Introduction

Since China’s accession to the World Trade Organization (WTO) in 2001, bilateral trade with the US has expanded dramatically, but so have frictions. Last year’s tariff escalation roiled financial markets and contributed to slowing global growth, underscoring the global stakes of the dispute. US concerns stem from systemic Chinese practices – including forced technology transfer, weak intellectual property (IP) protection, industrial subsidies, and the dominant role of the state – that systematically tilt the playing field in favor of Chinese companies domestically and globally.

The challenge is more than a trade disagreement. It intersects with national security concerns, especially regarding access to advanced technologies, and with broader questions about whether China will operate within a rules-based, market-oriented system. Resolving these issues will take time and cannot be solved through quick fixes.

Assessing the US-China relationship: Benefits and costs of the world’s largest economic relationship

US-China trade has grown from US$125 billion in 2001 to more than US$700 billion in 2017, while China’s economy quadrupled in size and became the world’s second-largest. China now accounts for around 16% of global economic activity and 40%–50% of global marginal growth, hosts the world’s largest middle class, and dominates e-commerce and banking rankings.

The relationship delivers substantial benefits to the United States. US exports to China support around 1.8 million American jobs, particularly in services, agriculture, and capital goods. From 2000 to 2007, lower-priced imports from China generated an estimated US$202 billion gain for US consumers, equivalent to more than US$100,000 per manufacturing job lost during that period.

Yet the costs are real. Between 1999 and 2011, direct import competition from China contributed to the loss of about 560,000 US manufacturing jobs, rising to two million when upstream effects are included. Still, these figures often overstate the impact, because they fail to account for US value-embedded in Chinese exports. A frequently cited example is the iPhone, for which China’s value-added is only about 3.6% while US value accounts for about 30% as of 2019 data.

Crucially, we argue that the bilateral trade deficit is a misleading metric. The US deficit reflects macroeconomic factors, especially low domestic savings, rather than market access barriers alone. When affiliate sales by US and Chinese firms are included, the picture reverses: US companies sell more into China than Chinese firms sell into the United States.

Why China’s economic model matters

Despite market reforms, the Chinese Communist Party (CCP) retains firm control over the economy. The state sets strategic goals and mobilizes resources through industrial policy, state-owned enterprises (SOEs), and control over finance, land, and regulation. Unlike Japan or South Korea in earlier eras, China’s sheer size means its model has global spillovers in ways that even Japan’s economy at its economic height did not.

Three features are especially problematic. First, China’s push for self-sufficiency in emerging technologies undermines comparative advantage. Second, SOEs benefit from subsidies, preferential financing, and weak rule of law, distorting competition at home and abroad. Third, industrial policies designed to ‘pick winners’ generate excess capacity and dumping, as seen in steel and solar panels, and potentially in advanced sectors such as robotics, electric vehicles, and batteries.

Industrial initiatives like ‘Made in China 2025’ aim for 70% self-sufficiency in strategic technologies. SOEs play a central role in implementation, often earning returns sometimes half as much as private firms but continuing to expand due to state backing. One striking comparison suggests that China’s state asset regulator, abbreviated as SASAC, resembles a single agency controlling America’s largest corporations simultaneously, illustrating the scale of state coordination.

The importance of the WTO to resolving US-China trade tensions

China’s economic model places acute stress on the WTO system. Although China undertook extensive commitments upon accession, enforcement has been uneven, and state control blurs the line between public and private action, making WTO litigation difficult. Informal guidance, opaque subsidies, and administrative discretion often leave little documentary evidence to challenge.

Despite these challenges, the WTO remains indispensable. It provides the only global rulebook reflecting US values such as non-discrimination, transparency, and rule of law. Abandoning it in favor of purely unilateral or managed trade solutions would impose enormous strategic costs.

The WTO should serve as both a baseline for compliance and a forum for identifying where existing rules fall short: justifying new rules or complementary bilateral and unilateral actions.

Making progress in US-China trade relations

We recommend a multipronged strategy aimed at long-term, market-oriented outcomes rather than short-term concessions.

Bilateral negotiations

Any bilateral deal must be verifiable, enforceable, and market-based. Simply restating prior Chinese promises on IP or forcing large purchases of US goods would be insufficient. China should reaffirm and implement all WTO commitments, accept additional ‘WTO-plus’ disciplines on SOEs, subsidies, and digital trade, and agree to credible enforcement mechanisms. We highlight Article 25 WTO arbitration as a way to achieve faster dispute resolution.

A renewed push for a US-China bilateral investment treaty (BIT) is recommended, with an aggressive timeline. A high-quality BIT could discipline Chinese practices, reinforce a rules-based approach, and provide additional enforcement tools.

What should not guide negotiations

Reducing the bilateral trade deficit or extracting purchase commitments should not define success. Such outcomes would amount to managed trade, risk WTO violations, disadvantage US allies, and contradict US demands for less state intervention.

The role for the WTO

The United States should bring more WTO cases against China, press for transparency on SOEs and subsidies, revive China-specific safeguards, and pursue reforms to speed dispute settlement. A bilateral deal or BIT could also be used to catalyze new WTO rules on technology transfer, SOEs, and digital trade.

Work with US allies

Allies are critical. High-standard trade agreements, such as the Trans-Pacific Partnership (TPP), were designed to raise global norms and create incentives for China to reform. One estimate suggests TPP would have reduced Chinese income by US$40 billion annually. We argue the US should reconsider joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) or pursue similarly ambitious agreements with key partners.

Unilateral US action

Domestic policy matters most. The Foreign Investment Risk Review Modernization Act (FIRRMA) and the Export Control Reform Act (ECRA) are steps toward addressing technology transfer and national security risks, but the controls must be targeted and coordinated with allies to avoid harming US competitiveness. Finally, the US should rely more on WTO-consistent trade remedies, such as anti-dumping and countervailing duties, rather than broad tariffs that undermine the system.

Conclusion

The US-China economic relationship is too large and consequential for simplistic solutions. We argue that competition with China does not preclude cooperation, but meaningful progress requires patience, enforcement, and adherence to market principles. Above all, the United States should resist ‘fig-leaf’ deals and instead pursue reforms that strengthen both the bilateral relationship and the multilateral trading system that has underpinned global growth for decades.

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