Legal Matters: China, Trade, and Politics

In Conversation with Stanford Law Professor Alan O. Sykes

Former Ambassador to China Max Baucus, LLB ’67 (BA ’64), remembers the first time he went to China soon after he was first elected to the Senate.

“An old airport, dirty old roads with weeds coming out of the concrete. And bicycles everywhere,” he recalls before sitting down for the interview that follows. He is, by now, a frequent visitor to China, where he has developed close friendships and associations during his six terms in the Senate and three years serving as ambassador to China from 2014 to 2017. “It’s the scale of the place that really makes an impression. China is just so big—with so many people. Half the world’s power is consumed in China, half the world’s steel is produced in China, and half the world’s coal. It’s a very important relationship for us to get right.”

Baucus credits his interest in China to Mike Mansfield, the senior senator from Montana in the 60s and 70s, who was professor of Far Eastern History before entering politics. Mansfield became a mentor to Baucus when he was elected junior senator from the state in 1978, after serving two terms as congressman from Missoula. China has been a central focus of Baucus’ career ever since, and he became a strong advocate for engaging and opening up trade with the emerging power.

Over the course of his tenure in the Senate from 1978 to 2014—a 36-year run that earned him a place in his state’s historical records as its longest-serving senator—Baucus gained a reputation as a moderate Democrat who worked closely with his Republican colleagues and got things done (he was the primary sponsor of 45 bills that were enacted).

He held powerful appointments including chairman of the Senate Committee on Finance, where he was a strong free-trade advocate, leading passage and enactment of agreements with 11 countries including Australia, Chile, Singapore, and South Korea. During his tenure on the committee, he helped to normalize trade relations with China and orchestrated congressional approval of permanent normal trade relations with China in 2000, facilitating China’s entrance into the World Trade Organization in 2001.

President Obama appointed Baucus to serve as ambassador to China in 2014, saying, “For more than two decades, Max Baucus has worked to deepen the relationship between the United States and China. The economic agreements he helped forge have created millions of American jobs and added billions of dollars to our economy, and he’s perfectly suited to build on that progress in his new role.”

Baucus’ enthusiasm for China is matched by caution—and the need for the U.S. to develop a clear strategy in dealing with the country. For him, the Obama-negotiated Trans-Pacific Partnership, TPP, presented the best opportunity for a framework. In the waning hours of his ambassadorship, as the 2016 presidential election approached, Baucus clocked more air miles than he could count to rally support for TPP, making the long journey back to D.C. from his post in Beijing for meetings with some 40 members of Congress—Republicans and Democrats alike—urging them not to fold to political pressure.

Today, as a regular contributor to CNBC’s news shows, he continues to weigh in on international issues—particularly the escalating trade war with China. He considers the U.S.’s rejection of TPP a huge mistake that will reverberate in the years to come.

“TPP was the most important geopolitical matter to cross my desk when I was serving,” says Baucus. “It would have fostered stronger ties with our allies in Asia, allowing for open trade but also giving us a unified and coordinated platform to negotiate with China on a range of economic and geopolitical issues.”

While serving as ambassador to China is the capstone of Baucus’ career, it is perhaps his service as chairman of the Senate Committee on Finance—and his stewardship and eventual passage of the historic Affordable Care Act (ACA) in 2010—that he will be most remembered for. Baucus made bipartisan involvement in shaping the act a priority, but the ACA eventually passed without any Republican votes. And though he was disappointed by what he saw as his Republican colleagues’ pullback from the health care overhaul and his own party’s mishandling of its rollout—which at the time he called a “train wreck”—still, he counts passage of the bill as one of his greatest legislative achievements.

Legal Matters: China, trade, and politics Max Baucus, Former U.S. Senator from Montana and Ambassador to China

Illustration by Brian Cronin

“We came up with a uniquely American solution. It was a major first step in the right direction,” he says. “And we worked very hard on it—all of us on the committee, Republicans and Democrats. It was bipartisan when we started—a real team effort over almost two years of hearings and seminars. And the country was so ready to see us do something about health care. It was disappointing when it became partisan.”

