There are a grab bag of issues that have popped up about China so let me try and hit them and wrap it all up into some type of coherent big picture idea.

First, I had heard recently Sen. John Kennedy had introduced a bill to effectively delist Chinese companies listed on US markets unless they effectively submit to big boy audits and SEC jurisdiction. This issue has been floated numerous times and in slightly different ways in the past couple years so I did not pay it much attention as many bills get submitted and die. I was surprised to wake up this morning and see that it has already passed the Senate.

According to Politico California Rep. Brad Sherman has already introduced a bill in the House with identical language. This is going to be interesting to watch the legislative sausage. What is notable is that it passed the Senate by unanimous consent. What makes this time so notable is there has been so little push back that have typically accompanied previous floating of this idea. I don’t know if this is simply because it happened relatively fast but given how it passed in the Senate, that will create enormous pressure in the House to pass it. The other issue is that there is no language about US investment capital going to China via indexes or other channels. This bill only deals with Chinese firms listed in the US. What is notable is that Chinese firms for most of the past decade have been allowed to eschew SEC jurisdiction and standard US accounting requirements for public firms. This matters because this bill does not impose any type of extra ordinary standard on Chinese firms, it only requires them to adhere to the standards that all other listing firms adhere to.

Second, the White House has released a document entitled “United States Strategic Approach to the People’s Republic of China.” The document is measured and realistic in its assessment of the challenge posed by Communist China. It includes such highlights as:

“ Since the United States and the People’s Republic of China (PRC) established diplomatic relations in 1979, United States policy toward the PRC was largely premised on a hope that deepening engagement would spur fundamental economic and political opening in the PRC and lead to its emergence as a constructive and responsible global stakeholder, with a more open society. More than 40 years later, it has become evident that this approach underestimated the will of the Chinese Communist Party (CCP) to constrain the scope of economic and political reform in China.”

“The CCP has chosen instead to exploit the free and open rules-based order and attempt to reshape the international system in its favor. Beijing openly acknowledges that it seeks to transform the international order to align with CCP interests and ideology. The CCP’s expanding use of economic, political, and military power to compel acquiescence from nation states harms vital American interests and undermines the sovereignty and dignity of countries and individuals around the world.”

“To respond to Beijing’s challenge, the Administration has adopted a competitive approach to the PRC, based on a clear-eyed assessment of the CCP’s intentions and actions, a reappraisal of the United States’ many strategic advantages and shortfalls, and a tolerance of greater bilateral friction. Our approach is not premised on determining a particular end state for China. Rather, our goal is to protect United States vital national interests, as articulated in the four pillars of the 2017 National Security Strategy of the United States of America (NSS). We aim to: (1) protect the American people, homeland, and way of life; (2) promote American prosperity; (3) preserve peace through strength; and (4) advance American influence.”

“Beijing’s poor record of following through on economic reform commitments and its extensive use of state-driven protectionist policies and practices harm United States companies and workers, distort global markets, violate international norms, and pollute the environment. When the PRC acceded to the World Trade Organization (WTO) in 2001, Beijing agreed to embrace the WTO’s open market-oriented approach and embed these principles in its trading system and institutions. WTO members expected China to continue on its path of economic reform and transform itself into a market-oriented economy and trade regime. These hopes were not realized. Beijing did not internalize the norms and practices of competition-based trade and investment, and instead exploited the benefits of WTO membership to become the world’s largest exporter, while systematically protecting its domestic markets. Beijing’s economic policies have led to massive industrial overcapacity that distorts glo bal prices and allows China to expand global market share at the expense of competitors operating without the unfair advantages that Beijing provides to its firms.”

“The CCP promotes globally a value proposition that challenges the bedrock American belief in the unalienable right of every person to life, liberty, and the pursuit of happiness. Under the current generation of leadership, the CCP has accelerated its efforts to portray its governance system as functioning better than those of what it refers to as “developed, western countries.” Beijing is clear that it sees itself as engaged in an ideological competition with the West. In 2013, General Secretary Xi called on the CCP to prepare for a “long-term period of cooperation and conflict” between two competing systems and declared that “capitalism is bound to die out and socialism is bound to win.”

