The US recently announced that it would soon file suit against China in the World Trade Organization (WTO) over Chinese trade barriers as well as violations of intellectual property through piracy of DVDs, video games, CDs, books, and other good. The decision is a change in the long-standing approach of the US, defined as "engagement," in which the US has overlooked Chinese violations of various laws and norms -- such as in human rights as well as economic -- in order to not derail the process of tying China more tightly to the international political and economic community. For example, after the Tiananmen Square massacre in 1989, the economic sanctions imposed by the US only lasted about 6 months (although a joint arms embargo imposed by the US and the EU is still in place today). When newly-elected President Clinton tried to condition renewal of Chinese Most-Favored Nation status on improvements in Chinese human rights policies as a response to the perceived soft American reaction to Tiananmen Square, Clinton was forced to abandon his threat and back away from confrontation.
The policy of engagement is based on two assumptions. One is that the process of domestic economic growth will create a climate more conducive to the development of a middle class, which in turn will demand political reforms, such as property rights and increased access to information, to protect their new-found wealth and status and to ensure future competitiveness. Such political reform will inevitably move the country closer to democracy, and following the logic of the democratic peace theory, democracies are less bellicose. Thus, China's peaceful rise can be assured by turning the country into a nation of rich, middle-class consumers.
The second thread of engagement is an argument that as China's economy grows, China will become increasingly tied to international economic and political institutions, such as the WTO. As that interdependence grows, China will come to identify its national interest with cooperation, not confrontation, as confrontation would risk upsetting the apple cart, threatening to undermine all of China's economic ties.
This larger policy of engagement, however, does create a moral hazard problem, in which China is encouraged to "cheat" in the short-term, knowing that the US is taking a long-term approach, and won't punish defection too seriously for fear for ruining the larger relationship. This explains, among other things, the "China-Google" controversy from last year.
So why is the US willing to challenge China now? For one, the process of Chinese integration into the global economy and political superstructure has proceeded nicely. Chinese entry into the WTO marked a critical junction; if China was willing to join the WTO and alter its laws to meet membership requirements, it is possible that the appropriate level of economic and political integration has occurred, and that China now identifies its interest with the status quo.
In my dissertation, as well as an article I published in the journal Security Studies entitled "Institutional Signaling and the Origins of the Cold War," I argued that institutions are vitally important to international politics not only for their intended benefits, but because they force states to reveal private information about their type and preferences. Complying with an institutional obligation forces a state to revel that it values adherence more than defection. That enables other states to then judge the first state's intentions and preferences.
China will be faced with a separating equilibrium -- a costly decision that will force actors of one type to choose one action, while actors of another type will not be willing to pay the cost and thus will choose a different action; this then reveals the preferences of the actors -- in the WTO: Risk losing in the WTO process and be forced to change its laws and behaviors (something China obviously would prefer not to do, otherwise the laws and behaviors in question wouldn't exist), or refuse to comply. Refusal will, however, force the EU and the US to question Chinese commitment to the multilateral economic and political institutions that make up the international system. Why would China be allowed to benefit from those institutions if it won't meet its obligations and responsibilities? Failure to comply would put at risk the economic growth that has buoyed the Chinese state. But, if China would prefer to pursue its own path, if it sees the extant rules as incommensurate with its national interest, it will not be willing to pay the price of WTO compliance.
The suit filed by the US against China signals that the US is ready to test Chinese intentions. All eyes will be on China to see if it complies with the institutional processes and any adverse ruling. If it does, the policy of engagement will be justified. If not, however, expect to see increased confrontation and suspicion of Chinese intentions. My guess is that China will comply. There's simply too much at stake for China to prefer being a revisionist state that seeks to undermine the status quo.