During his long political career, Baucus navigated the partisan trenches of Congress, gaining the respect of Republicans for his willingness to cross party lines and the wrath of Democrats when he went further than some in his party wanted, as when he partnered with Republican Senator Chuck Grassley to draft President George W. Bush’s first tax cut and helped Republicans pass the Medicare prescription-drug bill.

But he was a survivor in a state that has, over the course of his four decades of service, changed from liberal leaning to firmly conservative (from 1997 to 2006, he was the only Democrat elected to federal office in Montana) and back again. Through it all, Baucus has found a way to speak to and for the people of Montana—the state of his birth. He is a fifth-generation Montanan, his family’s roots deep in this Western landscape. His grandfather helped bring aviation to the state and his father owned a large ranch outside Helena. High on his list of career accomplishments is the work he has done for his state—particularly his efforts to protect well over a million acres of public land in Montana.

“I’m proud of everything we’ve done for Montana. But protecting our land was particularly important,” he says.

Alan O. Sykes, Professor of Law and Warren Christopher Professor in the Practice of International Law and Diplomacy

Much like Ambassador Baucus, Al Sykes has put international trade and the ever-increasing exchange of goods and ideas among nations at the front and center of his career. But it is perhaps fair to say that he is the antithesis of a politician. He is soft-spoken and un-showy—but pointed in his arguments. A lawyer and economist, Sykes is widely recognized as being in the vanguard of applying careful economic analysis to the study of international economic law.

As the world becomes more interconnected and interdependent, this field is gaining greater attention, particularly with the rise of economic superpowers such as China and trading blocks such as the European Union. And while the pace of change may be quickening, some of the key economic and legal issues can be tracked through Sykes’ scholarship. Take, for example, Legal Problems of International Economic Relations, one of the first casebooks in the field, which he co-authored in 1995 through its sixth edition in 2013; his contrarian take of Chinese currency manipulation in Currency Manipulation and World Trade, co-authored in 2010 with Robert Staiger; and Economic Foundations of International Law, co-authored in 2012 with Eric A. Posner, which offers a framework for assessing legal issues related to global warming and international crime and the challenges of enforcement.

Sykes’ scholarship and teaching encompass international trade, torts, contracts, insurance, antitrust, international investment law, and economic analysis of law. And not only does he teach about international issues, he also teaches an international cohort of students in Stanford Law School’s LLM program in International Economic Law, Business and Policy, for which he is the founding director.

Sykes has been a member of the executive committee and board of the American Law and Economics Association and served as reporter for the American Law Institute Project on Principles of Trade Law: The World Trade Organization. He is on the board of editors for the Journal of International Economic Law and the World Trade Review, and a member of the editorial board of the American Journal of International Law.

Sykes began his legal career in 1982 as an associate with the Washington, D.C., firm of Arnold & Porter. In 1986 he began his academic career at the University of Chicago Law School, where he was on the faculty until 2006. He was on the faculty of Stanford Law School from 2006 to 2012, served on the faculty of New York University Law School from 2012 to 2014, and in 2014 re-joined the faculty of Stanford Law.

—By Sharon Driscoll

Legal Matters: China, trade, and politics Max Baucus, Former U.S. Senator from Montana and Ambassador to China 2

Max Baucus, LLB ’67 (BA ’64), with members of the Democratic Senate leadership during the affordable care act negotiations (Photo by Chip Somodevilla/Getty Images)

SYKES: You seemed to have an early interest in China. How did that evolve?

BAUCUS: I care a lot about China and have long felt strongly that we need to better understand each other—to get to know each other’s countries. I became interested in China early on in my political career. I knew Mike Mansfield, a professor of Far Eastern History at the University of Montana who later served as majority leader in the U.S. Senate in the 60s and 70s and then became the U.S. ambassador to Japan. Mike was a big reason that I spent a lot of time thinking about China. While I was serving in the Senate, I took several delegations of Montana business people over to China and I brought back to Montana four or five Chinese ambassadors to the United States, because I felt that they should know about Montana and Montana should know a bit about them. The current ambassador, Cui Tiankai, and Zhang Yesui, Yang Jiechi, and several other Chinese ambassadors joined me in visiting with my constituents in Montana.

