved through bilateral negotiations. Any misperceptions in terms of reciprocity or trade imbalances can only cause undue interruptions of stable and sustainable bilateral economic cooperation.

Institution building in bilateral economic relations

With the new China-U.S. Comprehensive Economic Dialogue taking shape, there will be more predictability in terms of bilateral economic relations and trade disputes. To keep economic and trade relations more stable and sustainable in the long run, China and the U.S. need to continue with their unfinished work on the negotiation of the Bilateral Investment Treaty (BIT). During the Obama administration, both governments held lengthy talks and negotiations on the BIT, with the core concepts of a “negative list” and “pre-establishment national treatment” accepted by both sides. In this way, the major concerns and flash points in bilateral economic relations have been addressed, with market access and domestic regulations at the core of this negotiation process. Just as previously mentioned, such an investment treaty actually has taken some aspects of the role of a trade agreement. The achievements made in the BIT talks can provide a solid basis and are a great opportunity for the launching of a full and comprehensive bilateral free trade agreement negotiation. Only through institutional and legal arrangements can the potential uncertainty and instability in bilateral economic and trade relations can be fully addressed, which will also be of great importance to smooth and stable global economic growth.

In summary, the world economy is undergoing great changes, with the top two major economies leading and influencing the changing trend of global production, trade, and investment. A stable bilateral economic relationship is also at stake for China and the U.S. The future potential cooperation and institutional arrangements between the two countries will shape the prospects and framework of the global economic system. Such a high degree of interdependence and spillover effects should never be compromised with short-sighted partisan political interests.

Source of documents:SIIS