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The Trump administration does so many foolish things in trade policy — steel and aluminum tariffs on treaty allies under bogus national security pretexts — that one can miss or discount cases where the president and his team are on target.
That is largely the situation in the administration’s decision to challenge China’s aggressive high-tech mercantilist trade regime.
Under the cover of a bewildering maze of regulations and behind-the-scenes demands, Chinese officials have systematically raised barriers and closed off China’s information and communications technology sectors to foreign competition.
For once, the president and his trade advisers have done their homework and are not just blustering without solid evidence.
The March 22 report by the Office of the U.S. Trade Representative on Chinese practices related to forced technology transfer, intellectual property (IP) and subsidized, targeted foreign high-tech investment by Chinese state-owned enterprises (SOEs) is solidly researched and buttressed by scholarly analyses and real-world experiences by leading U.S. trade associations and individual corporations.
Looming over all of the intricate specifics of highly developed Chinese protectionist practices is the avowed commitment by Beijing’s top leaders to replace a high proportion of foreign technology with domestic Chinese technology.
This goal is no secret; it is laid out in the now-famous document, “Made in China, 2025.” The Made in China plan calls for 70 percent “self-sufficiency” by 2025.
As the administration documents, forced technology transfer is often a direct element of forced joint ventures in key sectors. As an example, in the automobile sector, China’s car industry has been almost entirely built by joint ventures with world-class foreign companies.
In the burgeoning New Energy Vehicle (NEVs) sector (plug-in hybrids, electronic batteries and fuel cell vehicles), Beijing is steadily moving to mandate higher percentages of NEVs in the future, and it is also granting substantial subsidies to move the programs along.
But it is also increasing pressure on foreign joint venture partners to transfer the latest technology (software, advanced battery techniques) as a condition of participating in the program. In the evolving strategic field of cloud computing, China forces foreign firms to contract with a local data center and not deal directly with either businesses or individual customers.
In addition to wholesale theft of intellectual property until recently, China’s legal and administrative IP regime allows Chinese companies to play fast and loose with IP rules, particularly in joint ventures.
It is common practice for Chinese partners to “upgrade” existing joint venture patents and then produce products on their own, without any effective recourse by the foreign partner.
Beyond this, China’s licensing regime for foreign companies (including IP) is rife with discriminatory provisions, including highly burdensome indemnification clauses protecting Chinese domestic partners and safety and environmental boards that allow access by Chinese competitors to vital technical information.
The Trump administration seems to be embarking on a two-pronged attack on China’s high-tech mercantile regime. First, it is bringing a case before the World Trade Organization (WTO), arguing that Beijing’s forced technology transfer and IP practices violate China’s terms of WTO accession.
Second, it is invoking Section 301, the provision in basic U.S. trade law that authorizes the president to proceed unilaterally against a wide variety of alleged unfair trade practices. China will no doubt challenge this policy in the WTO, but in the meantime, the administration should move ahead quickly with bilateral negotiations.
The president has threatened China with $60 billion in tariff penalties if President Xi Jinping and his top cohorts don’t respond with changes. Tariffs may ultimately not be the right weapon against Chinese mercantilism — invoking investment and capital market restrictions may be more effective.
But at least, with a mix of possible retaliatory measures on the table, the Trump administration has the chance to move beyond the talk-talk-talk stalemate of the past decade.
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