Correction: An earlier version of this op-ed misquoted Rob Atkinson of the Information Technology & Innovation Foundation on the extent of China’s reported subsidies for its semiconductor industry. The actual figure is $160 billion. This version has been updated.
There is much to dislike in President Trump’s trade agenda, but he is correct on one subject: China’s relentless quest to extort American “intellectual property” — technologies, business methods, patents. Trump took a swipe last week at China’s policies by ordering his top trade officials to investigate. Whether he can alter China’s behavior is unclear, but he is right to try, even at the risk of a trade war.
China has high economic ambitions, write David Dollar and Ryan Hass of the Brookings Institution. Its industrial policy, called “Made in China 2025,” envisions the country becoming the global leader in 10 crucial sectors: information technologies, machine tools and robotics, aerospace equipment, rail transport, maritime equipment, new energy vehicles, power equipment, agricultural equipment, new materials, and advanced medical products.
“These sectors will be supported by financing from state-owned [banks and] institutions and protected from open competition,” Dollar and Hass say.
To get to the top, China also needs advanced know-how. Here’s where foreign companies make a bargain with the devil. The Chinese require them to surrender technology in return for the right to invest and sell in China. There are many mechanisms: joint ventures with Chinese firms, China-based research and development centers, licensing agreements made at bargain-basement rates.
Again, Dollar and Hass:
“American companies agree to these technology transfers because it’s the only way they can access the second-largest market in the world. . . . 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 smartphones 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.”
To this legalized technology extortion must be added an indeterminant amount of illegal cybertheft of business secrets. Whatever the source, the consequences hurt Americans — and Europeans, Japanese and workers in other advanced countries. All of their high-technology industries face a slow eclipse by China’s favored firms. The aim is to substitute their production for other countries’, says Rob Atkinson of the Information Technology & Innovation Foundation. He says that the government plans to spend $160 billion to expand its semiconductor industry.
The danger of global overinvestment, driven by China’s subsidies, is obvious. “To put it plainly, China could do to semiconductors, artificial intelligence and pharmaceuticals what it has done to steel and aluminum,” Scott Kennedy of the Center for Strategic & International Studies writes in a report. If global gluts of production capacity emerge — as they have in steel and aluminum — and China protects its producers, then losses will fall heaviest on non-Chinese firms.
Finally, there’s national security. Writing last week in the New York Times, former National Intelligence director Dennis Blair and former National Security Agency director Keith Alexander argued that the mounting pillage of American intellectual property poses a threat to national security as well as the economy. “Chinese agents have gone after the United States’ most significant weapons, such as the F-35 Lightning,” they wrote.
The case for doing something is compelling; the ability to make progress is much less. Trump acted under Section 301 of the trade laws, an obscure provision that hasn’t been used extensively for several decades. It authorizes the U.S. special trade representative to investigate allegedly unfair trade practices, which could lead the president to order sanctions, including high tariffs, against offending countries.
Sounds simple. We’ll just hit China with higher tariffs until it ceases its offensive practices. Sorry, that’s not reality. The trouble is that the sanctions permitted by domestic law (Section 301) may violate U.S. membership in the World Trade Organization. China could retaliate and probably would. Boeing, Apple and U.S. soybeans are mentioned as potential targets. Down this path lies a trade war. A further complication is that, although many of China’s extortionary practices contravene the WTO’s spirit, they are not illegal under WTO rules.
Atkinson calls the Chinese system “innovation mercantilism.” He thinks that if advanced societies — the United States, the European Union, Japan, South Korea and some others — protest in unison against some of Beijing’s egregious practices, the Chinese night retreat. Dollar and Hass are dubious. They fear “a trade war, which will be ‘lose-lose.’ ”
The larger question involves how the new world order operates. Ideally, the United States and China would cooperate on many issues where they have similar interests. These would include a viable world trading system and the nuclear future of North Korea. So far, there’s scant evidence of this enlightened collaboration.
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