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My AEI colleague Derek Scissors recently posited that for various reasons, the Trump administration’s announced intention to “sanction” China is likely to result in a “fair amount of sound and fury” without real economic results. Scissors and others have pointed to the administration’s foolhardy goal of linking US trade policy to changes in the US trade balance. There are also the misguided actions to protect washing machines and solar panels (which actually aids a Chinese-owned company) and the decisions to coddle yesterday’s industries: steel and aluminum. The upcoming steel and aluminum actions seem almost certainly to fail to achieve the intended results while introducing the dangerous precedent of invoking national security as the rationale for protection. In crafting a response to Beijing’s predatory regime, precision should replace flailing scattershot.
Months ago, President Trump commissioned US Trade Representative Robert Lighthizer to come up with a plan to punish Beijing for intellectual property (IP) theft and forced technology transfer. The results of the investigation are due in the coming weeks, and the president has stated that retaliation is coming “in two to three months.” While we do not know what action the administration contemplates, there are potentially two big problems with this exercise. First, while forced technology transfers are a real problem, this is only one element in a maze of laws, regulations, and secret practices that Chinese high-tech protectionism is composed of (see below). Second, regarding IP, the administration seems to be gravitating toward a “large fine,” based on gross estimates of past and current IP theft ($600 billion). If this is the case, the administration will face major credibility issues — specific evidence for a number of examples will be necessary to counter inevitable Chinese denials.
A better route, with ample damning material from the experience of US and other foreign firms, is to launch a broad challenge to Beijing’s technological mercantilism surrounding the information and communications technology (ICT) sector and the operation of the internet. In addition to my own analyses, a notable group of scholars, think tanks, and business associations (Asia Society, Center for Strategic International Studies (CSIS), Information Technology & Innovation Foundation, European Center for International Political Economy, and the US-China Business Council) have reached a broad consensus over the past year that the US must confront growing Chinese ICT protectionism or face both commercial crowding out of international markets and the prospect of internet fragmentation under Beijing’s “Cyber Sovereignty” rules. The recommendations that follow are a brief distillation of my own writings, plus my reading of recent reports from CSIS and the USCBC.
A central focus of the US response should be the new National Cybersecurity Law (NCL) and elements of the earlier National Security Law. Standing at the intersection of trade and investment policy and security policy, new cyber law constitutes a blueprint for disguised protectionism through its sweeping but vague definitions, standards, and regulations. In negotiations with the Chinese, the Trump administration should demand a clear delineation of what sectors and activities are encompassed under its provisions for national security and so-called state secrets.
As CSIS’s Samm Sacks has chronicled, foreign ICT companies are now subject to six separate security reviews, administered by six different agencies with multiple overlapping and conflicting requirements. The NCL also developed a new cybersecurity review regime that is administered by the Cyberspace Administration of China. The Trump administration should strongly press Beijing to consolidate these processes and provide clear guidance as to what information will be required of foreign firms. Further, the US should stipulate that the often-used Chinese stricture that in the future technology must be “secure and controllable” not be used as a means of extracting vital trade secrets and competitive tools such as source code.
China’s data localization policies are muddled, though the trend is for ever greater restrictions. Once again, security regulations loom large, as no clear guidance as to what constitutes data related to critical information infrastructure exists. In addition, government agencies are preparing “technical standards” regarding data transfer, and early editions are unclear as to definitions of what data will be included and thus restricted. As the USCBC report points out, limiting data flows creates inefficiencies for not only foreign firms in China but also Chinese multinationals that need to service customers worldwide: “These (data flow) restrictions impact foreign and Chinese companies’ ability to operate global platforms, carry out ecommerce, and perform cutting edge research and development in China.” Efforts to forestall data localization have been a top priority for both the Obama and the Trump administrations — and should remain at the forefront in future negotiations with Beijing.
Similarly, regarding cloud computing where much commercial internet activity is now being conducted, Beijing is erecting significant barriers to competition. Under recent regulations, to provide cloud services and products, companies must obtain three separate licenses. Also, importantly, foreign cloud service providers must have a local partner to obtain these licenses. Here, the US should demand a simplified licensing regime and that foreign companies not be forced to partner with a local Chinese company. Further, in mandated partnerships, foreign companies should not be forced to share ownership of software and proprietary technologies with Chinese partners.
There are additional elements of an ICT and internet negotiating strategy beyond the scope of this blog posting, but they are laid out in the reports cited above. In the most sensible scenario, the Trump administration would first present Beijing with its proposals or demands and only turn to unilateral actions such as Section 301 if rebuffed. But however it proceeds, with the proposed set of priorities, the US will be taking the offensive regarding its technological future and shaping the global rules for competing in the digital economy.
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