• The U.S. Should Not Demand In-Kind Reciprocity from China
  • April 7, 2017 | Author: James M. Zimmerman
  • Law Firm: Sheppard, Mullin, Richter & Hampton LLP - Beijing Office
  • In a well-drafted task force report issued last week by the Asia Society and the University of California San Diego, a group of scholars and former government officials recommend that the Trump administration take steps to make the U.S.-China bilateral economic relationship “more reciprocal” and that trade agreements should “significantly restore greater reciprocity in trade and investment.” Such aspirational goals are reasonable to achieve greater parity and mutuality in the relationship.

    In an unrelated essay on ChinaFile, James McGregor goes several steps further and bluntly recommends that the Trump administration “focus on reciprocity” and that “[n]o Chinese-connected entity should be allowed to invest in or acquire U.S. assets unless American companies have equal market and acquisition access in China.” McGregor believes that “all discussions and agreements should be based on true reciprocity” and that if “[w]e can’t do it there, you can’t do it here.”

    In international legal parlance, a demand for straight or true reciprocity is a mutual, in-kind exchange of favors and privileges. In effect, it’s tit for tat.

    We need to be very careful what we ask for.

    A demand for straight reciprocity as a strategic approach, as McGregor suggests, is not without implications, given the rigidity of the demanded exchange of favors. Rather, negotiations with China should seek to secure reciprocal treatment on many levels but also to maintain a level of flexibility in order to reach a consensus that is overall beneficial to American companies, workers, and consumers.

    The downside of making a demand for “true” reciprocity is that the U.S. could deny itself the economic benefits of inbound foreign investment from China. Foreign investment brings needed capital and technology, funds beneficial research and development, and creates well-paying jobs.

    Indeed, the Rhodium Group reported cumulative Chinese foreign direct investment in the U.S. topped nearly $65 billion between 1990 to 2015, and hit a record high of $45.6 billion in 2016. More than 1,500 Chinese companies established operations in the U.S. across all regions of the country. Chinese companies-which as of the end of 2015 employ more than 90,000 people across the U.S., up from 20,000 just five years ago-bring jobs and value the innovation and productivity of American workers. This benefits local American economies significantly.

    Moreover, the U.S. is also a primary destination for Chinese tourists, high-end consumers, and students seeking the allure of America’s higher education system. To close the market for inbound investment by in-kind reciprocity could likely lead to collateral damage to the U.S. tourism and educational sectors as well. At the behest of the Chinese government, students and tourists will simply take their money elsewhere.

    While challenges remain, the truth of the matter is that China has made progress on a number of fronts. China has allowed its currency to steadily appreciate in value over the past decade, has reduced trade-distorting subsidies and granted greater market access to American goods and services, and has made important progress with respect to the protection of intellectual property rights.

    Exports to China-which have expanded in the past decade by almost 115 percent for goods and 300 percent for services-have strengthened America’s economy and created jobs for American workers across the country. As its middle-class expands, China will continue to play a significant role as an export market for a wide selection of U.S. goods and services.

    An added benefit would be to let Chinese investors come and live, learn, and make their mistakes under the U.S. legal system. Much like investors from Japan, Taiwan, or Korea in prior decades, Chinese companies that invest in the U.S. have the opportunity to learn about American corporate governance practices and the regulatory environment that they can take home to China. As their home countries have struggled with the rule of law, Asian companies in the U.S. have been forced by American courts to raise the level of their global business practices in areas ranging from worker rights to environmental protection to antitrust compliance.

    The real question is one of strategy: How do you demand fair, reciprocal treatment in the Chinese market for American companies without shooting yourself in the foot back home? Do we demand straight reciprocity and close our markets until reciprocal treatment is provided, or should we continue to demonstrate the benefits of market reform and non-discriminatory trade and investment, while continuing to enjoy the multitude of inbound benefits?

    I believe that the latter is the best approach given the consensus-driven flexibility of the process. Otherwise, a quid-pro-quo in-kind demand for reciprocity will likely undermine the entire U.S.-China relationship, and to the disadvantage of the American economy.