“The CCP’s campaign to compel ideological conformity does not stop at China’s borders. In recent years, Beijing has intervened in sovereign nations’ internal affairs to engineer consent for its policies. PRC authorities have attempted to extend CCP influence over discourse and behavior around the world, with recent examples including companies and sports teams in the United States and the United Kingdom and politicians in Australia and Europe. PRC actors are exporting the tools of the CCP’s techno-authoritarian model to countries around the world, enabling authoritarian states to exert control over their citizens and surveil opposition, training foreign partners in propaganda and censorship techniques, and using bulk data collection to shape public sentiment.”

“Beijing’s military buildup threatens United States and allied national security interests and poses complex challenges for global commerce and supply chains. Beijing’s Military-Civil Fusion (MCF) strategy gives the PLA unfettered access into civil entities developing and acquiring advanced technologies, including state-owned and private firms, universities, and research programs. Through non-transparent MCF linkages, United States and other foreign companies are unwittingly feeding dual-use technologies into PRC military research and development programs, strengthening the CCP’s coercive ability to suppress domestic opposition and threaten foreign countries, including United States allies and partners.”

“The NSS demands that the United States “rethink the policies of the past two decades – policies based on the assumption that engagement with rivals and their inclusion in international institutions and global commerce would turn them into benign actors and trustworthy partners. For the most part, this premise turned out to be false. Rival actors use propaganda and other means to try to discredit democracy. They advance anti-Western views and spread false information to create divisions among ourselves, our allies, and our partners.”

“The United States holds the PRC government to the same standards and principles that apply to all nations. We believe this is the treatment that the people of China want and deserve from their own government and from the international community. Given the strategic choices China’s leadership is making, the United States now acknowledges and accepts the relationship with the PRC as the CCP has always framed it internally: one of great power competition. United States policies are not premised on an attempt to change the PRC’s domestic governance model, nor do they make concessions to the CCP’s narratives of exceptionalism and victimhood. Rather, United States policies are designed to protect our interests and empower our institutions to withstand the CCP’s malign behavior and collateral damage from the PRC’s internal governance problems. Whether the PRC eventually converges with the principles of the free and open order can only be determined by the Chinese people themselves. We recognize that Beijing, not Washington, has agency over and responsibility for the PRC government’s actions.”

“Beijing has repeatedly demonstrated that it does not offer compromises in response to American displays of goodwill, and that its actions are not constrained by its prior commitments to respect our interests. As such, the United States responds to the PRC’s actions rather than its stated commitments. Moreover, we do not cater to Beijing’s demands to create a proper “atmosphere” or “conditions” for dialogue. Likewise, the United States sees no value in engaging with Beijing for symbolism and pageantry; we instead demand tangible results and constructive outcomes.”

“Chinese students represent the largest cohort of foreign students in the United States today. The United States values the contributions of Chinese students and researchers. As of 2019, the number of Chinese students and researchers in the United States has reached an all-time high, while the number of student visa denials to Chinese applicants has steadily declined. The United States strongly supports the principles of open academic discourse and welcomes international students and researchers conducting legitimate academic pursuits; we are improving processes to screen out the small minority of Chinese applicants who attempt to enter the United States under false pretenses or with malign intent.”

“Having failed since 2003 to persuade Beijing to adhere to its economic commitments through regular, high-level dialogues, the United States is confronting China’s market-distorting forced technology transfer and intellectual property practices by imposing costs in the form of tariffs levied on Chinese goods coming into the United States. Those tariffs will remain in place until a fair Phase Two trade deal is agreed to by the United States and the PRC.”

This is a great, well written document that lays out the reasons for the policies clearly. Would definitely encourage anyone to read it as this will form the corner stone of China dealings for years to come.

Third, there was an interesting speech by Sen. Josh Hawley about the international system and his push for the US to withdraw from the WTO. Now I should say, I do not support withdrawing from the WTO for multiple reasons. For instance, the restraints it places on the US are really not burdensome or excessively costly. While Sen. Hawley notes that the US has lost 90% of cases where the US has been challenged, the US has also won similar amount of cases where it is the plaintiff. This is likely due to high probability that only egregious cases get challenged so defendants have higher probability of losing.

Looking at the bigger picture of what Sen. Hawley is saying there are some very interesting ideas. Without revisiting too deeply how the China shock impacted the United States, it is worth emphasizing that while yes on aggregate America did better by opening up to more trade with China, there is much to great a willingness to overlook the narrow and targeted shock felt by many industries and parts of the United States. I personally do not believe that trade policy is proper channel to address those specific economic challenges, but WTO and China defenders choosing to ignore those issues and segment that feel aggrieved for a variety of understandable and less rational reasons simply makes them sound removed from valid concerns.

