Jun 29, 2018 00:15 PMJun 29, 2018 00:15 PM

OPINION

Opinion: Trump Presents Weak Case for Trade War

Against China
By Yu Yongding

Photo: VCG

No one wins in a trade war. Yet U.S. President Donald Trump seems
determined to pursue one with China, which he accuses of causing America’s
trade deficit, violating World Trade Organization (WTO) rules, and using
unfair practices to acquire foreign technology. While most economists marvel
at Trump’s ignorance of how trade balances work, many broadly agree with
his charges regarding intellectual property (IP). 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, unauthorized intrusions into U.S.
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 U.S. 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 — 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 transfers 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%. According to a report
compiled by the Conference Board of World Enterprises, the average rate of
return on capital for American multinationals in China in 2008 was 33%.
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 U.S. 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
Office of the U.S. 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 U.S., only 16 of which — totaling $21 billion — were in
technology sectors. Chinese investors spent far more than that — $940
billion — on real estate in the U.S. 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 U.S. claims is carried
out by the Chinese government. The report acknowledges that since 2015 —
when China and the U.S. 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 U.S. officials insist that this likely reflects a shift toward more
centralized, 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 $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 rumor, imagination, and
half-truths. 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 fulfillment 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 U.S. 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 U.S.

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, a former president of the China Society of World Economics and

director of the Institute of World Economics and Politics at the Chinese
Academy of Social Sciences, served on the Monetary Policy Committee of the
People’s Bank of China from 2004 to 2006.

Copyright Project Syndicate, 2018.

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