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What’s Behind The Trade War?

At the annual Long Beach – Qingdao China Sister City Association luncheon on November 9, speakers from the Chinese Consulate General in Los Angeles and the University of Southern California (USC) addressed the concerns that led up to the Trump administration’s trade war with China. At the forefront of these concerns were the Made in China 2025 initiative, China’s strategy for achieving modernization of its manufacturing industries, as well as alleged Chinese practices of intellectual property (IP) theft and forced technology transfer.

Ultimately, the speakers from USC reached the conclusion that these concerns had some legitimacy, but were to a degree rooted in misconceptions. Haiyan Liu, commercial consul for the Chinese Consulate, argued that IP theft and forced technology transfer were not perpetrated by China’s government. He painted his country as one making progress towards opening itself up to trade and a market-based economy. In contrast, he characterized the United States’ implementation of tariffs on $250 billion worth of Chinese goods as a closed-door policy to trade, and one that would not benefit either country.

There was no speaker from the U.S. government to illuminate its standing.

Setting the stage for the conversation was Bonnie Lowenthal, current vice president of the Long Beach Board of Harbor Commissioners and former state assemblymember and Long Beach city councilmember. “Almost all of the Port of Long Beach’s container cargo trade is with Asia. And most of that is with China,” Lowenthal said. “In 2017, China accounted for 69% of container imports through Long Beach and 39% of container exports.” She added, “The tariffs enacted this year will likely slow trade between the United States and China. We’re watching developments very closely, and ultimately we look forward to a resolution.”

According to Liu, one-third of the United States’ trade with China flows through the U.S. Customs and Border Protection’s Los Angeles district. “The state also attracts the largest number of Chinese investors, students and tourists in the United States,” he noted.

Brian Peck, director of the Transnational Law and Business Center and adjunct law professor at USC’s Gould School of Law, and his colleague Fangfei Dong, director of policy, research and programs for the center, outlined the White House’s concerns surrounding the Made in China 2025 initiative, as well as China’s goals for the plan.

The Made in China 2025 plan is the focus of the Trump administration’s investigation of Chinese practices that may be harming American IP and technological development. The investigation is being conducted under section 301 of the Trade Act of 1974, with allows the president to act against a foreign government found to be violating an international trade agreement to the detriment of U.S. commerce.

“The U.S. government is very concerned about this program. The problem is not many people know very much about it,” Peck said. “Given that Made in China 2025 is the focal point of the Trump Administration’s criticism of China, and its tariffs and the trade war, let’s put it in context with the overall trade relationship between the U.S. and China. . . . Two-way trade between China and the U.S. is extremely important, not only for the United States but for here in California, Southern California and particularly for the Long Beach and L.A. ports.

“Last year, the [trade] volume equaled about $600 billion. That’s a lot of containers back and forth between China and the United States. To show the importance for the Port of Long Beach, [for] its export containers, the number one destination is China,” Peck explained.

According to Peck, for China, foreign direct investment provides “10% of its employment, 20% of its national tax revenue, 25% of its national total in terms of industrial output, and 50% of total import and export volume in the country.” These trade and economic statistics illustrate the “healthy” aspects of the trade relationship between the two countries, beyond the trade in goods deficit, he noted.

“What [Made in China 2025] is in a nutshell is an industrial policy to move China from a manufacturing-based economy to an innovation-based economy,” Peck said.

Dong gave historical context for China’s current manufacturing-based economy, explaining that China began its industrialization after much of the Western world. While major Western countries such as the United States transitioned to service-based economies in the mid-20th century, China lagged behind, she said.

To advance China’s economy and position globally, Made in China 2025 aims to “turn China into a major manufacturing power in 10 years,” Dong said. By 2025, the Chinese government seeks to “greatly increase manufacturing digitalization, master core technology in key areas,” as well as to enhance the overall quality of the country’s manufacturing industry and enhance its capacity for innovation.

The plan also seeks to position China’s manufacturing strength at an “intermediate level among world manufacturing powers” by 2035, Dong said. “And by 2049, China will become the leader among the world manufacturing powers and will develop advanced technology and industry systems,” she said.

The plan is built around existing manufacturing sectors in certain geographic regions of China, such as shipping and rail equipment, and the automotive industry, Dong said. “A certain amount of market share in these priority sectors is designated for foreign companies,” she pointed out.

But the Trump administration views the Made in China 2025 plan “as an existential threat to U.S. competitiveness in the 21st century in key technology sectors,” according to Peck. The administration’s concerns center on four of the plan’s objectives. “Promoting of R&D [research and development] capabilities by reinforcing government control of setting targets or goals,” is the first concern, he said. “The U.S. sees this as a reaffirmation of the Chinese government’s central role in economic planning, rather than moving towards a market-based economy which of course is a concern of other global trading partners,” he explained.

“Next is the goal is supporting acquisition of technology from abroad by intensifying preferential policies and financial support,” Peck said. “Here, the U.S. government’s concern is that it is the Chinese government’s intent to leverage China’s legal and regulatory system to the advantage of domestic companies over foreign companies in the targeted sectors of the Made in China 2025 plan.”

Another concern is China’s desire to “control a segment of the global supply chain,” Peck said. “The U.S. administration feels that this is unfair competition, as the program calls for the government to provide billions of dollars in support to Made in China 2025 sectors and to acquire foreign technologies to help achieve dominance via its domestic companies.”

