But the evidence supporting these claims is also weak, at best.
The so-called Section 301 trade investigation launched by Trump’s administration last year accused China of acquiring foreign technologies using discriminatory licensing restrictions, unfair technology-transfer agreements, targeted outbound investment, unauthorised intrusions into US commercial computer networks and cyber-enabled IP theft. ‘The weight of the evidence’, the report concludes, shows that China uses foreign-ownership restrictions to force US companies to provide their technologies to Chinese entities.
But the case is not nearly as strong as the report makes it out to be. For starters, because Chinese firms are not starved for capital — thanks to China’s chronic savings glut — so gaining access to foreign technologies is their main motivation for trying to attract direct investment from abroad. Under WTO rules, they are free to seek technology transfer from their foreign partners on a commercial and voluntary basis.
Fortunately for China, foreign firms have been more than willing to enter its market, not least because of its preferential treatment of direct investment. In fact, for decades, foreign and domestic firms alike have willingly accepted China’s ‘market access for technology’ strategy, which required foreign investors to ‘import’ advanced technology in exchange for entering the Chinese market.
Whatever downside they may see to this approach, the fact remains that foreign enterprises — including completely foreign-owned companies and foreign partners of Chinese firms — have benefited greatly from their investments in China. A 2006 World Bank report put the average rate of return for foreign multinationals in China at 22 per cent. According to a report compiled by the Conference Board of World Enterprises, the average rate of return on capital for US multinationals in China in 2008 was 33 per cent.
That said, the earnings before interest and taxes of foreign enterprises in China had been worsening since 2009, but in 2017 the situation improved. This is an issue that the Chinese government must take seriously. In any case, no one can claim that foreign companies were forced to operate in the Chinese market. The argument that US firms have been compelled to transfer their technology to China thus lacks significance.
In fact, that argument was never backed by persuasive evidence. While the US Trade Representative (USTR), which compiled the Section 301 report, claims to have conducted many surveys, all respondents are anonymous and their assertions are little more than hearsay — nothing that would be admissible in a court of law. And, even if regarded as true, such claims would not definitively prove that forcing foreign enterprises to transfer their technology is prevalent in China.
The Section 301 report’s accusations regarding outbound investment — namely, that China uses ‘government capital and highly opaque investor networks to facilitate high-tech acquisitions abroad’ — are similarly flimsy. The USTR assumes that China’s government not only has a clearly defined investment strategy, but also that an army of obedient firms is willingly carrying it out.
Yet the American Enterprise Institute reports that, from 2005 to 2016, Chinese companies have made just 202 investments including mergers and acquisitions in the United States, only 16 of which — totalling US$21 billion — were in technology sectors. Chinese investors spent far more than that — US$94 billion — on real estate in the United States in 2013 to 2016.
The sectoral distribution of Chinese firms’ outward investment indicates that there is not even an effective market mechanism at work driving Chinese firms to invest in a rational way. Instead, companies are making independent — and often irrational — investment decisions, which sometimes lead to large losses.
The final issue raised by the Section 301 report relates to cyber-enabled theft of IP and sensitive commercial information, which the United States claims is carried out by the Chinese government. The report acknowledges that since 2015 — when China and the United States agreed that neither would ‘conduct or knowingly support cyber-enabled theft of intellectual property, including trade secrets or other confidential business information for commercial advantage’ — the number of detected incidents of Chinese cyber-espionage has declined. Yet some US officials insist that this likely reflects a shift toward more centralised, practiced and sophisticated attacks by a smaller number of actors.
The truth is that China has been making steady progress in its protection of property rights. As Nicholas Lardy of the Peterson Institute of International Economics points out, ‘China’s payments of licensing fees and royalties for the use of foreign technology have soared in recent years, reaching almost US$30 billion last year, nearly a four-fold increase over the last decade’. In fact, Lardy continues, ‘China probably ranks second globally in the magnitude of licensing fees paid for technology used within national borders’.
The Section 301 report was, it seems clear, based on rumour, imagination and half-truth. The obvious question is how the Trump administration can base a policy decision as consequential as trade tariffs — which could trigger a catastrophic trade war — on such weak evidence. The obvious answer is that the report was intended to justify, rather than inform, the policy.
This is not to say that the issues raised by the Section 301 report are mere fantasy, or that China’s fulfilment of its WTO commitments has been impeccable. On the contrary, China has plenty of room to improve its WTO compliance, especially when it comes to opening up its financial-services sector and strengthening IP protections.
But trade-related issues should be addressed within the WTO framework, with the United States using that body’s resolution mechanisms to address its grievances. In lieu of such an approach by the Trump administration, China should consider launching a new round of WTO negotiations in cooperation with Australia, Canada, the European Union, Japan, Mexico and New Zealand. Multilateralism should be preserved, with or without the United States.
Trump’s trade war will not succeed in driving China to abandon its aspiration to catch up to the advanced economies. China is ready to fight a war of attrition. Unfortunately, both sides — as well as the rest of the world — will incur heavy losses in the process.
Yu Yongding is a Senior Fellow at the Chinese Academy of Social Sciences and former member of the Monetary Policy Committee of the People’s Bank of China.
This article was first published here on Project Syndicate.
The main problem I have with this is that it completely overlooks the link between military and economic power, as well as the need for market-based comparative advantages to ensure a fair and prosperous global economy.
