Constructive, Alliance-Backed Confrontation: How the Trump Administration Can Stop Chinese Innovation Mercantilism

As President Trump observed on the campaign trail, China often plays by its own set of rules when it comes to trading and competing in the global economy. Indeed, its aggressive innovation mercantilism poses a growing threat to not only the U.S. economy and its enterprises, but also to the entire global economy and the international trading system that supports it. It’s clear that previous administrations’ strategy of favoring dialogue, engagement, and gentle cajoling—in an effort to convince the Chinese government to retreat from its innovation mercantilist approach—have failed. It’s time for the United States to pursue a new doctrine of constructive, alliance-backed confrontation, with America leading an international coalition that pressures China to stop rigging markets and start competing on fair terms.

ITIF hosted a panel discussion to unveil a new report advocating for such a framework and examining the ways in which the Trump administration can stop Chinese innovation mercantilism. Nigel Cory, a trade policy analyst at ITIF and a co-author of the report, began by highlighting the salience of U.S.-China relations and how trade and economic issues are just one of many serious bilateral issues that President Trump has to contend with in framing America’s relationship with China, amongst other important goals such as addressing China’s militarization of the South China Sea and North Korea’s nuclear program. However, with President Trump and Chinese President Xi due to meet for the first time in early April, President Trump and his administration have only a short period of time to translate rhetoric into action on these issues.

China poses a unique and persistent challenge for the United States and other nations. As ITIF President Rob Atkinson explained in his overview of the report, China diligently shields its firms from international competition as it seeks to establish autarky in advanced-technology goods and services industries. In pursuit of these objectives, China has implemented a vast number of innovation mercantilist policies including the massive use of subsidies, the misuse of antitrust laws for industrial policy, and the theft of intellectual property. Yet even as China shuts out foreign competitors from its domestic market, China expects to be able to have unfettered access to international markets. So, it wants to close off its own economy in scores of advanced-technology industries while maintaining the benefits of having open access to international markets in those very same industries.

Traditionally, the United States has sought to cajole Chinese leaders into rolling back the country’s mercantilist policies. However, Claire Reade, senior counsel at Arnold & Porter Kaye Scholer and former assistant U.S. trade representative for China affairs, observed that the 2008 financial crisis undermined the legitimacy of Western economic models (at least in Chinese policymakers’ eyes) and strengthened the hand of those in China who favor mercantilist policies and increased economic nationalism. Mark Wu, assistant professor of law at Harvard Law School, agreed, noting that the United States and China have fundamentally different approaches to managing their economies.

The United States has also challenged China at the World Trade Organization (WTO). Yet the panelists agreed that the WTO is not adequately equipped to address Chinese mercantilism. Atkinson argued that for countries like China that are violating international norms (and even many actual rules) governing global trade, the efficacy of the WTO is limited. Furthermore, John Veroneau, partner at Covington & Burling LLP and former deputy U.S. trade representative, observed that WTO agreements have a certain level of intentional ambiguity, which China uses to obscure its breaking of WTO rules. As a result, the WTO is not currently equipped to effectively counter Chinese innovation mercantilism.

The panelists agreed that, when possible, the United States should more vigorously pursue WTO enforcement action against China. However, Scott Kennedy, deputy director, Freeman Chair in China Studies at the Center for Strategic & International Studies, remarked that WTO cases are complex and require a significant amount of evidence, especially from U.S. companies, which are often reluctant to provide evidence due to a (well-justified) fear of retaliation from the Chinese government. Wu suggested that a stronger public-private partnership could be a source for that evidence and bolster U.S. efforts to build WTO cases against China.

The panelists all agreed that America’s traditional approach to China has proven insufficient and ineffective. Atkinson observed that, under President Xi, China has even more aggressively implemented its mercantilist strategy in recent years. In response, ITIF’s report proposes a new approach. The United States should start by building a detailed list of China’s mercantilist policies and documenting their deleterious impact on the global innovation economy, and use this to mobilize like-minded countries in Europe and Asia to pressure China to change its approach and to abide by both the letter, and the spirit, of the rules it agreed to when it joined the World Trade Organization. The report argues that unless China meets specific, performance-based results, the United States and its allies should be prepared to impose consequences. Kennedy noted that a prudent starting point for the United States to confront China would be to pursue Chinese compliance with existing WTO rulings.

To more effectively confront China, Atkinson argued that the Trump administration should bolster U.S. organizational capabilities, strengthen trade engagement and enforcement process, and rethink key domestic policies. Reade argued the United States should not just confront China but also “nurture our innovation ecosystem” to ensure that U.S. firms are ready to compete with firms from China and other countries. Echoing this point, Wu emphasized that the United States must strengthen its own economic competitiveness. In addition to government action, Kennedy also emphasized that U.S. companies have to play a larger role in pressuring China. U.S. companies must be willing and ready to walk away from the Chinese market if China continues its mercantilist policies.

Chinese innovation mercantilism poses a threat to not only U.S. economy, but also to the entire global economy and trading system. China remains unconvinced by U.S. dialogue and undeterred by WTO action. Instead, the United States should mobilize its allies and pressure China into rolling back its mercantilist policies. At home, the United States should align agencies, policies, and processes in a “whole-of-government” approach, and to ensure enduring U.S. competitiveness, the United States should invest more in fostering its own innovation capacity. The United States is uniquely positioned to take the lead in confronting China. But if the current approach is not changed, Chinese economic aggression will continue unchecked as China pursues its goal of increasing market share in advanced-technology industries through a range of policies that are often out of line with the country’s WTO commitments and that are inflicting significant damage on U.S. and other foreign advanced-technology industries. To the extent China wishes to compete in such knowledge- and technology-based industries, it should do so only through the use of “good” innovation policies, such as investing in science, education, knowledge, and infrastructure, but eschew competition through the use of mercantilist means.