How Not to Confront China on Trade

E veryone talks tough on China trade, yet not much happens. In this light, calls to end permanent normal trade relations (PNTR) status for China do not hold up well. Bills in Congress and comments from former Trump-administration officials suggest that China’s PNTR status could be downgraded or suspended. Countering China’s predatory economics is an excellent idea, but PNTR’s role in that is small. For the sake of American security and prosperity, China must be pushed out of key supply chains. In comparison, PNTR is a distraction.

The mid and late 1990s saw intense pro-market economic reform in China, encouraging the U.S. and others to begin negotiations for China to join the World Trade Organization (WTO). The U.S. took domestic legislative and regulatory steps to treat China the way it treated other valued economic partners, and the country acceded to the WTO in late 2001.

While not at all clear at the time, this turned out to be a serious mistake. The People’s Republic of China’s (PRC) reform era arguably ended as early as 2003, when new leadership began encouraging and directing much more rapid investment growth. Reform definitely ended by 2009 with the global financial crisis and a surge in lending by state banks. China has been effectively reducing the role of the market for at least 15 years.

In simple terms, the PRC uses WTO membership to fortify its comparative advantages while working to deny partners their comparative advantages. Competition with all state-owned enterprises is forbidden or limited, durable large-scale overcapacity is created through various subsidies in industries from steel to shipbuilding, and intellectual property (IP) is stolen or coerced — for instance, in telecom.

China is an undesirable American partner on the basis of these economic reasons as well as security and values reasons. The issue is what to do. PNTR is just a label; changing it does not generate new policies to deal with IP loss, dumping, or market-access barriers. An obvious response is that we can retaliate against the behavior with higher tariffs. True, and the U.S. has already imposed higher tariffs without touching PNTR.

The Trump administration cited Section 301 of the Trade Act of 1974 to raise tariffs on the PRC for its IP practices and Section 232 of the Trade Expansion Act of 1962 to raise tariffs on various countries on national-security grounds. The Biden administration used Section 301 to increase tariffs on Chinese electric vehicles and parts. Candidate Trump promises to hike China tariffs to 60 percent, possibly using the International Emergency Economic Powers Act. PNTR changed none of this.

Congress could create more policy tools. Section 421 of the Trade Act of 1974 was a China safeguard against market disruption. China has, for many products, pledged state support to acquire more global market share. When most American suppliers of these products are forced out of business and replaced by Chinese firms, investigations should be launched to see if remedies should be applied. There could be a lot of investigations.

They should not aim at the trade deficit, as the Trump 301 tariffs were said to. High volumes of the consumer electronics that lead U.S. imports don’t matter much; what matters far more is dependence on China in vital supply chains, such as in pharmaceuticals and critical minerals. High tariffs can block Chinese participation in vital supply chains, but quotas, including zero quotas, would be more effective. Covid made clear these are overdue.

Section 421 is hardly the only solution, but it represents the right type of solution: Don’t target symbolic WTO changes, target China with new policies. China aside, the WTO still has value. Our allies can participate in our supply chains, China shouldn’t. Ending PNTR is a natural inclination, but you don’t start making a cake by lighting candles. If the real work of fighting Chinese predation is finally done, PNTR will be an afterthought.