SYKES: China’s entry into the WTO was critical to its strong economic development. You were a U.S. senator during the controversy over China’s most favored nation (MFN) status and WTO accession negotiations. Can you talk about that?

BAUCUS: It was clear to me that China was going to play a very large role in America’s future, and the world’s future for that matter. It made eminent sense that China should be part of the WTO, because it’s far better that, as much as possible, we all play by the same trade and investment rules. I was very impressed with Chinese Premier Zhu Rongji who at the time was helping lead China toward economic reform begun by his mentor Deng Xiaoping. I was very involved in “most favored nation” discussions back then under Jackson-Vanik—discussions that were linked to the larger WTO deal.

The key challenge was legislation passed by Congress—I think it was in the 70s—essentially stating that MFN would not be automatically extended to Communist countries. Rather, MFN would be granted only annually—not permanently—and with conditions. For example, certify that no Chinese products are made by the PLA [People’s Liberation Army]; certify that China is adhering to certain human rights declarations and ILO [International Labour Organization] labor provisions, etc.

The yearly renewal of MFN with conditions created more problems than it solved. Both for China and for the U.S. I thought it was nuts.

"TPP was the most important geopolitical matter to cross my desk when I was serving. It would have fostered stronger ties with our allies in Asia—allowing for open trade but also giving us a unified and coordinated platform to negotiate with China on a range of economic and geopolitical issues."

Max Baucus, LLB '67 (BA '64)

SYKES: Didn’t you introduce the MFN bill?

BAUCUS: Yes. I introduced a bill with annual conditional MFN declarations. At the time, it was very controversial. Man! Liberal Democrats in the Senate just took my head off. “Oh, you’re kowtowing to China!” they exclaimed. But for me it was the right thing to do, and the change finally passed. It’s true that the WTO set conditions that were a little bit more favorable to China, as a developing country, than for the United States, which I thought was fine.  You’ve got to take things one step at a time. But the terms set back then and China’s entrance into the WTO made a lot of sense to me. If China had not entered the WTO, our current friction with China would be much worse than it is today.  Nevertheless, the WTO needs to be reformed today so that China plays by the same rules as the U.S. and other Western countries.  It should no longer be granted developing country status.

SYKES: China has made huge progress in the last 18 years since joining the WTO. Is China playing fair?

BAUCUS: I’d say that China just took advantage of provisions that allowed it to develop and grow. China subsidized its export industries and restricted many foreign industries from exporting into China. China learned about technologies from U.S. companies. They forced technology transfer and in many cases stole American intellectual property. After entrance into WTO, Chinese exports worldwide exploded and the American trade deficit ballooned. Even so, because of the size of the Chinese market many American companies began to realize that they could still do business in China. And many did.

Is China being fair? By our standards in America and the West, the answer is clearly no.  China has not been fair.  By Chinese standards, China will say they’re being fair.  They’re just taking advantage of their special status under the WTO.  More important is the cultural difference between the U.S. and China. We Americans care more about process. Is the transaction fair? Does it conform to the rule of law and is it protected by an independent judiciary?  Chinese care less about fairness and process. They care more about results—looking for commercial advantage, doing the deal, almost regardless of whether it is fair or not.

"I'm not sure this administration is clear about what they're aiming for. Is it structural reform or is it a short-term reduction in the trade deficit? Our negotiations seem to be pursuing the former, whereas our President seems more interested in the latter."

Max Baucus, LLB '67 (BA '64)

SYKES: What do you think were China’s missteps?

BAUCUS: China has done quite well in the last 40 years. From their perspective, they haven’t taken many missteps. Their astounding economic growth has also fueled world growth.

Nevertheless, some of the current rising tension between the U.S. and China can be laid at their feet. Some of the tension is natural as China’s rise automatically challenges the U.S. Yet, I think China made a mistake in fueling U.S. anxiety when it touted its Made in China 2025 program stating that in a few years it will pass the United States in developing key future technologies such as AI, 5G, new materials, and quantum computing. That frightened a lot of people. It certainly frightened American politicians. It was a mistake for China to brag about eventually surpassing U.S. technology.

From our perspective, it was a mistake for China to so brazenly take control over islands in the South China Sea. China just took the islands, thumbing its nose at the unanimous international ruling in The Hague that China violated the United Nations Law of the Sea. For China, “might made right.” That certainly doesn’t sit well with Americans.

