Trump could be on the brink of starting a trade war with China

 by David Dollar and Ryan Hass, August 9, 2017/ Brookings

President Trump is expected to direct the U.S. Trade Representative to open a 301 investigation into China’s violation of U.S. intellectual property rights, especially through forced technology transfer. This signals a tougher trade stance on the part of the administration, but it will be some months before it is clear how serious U.S. actions will be.

High-tech U.S. companies cannot currently do business in China unless they form joint ventures with local partners and turn over key technology to those partners. In sectors such as cloud computing, Chinese law also prevents the use of the foreign brand name, which would put U.S. firms at a disadvantage in the future if China ever does open up. American companies agree to these technology transfers because it’s the only way they can access the second-largest market in the world, rapidly on its way to number 1.

The list of companies operating in such ventures is essentially the roll call of top American technology firms. Intel has agreements with two Chinese chipmakers in order to get access to the market for smart phones and tablets. IBM and Advanced Micro Devices have both licensed chip technology to Chinese partners. Qualcomm has a similar partnership. Automakers have to share their technology with local partners in order to produce and sell there.

Companies that agree to operate through these joint ventures are basically betting that they can invent new technologies faster than the Chinese partners can appropriate the existing technology; otherwise, they are partnering themselves out of existence. From China’s point of view, these technology transfers are part of an industrial policy, “Made in China 2025,” aimed at making the country the technology leader in 10 priority sectors: new advanced information technology; automated machine tools and robotics; aerospace and aeronautical equipment; maritime equipment and high-tech shipping; modern rail transport equipment; new-energy vehicles and equipment; power equipment; agricultural equipment; new materials; and biopharma and advanced medical products. These sectors will be supported by financing from state-owned institutions and protected from open competition.

The U.S. faces a number of challenges in taking on these industrial policies. For one, the Chinese restrictions on import of services and inward investment are mostly legal under its World Trade Organization (WTO) accession agreement. When the Clinton and Bush administrations negotiated China’s entry into the WTO, they left the country wide latitude to restrict trade in services and inward investment. The expectation was that China would gradually liberalize these areas over time. The U.S. thought that joining the WTO was the beginning of China’s opening, but it turned out to be the end. There has been no significant opening of these areas since accession in 2001. President Xi Jinping, in particular, seems very wedded to the industrial policies and the China 2025 goals.

By launching the 301 investigation, the U.S. is signaling that it will take a unilateral approach to dealing with China’s behavior. The investigation is likely to determine that China is pursuing unfair trade practices. The dilemma, then, is what to do about it.

The U.S. has been negotiating with China on similar issues for years, and it is unlikely that China will change course easily. The Chinese economy is not as export-dependent as before, and not that U.S.-dependent. China’s exports to the U.S. are about 5 percent of its GDP, but the value added in the exports is more like 3 percent because China’s exports have a lot of imported content from Japan, South Korea, and Taiwan. A serious trade war would be a problem for China, but not such a great one that China is likely to buckle to under pressure. The fact that the Chinese delegation to the Comprehensive Economic Dialogue in July came with so little to offer suggests that the leadership is resigned to poorer economic relations with the United States. Standing firm in negotiation and punching back against any U.S. punitive measures will be better for Xi Jinping politically in the next few years. Historically, China has always responded to trade measures with proportionate retaliation. Read more…

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