Decoding Trump’s Tariff-Tremors to China

The United States of America has imposed tough sanctions on China on April 05, 2018 pushing the global economy into a spiral of uncertainty. In a retaliatory note, China also levied tariffs amounting to $3 billion US exports primarily fruit and pork. The apparent dispute signalled less economic cues but more of a struggle for influence over strategic strongholds of the global economy. The latest round of trade confrontation is one step higher than the preceding US metal tariffs and the solar panel-sorghum event.

The two sides share contrasting views on the issue unfair trade practices by China. The US claims that Chinese economy suffers from an internal systemic weakness as its economy is run on a state-driven model. This led China to press US companies who wanted to invest in China and carry business there to surrender the intellectual property secrets as a precondition. American President Trump has strongly condemned the whole practice and has labelled it as an assault on US prosperity and free society.

Xi Jinping has however stated that China believes in the ideology of Socialist modernisation which has its own set of challenges and issues. Thus, the transfer of technology by Western nations is a voluntary act done to enhance themselves on Chinese soils. The half-baked truth as stated by the Chinese leader is all but hard to swallow.

The (Mis)Trade and Section 301

The recent line of events in the dispute is based on impulse and thus highly unpredictable. It can be said to be a culmination of an investigation started by the Office of the US Trade Representative under Section 301 to look into the unfair trade practices in China which were hurting American intellectual property in 2017. USTR also took feedback from the public and industry. It was in March 2018 when USTR submitted its final report which was a 215-page document  and prompted President Trump to take the following actions namely ordering USTR for development of a list of products from China which can be taxed while also directed the department to take the issue with WTO and enumerate the discriminatory and unfair licensing practices of China. He also ordered Steve Mnuchin the US Treasury Secretary to take care of all the issues which are related to Chinese investments in vital sectors of American economic structure. The action was not perceived well in China which responded in sharp words as the Chinese Ministry of Commerce warned the US of its steps and stated that China is ready and capable of meeting any challenge and although it does not want to enter into a trade war yet it is not scared to do so if need be.

US path was already marked and there was no backing as the real jolt to China came on April 3, 2018, when the US imposed major tariffs on about 20 percent Chinese exports to the tune of $50 billion on a list of products. Industries as wide as aerospace to pharmaceuticals were affected. The exports would now have to pay an extra 25 percent duty. China too retaliated with equal footing and imposed $50 billion tariffs on 14 categories of US exports to China primarily aircraft, automobiles and soybeans.  China adopted a careful approach by targeting the agriculture goods and not the heavy aircraft versions. It was seen as a calculated response as China showed restraint and moderation in tariffs. President Trump known for acting on impulses found the Chinese response hard to swallow and ordered fresh tariffs worth $100 billion on China. China along with the world was dismayed at the speed of response by President of United States who had completely put to rest the 40-years of economic cooperation and is swayed by impulses to cause major disruptions by deliberately hitting the hitherto passive fault-lines in the bilateral trade relations between the two.

Valid concerns

The USTR Investigation Report under Section 301 which was the prime trigger for the confrontation has clearly enumerated the effect of unfair Chinese practices on majorly four areas of concern which have had deep impacts on US intellectual property and technology. The practices have crippled the spirit of innovation among US companies who have the presence in China as latter was legitimizing the steal of state-of-the-art technology from US firms. The Report presented four prime areas of concern:

Unfair Joint Ventures: there is an apparent presence of forces transfer of technology via both formal and informal trade practices.  Chinese policies demand that any US or foreign company desirous of operating in China has to enter into a joint venture with a Chinese firm which is mostly state-owned which in many sectors also includes that the controlling interest lies with the Chinese firm. Latter passes the right to have control over operations which is often intensified by the recruitment of workers from the Chinese partner firm’s current operation. This is further aggravated by the staunch licensing and administrative constraints and requirements which ultimately result in the transfer of technology in return for gaining market access.

Free-Riding: Another major area of concern is the Article 29 (3) of the China Regulations on Technology Import and Export  Administration which clearly bars US companies who have acquired Chinese licences to operate from imposing any restrictions on Chinese licensees to use the transferred technology. Latter includes highly important information which is bound by patent laws and other trade secret protection agreements. Additionally, these licensing arrangements in many cases are defined for a 10 year period even though the patents extend much beyond the period. US firms thus feel violated as they have no control over infringement of their base technology and the right to stop improvements over the same by China. This free-ride on US intellectual property is a direct assault on international rules of trade.

Getting in the “Going-Out strategy”: The investigation has established that the Chinese investments in vital sectors of US economy like automobiles,  electronics, energy, health, robotics, IT etc. are backed by the Chinese government which facilitated the acquisition of many US firms in technology-sensitive sectors with the aim of technology transfer. It was found that many state-backed research centres in China partnered with or funded many academic research institutions in the US. This has massively stunted the growth in innovation in strategic sectors and thus have had a sharp blow to the competitive advantage of US.

Cyber-meddling: Finally, the investigation also reveals that there have been serious incidences of cyber intrusion by the PLA’s Third Department which has helped it to get access to highly sensitive and critical trade secrets, leverages, internal communications, other technical data of US firms.

The Fury

The President of United States of America has justified his tariffs on the above information as a fair punishment in comparison to the extent and nature of damage China has caused to US economy. The tariffs list has been carefully worked out after a lot of forethought to include only the products which derive advantage from various economic initiatives of PRC and at at the same time will have a negligible effect on US stats. The latest threat of $100 billion fresh tariffs will thus cover about 30 percent PRC’s exports to China and if an equal reciprocal response comes it will span almost the entire set of US export to China. This can thus snowball into a full-fledged trade war between the Western and Asian giant.

What next?

Looking at the larger picture, the current deadlock is not merely a culmination of skewed trade practices and unfair activities but point towards an inherent tendency for influence in the global sphere of commerce. It also means Trump administration is looking forward to gaining leverage in future negotiations. Trump with his disruptive approach to almost all world affairs has carved a niche wherein all is accepted till it is the US. The moorings of a brutal trade war could actually morph into a new order in international trade and relations. The US has stood for more liberal and free market approach while China has pushed its way ahead with its state-owned economic model characterised by a highly regulated economy. The recent Boao Forum, however, signalled winds of change blowing over the age-old Chinese practices as President Xi expressed his openness to a more liberal economic approach. There is no doubting the resilience and grit of both sides, yet the current upheaval can be tamed judiciously which ends in synergy and not a faint short-termed glory.

 

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