Protecting America's Technology Industry From China Tariffs Aren't the Answer
Protecting
America's Technology Industry From China
Tariffs
Aren't the Answer
A month
into U.S. President Donald Trump’s trade
war with China, the conflict has generated only a flurry of rhetoric and
threats, but further escalation looms. Both sides are close to implementing
tariffs on another $16 billion worth of goods, and the United States looks
prepared to impose tariffs on a further $200 billion worth as early as the end
of August. So far, investors seem to see these tensions as temporary and
believe that they won’t damage the overall U.S. economy. The stock market has
barely budged, and futures prices for steel and agricultural goods caught up in
the conflict show that traders expect prices to return to more normal levels
within the next six to nine months.
Yet the
most important question is not how long the trade war will last but whether the
U.S. frustrations that sparked it in the first place will be addressed.
Unfortunately, the Trump administration is only partially focused on the right
issues, and so it has reached for the wrong weapons. The heart of the
commercial conflict between China and the United States is not metals and beans
or trade balances but the commanding heights of any economy: high technology
industries. The dangers to U.S. high-tech prowess are only loosely connected to
trade. That’s why tariffs
should not be playing the starring role for which they have
been cast.
DIFFERENTIAL
DIAGNOSIS
One often
hears that when it comes to the U.S.-Chinese commercial relationship, the Trump
administration has the diagnosis right but the prescription wrong. That is
largely true. The administration certainly deserves credit for raising the
urgency of unfair Chinese practices. White House economic adviser Peter
Navarro’s June report, “How
China’s Economic Aggression Threatens the Technologies and Intellectual
Property of the United States and the World,” is hyperbolic in much of its
language, but it rightly identifies various Chinese actions that create an
uneven playing field. Similarly, the Office of the U.S. Trade Representative’s
recent Section 301 investigation into the misappropriation of intellectual
property appropriately zooms in on threats to the United States’
competitiveness.
The Trump
administration seems to appreciate the challenges that Chinese industrial
policy targeted at high-tech industries creates for the United States, other
advanced economies and the industries of the future. There are four main
issues. The first comes from insufficient access to the Chinese market for
exporters and investors. “Made in China 2025,” a government strategy to upgrade
Chinese industry, and the larger 13th five year plan of which it is a part,
focus on import substitution by creating specific targets for displacing
foreign technologies. And as part of its One Belt, One Road project, China is
pressing participating countries to buy Chinese high-speed trains, solar
panels, and telecommunications equipment, which could reduce opportunities for
American businesses beyond China.
The
second consequence of Chinese policies is to undermine the value of
intellectual property. China imposes long delays before awarding rights for
foreign patents, copyrights, and trademarks; often insists on unfair licensing
terms; demands that companies transfer technologies to Chinese firms in
exchange for market access; buys foreign technology with a seemingly bottomless
bucket of public money; and sometimes outright steals foreign commercial
secrets.
The third
problem is overcapacity. China’s state-backed financing and other policy
incentives regularly attract waves of corporate investment that far outstrip
reasonable expectations of market demand. The result is a fall in prices and
profitability, with good and bad firms both suffering. Chinese state-owned
firms are better able to endure these downturns than companies in market-based
economies because the state has a habit of supporting them even in the absence
of sufficient demand, destroying otherwise healthy foreign companies and their
supply chains around the world. This phenomenon began in construction
industries, such as steel and cement, but has spread to high-tech sectors that
produce standard goods, such as solar panels and wind turbines. Electric cars
are ripe to suffer the same fate.
The final
problem is the poor governance of data. Beijing is able to collect, process,
and use data of all kinds on a massive scale. At the same time, the government
not only places huge constraints on the ways multinational companies use data
and on cross-border data flows, it also tilts the balance between privacy and
state security much too far toward the latter. This is likely to damage
businesses and consumers that rely on global data, e-commerce, and other online
services and the development of artificial intelligence applications, such as
autonomous vehicles.
TREATING THE WRONG
SYMPTOMS
Although
the Trump administration’s complaints are in many respects on the money, its
obsession with the bilateral trade balance has prevented it from finding
genuine solutions. The administration regularly cites the U.S. trade deficit as
the key problem to be resolved. According to a recent
report, the U.S. bilateral deficit in advanced technology products with
China grew from $109 billion in 2011 to $135 billion in 2017. But the great
majority of the imbalance results from shifting global investment and
transnational supply chains, not Chinese malfeasance.
