Tricks of the Trade, The Wire China, Sep. 24, 2023.
How a little-used legal tool began the process of "strategic decoupling."
On November 9, 2017, the American state car bearing President Trump, known as “the Beast,” rolled through Beijing into Tiananmen Square.
It was the first official visit of his administration to China. In front of the Great Hall of the People, the red carpet had been literally rolled out for President Trump and the American delegation to which I, as the United States trade representative, belonged. Ranks of soldiers marched in formation, flashing bayonets. A military band played “Stars and Stripes Forever” as Presidents Trump and Xi walked side by side. A crowd of children waved a forest of small American and Chinese flags.
This was the third stop in a five-stop Asian swing near the beginning of the Trump presidency. We had spent a few days in Tokyo and then gone on to Seoul, South Korea, for talks. By far, however, the most important part of the trip was the visit to China.
Prior to his election, President Trump had campaigned hard on the issue of the imbalance in our trade relationship with China and had strongly critiqued China’s unfair practices. Chinese officials were very much aware of this and had set about to charm our new president by engineering a visit to Mar-a-Lago in Palm Beach in April, right after the president’s inauguration. That visit — with its memorable images of the president’s granddaughter singing a song in Mandarin to the smiling Chinese president and his wife — had succeeded in getting the two leaders off on the right foot. Indeed, President Trump went on to develop a good personal relationship with President Xi Jinping.
Nevertheless, President Trump still maintained his position on the significant issue of China trade. He was capable of having a good personal relationship with world leaders while still being able to take hard decisions against them.
China’s early charm offensive at Mar-a-Lago continued in full force when we arrived in Beijing in November 2017. In an unprecedented move, President Xi and his wife had given President Trump and Melania a personal tour of the Forbidden City — the vast palace complex in the center of Beijing that is the ancient seat of Chinese emperors. The tour was followed by an ancient dance routine in the opera house in the imperial city and then a private dinner.
The next day, the official meetings between the two delegations began. After the formal welcome for the state visit outside the Great Hall of the People, there was a small meeting of just a handful of senior Chinese and American officials in preparation for a larger meeting later that day. There were only five people attending on our side, and I’m sure that the Chinese wanted to set the tone without any trade minister present. But Chief of Staff John Kelly had told me to go in and take his place so that I could follow what was going on. I was later told that the Chinese were not happy about the substitution, but John Kelly was a tough, Italian-Irish four-star marine from Boston, and he tended to get his way.
Despite the warmth of the welcoming ceremonies, this was essentially a meeting between the leading ranks of two armies facing off against each other.
The meeting featured the normal chit chat and pleasantries, with serious issues dealt with at a top-line level. A few minutes after the small meeting concluded, I found myself sitting in a cavernous room in the Great Hall of the People under a crystal chandelier that was perhaps ten feet in diameter. The American and Chinese delegations faced each other in two parallel lines across a gleaming conference table of heroic proportions. At the center of one side was President Xi. On the other side, facing him, sat President Trump with his 12 senior officials. President Trump was flanked by Secretary of State Rex Tillerson and our ambassador to China, former Iowa governor Terry Branstad.
I sat next to Tillerson, the former longtime CEO of Exxon. He looked the part of secretary of state. He was very much at home at big ceremonies such as this, if rather less so in the day-to-day back-and-forth of working as a member of a team behind the scenes.
Despite the warmth of the welcoming ceremonies, this was essentially a meeting between the leading ranks of two armies facing off against each other. As with all such occasions, the opening comments were highly scripted, with the wording having been hammered out in conference with staff and the implications of each phrase carefully weighed in advance. President Xi read his formal statement, followed by President Trump.
Both statements were cordial, raising issues only in the most diplomatic of terms. After that, President Xi called on his foreign minister to make a statement on foreign policy issues. Following protocol, President Trump did the same thing and called on Secretary Tillerson, the only other cabinet officer in the meeting besides myself. The statements had been thoroughly vetted down to exact details. All proceeded according to plan.
Then came the curve ball.
Following a short statement on economic issues, President Trump looked briefly in my direction. Then he called on me and asked me to speak to the Chinese about our position on trade. I had no carefully scripted statement with each word curated for content. What followed was very much my spontaneous thoughts on trade, on its effects on the American economy over the years, and on American workers. Oddly, the impromptu nature of the speech made it easier to find the words.
For the next several minutes, in a very respectful but direct way, I explained to the Chinese leadership our thoughts on the current trade situation. I talked about the theft of technology, the failure to protect intellectual property, cyber theft, the lack of progress in the multitude of talks held over the course of the previous two administrations, and the stream of gigantic trade deficits. I tried to explain all of this from our perspective, how the American people viewed our economic relationship as an uneven, unfair relationship that wasn’t sustainable and how it had affected people’s lives in many communities.
The Chinese appeared surprised by my statement. There was a pause.
The group grappled with an appropriate response to an outbreak of candor in the midst of a highly choreographed meeting. It was not exactly a setting known for open, critical speech directed at the highest authorities of the CCP. After I spoke, as if by some silent consensus, the Chinese delegation continued to read the rest of their formal statements prepared by their officials. There was no straightforward response to my argument, although I can imagine that it inspired considerable debate and reaction behind the scenes.
