Vital Interests: The fields of international economic and trade law have seen major developments during the three years of the Trump Administration, including a trade war with China and the renegotiation of trade deals like NAFTA. Can you give us your overview of these developments?

Gregory Shaffer: With respect to China, during his presidential campaign Donald Trump ran on the promise to do something about China. According to him, the United States had gotten a terrible deal with the World Trade Organization. China should not have been allowed into it. China was always cheating such that the trade deficit with China hurt working Americans. China was manipulating its currency. And China was stealing American intellectual property. Trump promised to get China to change its unfair trade practices.

First of all, just to put this trade conflict in perspective, when China joined the WTO there was immense concern within China that it had signed an "unequal treaty" because it had agreed to more constraints than any other country at its level of development. Much more so, say, than Brazil or India.

The tariff cuts demanded of China were much more substantial as were other commitments China agreed to. What everybody referred to as "China plus" and "China minus" provisions in its WTO accession protocol, meaning additional commitments only made by China – and not by any other WTO member – and fewer rights – applied only to China.

There was a sense within the country that Chinese negotiators had agreed to too much. The idea that, somehow, China didn't get  a great deal when it joined the WTO is false. The United States made no new commitments towards China except to treat it like it treated any other WTO member, while China joined a pre-existing organization where it did not participate in the negotiation of the rules other than the additional commitments that it made.

What transpired next is that China was very successful economically. With the 2007-2008 financial crisis, the Western World imploded financially. This exacerbated the difference in growth rates and enhanced China's economic power. In addition, while China previously was just a low-cost manufacturer in global supply chains, after the government subsidized its high-tech industries and invested a huge amount in research and development, China became competitive in more advanced manufacturing. 

Now, it looked like China was not going to be just a manufacturing powerhouse of relatively low-tech items, but a competitor against the United States in high tech. For example, Huawei is a vanguard firm, building telecommunications infrastructure around the world with its 5G networks. China also threatens to lead in what's called smart manufacturing, the Internet of Things, which is the future of manufacturing both in terms of manufacturing processes, using robots and sensors, as well as the processing of data to target consumers. 

China has invested significantly in this technology. It could become a leader in the production of self-driving vehicles and high-speed rail. The United States suddenly realized that China was a much bigger threat than simply a low-wage manufacturer.

At the same time as the “China shock” on U.S. manufacturing, there was growing economic inequality in the United States. Resentment over the loss of economic opportunities was easily blamed on “globalization” and created the political and social conditions that were ripe for a populist like Donald Trump to be elected. I call it a double-edged shift in inequality. On the one hand, there was growing inequality within the United States, creating social tension and rebellion against “elites.” On the other hand, there was reduced inequality between the United States and China.

Suddenly, these two developments raised the question, "How was the United States going to react to China’s rise?" The United States hoped to pressure China through threatening to block access to the U.S. market. China exports a lot more to the United States than the United States exports to China. The Trump administration thought that, by raising tariffs on Chinese goods coming into the United States, it could exercise considerable leverage over China. This policy did hurt the Chinese economy but not to the extent that it brought China to its knees. During this period of heightened U.S. tariffs, Chinese exports still grew. While Chinese exports to the United States were reduced considerably, by around 25 percent, exports overall from China to other countries still increased.

Asian economies, in particular, have been growing more rapidly than those in other regions. China is the largest trading partner of more than twice the number of countries around the world as the United States. China is actively creating new global markets for its goods and services. At the same time, China has a rapidly growing middle class. With this larger domestic market, China is less dependent on trade than it was in the past. With dynamic companies like Alibaba and others, electronic commerce is booming in China. China is quite innovative in developing electronic banking and payment systems.

China retaliated against the U.S. tariffs in areas that could potentially hurt President Trump politically, particularly in agricultural districts. There was space then for the two countries to come to the bargaining table and the result is the so-called “Phase One” agreement we now see. 

It's a curious agreement. It's a little over 80 pages with eight chapters, so it is a relatively short agreement given the impact it is supposed to produce. It is not written in precise legal terms like other trade agreements. 

The biggest concern for President Trump and his adviser within the White House, Peter Navarro, was to reduce the trade deficit. This is addressed in the last chapter of the agreement where China agrees to purchase an additional $200 billion of U.S. products over two years from a benchmark in 2017. The commitment is actually $240 billion of increased purchases because U.S. exports to China had decreased by 40 billion on account of the trade war. The question is will China really be able to purchase that amount? The fact is, we will not know until after the 2020 election, which is convenient for President Trump.