Reduced
U.S. exports are not the only, or even the chief, malady caused by Chinese
high-tech policy. The damage is much broader. Devalued intellectual property,
overcapacity, and the abuse of data all stifle business investment and
profitability in the short term and smother the drive to innovate over the long
term. This translates into slower productivity growth, fewer high-wage jobs,
less consumer choice, and fewer new technologies.
In fact,
by raising tariffs or striking a trade deal in which China expanded its
imports, the United States could eliminate the trade deficit without touching
Chinese industrial policy. But such steps would not address the most important
consequences of China’s high-tech strategy. Conversely, constraining Chinese
technology policies and allowing markets to play a greater role could well
cause the United States’ overall bilateral deficit and its deficit in high-tech
goods with China to rise. That is because a more open China would attract more
foreign investment and some of that activity would result in more exports from
China to the United States. The Trump administration, unfortunately, would likely
balk at this outcome.
The
chances of escalation are higher than most appreciate. The Trump administration
is preparing tariffs on an additional $200 billion worth of goods, and Trump
has threatened tariffs on all Chinese exports to the United States. If Chinese
President Xi Jinping doesn’t then raise the white flag, it is not hard to
imagine the administration revoking China’s most-favored-nation status under
the WTO, a move that could send U.S. tariffs on Chinese goods skyrocketing well
beyond the current levels of between 10 and 25 percent that Trump has imposed.
China would likely follow suit. American businesses, workers, and consumers
would suffer, raising pressure on the Trump administration to provide far more
in relief than the $12 billion it has suggested handing out to farmers hit by
the trade war. The danger would then be that the global economy would fracture
as the world’s two largest economies cut ties with each other.
THE RIGHT MEDICINE
Tariffs,
no matter how high, cannot fix the real problems produced by China’s aggressive
approach to technology. At most, they can get China’s attention and bring it to
the bargaining table. But at some point the focus must turn to more appropriate
remedies.
To some
extent, this will mean vigorously enforcing existing rules against dumping (the
practice of selling goods abroad at a price below their domestic value),
imposing countervailing duties to offset unfair subsidies, and strengthening
safeguards against surges of Chinese imports. (The United States already has
over 100 antidumping and countervailing duties against China in place.) It will
also mean strengthening domestic rules to cut down on the leakage of
technologies that would put national security at risk to China and other
potential foes. Congress’ recent expansion of the scope of the Committee on
Foreign Investment in the United States should help address this problem.
Export controls on advanced U.S. technologies are also overdue for an update.
But much
more needs to be done. The United States should push for new international
rules that govern the development, production, and sale of high-technology
products and services. The Trans-Pacific Partnership, which Trump abandoned
last year, would have filled in a lot of the blanks in this area. Moreover, the
WTO has long been negotiating an agreement on trade in environmental goods and
is considering a similar deal on e-commerce. The United States should embrace
and lead these and other international initiatives. Taking this path would be
far more likely to work in a globalized economy than trying to negotiate a long
sequence of laborious bilateral arrangements one after another, as the Trump
administration proposes. The framework on trade announced last week between the
United States and the European Union, for example, is not a sufficient
substitute for a broad international coalition and multilateral actions taken
to counter Chinese practices.
The
United States also needs to do more to develop its own high-tech sector. The
United States and other developed countries need to provide additional funding
for basic research and for the infrastructure that will allow scientists and
engineers to devise new technologies and businesses to deploy them. Governments
not only need to incentivize the supply of new technologies, but also to
encourage the demand for their adoption and diffusion. Western countries can’t
expect to set the rules for technologies they don’t use. China’s emerging
dominance in electric cars, for example, means that the industry—from raw material
suppliers and battery makers to car manufacturers—is bending to Beijing’s
preferences. The United States shouldn’t force every family to buy an electric
car, but federal and state governments can radically raise emissions standards,
eliminate fossil fuel subsidies, support companies that are building charging
points, and offer incentives to develop and deploy better batteries, usable
hydrogen vehicles, and more efficient power grids. Policies that promote
technology pluralism and consumer choice—think tax incentives for shoppers, not
subsidies for producers—will keep the United States in the driver’s seat.
The Trump
administration is right to sound the alarm bells on China’s policies. At 20
percent of global GDP, China matters: when Beijing intervenes in the Chinese
market, people on the other side of the world feel the effects. And high-tech
sectors, which are unusually globalized, are particularly vulnerable. The
stakes mean that getting U.S. policy on Chinese technology exports right could
bring huge benefits—and that the costs of getting it wrong are even greater. August
2, 2018Trade
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