When the meeting ended a few minutes later and we began to leave, President Trump came up to me and said he would like to read my statement. I told him that I didn’t have any written statement prepared.
At the big state banquet that night, I had been told that I would sit between the fifth and the seventh members of the seven-member standing committee of the politburo. These are the seven people who run China. As we approached the dinner table, my staff told me that I was now sitting between the fifth and the third members of the politburo in rank.
It occurred to me that the Chinese finally realized that I may have some role in making Chinese trade policy. My relevance had been reevaluated and recalibrated up a couple of notches.
TURNING THE BOAT AROUND
Without the means to ensure a level playing field, the decision to let China join the WTO in 2001 was a fundamental error. It followed from a miscalculation about the way China’s economy and political system function and about the dynamic function of strategic leverage held by the United States. The annual review of China’s trading status — which we gave up when we granted it Permanent Normal Trade Relations (PNTR) status in 2000 — had been a vital bargaining chip.
More importantly, the annual review had created a level of business uncertainty. What U.S. company would shift a plant to China if it might face high tariffs the next year when exporting its products back to America? Yes, in practice, the favorable trade status for China had been extended every year. But the potential for withholding this status existed. Granting PNTR removed much of the leverage that the U.S. exercised in attempting to maintain a level playing field for trade with China.
Meanwhile, the WTO’s enforcement actions turned out to be time-consuming and ineffectual. Predictions made in the 1990s and early 2000s regarding the future of trade between the U.S. and China proved to be far off base.
By the time I assumed the role of USTR under the Trump administration, then, our hands were tied.
Efforts to work through official channels of the WTO brought frustration to a fine art. The WTO’s arcane rules meant that any complaint must be structured in very specific terms that precluded addressing problems at the level of their root causes. Even when the WTO chose to act in our favor, there was no effective means to enforce compliance. If we wanted to see real and sizable enforcement actions, the U.S. had no choice but to act on its own. But how could we find room to move within the strictures of U.S. law?
My solution to this problem lay in the revitalization of a legal tool called Section 301.
Section 301 of the Trade Act of 1974 states that if there is an “act, policy or practice” of a foreign government that is “un-reasonable or discriminatory” and “burdens or restricts U.S. commerce,” the president, acting through the USTR, can take “all appropriate and feasible action” to counteract that policy — and this includes placing tariffs and restrictions on imported products coming into the United States.
Section 301 has been used in one way or another several times over the years, mostly as an enforcement mechanism that gave some teeth to our trade negotiations. I constantly had it on my desk during my time as deputy USTR in the Reagan administration. For example, in 1984, President Reagan instructed me to negotiate VRAs on carbon steel with several countries around the world. The objective was to slow the flood of foreign steel into our market that was devastating our industry. South Korea initially refused to cooperate in the effort. I threatened to go to the president and ask for authority to bring a Section 301 case, potentially leading to a loss of access to the U.S. market.
This move was effective — we ended up making a deal with South Korea and with all the other target countries. Later, the Clinton administration used Section 301 in a similar way, as leverage in negotiations with Japan on auto trade.
Because we used this statute so effectively as a threat during the 1980s, free trade advocates and our trading partners were determined to defang it. During the long and tortuous course of the Uruguay Round trade negotiations (1986–93), numerous countries (led by Japan and Europe) had pushed hard for rules at the WTO that would stop the U.S. from taking unilateral action on trade. The primary channel for that action was Section 301.
In the final text of the agreement, severe limitations were put on Section 301 and on unilateral U.S. action. The implementing bill as enacted by our Congress in 1994 stated that if a trade agreement violation was found using Section 301, the only remedy was to bring an enforcement action at the WTO. At the time, everyone expected this to be a workable channel for enforcement. Few anticipated that any action through the WTO would develop into a laborious effort that would rarely lead to effective remedies. A few years later, this downside became abundantly evident.
There was, however, still one opening left in the former Section 301.
That opening said that if the USTR determines that the unfair or discriminatory foreign practice against the U.S. is not a violation of a trade agreement, then the prior authority still pertained.
That meant that the president (acting through the U.S. trade representative) could still legally use all appropriate and feasible authority to force the foreign country to stop the practice — including through raising tariffs and restricting access to our market.
I had long believed that putting appropriate tariffs on Chinese exports to the U.S. was the only feasible way to address China’s systemic mercantilist practices. I publicly called for such tariffs in my testimony before the U.S.-China Commission in June 2010. There were few ways to impose such broad tariffs. There was Section 301, and there was an act of Congress.
Unfortunately, going to Congress and getting it to pass a sanction against China for unfair trade was not a realistic option in 2017. The combination of big business, the Chamber of Commerce, and Chinese lobbying would stop any action in its tracks. Free trade absolutists in the Senate and House of Representatives were pleased that we had so many imports from China (meaning cheaper goods for all). They would have worked against any action to stem the flow. Anyone concerned about the threat from China had to find an existing statute that would authorize action by the president.