For the election campaign, President Trump can say, "I have this great China deal. They agreed to purchase $200 billion over 2017 when I came into office.” Verification of this degree of increased trade will be difficult to measure, however, and take months after the election results. There also is a provision in the agreement that says if U.S. actions (i.e. such as export controls) cause a reduction in Chinese purchases, China can complain about that. There will also likely be a WTO challenge about this from Europe and Brazil and other countries if China replaces purchases of their products to meet its commitments to the U.S. Clearly, this agreement will put pressure on China to reduce purchases of soybeans from Brazil and Airbus jets from Europe in favor of purchasing soybeans and Boeing aircraft from the U.S. This violates WTO rules.

VI: Doesn’t this agreement presuppose an odd notion that trade has an on-off switch, that China can turn on trade with the United States and turn off trade with Europe or South America? 

Gregory Shaffer: It does go counter to a belief in markets.  This is ironic as one of the primary tensions with China is that the United States doesn’t like China’s state capitalism model. China could use its state-owned enterprises to purchase large amounts of American oil, gas, and agricultural products and just store them so that the effects will only be short term. 

The 2020 “phase 1” agreement is very unequal. Basically it says, on one side, "this is what China commits to doing," and, on the other side, “the U.S. confirms that this is what the U.S. already does.” That is how the intellectual property chapter (chapter 1) reads. As regards agriculture (chapter 3), it involves Chinese commitments to accept American biotech approvals and confirmations that U.S. agricultural products meet Chinese safety standards for milk beef, pork, chicken and so forth, including where the U.S. uses growth hormones. In services, the agreement  provides more openings for large U.S. financial entities like Citibank, VISA and insurance companies, to access the Chinese market. Those are real openings that will facilitate U.S. sales into China.

This agreement will result in formal legal changes in China – such as regarding civil and criminal law procedures with respect to Intellectual Property enforcement. It even goes so far as to specify a reversal of the burden of proof for trade secret misappropriation cases (in favor of the complainant), which will target provincial courts in China. That’s interesting.  The U.S. certainly wouldn't accept an international treaty that specifies what the burden of proof state courts in Texas must apply.

Clearly, China made the calculation that, if this makes the U.S. happy, it can live with this.

VI: Live with it for maybe a year, or maybe even four years, to wait out the administration?

Gregory Shaffer: Yes or maybe even in the long term as China moves up the value chain and it invests in high tech. These things might not be bad for the Chinese economy and the government has been moving in this direction. In any case, yes, China must enact changes in Chinese law under this agreement.

VI: In other words, the Chinese will be required to enact new laws that would change how it regulates its economic order?

Gregory Shaffer: Yes, the Intellectual Property chapter is the longest part of the agreement. Specific legal requirements are spelled out.  In it, for trade secrets, China has to shift the burden of proof and change domestic procedures. It has to change evidentiary requirements in criminal procedures. China agreed to significantly increase the number of enforcement actions on counterfeit goods. It agreed that it will destroy such goods following civil and criminal procedures. China agreed that it will issue quarterly reports with respect to the enforcement actions that it will provide to the United States. The agreement provides that Chinese administrative authorities will transfer more cases to criminal authorities for IP enforcement. China agrees to increase penalties towards the maximum under its current system, and that it will subsequently increase those penalties. All this will be done within 30 days pursuant to a Chinese action plan. The plan will be published and the U.S. can make comments on it.

In other words, the agreement basically says, "China, you have to do everything on this list and you have to create an implementation plan that you will provide to the U.S. that the US can comment on.” That's significant.

China doesn't have a free press so there is not much discussion of the details of the agreement but there's some sense in China that this looks like a pretty unequal treaty. It looks like China is making all these commitments and the U.S. is making none. The Chinese leadership has to manage this public reception, since the agreement constitutes basically a transfer of U.S. civil and criminal law procedures on IP and enforcement mechanisms to China.

VI: This sounds like it's a real boom for lawyers?

Gregory Shaffer: It is great for lawyers in China and its growing legal profession. The IP legal practice is growing in China. Already China is the most litigious country in the world on intellectual property matters, more so than the United States. There is more litigation over IP in China than in any country in the world and most of this litigation is Chinese versus Chinese. China is clearly making a bet that this is fine for the Chinese economy. It's catching up fast with the West so that it could implement these formal legal changes. 

