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December 9, 2018

Responding To: Examining the Impact of the U.S.-China Trade Dispute on Technological Innovation

The Trade War is a Self-Fulfilling Prophecy

Yeling Tan

The Trump administration has unleashed a slew of measures to bring external pressures to bear on the Chinese government, from unilateral tariffs to WTO dispute cases and revisions to CFIUS guidelines on foreign investment. Many of these measures have been enacted not just to force changes in the bilateral trade balance, but also to address deeper structural issues with China’s domestic policies, ranging from industrial guidelines such as Made in China 2025 to specific measures such as technology transfer provisions in joint venture agreements. The current administration’s actions are often seen as an extraordinary act of unilateralism, yet such actions are not new if we go back far enough in time. Indeed, they are rather reminiscent of the George H. W. Bush administration’s use of ‘Super 301’ provisions to threaten sanctions against an economically ascendant Japan in the late 1980s.

When these Super 301 actions were taken, the US and Japan met to negotiate through what were called the Structural Impediments Initiative (SII) talks. The US demanded a sweeping set of domestic reforms from Japan targeted at fiscal policies and measures that excluded foreign firms from domestic markets, as well as market barriers created by the dominant positions of its corporate groups (keiretsus). The concessions that Japan made under the aegis of the SII were seen as a successful case of external pressure (“gaiatsu”) creating a new impetus for change by shifting the domestic balance of power in areas where entrenched interest groups were blocking reforms.

Yet we should not conclude from the Japan example that the current trade war with China would produce similar concessions. Why? Because we need to distinguish between two types of external pressure: (a) external pressure that increases the probability of change by expanding the base of supportive domestic constituents and thus generating positive feedback loops; and (b) external pressure that reduces the probability of change by narrowing the base of domestic constituents and thereby generating negative feedback loops. In the case of Japan, the concessions that the Japanese government made varied across issue areas despite strong external pressure across all demands placed on the able, because of variation in the degree to which these external pressures altered the domestic base of support.     

The trade war is unlikely to be resolved anytime soon not because there is no support within China for the types of reforms demanded by the US government – many of the demands made by the USTR are changes that reformist and technocratic parts of the party-state have long been pushing for - but because the specific type of external pressure being exerted is generating negative feedback loops that narrows the base of such support within China. Precisely because these demands are perceived in China as part of a broader containment strategy, it reduces the political space for these reformist officials or agencies. None of them can step forward to support these demands for fear of being portrayed as betraying the nation and caving to foreign aggression. As a result, the US demands have strengthened the hand of precisely those Chinese agencies and officials who oppose market liberalization and intensified calls for the de-coupling and indigenization of supply chains. This type of negative feedback loop makes the fears of the US government a self-fulfilling prophecy.

When China has committed to wide-sweeping changes, it has been under circumstances where external pressure was accompanied by positive feedback loops: such as when China joined the World Trade Organization (WTO) in 2001. The external pressure exerted by WTO rules opened up political space for reformist agencies within the Chinese state to push their agenda forward. Then-Premier Zhu Rongji openly argued that the increased market competition brought by the WTO would boost Chinese economic development. Reformist officials supported WTO entry by pointing to the benefits that membership would bring to China. These benefits included the ability of China to use multilateral rules to defend its interests internationally, as it has since done many times. And as Bill Clinton pointed out in his public efforts to support China’s WTO membership, China could very well choose to go down a more hostile or nationalistic path in the future. But “we should not make it more likely that China will choose this path by acting as if that decision has already been made."

Yeling Tan is an assistant professor of political science at the University of Oregon. She is a participant in the Initiative for U.S.-China Dialogue on Global Issues faculty research group on business and trade.

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