Peck continued, “Then the fourth objective that the U.S. is concerned about is altering and creating competitive advantage by setting global benchmarks. The U.S. concern here is that China is developing global champions to dominate both China’s domestic market and global markets in the key sectors of this program.”

Peck pointed out that the United States already has “significant competitive advantage in key areas such as talent, innovation policy and infrastructure, energy policy, physical infrastructure, legal and regulatory environment.” On the other hand, “Yes, they [the Chinese] are increasing their challenge to U.S. technology superiority, but China has a long way to go.”

Ultimately, Peck said, “It’s China’s industrial policy. Countries have a right to have their industrial policy.”

Forced Technology Transfer, IP Theft And The Trade Deficit

Also behind the Trump administration’s implementation of tariffs on Chinese imports are concerns about the country’s alleged encouragement and support of American IP theft and the practice of forcing U.S. companies to transfer their proprietary technologies in order to do business in China, according to the speakers.

Peck said that the U.S. government surveyed American companies doing business in China, and found that 19% of responding executives said they had been asked to transfer their technologies to Chinese entities. “But if you look at the vast majority of those that had been requested to transfer technology, it came from their potential business partners, the private sector, rather than the central or local government,” he said. About 60% of respondents said they were “somewhat concerned, rather than overly concerned,” about their IP rights in China.

In his remarks, Liu largely focused on the benefits of bilateral trade, and pushed back against claims of practices of IP theft and forced technology transfer on the part of the Chinese government.

Liu said that the reasons behind the trade war were “not justified.”

He first took issue with the Trump administration’s concern about the trade deficit between the United States and China. He argued that the deficit exists because U.S. companies found that investing in China would give them a higher return on investment, and similarly, that consumers and importers “found that buying from China makes more economic sense.” He added, “That’s why, from 1990 to 2017, China’s share in the U.S. trade deficit has increased. Japan, Korea and other Eastern Asian countries, their share in the U.S. trade deficit decreased.”

He argued that this is a macroeconomic issue within the United States, rather than an issue of unfair trade policies.

“Another reason quoted by the initiators of the trade war is the so-called ‘forced transfer of technology,’” Liu said. “For this, I would say the fact is, the Chinese government does not have any laws or regulations to ask for investors to force foreign investors to transfer their technology to Chinese entities.” Instead, he said any agreements that require technology to be transferred from U.S. companies to Chinese businesses is a requirement made by the private sector, not the government.

In a question-and-answer session following the luncheon, Peck said that the U.S. concern about forced technology transfer is “a misperception.” He said, “Those who are very hawkish in the Trump administration believe that China is basically on a mission to destroy the competitiveness of the United States – to become globally dominate in all the high-tech sectors critical to the 21st century. And part of that strategy is IP theft. . . . But overall, the vast majority of requests for technology transfer come from private sector negotiations between two potential business partners. There is no Chinese law that requires forced technology transfer to do business in China.”

Evan Braude, a former Long Beach city councilmember in attendance, pointed out that the Chinese government often backs, and to a degree controls, companies in its private sector. “How do you consider it private if it looks private for the outside world, but we all know that it’s handled by the government officials who you have to go through to get all the approvals?” he asked.

Liu acknowledged that China has a “different system” than the United States when it comes to state-owned companies. “We have more state-owned companies, but we are also reforming this kind of state-owned enterprise system,” he said. He also said that state-owned companies play by the same rules as private sector companies. Braude said he disagreed, but left it at that.

What’s At Risk

The 40-year anniversary of bilateral U.S.-China diplomatic and trade relations is coming up in 2019, Liu noted. Since then, he said, bilateral trade in goods between the countries “increased by over 330 times.” The amount of U.S. goods exported to China in 2017 was “almost six times that of 2001, when China joined the World Trade Organization, and was five times faster than the U.S. global average growth of exports,” Liu pointed out.

In 2017, three million Chinese tourists visited the United States and 42,000 Chinese students studied at U.S. institutions of higher education, contributing a combined $51 billion to the U.S. economy, according to Liu.

Continuing to outline the benefits of bilateral U.S.-China trade and relations, Liu said, “At present, bilateral trade has reached $700 billion. The two-way investment exceeds $230 billion U.S. dollars, and annual sales of U.S. funded enterprises in China is about $700 billion. . . . According to the U.S.-China Business Council and Oxford Economics, U.S. exports to China and two-way investment supported 2.6 million jobs in the United States in 2015. Trade with China saved $850 each year for an average U.S. family.”

But Liu believes these benefits to the U.S. economy are at risk due to the current trade war. “U.S. China trade relations have been a win-win relationship, and now we are like in a battlefield, and we’re in this kind of a cross fire,” Liu said.

He used a metaphor to illustrate his point. “This reminds me of something that recently happened on a transit bus. In this incident, a passenger on the bus was angered by missing the station and attacked the bus driver, causing the bus to crash into the guard rail and fall into the river, leaving all 14 passengers perished. In the current U.S.-China trade war, I think we are facing the same danger as passengers on our two countries’ bus, as we are caught in the wrong war, at the wrong time, on the wrong grounds.”

President Donald Trump and Chinese President Xi Jinping are expected to meet during the G20 Summit in Buenos Aires, Argentina, which begins November 30.

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