There are other challenges. Essentially, other actions taken by China that raise our anxiety but which China would not call mistakes. President Xi’s solidifying control over the Communist Party and the country from our perspective has caused our respect and certainly our trust in China to slide. That’s probably a mistake as we see it. Corralling millions of Uyghurs in Xinjiang Province makes it worse.

SYKES: Many American companies have complained about the challenges of breaking into the Chinese market. Are these complaints fair?

BAUCUS: Yes, but my main impression was that American companies could do well in China if they really worked at it. It’s kind of corny, but when I was there, I came up with what I call my three P’s of doing business in China: You’ve gotta be patient, you’ve gotta be positive, and you’ve got to be persistent. You’ve got to stick with it, and in a positive way, not in a negative way. And it helps if discussions are private. After a while—not always—but after a while, a U.S. company, or even the U.S. government, would make real headway. I’ve seen many U.S. companies succeed with positive persistence.

SYKES: Listening to you, I hear China has grown a lot, it has taken advantage of developing nation status and other opportunities, and it’s tough and ambitious. But isn’t China a bad actor in certain ways?

BAUCUS: “Developing nation status” is dated. It should be deleted. The developed world for too long has allowed China to maintain developing nation status. Until that’s changed, China will continue to take advantage of it.

As I’ve said, they’re a bad actor in a good number of ways. There’s no question. The question “Is China a bad actor” is important. The better question is regardless of whether China is a good or bad actor “What should American strategic policy be toward China.”

SYKES: How about in the business arena?

BAUCUS: Yes, that too. But what I’m getting at is that there’s a way to deal with China. China will be China, but there’s a way for us to get along. To give you an example, in 2014 the Chinese government promulgated a proposed banking guideline. Essentially, the proposed guideline provided that by 2018/19, all components in Chinese banks, including servers, routers, etc., had to be domestic, i.e., provided by local, domestic companies in China. At the same time, they all would have to provide a source code, data localization, and a backdoor, so the government would have access to communications.

Well, that was just anathema to our way of doing business. I talked to a lot of business leaders and I flew down to Silicon Valley and met with the usual suspects: Tim Cook at Apple and a bunch of others. We got organized and we pushed back. China can be a bully and they’ll push as far as they can, until you call them on it. We had to push back.

We had a coordinated campaign. I spoke as strongly as I could with the Chinese leadership. So strongly that Premier Li Keqiang told the U.S. government that he listened to me because ambassadors usually don’t get emotional. I guess I was emotional. We got the American Chamber of Commerce to strongly protest. The U.S.-China Business Council, the European Chamber of Commerce, the European Commission, business organizations in Japan and South Korea, all protested just as strongly. Guess what? China backed off. They backed off because they could not divide and conquer. They could not split one country or company off against another. We were unified. It was a big lesson to me in dealing with China.

Legal Matters: China, trade, and politics Max Baucus, Former U.S. Senator from Montana and Ambassador to China 1

Senator Max Baucus, LLB ’67 (BA ’64), welcomed to China in March 2004 by Wang Xinkui, head of Shanghai WTO Affairs Consultation Center (AP Photo/Eugene Hoshiko)

SYKES: But it doesn’t always work. They’ve closed off entire sectors from trade.

BAUCUS: That’s right. In special seeds and agriculture, for example, they would politely listen but not agree to our entreaties. The Chinese just won’t take our beef. I worked on that for years and they still won’t. Of course, many U.S. high-technology companies find the Chinese market virtually closed. To say nothing of Amazon, Facebook, and the New York Times. It’s tough. They do discriminate to protect themselves—their businesses and their government.

SYKES: What did you think of the Trans-Pacific Partnership (TPP) and our withdrawal from it?

BAUCUS: TPP was the most important geopolitical matter to cross my desk when I was serving. It would have fostered stronger ties with our allies in Asia—allowing for open trade but also giving us a unified and coordinated platform to negotiate with China on a range of economic and geopolitical issues.