China cannot be examined through a strictly economic lens because their reforms and ambitions are military in nature as well. China’s unilateral and unprovoked aggression against neighbors, even in instances where the U.S. has acquiesced completely to their demands and interests, shows that there is an urgent need to develop a new security framework that counters China’s aggression. This peace at all costs mentality has primarily taken the form of economic policy. China’s economic model focuses on acquiring technology because it wants to surpass the U.S. technologically, and these trade imbalances the U.S. has with the China have been a mechanism through which China has funded military buildup. Economic power is a prerequisite to military power, enriching enemies is a way to lose influence period, but with China its even worse than that. Since type of trade relationship that existed with China pre-tariffs was friendly to their made in China 2025 program, it created and to a lesser extent still does the risk that an economically self-sufficient China would be able to insulate themselves from the effects of international sanctions in the event of military conflict, perhaps even making up for lost demand with war.
But even if China’s ultra-nationalism does not stick around and military conflict never erupts, we still must reckon with the fact that the types of trade barriers that Trump is erecting parallel what China has had for decades. By limiting market access, demanding access to new technologies, and by having massive one way tariffs, China deprives countries around the world both rich and poor of the ability to specialize in the industries they can do most efficiently. China could be the most inefficient nation in the world at producing something and still have exports in that because they use government imposed economic controls to maintain a trade balance. Confronting China in a way that evens out these, even with our own tariffs and market barriers, will help facilitate international competition and growth by allowing comparative advantages to naturally distribute wealth and trade balances to a variety of countries instead of almost always benefiting China. China’s debt bubble adds a double effect because the shocks to the international economy it would create if it gets out of control.
Point is, gone are the days where there was an easy way out of these problems. We must confront China on trade for the sake of U.S. national security, regional stability, and the stability and fairness of the global market. You can’t have your cake and eat it, for a rules based order on trade to exist there must be reciprocity. When we are trying to use the WTO and international trade guidelines to justify a pro-China position such as this we are effectively conceding that we live in a positive economic system in which tariffs by the U.S. are acceptable whether you want to admit it or not. These double standards benefiting China are dangerous and frankly absurd.
1 “No one wins in a trade war”.
This is true.
2 “Yet US President Donald Trump seems determined to pursue one with China, which he accuses of causing the United States’ trade deficit, violating World Trade Organization rules and using unfair practices to acquire foreign technology.”
These are all lame excuses and fake news because, in my view, it is not about a trade war but instead about a currency war with China after she had the audacity to launch the crude oil futures in Shanghai on 26 March 2018, to be settled in yuan and not in petrodollar. The crude oil exporters can then exchange the yuan for gold at the Shanghai Gold Exchange or in Hong Kong or in Dubai.
This means that the yuan is now de facto backed by gold and is challenging the legitimacy of the US dollar as the world reserve currency which is backed by nothing but the business end of a cruise missile.
The last time two countries proposed to sell oil in euros (Iraq) or in gold dinars (Libya), they were invaded or bombed into near oblivion by the United States and its rules-based coalition of the killing in the Western liberal democracies.
Saddam Hussein was deposed, captured and executed in the gallows like a treasonous traitor. Even Hillary joked about Col Qaddafi’s demise irreverently like he was a common thief: “We came, we saw and he died.”
But with China it is a different ball-game because China, like her strategic partner, Russia, is already prepared for WW3 and both can destroy eight cities with each hypersonic nuclear bomber, dropping from space at 20 times the speed of sound and the US military has yet no defense against this type of weapon.
3 So what can Trump do to defend the US dollar, which is backed nothing but a promise to pay with yet more green papers, when US national debt is already over US$21.197 trillion and its unfunded debt was US$200 trillion in 2013, according to Prof Lawrence Kotlikoff and another US$21 trillion are missing in the Pentagon and in other US government agencies, according to Prof Mark Skidmore of Michigan State University?
Nothing, except to accuse China of “causing the United States’ trade deficit, violating World Trade Organization rules and using unfair practices to acquire foreign technology”, and to try to destroy China’s economy.
But these are misrepresentations because according to former VP Dick Cheney, debt is not a problem as the US can print unlimited amounts of US dollars to pay for it.
Perhaps, Trump does not understand that all the US needs now is not trade wars but more printing presses to buy consumer goods from China, Russia, Brazil, India, Mexico and the EU, when the US dollar is STILL the world reserve currency.
And having a strong-dollar policy, like during the cavalier Bill Clinton and Robert Rubin era, will enable the United States to buy even more consumer goods on the cheap to make ends meet for the Americans, whose voracious consumption makes up two-thirds of the GDP of the United States.
By restricting trade, US consumption will fall and so will its GDP. The liquidity of US dollars in the world will plummet and countries will be forced to turn to other currencies, like the de facto gold-backed petroyuan, euro and the ruble or even gold itself for multilateral international trade, leading ominously to the eventual demise of the US dollar as the world reserve currency.
So what happens when the US dollar is no longer the world’s reserve currency, like British pound, the French franc, the Dutch guilder, the Portuguese escudo and the Spanish peso before it?
According to Dr Paul Craig Roberts, a former Reagan Treasury official, the United States’ economy may go bust if the US dollar is no longer the world reserve currency.