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How the U.S. Should Handle China's High-Tech Ambitions

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(Bloomberg) -- President Donald Trump’s handling of the trade relationship with China poses a threat both to the U.S. and to the world economy — but even his harshest critics agree with him on one thing. China’s bid to dominate the high-tech industries of the future often bends or breaks the rules of liberal international commerce, and needs to be checked.

What’s important, and what this administration finds so difficult, is to be smart about it.

Through its “Made in China 2025” blueprint and assorted plans and directives, China’s government aims to move the country up the manufacturing value chain and dominate advanced technologies such as robotics, artificial intelligence, semiconductors and biomedicine. In this effort, China has advantages — an enormous (and relatively closed) domestic market, a capacious budget for supporting preferred industries, and a technocratic government facing no organized domestic opposition.

To be clear, China isn’t wrong to harbor such ambitions. And, so far as the basic economics goes, its success needn’t disadvantage the U.S. or any other country. The U.S. didn’t get rich in the last century at Europe’s expense: Its innovations raised living standards everywhere. That’s what trade and commerce do. In a well-functioning global system, successful economies prosper together.

In many ways, this is still happening. Take just one instance of China’s emerging technological prowess: Its success as a manufacturer of solar panels has lowered the cost of clean energy worldwide.   

But the U.S. and its partners have two pressing and legitimate concerns. First, China is seeking technological superiority in fields — artificial intelligence, robotics, autonomous vehicles, augmented reality — that will be crucial for military, not just civil, innovation. The U.S. and its allies need to maintain their edge on the battlefield.

Second, China isn’t playing by the rules. It wants access to other countries’ markets and technologies but is slow to grant access to its own. And its technological push has often relied on questionable or outright illegal methods — from rampant cyber-theft of commercial and military secrets, to subtler violations of the spirit if not always the letter of the country’s obligations as a member of the World Trade Organization.

The 200-page report produced by the U.S. Trade Representative’s office as part of its investigation of Chinese intellectual-property theft is a litany of such complaints. Companies report (mostly anonymously, for fear of retaliation) various forms of pressure to make them share technology with their Chinese joint-venture partners. Permits are withheld and approvals delayed. Demands are made through private channels, with no paper trail to prove a breach of China’s WTO commitments. Foreign companies that give way may find themselves competed out of the market once their former partners have mastered the technology for themselves.

China also uses internal and semi-official documents to set demanding self-sufficiency targets — which do not comport well with WTO undertakings. In sectors such as telecommunications and aviation, companies are directed to source 70 percent of their core components domestically by 2025. The government supports its tech companies with tax rebates, cheap financing and direct capital injections, often without reporting the money as subsidies, as generally required by the WTO. Such aid can make up more than 10 percent of operating revenue at some robot and machine-tool makers.

Opaque government funds have been used to underwrite venture-capital investments in and mergers with companies dealing in sensitive technology. In the case of German machine-maker Aixtron, one state-backed Chinese company abruptly withdrew a critical order, sending Aixtron’s share price plummeting; another state-backed Chinese firm swooped in with a takeover bid.

Where foreign technology isn’t required or desired, China has closed key sectors to outside competition. Foreign cloud-service providers have to share technology with and market their services through Chinese partners. Firms such as Google and Facebook remain banned on the mainland, and foreign technology companies can’t bid for government IT contracts.

What’s to be done?

China isn’t the first country to bend or break the rules of liberal trade — but the sheer scale of its economy makes the consequences for other countries harder to overlook. A measured response is justified. Tariffs, though, are the wrong instrument. They punish American consumers, workers and businesses as much as they hurt China. And they’re a threat to global growth, especially if they provoke a cycle of action and retaliation. The Trump administration should tailor its responses more carefully.

It should address security concerns by expanding the remit and resources of the Committee on Foreign Investment in the United States, so that the panel screens a broader range of deals involving Chinese investors. (Invoking emergency powers to ban Chinese investment in sensitive sectors seems premature.) The U.S. needs to spend more on commercial and government cyber-defenses, and on coordinating them effectively.

It should also join with partners in urging China to pursue its legitimate technological ambitions under the same rules as everyone else. The U.S. needs to enlist allies in Europe, Japan, Canada, South Korea and elsewhere — many of which it has foolishly alienated with trade threats and steel tariffs — to demand a common set of concrete reforms that would hold China to its WTO commitments. If further leverage is required, the U.S. and its partners could threaten to enforce reciprocal curbs on Chinese businesses until barriers are lifted on the mainland.

At the same time, they should acknowledge that WTO rules, written before many of these technologies were even envisioned, aren’t adequate for regulating, say, digital trade. Rather than expressing disgust with the WTO, Trump should want America to lead it, as it has before — by rewriting rules that need to be updated and putting more teeth into the enforcement mechanisms.

If that can’t be done, there are other multilateral ways to move forward. U.S. leadership of the Trans-Pacific Partnership was such a way — a means of both raising international standards and persuading China to change its policies. Trump foolishly stepped away from that initiative, but it isn’t too late to go back.  

None of this relieves the U.S. of the need to pursue its own ambitions for technological superiority — while following the rules. To support innovation, it ought to invest more, and more effectively, in education and R&D. It should make it easier for high-skilled immigrants to enter the country. And there’s no reason the administration shouldn’t set its own “moonshot” targets — backing high-tech projects that bring together the combined resources of the government, business and academia.

Competition with China need not be a problem. Approached in the right spirit, it’s an enticing opportunity. If both sides follow the rules, both will gain.

--Editors: Nisid Hajari, Clive Crook.

©2018 Bloomberg L.P.

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