Source: Financial Times

A high-level US negotiating team will arrive in Beijing later this week to talk about trade and technology wars. These discussions are not really about trade. America has been running trade deficits for forty years, long before China even became a major trading nation. As many experts have noted, America’s trade deficits are driven largely by its low savings rates and this has little to do with China. The team’s reported request for China to cut its bilateral deficit with the US by $100bn is illogical conceptually and in its practicality.

This economic war is more about protecting America’s technological edge. The White House’s latest round of trade sanctions draws on Section 301 of the 1974 Trade Act to cite China for Intellectual Property Rights (IPR) violations and unfair investment practices. IPR theft is not the issue. To the extent it exists, it should and is being addressed.

The more serious concern is whether through its Made in China 2025 initiative and other industrial plans, China is unfairly subsidising strategic industries and violating World Trade Organization guidelines, in particular by “forcing” foreign companies to transfer their technology to China as a condition for accessing its domestic market.

All countries have programmes to support strategic industries. The issue is more about forced transfers. China denies that this is official policy; documented examples of “forced” transfers are nearly impossible to find or any such intentions are unlikely to be put in writing.

The focus then turns to the process — whether it is “fair” to require foreign companies to form a joint venture with a Chinese partner as a condition to operate in selected activities. In general, transfer of technology between companies and nations is seen as desirable since the more widely that newer technologies are shared, the more rapidly countries grow. As long as IPR is protected, the international community sees this transfer as a desirable objective.

The WTO specifically notes that as part of the bargain to protect IPR, “developed country members are required to provide incentives for their companies to promote the transfer of technology to least-developed countries”. While the reference is to the poorest countries, the principle is seen as applying to all developing countries and regulations that are in conflict with this sense are often simply ignored.

What makes this seem unfair is that the Chinese company has an advantage in negotiating with foreign groups that may feel obliged to have a presence in China given its huge market. From China’s perspective, that access is seen as a benefit to be negotiated, since if one company is unwilling, there are likely to be others that are. There is logic, however, in arguing that China’s huge size gives it monopoly power in dealing with foreign groups and that this needs to be addressed.

From Beijing’s viewpoint, moving up the value chain is the key to escaping the so-called middle-income. The handful of success cases that have done so are almost exclusively East Asian economies that were able to absorb technologies from the west and then move on to develop their own. Thus, putting up barriers to inhibit technology transfer is tantamount to preventing it from progressing to high-income status.

That joint ventures can be a powerful tool in this process is the subject of a recent National Bureau of Economic Research study that concludes that joint ventures between US and Chinese groups led to benefits from technology transfer that were twice as high as those done through wholly foreign-owned investments. Because the selected Chinese partners were likely to be among the more productive and financially stronger companies, the US companies also benefited from the arrangement. Thus, the authors conclude that, “the move away from joint ventures might amplify the negatives and attenuate the positives arising from foreign investment.”

US officials have argued that such practices can be counterproductive. Often theft is raised as an issue. The annual Section 301 Report classifies countries into various categories of what are labelled as “violators” of IPR. China compares with other successful Asian economies that have been cited as violators during their evolution from middle to high-income status. Rapidly growing developing countries are prone to IPR violations, but this disappears once they reach higher income levels.

A commonly held view is that as China’s economy becomes more developed, institutions will evolve, leading to better IPR protection. This in fact is happening: 96 per cent of the respondents to the 2018 AmCham China survey responded that China’s IPR enforcement had improved in recent years. Yet 75 per cent of the respondents still say that they feel less welcome operating in China.

There is much that China can do to change the atmospherics, such as strengthening the effectiveness of its adjudication courts and eliminating the requirement to form joint ventures in many areas as Beijing has announced for autos.

At the international level, WTO guidelines need to be revised to address contested investment practices. Meanwhile, the best means to resolve America’s specific concerns is to revive discussions on the Bilateral Investment Treaty with China that has been put on hold.

This piece was originally published in the Financial Times.