Saturday, April 07, 2018

Trump’s Right to Say He’s Not Launching a Trade War With China. He’s Doing Something Bigger.

hmmmm…. something, all right.

Trump's Right to Say He's Not Launching a Trade War With China. He's Doing Something Bigger.

No one likes trade friction, but after decades of failing to stop Chinese theft of American intellectual property, there are no more no-cost solutions.

Photo Illustration by Kelly Caminero/The Daily Beast

Hours ago, President Trump, acting under the authority of Section 301 of the Trade Act of 1974, instructed U.S. Trade Representative Robert Lighthizer to consider the imposition of tariffs on $100 billion of Chinese goods. These tariffs are on top of those Lighthizer proposed Tuesday on $50 billion of China's products. All these duties are intended to remedy China's theft of American intellectual property.

"We are not in a trade war with China," President Trump tweeted Wednesday morning.

The president is correct. What looks like a trade war is really a struggle for the control of the technologies that will dominate coming decades.

The trade war narrative seems at first glance to fit the facts. On March 8, the United States, pursuant to Section 232 of the Trade Expansion Act of 1962, imposed tariffs on steel and aluminum from China and other countries.

On March 22, President Trump issued a memorandum directing Lighthizer to consider 301 tariffs on China. Beijing, within a few hours, announced tariffs of its own on $3 billion of U.S. goods.

This Wednesday, Beijing made another announcement, this time proposing tariffs on $50 billion of imports from America.

This looks frightening because no one knows what happens when a dispute engulfs the planet's two largest economies. As Neil Irwin of The New York Times wrote Thursday referring to China, "a trade war with such a major trading partner is without precedent in modern times."

President Trump, whether he ends up in a trade war or not, has zeroed in on the core of the competition between China and the U.S. Lighthizer's proposed tariff list Tuesday includes duties on some mundane items but especially goes after the Chinese aerospace, information and communications tech, and robotics sectors. As Zhou Hao of Commerzbank in Singapore told Bloomberg, "The U.S. list suggests that the government is targeting the 'Made in China 2025' initiative."

That initiative, announced in 2015 by China's State Council, seeks to make that country nearly self-sufficient in 10 crucial industries, including aircraft, robots, electric cars, and computer chips. Beijing has set out specific goals for market shares by industry.

The plan aims for near self-sufficiency in components by 2020 and materials five years later. Moreover, Beijing, stepping into trade-violation territory, wants Chinese industries to possess 80 percent of their home market in the listed sectors.

CM2025, as the initiative is known in China, calls for jumbo-sized, low-interest loans from state investment funds and development banks, aid for the purchase of foreign competitors, and research subsidies.

Trump fired back at Beijing's plans. In his March 22 memorandum, the president directed the Treasury secretary to "propose executive branch action … to address concerns about investment in the United States directed or facilitated by China in industries or technologies deemed important to the United States."

The president has already stopped two Chinese acquisitions of American tech companies. First, he thwarted Canyon Bridge Capital Partners, a Chinese-controlled buyout fund, from taking over chipmaker Lattice Semiconductor. More important, Trump just stopped Singapore's Broadcom from making a run at Qualcomm, the giant competing against China's Huawei and ZTE in the race to dominate 5G wireless communications.

The news of Trump's additional $100 billion in tariffs is now tanking markets. Investors don't like "trade wars" or disruptions of any kind.

Yet the current relationship between China and the U.S. needs to be disrupted. Chinese theft of intellectual property is sapping American innovation and therefore America's economy. The IP Commission, in a 2017 update (PDF) to its landmark 2013 report, estimates the U.S. each year loses somewhere between $225 billion to $600 billion in intellectual property through predatory means. It almost goes without saying that most of that loss is, directly or indirectly, to China.

Some say the annual loss is far less than the Commission thinks, but the theft, even according to low estimates, is grievous for a country that has developed an innovation-based society.

Innovative America is now competing with China not just for dominance in 5G but also in artificial intelligence and quantum communications and computing.

Beijing, in order to compete, is devoting substantial state resources to these areas, some $300 billion for CM2025 alone. The U.S. Federal government, on the other hand, has been reluctant to match the Chinese commitment. Washington, D.C.-based trade expert Alan Tonelson told The Daily Beast that the Trump administration's record when it comes to support for basic research "is mixed at best."

If Washington is not going to help create the technologies of the future, it at least has to protect what the private sector in the United States develops. No one likes trade friction, but after decades of failing to stop Chinese theft, there are no more no-cost solutions. And there is now no choice but to impose costs on China greater than the benefits it obtains from theft.

As Trump said, this is not a trade war. This is a contest for control of critical technologies, in other words, for the future.

Adrienne L den Tex

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