The United States Needs a Free Trade Deal with China

Maurice R. Greenberg (C.V. Starr and Co., Inc.) and C. Fred Bergsten (PIIE)

Op-ed in the Wall Street Journal

December 18, 2014

China has intensified its efforts recently to deepen diplomatic and trade relationships with international partners and secure its rapidly expanding interests globally. This new dynamic presents both challenges and opportunities for the United States. Regrettably, Beijing sees the US strategy of "pivoting" or "rebalancing" its Asia policy in a negative light, as an effort to contain China. Moreover, in the important areas of trade, investment, and regional security, China and the United States seem to be moving apart. Both countries need to refocus on ways to strengthen mutual ties and work to resolve the issues that divide them.

The benefits? How about an extra $400 billion in American exports each year, and $100 billion in national income.

There has been some progress. During the November Asia Pacific Economic Cooperation (APEC) conference in Beijing, the United States and China concluded new agreements on climate control, IT tariffs, and military cooperation. And both countries continue to be engaged in issue-specific discussions, such as cybersecurity.

Still, the United States needs to set its sights higher. In particular, there seems to be no compelling reason why the world's two greatest economic powers shouldn't start the process of establishing a comprehensive, bilateral free trade agreement. We've argued in favor of such an agreement for years, and on many trips to China top leaders have told us that they would be receptive to such an initiative.

The Peterson Institute for International Economics' recent study, Bridging the Pacific, concludes that such a trade agreement would be of great benefit for both countries. US exports would increase by almost $400 billion a year, and US national income would rise more than $100 billion annually. There would be 1.7 million export-related jobs added to the US economy over 10 years, and American consumers meanwhile would benefit from lower prices and wider product choices.

China's national income would increase by more than $300 billion a year, helped by a dramatic boost in foreign direct investment (FDI) between the two countries. At present, the United States has in China about $50 billion of FDI stock (about 2 percent of China's total FDI), which are direct investments in companies, while China's FDI in the United States is around $36 billion. With a bilateral free trade agreement in place, US FDI could rise in five years to $160 billion, and China's FDI in the United States could rise to $122 billion. This would help reposition the United States—the world's leading investor—to benefit from future growth in the world's second largest economy.

It may take 10 years to achieve a bilateral free trade agreement. But a number of countries across the Asia-Pacific region—including Australia, Japan, New Zealand, South Korea, and members of the Association of Southeast Asian Nations (ASEAN)—have already implemented or launched negotiations on free trade agreements with China. All the more reason not to wait any longer to begin. The US share of China's import market has declined in recent years, and our country risks further market-share losses to these countries and others.

The negotiations themselves, while they will undoubtedly be arduous, are beneficial. They create a forum for addressing and settling disputes that can deepen mutual trust and confidence between the two countries. They also offer opportunities to reach agreement on some of the less intractable trade issues, the "low hanging fruit," perhaps incorporating the current effort to achieve a bilateral investment treaty. And they help ensure that US companies do not lose ground to foreign competitors. We suggest that China and the United States each appoint three representatives to explore the benefits and problems in negotiating and implementing such an agreement.

Right now there are a number of trade pacts both countries are pursuing in which the other is not participating—for example, the US-led Trans-Pacific Partnership, or the Asia-only Regional Comprehensive Economic Partnership talks led by China. These negotiations—which may be increasingly seen as mutually competitive—have already led to misunderstanding and tension between China and the United States. Bilateral negotiations for a trade pact between the two countries can help defuse tensions and enhance trust.

The relationship between China and the United States is unarguably the most important in the world today. To ensure that it remain so, the United States needs to act now to secure a free trade pact between the two countries.

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