He accuses China of increasing trade deficit of America, in violation of the rules of the world trade organization and in the use of dishonest methods to obtain Western technology.
Most economists marvel at the ignorance of trump in matters of nature in their external trade balances, but many generally agree with his allegations concerning intellectual property. However, according to Professor of the Chinese Academy of social Sciences Yu Yongding in his article on Project Syndicate, the evidence supporting these accusations, too, to put it mildly, weak.
According to the results of trade investigations initiated by the administration to trump last year in accordance with section 301 of the law On trade, China was accused of accepting foreign technology through licensing restrictions discriminatory, unfair agreements, technology transfer, targeted investments abroad, illegal intrusions into computer networks of American companies, as well as cybercrash intellectual property.
“The weight of the evidence,” conclude the authors of the report shows that China uses to restrict foreign involvement in the economy to force American companies to transfer their technology to Chinese organizations.
As far as the US and China are important to each other
However, these arguments completely convincing, as it appears in the report. Start with the fact that Chinese companies do not suffer from a lack of capital (due to chronic excess of savings in the country), so for them the main motive of trying to attract direct investment from abroad is to access foreign technologies. According to WTO rules, these companies have the right to demand technology transfer from its foreign partners on a commercial and voluntary basis.
Fortunately for China, foreign companies are very eager to go on the market, and not least because there are preferences for direct investments. Moreover, for decades, foreign and local companies readily agreed with the Chinese strategy of “market access technologies,” which requires that foreign investors have “imported” the advanced technology in exchange for access to the Chinese market.
Whatever shortcomings they may see in this approach, the fact remains that foreign companies, including companies fully owned by foreigners or foreign partners, Chinese firms have received much benefit from their investment in China. According to a report published by the world Bank in 2006, foreign multinational companies, the average rate of return from investment in China amounted to 22%. And according to the report prepared by the Conference Board of World Enterprises, in 2008 the average level of profitability of capital in China for U.S. multinational companies was 33%.
However, since 2009, profit before interest and taxes from foreign enterprises in China decreased, while in 2017, the situation has improved. This is a problem that the Chinese government should be taken seriously. Anyway, no one can argue that foreign companies are forced to work in the Chinese market. The statement that American firms are forced to transfer technology to China thus have no meaning.
Moreover, these statements are generally not based on any conclusive evidence. Management of United States trade representative (USTR abbreviated), which prepared the “report on section 301”, claims to have conducted many interviews, but all participants in these surveys were answered anonymously, and their statements are nothing more than speculation: there is nothing that could be taken into consideration by the court. And even if these claims were true, they cannot conclusively indicate that forcing foreign companies to transfer technology is the dominant practice in China.
Equally unconvincing and the charges in the “report on section 301” concerning investments abroad, namely the utilization of China’s “state capital and is extremely opaque investment networks to facilitate the acquisition of high technologies abroad.” According to USTR, the Chinese government has not only clearly defined its investment strategy, but also has an army obedient to him firms that are willing to implement this strategy.
Meanwhile, according to a report by the American enterprise Institute (AEI), from 2005 to 2016, the Chinese company has carried out only 202 investment in the United States, including mergers and acquisitions, and only 16 of them (totaling $21 billion) were directed to the technology sector. In the period from 2013 to 2016, Chinese investors have spent much more – $94 billion on U.S. real estate.
Sectoral distribution of foreign investment by Chinese companies shows that there are no signs of effective work of the market mechanisms that would have forced Chinese companies to invest rationally. On the contrary, the company make independent – and often irrational investment decisions that sometimes lead to major losses.
The last question raised in the “report on section 301” refers to cyberformula intellectual property and confidential business information, which, according to the U.S., performed by the Chinese government. The report acknowledges that the number of cases of Chinese cyber espionage declined after 2015, when China and the United States agreed that neither party will not “engage in or knowingly support cyberworks intellectual property, including trade secrets and other confidential business information for the sake of commercial benefits.” However, some us officials insist, if such a reduction is likely to be a consequence of the transition to a more centralized, polished, and sophisticated attacks carried out by a smaller number of participants.
In reality, China is gradually progressing in the protection of property rights. As noted by Nicolas Lardy of the Institute for international Economics them. Peterson, “the amount of payments of China for license fees and royalties for the use of foreign technology has increased dramatically in recent years, reaching last year to almost $30 billion, almost a fourfold increase in a decade”. Moreover, continues Mr. Lardy, “China probably ranks second in the world in the scale of royalties payable for the use of modern technologies within the national borders of the country.”
Clearly, “report on section 301” is based on rumor, imagination and half-truths. And the question is obvious: how does a trump can take the political decisions with such serious consequences, namely to impose trade duties, which could provoke a disastrous “trade war” if it is based on such weak arguments. The answer is obvious: this report is designed to justify the decision, not to provide the information necessary for decision-making.
All this does not mean that the issues raised in the “report on section 301” is a pure invention, or that China fulfilled its WTO obligations. On the contrary, China is still a lot to do to improve the quality of WTO compliance, particularly in regard to opening the financial services sector and strengthening the protection of intellectual property rights.
However, trade issues should be addressed in the WTO: the United States should use the dispute settlement mechanism of that organization to satisfy their claims. Considering that the trump does not demonstrate such approaches, China should consider the possibility of initiating a new round of negotiations on the WTO in cooperation with Australia, Canada, European Union, Japan, Mexico and New Zealand. Multilateralism needs to be preserved no matter with US or without them.
“Trade war” waged by trump, won’t be able to force China to abandon its quest to catch up with developed countries. China is ready to wage a war of attrition. Unfortunately, both sides, as well as the rest of the world will suffer in the process, serious losses.
