- April 3, 2018 US-China
Trump’s Trade War Isn’t About Trade, It’s About Technology
Over the last ten days, the Trump Administration has unveiled a grab bag of punitive measures directed at Chinese economic statecraft: tariffs on up to $60 billion worth of Chinese imports, accusations of intellectual property (IP) theft through hacking, restrictions on Chinese acquisitions in the United States, and a World Trade Organization (WTO) complaint over China’s technology licensing laws.
The diversity of tools used (tariffs, investment restrictions, WTO cases) and activities targeted (imports, investment, and hacking) raised questions about the Trump administration’s underlying goals. Are these actions about reducing the bilateral trade deficit or stymying China’s technology ambitions? Are they aimed at protecting American IP or undermining Chinese industrial policy?
Compounding this confusion have been the mixed messages sent by the Trump administration. In announcing the tariffs, President Trump himself railed against the bilateral trade deficit and gave a quick nod to “tremendous intellectual property theft.” But Robert Lighthizer, Trump’s highly influential U.S. Trade Representative (USTR) and the man tasked with picking industries for those tariffs, has instead hammered away at Chinese industrial policy that seeks to acquire U.S. technology and use it to dominate key sectors.
While these positions aren’t mutually exclusive, there is a major difference between the remedies for a short-term trade imbalance (have China buy more U.S. goods) and the desire to maintain the United States’ long-term technological edge (prevent China from unfairly acquiring core U.S. technologies).
So what’s the real issue here, trade or technology? The answer, I believe, is found in the key policy document of the past month: the USTR Section 301 report. Both that document and the measures taken since its release indicate that, despite Trump’s own rhetoric, the main target here is Chinese industrial policy aimed at upgrading its technological infrastructure. Specifically, the latest actions seek to combat what is being viewed as Beijing’s concerted and coordinated efforts to acquire American technology in support of China’s “Made in China 2025” plan.
The Target: Made in China 2025
First approved by the State Council in 2015, Made in China 2025 is the Chinese government’s sweeping industrial policy that aims to indigenize certain technologies and establish technological leadership in ten key industries, including information technology, robotics, and new energy vehicles. After flying under U.S. policymakers’ radar the first couple years after its release, the plan is now emerging as a focal point of bilateral economic tensions.
Chinese industrial policies are dime a dozen, but what makes Made in China 2025 stand out is the breadth of its ambition, as well as the tactics employed to achieve its goals. If Made in China 2025 were to generally succeed, it would do for high-tech manufacturing what China did to low-cost manufacturing in the preceding two decades: vacuuming up a huge portion of global production and concentrating it in mainland China.
That has set off alarm bells for policymakers in several countries, and placed it at the center of recent economic frictions. In an excellent analysis of Made in China 2025, Lorand Laskai of the Council on Foreign Relations noted that the Section 301 report mentions or cites Made in China 2025 a full 116 times. Testifying before the Senate Committee on Finance, Lighthizer stated that he would like the tariffs to target the industries covered by Made in China 2025: “These are things that China listed and said we’re going to take technology, spend several hundred billion dollars and dominate the world. These are things that if China dominates the world, it’s bad for America.”
As my colleague Evan Feigenbaum has written on MacroPolo, China’s pro-active approach to technological upgrading is nothing new and dates back to the 1950s, with the Chinese government consistently viewing cutting-edge technology as key to national power. But three things have changed the U.S. reaction to this round of Chinese industrial policymaking: (1) China now has the money to simply buy up cutting-edge American firms; (2) Made in China 2025 aims for Chinese firms to dominate not just domestic markets, but also global markets that America counts on; and (3) after decades of doubting China’s innovation potential, the United States now fears the rapid pace of China’s technological catch-up, and sees Chinese technology as a major (perhaps even existential) threat to U.S. economic competitiveness.
To see how those concerns are being translated into policy, I’ll first outline the contentions of the Section 301 report, and then show how the apparently disparate actions taken in its wake all seek to address specific concerns raised by the report.
President Trump initiated the Section 301 investigation last August, with the goal of determining whether Chinese government actions resulted in unfair or illegal acquisition of American IP. Released on March 22, the Section 301 investigation answered that question with an emphatic “yes.”
The report breaks down Chinese actions into four categories, each with its own dedicated section: forced technology transfers, discriminatory licensing requirements, overseas acquisitions, and illegal commercial hacking. But beyond a straightforward accounting of nefarious Chinese practices, the 182-page document is laced with a more significant argument: these actions are systematically undertaken in support of Chinese industrial policy goals, specifically Made in China 2025.
In the first section, the authors draw on surveys of U.S. firms to show that Chinese authorities require foreign firms to form joint ventures with Chinese companies and transfer valuable IP to them as a precondition to operating in China. The demands for technology transfers are often made indirectly or orally to avoid explicit violation of WTO rules that prohibit the practice. Though these transfers occur across a range of industries, they’ve been particularly onerous in industries targeted by Made in China 2025, like new energy vehicles and aviation.