And yet, as we all know, there's a difference between formal law and actual practice. Quarterly reports are not going to solve the problem of IP protection for U.S. firms. It is like asking local police, how many traffic tickets did you issue? They can come up with their number of traffic tickets done per quarter and show a steady increase. But I nonetheless think it will be meaningful to the extent China finds that this is in its own interest. There is an IP bar and companies such as Huawei and others that are determined to protect IP rights within China. 

For this agreement to be effective, the ultimate question will be whether there is a Chinese constituency that really wants to have this happen. If that is not the case, then these provisions won't mean much. My sense is that we are seeing a gradual shift in China where there will be more IP enforcement and more IP litigation and a clear role for IP lawyers.

VI: To put this trade agreement in the context of the greater Chinese economic picture, you recently wrote an article that talked about how China is developing an internal market with a growing middle-class that is able to purchase domestically produced products while at the same time developing new trade agreements to sell their products all around the world. This must have been a factor in the negotiations that took place with the United States?

Gregory Shaffer: It is certainly a U.S. concern because, as I mentioned before, China has become the most important trader in the world for most countries – more so than the United States. To the extent that the U.S. wants to decouple from China, which is the wish of Peter Navarro and others, it also wants other countries to decouple from China. 

But other countries are not going to do this even with the U.S. warning, "You're either with us or against us." In today’s world you can’t force your policies on these countries. The United States does not have the same influence it did over them as it did  in the 1960s and 1970s. They are now saying,  "No, we're still going to trade with China."

With the Belt and Road initiative – China’s colossal global infrastructure, investment, and trade strategy – even though China may lose money in certain countries, it is creating political connections, connections with industrial elites, and people-to-people connections around the world. 

This being said, arguably the biggest long-term impact of this “phase 1” agreement will not be the substantive chapters on IP, agriculture, financial services, currency, or China’s commitment to buy $200 billion more in U.S. goods. The big question is how will China and the U.S. resolve their disputes? There is a final chapter in the agreement that creates a bilateral dispute settlement mechanism outside of the WTO. It provides for the creation of a structure where either party can write a complaint, the other party has to assess it within 10 days, there is consultation for 21 days, and if not resolved, the issue is moved to a higher political level.

Ultimately it is agreed that if there is an alleged breach -  and since China really made all the commitments, it  will be only the Chinese who can be in breach - then the United States can take a proportionate response and if China thinks that this is a fair proportionate response, then it will simply accept the U.S. retaliation. If it doesn't believe that it's a proportionate response, then China can't simply retaliate.  Rather, all China can do is withdraw from the entire agreement.

Then we're back in the trade war.

VI: So back to square one.

Gregory Shaffer: It will be curious to see China's strategy if this occurs. China recognizes the importance of being able to count on a neutral third-party for dispute resolution with the United States. The United States is unwilling to go this route with China and so it is insisting on bilateral procedures. This is significant for the future path of international economic law. Previously countries made scores of commitments under WTO agreements and if there was a disagreement about them, there was a neutral third-party to resolve the disagreement. What we now see evolving is a power-based system based on bilateral political diplomacy and coercive threats.

China has to determine what its strategy is with respect to this development. One strategy is to try to manage its relationship with the United States politically through this “phase one” agreement - most commentators doubt there will be a meaningful second agreement.

At the same time, China wants to not be dependent on the United States, so it's going to try to reduce the leverage that the United States holds over it in two ways. One way is to expand its trade relationships with the rest of the world, potentially where WTO rules and dispute settlement can still apply. Secondly, China will invest significantly in high tech so it's not dependent on the United States for key inputs for its final products.

This of course worries the U.S. high-tech sectors because China is their biggest market, including through companies like Huawei.This concerns U.S. companies like Micron. A phase 2 deal purportedly is to curtail China’s use of subsidies, such as to develop leading high-tech sectors. Because China does not wish to be dependent on the United States for core technologies, such a phase 2 agreement will be difficult to achieve. 

VI: How does China’s involvement with international organizations help further its international agenda? As you said, when China first joined the WTO, it had some disadvantages for the Chinese, but it also made them a member of the global club. 

Gregory Shaffer: The Chinese have learned how to participate relatively effectively in international organizations, including from studying what the United States and other developed countries do. The U.S. and the E.U. have long dominated such organizations. Now China has built significant capacity to engage with them. For example, Chinese now hold important positions in all the global standard-setting bodies, including ones implicating smart manufacturing, telecommunications, and so forth. China understands how this game is being played and it's trying to develop allies in such bargaining. Under the Trump administration, the U.S. is stepping back from multilateral organizations, so the Chinese are happy to try to fill this void in leadership if they can.

