May 16, 2018 12:14 PM

Opinion: China’s Trade War With U.S. Is About Technological Dominance

By Yukon Huang

The current trade war between the United States and China is not about trade. Driven by the unique role played by the U.S. dollar, large budget deficits and low personal savings rates, America has been running trade deficits for 40 straight years, long before China even became a major trading nation. As many economists have noted, America’s trade deficits have little to do with trade barriers and tariffs, and reducing it has little to do with China.

This war is about protecting the technological edge that has made the United States the world’s dominant economic power. China is accused of violating World Trade Organization (WTO) guidelines by “forcing” foreign firms to transfer their technology to China as a condition for accessing its domestic market. China denies that this is official policy, and documented examples of “forced” transfers are nearly impossible to find since companies always have the option to say no and walk away.

Even if there are such policies requiring technology transfers, proving it is difficult since such intentions are unlikely to be put in writing. In a 2016 U.S.-China Business Council survey of American firms doing business in China, requests to transfer technology came up in 19% of the proposed transactions. Only 10% of these resulted in no deal, but in the rest, some kind of compromise was struck that resulted in an agreement involving technology transfer that was generally mutually beneficial.

The concern then becomes whether a policy of requiring foreign firms to form a joint venture with a Chinese partner is “fair.” Such an arrangement is common practice globally, especially in developing countries. What makes the China situation seemingly unfair, however, is that its huge market size gives Chinese firms excessive leverage in negotiations with foreign companies. If one foreign firm does not see the arrangements as attractive enough to share its technology, there will likely be others that do.

The concept of fairness depends in part on whether transferring technology from developed to developing countries is a globally worthwhile objective. A key determinant of economic growth is technology development, and the more that the intellectual knowledge created is “diffused” across firms and countries, the faster that economies grow.

Given the relative benefits and costs of developing new technology, not counting China, nearly 90% of the global research and development is done in developed countries. For developing countries that are further away from the technological frontier, the key to more rapid growth is through technology transfers from developed countries. Developed countries have broadly endorsed this process as essential to narrowing income differences across countries.

WTO guidelines indicate that as long as intellectual property rights are protected, developed-country members should promote the transfer of technology to enable developing countries to create a sound and viable technological base. While the guideline is targeted to low-income countries, it has been generally seen as applying to all developing countries. What makes China’s situation unique is both its size and its capacity to “adopt” and make use of foreign technologies.

The World Bank has an index showing that China has done far better than other developing countries in adopting technology from abroad. Adoption comes from imports, licensing agreements and foreign investment, most of which is conducted in line with globally accepted norms. Current tensions largely reflect the fact that China is just too big. If China were divided into, say, 10 countries with similar policies and outcomes, there would not be any concerns.

The very few countries that managed to move from middle- to high-income status were almost exclusively East Asian economies that were able to absorb technologies from the West and then move on to develop their own branded technologies as they reached high-income levels. Joint ventures can be a powerful tool in this process and also mutually beneficial for foreign firms, such as the arrangement that U.S. auto companies have with their Chinese counterparts. U.S. officials have argued that while China’s desire to become more innovative is understandable, its efforts to condition market access to the transfer of intellectual property rights by foreign firms will hinder, not promote, this goal. Many foreign companies have expressed concerns over recently proposed regulations on ICT products and services that would limit foreign access to China’s markets on supposedly national security grounds.

Often, theft is raised as issue. Cross-border technology “theft” has been around for centuries, and even the United States has been guilty. China has argued that they have been addressing these concerns and that intellectual-property theft is also a problem for domestic Chinese firms. Surveys of U.S. firms show that they sense an improvement in enforcement of intellectual property rights, but nevertheless, many foreign firms feel that they are less welcome in China than previously.

There is much that China can do to improve its foreign investment climate. Stronger adjudication courts would strengthen the sense of neutrality. The requirement for joint ventures is no longer needed in many activities given the increased competitiveness of Chinese firms. More generally, liberalizing entry in high-value services would be good for both foreign investors and Chinese firms by increasing competition. These issues should be major topics for discussion between the U.S. and Chinese negotiators, rather than trade tariffs.

The author is a senior fellow at the Carnegie Endowment and author of “Cracking the China Conundrum: Why Conventional Economic Wisdom Is Wrong.”

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