I took it upon myself to fly to Washington two months before the 2016 election to rally support for TPP and I met with 45 different members of Congress on that subject alone—Republicans, Democrats, in both houses. I did not see it as a political matter at all. I didn’t care about that. But I could tell right away that it was toxic. Members of Congress squirmed and looked the other way. Hillary Clinton opposed it because labor opposed it and she wanted to be the nominee. When Trump railed against TPP, all the Republicans started to oppose it. That was a huge mistake. Facts got lost in campaign slogans. Would TPP make American businesses and the American political position in Asia stronger? Clearly, yes! On a net basis it would have modestly created jobs. Our Asian allies wanted us to pass it.  Our military Pacific commanders wanted it. Withdrawal from TPP was a critical mistake. Moreover, when President Trump touts “America First,” the subliminal message he’s conveying to the rest of the world is that we’re better than you. That does not help matters internationally.

SYKES: How do you view the current trade negotiations—and escalating trade war—with China?

BAUCUS: They’re not going well. We’re not going to get the major changes in the Chinese economy that we want: No more forced technology transfer, elimination of ownership requirements, IP protection, etc. We will get a reduction in the trade deficit because I suspect the two presidents will agree on China buying soybeans and Boeings. Again, I doubt that there will be much progress on the structural issues.

TPP would have helped because we would be seeking relief in conjunction with our Asian allies. But going it alone is virtually impossible. It’s true that the tariff war has probably hurt China more than it has hurt the U.S. Yet, China can manage the damage by working with other countries and because they can withstand pain more than Americans realize.

President Trump is right, however, in more strongly addressing China’s unfair trade practices. But he’s going about it in the wrong way. Unilateral Section 301 tariffs won’t work. They are a big burden on U.S. business and consumers and they force China to retaliate with tariffs of their own. U.S. tariffs also allow the Chinese to effectively play the nationalism card. Already Chinese consumers are buying fewer U.S. products.

SYKES: What should we be trying to achieve in this deal? And what do you think of this administration’s strategy, if you can perceive one?

BAUCUS: Oh, that’s a tough one. Because it assumes that everything’s on the up-and-up, and I’m not sure everything is on the up-and-up. By that I mean that the president might wait on an agreement until he gets closer to the 2020 election.

But I’m not sure this administration is clear about what they’re aiming for. Is it structural reform or is it a short- term reduction in the trade deficit? Our negotiators seem to be pursuing the former, whereas our president seems more interested in the latter.

The United States essentially needs to come up with a strategic plan to deal with China—on all levels including geopolitical and trade. We so far don’t have one. We’re too ad hoc, too reactive. We need to develop a strategic plan for China as best we can. Then, be clear with China as to where we can agree, what we can accept and what we cannot accept, explaining clearly and credibly that otherwise there will be consequences.

When I was our ambassador, almost day by day, there was a new issue—something else China would be doing. We would react. We weren’t acting according to any long-term U.S. strategic plan. It was seat of the pants. It was stunning, frankly.

China plans for the long term with respect to the United States and the rest of the world, and we have to do something similar. Whereas China is autocratic, has virtually no rule of law or independent judiciary or freedoms of the press, we Americans, with values we cherish, must deal with biannual democratic elections, and free press. It makes it difficult to plan for the long term. But we have no choice.  As difficult as it is, we must try.

We also must show China respect—not call them names but deal with them as adults. It should be done in private—not by Twitter, not publicly. Everybody talks about the Eastern culture of saving face. Well, everybody likes to save face and not be embarrassed! It is clear to me that the Chinese and Americans are a lot alike—we have similar goals, aspirations, and desires. People are people, worldwide. Both governments should keep that in mind when they’re negotiating.

Professor Alan Sykes Q&A on the New U.S.-China Trade Agreement

SYKES: What do you think of the administration’s use of tariffs?

BAUCUS: I think these trade tariffs are a huge mistake. The tactics we are using with respect to China are haywire. The tariffs hurt American consumers and American business. And the Chinese have got to retaliate—they have no choice but to save face. The trade war escalates. Things have gotten out of hand. I’m wondering whether President Trump actually is going to wait until a date that’s closer to election to secure a trade deal.

SYKES: So you think it might just be a political game to have a trade war and then declare victory when it’s over and take that to the election?