The subsequent section on discriminatory licensing practices lays out Chinese laws that systematically discriminate against foreign firms licensing technology to Chinese companies. Among those rules is one requiring that after ten years of paying for licensing, the Chinese firm will be allowed to use the technology in perpetuity after the contract expires. These practices apply across the board for U.S. firms, not specifically to Made in China 2025 industries.
It’s in the third section, on overseas acquisitions, that the report’s authors make their strongest case. Spanning over 90 pages—nearly half of the entire report—the authors lay out how different Chinese government entities have shaped and funded a shopping spree of American technologies. It describes in detail Chinese acquisitions in strategic sectors highlighted by Made in China 2025, such as integrated circuits, robotics, aviation, and biotechnology. Many of those acquisitions involved government backing that worked against market forces or gave Chinese firms a financial edge in outbidding other buyers.
While these acquisitions by no means account for the entirety (or even the majority) of China’s multi-year outbound investment surge, they do paint a compelling picture of Chinese government support for non-market-driven purchases of key technologies that support Made in China 2025’s goals.
In the final major section, the report outlines the impact of commercial hacking originating from China that seeks to steal IP or trade secrets from U.S. companies. This section largely rehashes longstanding accusations of Chinese cyber corporate espionage, though it does highlight overlap between the U.S. industries targeted and those encouraged by Made in China 2025. It makes the argument that while these cyber attacks have declined substantially since 2014—with some of that decline attributed to a 2015 agreement between Presidents Obama and Xi—they still regularly occur and continue to damage American firms.
In the wake of the Section 301 report’s release, the Trump administration has threatened various actions to address issues raised in the report: tariffs on $50 to $60 billion worth of Chinese goods, restrictions on Chinese investment in the United States, and a case at the WTO. At first glance these appear scattershot, and the public focus on tariffs has led many to mistakenly view this scuffle as centering on the trade deficit.
But upon closer examination, these moves largely target the four categories of unfair technology acquisition listed above: technology transfers, discriminatory licensing, overseas acquisitions, and hacking.
Category two—China’s licensing practices—is the target of the WTO case. It specifically challenges the Chinese law that grants Chinese entities the right to use foreign technology in perpetuity after a ten-year licensing contract expires.
Category three—Chinese acquisition of U.S. technology firms—is addressed by President Trump’s order for the Treasury Department to propose measures restricting Chinese investments. To that end, the Treasury Department is apparently weighing the use of the 1977 International Emergency Economic Powers Act, a law that would allow the president to block transactions or seize assets in the face of an “unusual and extraordinary threat.”
Whether the administration takes that action or not, stepped up scrutiny and legislative reforms to managing foreign direct investment in the United States are already tightening the vise on Chinese acquisitions. Both of these investment restrictions may paint with too broad a brush—blocking legitimate, purely commercial acquisitions of U.S. firms—but it seems that’s a price the administration is willing to pay for undermining Chinese industrial policy.
That leaves categories one and four: forced technology transfers and commercial hacking. Neither of these are as susceptible to the responses listed above. Demands for technology transfers are often made informally and between companies, making them hard to prosecute at the WTO. On a more fundamental level, the WTO was built to deal with more traditional barriers to trade, not the more nuanced world of protecting IP. Finally, commercial espionage is not something you can “block” like a Chinese acquisition of a U.S. company.
So instead the administration has opted for tariffs, a punitive measure designed to exact an economic cost for Chinese behaviors that it deems predatory. In an attempt to send a more targeted message, Lighthizer has said the tariffs will focus on Made in China 2025’s target industries.
Tariffs are an imperfect response for several reasons. It sends the wrong message (“trade war”), and also opens the United States up to a legal challenges at the WTO for taking unilateral action. If the administration loses that challenge, it risks allowing China to position itself as a defender of free trade and existing norms, while the United States comes across as the bull in the China shop of international agreements. Or, if things really come to blows on the trade front, China may simply be able to exert enough targeted pressure on U.S. agriculture to require a favorable settlement. China’s recent imposition of tariffs of up to 25 percent on 128 categories of American goods, and the subsequent damage to stock prices for American manufacturers, gave a first taste of what may lie ahead.
But, as Scott Kennedy of the Center for Strategic and International Studies has argued, an even more fundamental risk lurks: that President Trump will settle for a “pyrrhic victory” of a reduced trade deficit while letting the deeper issues of technology acquisition go uncorrected. In that world, China could drive a wedge between the president and USTR by appealing to Trump’s personal obsession with trade deficits, letting China buy its way out of a deeper challenge to its industrial policy with a couple hundred billion dollars of soybean imports and airplanes.
If the above tariffs result in a protracted and painful trade war, that “pyrrhic victory” of increasing U.S. exports to China could end up looking like an appealing outcome to President Trump. But given the realities outlined in the report that the President himself commissioned, it’s one he should not choose.
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