(Yicai Global) August 25 -- A few weeks ago, we looked at the attitudes expressed by American and European firms operating here in China.  Surveys show that they are increasingly committed to this market, which is becoming relatively more profitable. While the business environment is improving, these foreign firms would invest even more in China, if they had the same opportunities as their domestic competitors.

This week, we turn our attention to the views of firms in the US that import from or export to China.

On August 5, thirty-four American business organizations sent letters to Treasury Secretary Janet Yellen and Trade Representative Katherine Tai. These organizations – as disparate as the Idaho Potato Commission, the Securities Industry and Financial Markets Association (SIFMA), the Semiconductor Industry Association and the American Apparel and Footwear Association – asked the US government to deepen its engagement with China on trade and economic issues.

The groups have three specific requests.

First, they urge the Administration to work with the Chinese government to increase purchases of US goods and implement all structural commitments under the Phase One US-China Trade Agreement.

Second, they ask the Administration to re-instate tariff exemptions for those products whose exemptions expired in 2020. Moreover, they request a “new, fair, and transparent” process to determine which products can be exempted from the tariffs.

Third, they propose that the Administration negotiate with China so as to remove “both nations’ counterproductive tariffs as soon as possible.”

While it is difficult to say how the US Administration will respond to the letters, we continue to see encouraging signs of an incipient warming in Sino-US relations.

In late July, Deputy Secretary of State Wendy Sherman met with State Councillor and Foreign Minister Wang Yi in Tianjin. Sherman emphasized that while the US “welcomes the stiff competition” with China, it does “not seek conflict with the PRC.” Moreover, she underlined how important it is for the US to cooperate with China on such issues as the climate crisis, counternarcotics, non-proliferation, and various regional concerns.

In another positive development, shortly before Sherman’s visit, the US dropped charges against five Chinese scholars who were accused of hiding their military affiliations in their visa applications.

Of course, these are only baby steps toward confidence-building and greater cooperation. And the road ahead is bound to be a bumpy one. Ultimately, the way the Administration responds to the business organizations’ requests will be informed by strategic considerations. But, here too, there are reasons to be optimistic.

In pursuing his foreign policy for the middle class, President Biden says, “Every action we take in our conduct abroad, we must take with American working families in mind.”

“Trade policy,” he says, “must grow the American middle class, create new and better jobs, raise wages, and strengthen communities.”

In my view, the Administration’s positive response to the business organizations’ requests would go a long way toward achieving these objectives.  

According to the thirty-four groups, the Chinese government has met important benchmarks and commitments made in the Phase One Trade Agreement. They say that this has resulted in benefits for “American businesses, farmers, ranchers, and workers.” The letter specifically mentions the importance of having followed through on opening up the financial sector and addressing most long-standing agricultural market access barriers.

In contrast, the organizations emphasize the harm the tariffs are causing to American consumers, manufacturers, service providers and businesses. They cite analysis by Moody’s that shows the burden of the tariffs has disproportionally fallen on Americans – US importers are paying around 18.5 percent more for the affected Chinese products, while Chinese exporters receive just 1.5 percent less. They also refer to estimates by the Congressional Budget Office (CBO) that the tariffs cost the average American household close to USD1300 in 2020 alone.

In the same report, the CBO estimates that the trade barriers reduce the level of US real GDP by 0.5 percent in 2020. The negative effect of the trade barriers is projected to linger for as much as ten years, with the level of GDP in 2030 still 0.1 percent below that of the “no trade barrier” scenario. With potential GDP growth estimated at 1.7 percent, these are very significant output losses. And they most certainly depress middle-class incomes and employment.

The business groups stress how the tariffs have increased their costs of manufacturing and providing services. The tariffs raise product prices domestically and reduce the attractiveness of US exports abroad. Indeed, US firms face international competitors who do not pay the tariffs on their inputs from China and those whose goods enter China tariff-free.  As long as the tariffs remain in place, the organizations request that the Administration “mitigate the damage to US workers and other stakeholders” by resuming a process of exempting particular goods from the tariff.

While it appears that engaging China, along the lines proposed in the letters, may indeed be middle-class friendly trade policy, it is clear that the two countries have many unresolved differences. For example, the business organizations mention subsidies, government procurement, digital trade, data governance, market access barriers for US-manufactured goods and many other issues as long-standing and unaddressed.

Given the US and China’s global importance, these issues need to be addressed, preferably in a transparent and even-handed manner and via multilateral fora, where appropriate.

Take subsidies for example.

Every major economy, from time to time, appears to have engaged in some sort of subsidy. It is instructive that the Americans and the Europeans only recently called a truce in the 17-year, Airbus-Boeing subsidy war.

Some subsidies may be beneficial. For example, subsidizing the production of solar panels might correct for the severe externalities associated with burning fossil fuels and spur the transition to a low-carbon economy. Some subsidies may promote research and development with large social benefits.

Addressing subsidies requires creative thinking along the lines of the proposal made by Chad Brown and Jennifer Hillman. Their idea is to classify subsidies into three groups. Permitted or “green light” subsidies would be those that promote the public good, such as addressing climate change. Countries would commit to limit their spending on “amber light” subsidies, those which likely distort production and trade. Prohibited or “red light” subsidies would be those which directly promote exports or favour domestic products over imported ones.

Reaching international agreement on such a framework would take time – perhaps as much as 17 years! But the type of deepened engagement proposed by the 34 American business organizations appears to be the right place to start for resolving such long-standing differences.