VI: Speaking of multilateral agreements, let's discuss revisions to NAFTA. There was broad agreement among the parties - the United States, Mexico, and Canada - that it needed to be revised to take into account intellectual property and financial services, which were not adequately addressed in its original iteration. Is the new so called USMCA (United States-Mexico-Canada Agreement) just an update or is this a substantially new agreement to replace a “really bad deal” as the White House likes to characterize it? 

Gregory Shaffer: It's a mix. The USMCA clearly updates NAFTA in certain ways with respect to services, Intellectual Property, regulatory cooperation and so forth. It also reduces economic integration in some areas, so that free traders are not happy with this aspect because it's a step back as far as they are concerned. 

In three major areas, there is reduced liberalization. One is in investment. The U.S. pulled back on the protection of investors. Democrats, including candidates such as Liz Warren and Bernie Sanders, agree with this change. This definitely pulls back from investment protection compared to the old NAFTA.

Second, the USMCA tightens rules of origin. Rules of origin determine what percentage of the product has to come from Mexico, the U.S. or Canada in order for it to be imported duty-free into the United States. Under the USMCA, that threshold increased. There was concern that, at lower thresholds, China could sell products and components into Mexico, and then those components would form part of a good that would be imported duty-free into the United States, such as automobiles. 

In addition, regarding rules of origin for autos, 40-45% of auto content has to be produced by labor that is paid at least $16 an hour, which effectively means that it has to come from the U.S. or Canada. That, in theory, means less of a shift towards production in Mexico. However, if there still is a shift toward increased use of robots instead of labor, this agreement is not going to lead to greater employment in the auto industry in the United States. Rather, we'll see a sectoral shift towards the use of technology displacing labor.

There is one other change I would like to highlight. Mexico agreed to change its labor laws to facilitate the formation of independent unions. This is something that labor advocates have demanded and so this is a significant change. Of course, it's a leftist government in Mexico that supports greater labor rights and greater constraints on capital, which facilitated this change. This is a meaningful shift as well.

VI: In negotiating multilateral trade agreements, some groups advocate commitments on social consciousness considerations with regards to human rights, the environment, and social inclusiveness. Is that happening with these new agreements that are being negotiated bilaterally?

Gregory Shaffer: Bilateral agreements are more likely to address these issues than multilateral agreements. Developing countries generally are wary of these demands as a way to keep their products out of developed countries, so they are more successful in collaborating as a block to keep these issues out of the WTO. What really upset the developing countries in Seattle, at the famous ministerial meeting in 1998, was when President Clinton announced that he supported addressing labor rights in the WTO. They collectively said no and these issues were dropped from the WTO negotiating agenda.

Advocates thus realized that the best prospects were in bilateral negotiations, where the U.S. simply has more leverage over developing countries. The furthest these labor rights commitments have developed in a trade agreement is under the new USMCA. Generally, Democrats in the U.S. have  been pushing these issues, such as through U.S. free trade agreements with Colombia and Central American countries. The commitments nonetheless have been relatively soft in the past. The USMCA provisions are stronger than ever before. I think there are ways that the agreements could go even further, but at least the USMCA represents a move in this direction.

VI: So that's an encouraging development on the horizon.

Gregory Shaffer: Others vociferously disagree, such as free traders who fear that this will be used as a protectionist ploy. Many free traders think that human rights, labor, and environmental concerns should be left to domestic law. I disagree. Otherwise, these agreements just empower capital over labor. Thus, in my view, labor issues have to be addressed at multiple levels. Primarily they must be addressed at the national level, but there's got to be support at the global level as well. At a minimum, global rules must permit countries to protect their social systems. Otherwise there will be a backlash, one that we are now seeing,  in short, domestic and international developments are intermeshed legally, socially, and politically.

Gregory Shaffer is the Chancellor’s Professor of Law and Director of the Center on Globalization, Law, and Society at the University of California, Irvine School of Law. Professor Shaffer writes theoretically and empirically on international economic law and law and globalization. His publications include seven books and over one hundred articles and book chapters. The work is cross-disciplinary, addressing such topics as transnational legal ordering, legal realism, hard and soft law, comparative institutional analysis, public-private networks in international trade, the rise of China and other emerging economies, and the ways trade and investment law implicate domestic regulation and social and distributive policies. His forthcoming book is Emerging Powers and the World Trading System: The Past and Future of International Economic Law (Cambridge University Press).