China, Again

Stimson Spotlight

China, Again

By William Reinsch

I had planned this week to write about something else, but the Trump administration’s action on China prompts me to return to what has long been one of my favorite topics. As those of you reading this know, the president on August 14 ordered the U.S. Trade Representative to consider initiating a section 301 investigation into China’s intellectual property and technology transfer policies. This is good news, though I don’t think it will necessarily lead to a happy ending.

It is good news because it shows that the administration has figured out what our most serious problems with China are and is presumably preparing to deal with them. It is also a tiny bit gratifying because it addresses the problems I identified in a previous column, although I am 100% confident that is not because anybody in the administration is paying any attention to me.  (This is in the category of “even a blind hog gets an acorn now and then” which I wholeheartedly subscribe to).

It is also good news because it suggests that somebody in the administration is actually listening to what the business community is telling them and that they are willing to broaden their focus beyond imports and also drill down on the problems U.S. companies face in China. 

In the midst of the quiet rejoicing, however, let me offer some cautionary notes.

First, it is a mistake to link this to North Korea. China’s tech transfer requirements strike at the heart of American high tech competitiveness. Going easy on China in return for short-term cooperation on North Korea would be a serious long-term mistake. 

Second, the media is already beginning to treat this as an investigation that ends in retaliation.  That misses the point. The intent of section 301 has always been to produce negotiations, not penalties. It is a mistake, particularly at this early point, to spend time debating the utility of various trade actions that U.S. might take. USTR will be using the time to accumulate evidence that supports its allegations, evidence it can then use to try to persuade China to change its practices. Focusing only on the endgame does the process a disservice and complicates getting the Chinese to the table.

Third, even if USTR’s investigation does lead to a negotiation, chances of success are limited for three reasons.

  1. China’s policy of forced technology transfer has worked very well for them, but they are not yet where they want to be. They will not be anxious to give up a successful policy simply because the foreigners don’t like it.
     
  2. The American complaints go to the core of how the Chinese economy and polity operate. What we will be asking them to do will inevitably mount a challenge to both their nonmarket system and to the party’s control of the society.
     
  3. On some issues, like IP theft and technology transfer as a condition of doing business, the Chinese could well agree to do something. It’s easy to promise not to steal after you deny you were doing it, look at the Obama-Xi agreement in Sunnylands. China already promised not to make tech transfer a condition of doing business in their WTO accession agreement. (They get around that by having the Chinese joint venture partner demand the transfer rather than the government). Getting renewed commitments on this may be possible, but without vigorous monitoring and enforcement they won’t mean much.

Similarly, if we try to tackle discrimination against U.S. firms operating in China — i.e. non-national treatment  —  like under the Anti-Monpoly Law, we might be able to make some progress because there may be some winnable WTO cases there, which the Chinese will understand.

Addressing IP issues in digital trade and cloud computing, including forced localization of data storage will be much harder because for China it is not just a trade issue; it is a national security and public control issue. The Chinese are suspicious of US ICT products (as we are of theirs), and they are determined not to let them in to the extent they can get away with it. They will insist on having their own back doors to those products for censorship and Great Firewall purposes, which would fatally compromise the integrity of our products. Those are not issues a trade negotiation can address in any meaningful way. 

It is classically American to think that all problems can be solved if we just sit down and talk about them rationally. The 301 investigation’s greatest value might be that it shows us our optimism is misplaced. That, in turn, might bring us, finally, to the strategy I recommended two weeks ago — stop focusing on Chinese practices in China and instead focus on restricting their unfair practices in the U.S. and going head-to-head with them in third countries. Those are things we can do for ourselves rather than things we have to persuade them to do for us. 
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William Reinsch is a Distinguished Fellow with the Stimson Center, where he works principally with the Center’s Trade21 initiative.


Photo credit: Håkan Dahlström