My proposal was to revitalize Section 301 for this purpose, as well as to make maximum use of the powers that it gave the president to act on China’s unfair trade practices. No president had ever attempted to use this authority to fight systemic mercantilism. No one had ever used it to impose large tariffs on a trading partner. No one had ever used the law to broadly attack such massive and damaging unfair practices. This powerful tool was left sitting on the shelf. As USTR, I was determined to make full use of it to serve the needs of American workers and communities and, in effect, to reorient our trade policy toward the common good.
We decided to single out the most egregious of China’s actions that were clearly within the parameters of Section 301. We would focus on technology theft, cyber intrusions, and failure to protect intellectual property. We launched an investigation to determine whether these practices were unreasonable or discriminatory and whether they burdened or restricted U.S. commerce. That is the course that President Trump laid out in the summer of 2017.
We would have a full and thorough investigation over the course of several months. We would exhaustively document our findings. Then we would take action within the context of the WTO for any practices that we found to be in violation of a trade agreement as required by the Section 301 statute.
With respect to those items that were not found to be a violation of a trade agreement, we would use the other part of the statute — the remaining opening that allowed for unilateral action in such cases. We would take all appropriate and feasible actions necessary to force China to stop these unfair practices. That was our plan from the beginning, and we followed that plan to the end.
HOLDING THE LINE
The Section 301 action began the process of strategic decoupling of our economy from China’s. History will view this as the start of something of global historical importance. In its 2017 National Security Strategy, the Trump administration for the first time labeled China a “strategic competitor” and decried its military, diplomatic, and economic aggression. In this context, the president said, “For the first time, American strategy recognizes that economic security is national security.”
It was the right policy at the right time, and it has achieved its intended objectives. Indeed, today, U.S. high-tech imports from China are on the decline, and businesses across the country are questioning the long-term wisdom of producing their products in China. It is also now clear that the once nearly unanimous Washington consensus on free trade is dead. In the final days of the Trump presidency, some Republicans in Congress who had disagreed with me for decades confided that I had changed the way they thought about trade, and the few staunch free trade holdouts remaining in the party are slowly retiring.
President Biden, despite supporting most of the failed trade policies of the past during his time in the Senate, essentially adopted the Trump trade policy during his 2020 campaign. The Biden administration’s subsequent decisions to keep most of the China tariffs in place, to continue to ignore the World Trade Organization, and to support American semiconductor and electric vehicle production show that the shift in priorities that we started has become entrenched across both parties.
Now, in order to deal with China going forward, the U.S. needs to continue the process of strategic decoupling. We need to continue our economic relationship to the extent that it is beneficial to America and its workers, farmers, and businesses and stop it to the extent that it is harmful to us. We must achieve balance and fairness, eliminate important dependencies, reduce investment in each direction, and stop technology interdependence.
In short, strategic decoupling means balancing trade, limiting imports to needed items, limiting exports that contain sensitive technology, controlling inward Chinese investment and our outward investment in China, and developing a smart technology regime that completely de-couples in security technology and only engages in other technology when it is in our interest and never in sensitive sectors.
The strategic decoupling that I propose is really no different from that followed by the Chinese right now. This is what Kevin Rudd calls “decoupling with Chinese characteristics.” Essentially, the Chinese are moving away from interdependence and toward a relationship where they supply to us as they want and develop and produce on their own in important sectors. Another way to think about the strategic decoupling is that it is merely enforcing reciprocity with China — that is, reciprocity of trade, reciprocity of investment, and reciprocity of technology.
With a sensible policy of strategic decoupling combined with pro-growth tax cuts, regulatory reform, and industrial policy, America can and will prevail.
Those who predict that America will lose this great competition should consider that Japan engaged in some of the same industrial policy practices used by China. Although we should never forget the fundamental difference that Japan was an ally and a friend, Japan engaged in forced technology transfer from U.S. companies (but not theft), maintained a closed domestic market, manipulated its currency, and utilized cheap credit and massive debt to grow impressively in the 1970s and 1980s. Its GDP was 73 percent the size of ours by 1995. Predictions were that Japan could surpass us.
However, after Japan’s debt bubble burst, inefficient policies caught up with the Japanese, and the Reagan administration adopted policies to help our industry. Nearly 40 years later, Japan’s economy is now 25 percent of ours.
China’s GDP is currently 73 percent of ours. With a sensible policy of strategic decoupling combined with pro-growth tax cuts, regulatory reform, and industrial policy, America can and will prevail.
Excerpted from NO TRADE IS FREE: Changing Course, Taking on China, and Helping America’s Workers by Robert Lighthizer. Copyright © 2023 by Robert Lighthizer. Reprinted by permission of Broadside Books, an imprint of HarperCollins Publishers.
Robert Lighthizer served in President Trump’s cabinet as the United States Trade Representative from 2017 to 2021 and was a deputy USTR under President Reagan. He has negotiated dozens of international agreements and practiced trade law for more than forty years. Lighthizer was born in Ohio and now lives in Palm Beach, Florida.