One of the points which is likely to remain most overlooked in his statement, is the point that the GATT was designed to build up a system of like minded countries agreeing on the rules but the entry of and inclusion of countries like Russia and China altered dynamics fundamentally. Now it was meant as a broader mission trying to change norms and practices rather than like minded countries already having general view of the world and governance.

China has systematically worked to keep disputes out of the WTO threatening countries and seeking to later the fundamental understanding of the rules of engagement around trade, reciprocity, and national treatment. Though defenders of the WTO may argue with Hawley’s interpretation of events or WTO strengths or Chinese compliance, what is distinctly less arguable is how countries around the world have behaved with regards to trade agreements since the WTO and China’s entry. The WTO has not engaged in any significant reform this century either to its operations or trade rules. Yes, that it not necessarily a reflection upon the WTO as an organization. Countries around the world for the most part have moved trade agreements into bilateral or regional multilateral formats and chosen non-WTO formats for dispute resolution either in political or in other formats. Furthermore, newer trade agreements are covering issues around things like SOEs in bilateral and regional agreements that are not covered in the WTO and will not be allowed to be covered in the WTO. One can have reasoned disagreements with Sen. Hawley about some of his finer points but the reality is that countries have been behaving for some years to treat the WTO as an atrophying organization that does not provide the value they need effectively incapable of reforming itself to provide value. It is hard in a larger sense to disagree with the broader brush of his argument.

One of the major reasons I would advise against pulling out of the WTO is there is no agreed upon vision for what comes next and what it looks like. There are some positive and negatives but workable starts here. The biggest hurdle is there is no well formulated plan for what comes next and how to achieve it. The dispute resolution format described by the Senator are interesting but would need more work. Whatever the WTO short comings, it was pretty widely respected as a dispute settlement format because countries felt their complaints got recognized even if they did not always win. As an American I can say, most every case I know of where America lost, there was a very strong argument for America to lose based upon the agreement and behavior in question. Many countries would fear strictly bilateral format where they would face a super power like America alone. His proposal however does however speak to potentially addressing issues more frequently if they can be resolved through lower level arbitration or more speedily than multi year litigation where many times the market or situation has moved beyond the original dispute. What the Senator seems to be calling for more broadly while not explicitly laying it out in any detail, is broad economic alliance of like minded countries that stand in opposition to China and their like minded authoritarianism such as in Russia or Iran and the vassal state relationship Beijing seeks to establish with many Belt and Road countries.

I fully support this broad vision but there are two basic hurdles: first, this is actually a much more expansive and differentiated view of American foreign policy than most people realize requiring a lot of new work to execute. Whether one leaves the existing institutions or just allows them to atrophy, this vision of bilateral or multilateral agreements in trade and other policy areas of like minded countries requires an enormous amount of work. Given that this seems to be the beginning of a long Cold War type of period between China and the US, this is a reasonable approach but requires a lot more work and coalition building both within the United States across party and groups and around the world.

This could imply not simply rejoining TPP but beefing it up to give it a small secretariat or an economic development section. It could mean creating security cooperation mechanisms across the Indo Pacific countries that are concerned about Chinese encroachment. It could mean significantly expanding the newly established Development Finance Corporation to assist in economic development across countries that wish to be like minded about freedom and authoritarianism. Fundamentally, however, it implies a much broader institutional and agreement framework for the United States with other countries that does not currently exist.

Finally, the US will need to persuade countries that it is not simply trying to use bilateral power but will constrain itself to rules of engagement and behavior and persuade others of its vision for groups or alliances of countries concerned about the latent authoritarianism of China. The initial reaction by many will to discuss Trump but the reality is the US government as an institution must demonstrate the commitment to the Indo Pacific and willing governments. Europe is unlikely to play any meaningful role in dealing with China and has a long demonstrated lack of interest in their own security unless the United States provides it. The focus of relationship, alliance, and institution building should be focused in the IndoPacific. The US must demonstrate this through approval of trade regional and bilateral trade agreements. Increased allocation of resources from military training to development assistance and investment and visas for students from places like India and Vietnam. Many will be persuaded by this vision if the United States invests political and financial capital.

I believe there is increasing realization that there is significant scope to change a generation of relationships and rise to the challenge to confront an authoritarian China seeking to expand its authority and influence. Believe it or not, policy is moving in the right direction and great moves are being made to counter and address China. I have this sense there is a lot more to come.