• China and the US, like all other countries, should be able to maintain their own economic model. But international trade rules should prohibit national governments from adopting ‘beggar-thy-neighbour’ policies

China’s economic rise poses significant political and strategic challenges to the existing global order. The emergence of a new superpower in Asia has inevitably produced geopolitical tensions that some have warned may eventually result in military conflict. Even absent war, the hardening of China’s political regime, amid credible allegations of myriad human-rights abuses, raises difficult questions for the West.

Then there is the economics. China has become the world’s top trader, and its increasingly sophisticated manufacturing exports dominate global markets. While China’s international economic role is unlikely to be insulated from political conflict, it is also inconceivable that the West will stop trading with China.

But what kind of rules should apply to trade between countries with such different systems? I recently teamed up with Jeffrey Lehman, vice-chancellor of New York University’s Shanghai campus, and Yao Yang, dean of the National School of Development at Peking University, to convene a working group of economists and legal scholars that could devise some answers. Our working group recently issued a joint statement, with support from 34 additional scholars, including five Nobel laureate economists.

China’s admission to the World Trade Organisation in 2001 was predicated on the implicit premise that national economies, including China’s, would converge to a broadly similar model, enabling significant economic integration. China’s unorthodox economic regime – opaque government intervention, industrial policies, and a continuing role for state-owned enterprises alongside markets – has been very successful in reducing poverty. But it makes deep economic integration with the West impossible.

A perspective gaining ground in the United States is that its economy should decouple from the Chinese economy. This would entail high trade barriers to Chinese exports and severe restrictions on investment flows. Such an approach would render permanent President Donald Trump’s trade war.

We propose a middle ground between convergence and decoupling. The key is that China and the US, like all other countries, should be able to maintain their own economic model. Policies aimed at safeguarding a country’s economic system should be presumed legitimate. What is not acceptable are policies that would impose one country’s rules on another or that provide domestic benefits only by imposing costs on trade partners.

Targeting the latter category, which economists call “beggar-thy-neighbour” policies, is central to our approach. We argue that international trade rules should draw a bold red line around beggar-thy-neighbour policies and prohibit them. A typical example is trade restrictions that enable a country to exercise monopoly power globally, as China tried to do by restricting exports of rare earth minerals some years back. Another example is closure of domestic markets to foreign investors to obtain scale benefits on world markets. A third example is persistently undervalued currencies that help sustain large trade surpluses.

Under this approach, many policies that the US complains about would not be objectionable. China’s industrial subsidies and state-owned firms, for example, would be considered a domestic matter. While they may hurt specific US firms, they are not of a beggar-thy-neighbour nature: either they benefit the rest of the world in aggregate (as with subsidies), or their economic costs are borne primarily at home (as with state ownership).

By the same token, the US would be free to adopt policies that safeguard the integrity of its technological systems and protect communities adversely affected by imports. It could also insulate itself from any negative spillovers from Chinese policies, if it chose to do so, by imposing restrictions at the border. China must recognise that policy autonomy is a two-way street.

While our approach is stated in bilateral terms, it is easy to embed it in a multilateral framework – even the WTO. However, progress on the multilateral front is unlikely without agreement between the world’s two largest economies.

Like all international agreements, our proposed approach depends on the willingness of the parties to abide by the terms. We are not so naive as to suppose that the US and China would easily agree on what is and is not a beggar-thy-neighbour policy. Even so, our hope is that a framework that guards against the worst trade abuses would create the incentives needed to build mutual trust over time.

This approach leaves open the question of how Western countries should respond to China’s political repression or human rights abuses. That is not because these issues are unimportant, but because clear rules of conduct in economic relations must be established regardless of how bigger conflicts are to be resolved. Without such a road map, it is not just the economic interests of China and the US that will suffer. The rest of the world will pay a high price as well.

Dani Rodrik, professor of international political economy at Harvard University’s John F. Kennedy School of Government, is the author of Straight Talk on Trade: Ideas for a Sane World Economy. Copyright: 

Project Syndicate