BAUCUS: President Trump doesn’t call me up for advice! But that has occurred to me. By next summer, they might agree to something and maybe China will agree to something that will probably amount to fig leaves in terms of addressing structural reform in China. But they’ll have something to walk back the tariffs, and the stock market will just lap it up. So, as I said earlier, I’m not sure everything is on the up and up here.

SYKES: Intellectual property and forced technology transfer issues are central to the trade talks. What should we be trying to achieve? What realistically could China agree to in those areas?

BAUCUS: These solutions take a long time, but we are already seeing some progress—apart from these talks—on the IP side of things. China has several intellectual property courts dedicated to IP disputes. I’m told by IP lawyers that they’re getting better. Interestingly, almost all the cases are brought by Chinese companies against Chinese companies. And it’s my understanding that the courts rule in favor of the U.S. companies more often than not.  So American companies are making some headway. But it took time—years—of discussion and persistence to make that headway. We have a long way, still, to go.

SYKES: How about the issue of state-owned enterprises (SOEs)? A lot of people say that SOEs compete unfairly because they’re subsidized themselves or else they confer subsidies on favorite Chinese private companies. What if anything can be done, do you think?

BAUCUS: Yes, it is a problem. But I am not optimistic about it being solved in this trade negotiation.  Under President Xi, SOEs are almost a Chinese cultural core issue that he will not negotiate away.

SOEs are not just a problem for American companies—they are also a problem for the private sector in China. I go to China four or five times a year, and I talk with my Chinese friends, many of them businesspeople. A lot of them are pushing against the favored status of SOEs. In time, I expect some change will come from inside China.

I believe there is going to come a time when there will be more economic reform—but that, unfortunately, is threatening to the leadership because the more there’s economic reform, the more the leadership fears it will lose power. Eventually, continued pressure both internally and externally will cause President Xi to open up more.  It will take time.

SYKES: Historically, we know that countries with economies that have been micromanaged by their governments have not done very well economically. Is this a reason for us to be less concerned about the rise of China?

BAUCUS: Oh, I think that we should be very concerned about China—regardless of SOEs. It’s so big—the scale just strikes you when you go there. And it’s so opaque. China will do well for the foreseeable future.

I think that the U.S./China relationship is one of the most important in the world. Look at the trend line too. Its GDP has been doubling, roughly, every 10 years and military spending is doubling every six, seven years. As China grows and its GDP exceeds that of the U.S., how are we going to get along? I mean, our relationship with China may well determine the living standards of U.S. citizens—and of Chinese citizens and people throughout most of the world. How well we work through this current negotiation, and more importantly how well we manage the relationship, will have a major effect on the lives of our children and grandchildren.

SYKES: Pivoting to national security, in 2012 the U.S. banned companies from using Huawei networking equipment and it was recently added to the Department of Commerce’s Bureau of Industry and Security entity list in mid-May, after an executive order from President Trump, in effect banning Huawei from U.S. communications networks. How serious do you see the security issues associated with Huawei, in particular, and our commercial dealings with other Chinese entities more generally? And are we pursuing the right strategy by prohibiting Huawei and similar companies from doing business in certain ways?

BAUCUS: Clearly, it’s a national security concern. It’s very challenging because it’s so effective and it’s a stealth technology.  It’s not visible like Sputnik or Pearl Harbor. Again, the U.S. government has to negotiate this issue firmly and persistently. We also need to work with our allies who share these security concerns.

So far, the U.S. seems to be sanctioning Huawei mostly on its own. It won’t work. The more we restrict Huawei sales in the United States and insist that American companies cannot sell chips and other products to this or another Chinese company, the more we as a country try to pressure our allies not to do business with Huawei or another company, the more we lose. Huawei has doubled down. It’s developing its own chips, 5G network, and operating systems.  Huawei and other Chinese companies are going their own way. Whether through China’s “belt and road” initiative, or with others such as India, South America, and even Europe—they will bypass us and do business elsewhere. We’re going to isolate ourselves and, I think, lose in the long run. It’s another casualty of America First.

SYKES: Thank you for being so generous with your time. It’s been a pleasure talking with you.

BAUCUS: You’re welcome. Happy to do it.