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Did China break the world economic order?
THE US-China trade war is now full-on - except that it's not really about trade. China does account for the largest share of America's trade deficit. But many experts don't seem to think that bilateral trade deficits are a problem in themselves - they're just a symptom of other issues (if even that).
"The overall United States global trade imbalance is the result of economic conditions in the United States - the excess of investment over savings," Martin Feldstein, a former chairman of the Council of Economic Advisers, has argued, adding that if America's trade imbalance with China were eliminated, it would simply shift to other countries.
Whether President Donald Trump is misguided in doggedly pursuing tariffs or playing coy and using them as leverage with the Chinese government, America's continued drive to levy penalties is less about fixing a trade problem than about changing China's investment rules. In particular, the Trump administration perceives those rules as forcing the transfer of foreign technology to Chinese companies, unfairly helping them.
But even American negotiators who parse the trade versus tech issue clearly tend to overlook an essential fact: The international trade and financial system that was set up after World War II - with the creation of the World Bank, the International Monetary Fund and, much later, the World Trade Organization (all nurtured and dominated by the United States) - actively encouraged "technological spillovers" from developed economies to developing ones. Under the WTO's agreements on intellectual property, developed countries are under "the obligation" to provide incentives to their companies to transfer technology to less developed countries.
Such transfers were seen to be in the West's interest, too: Far better that poor countries achieve self-sustaining growth than be dependent on foreign aid, the thinking went. But China did much better than achieve self-sustaining growth.
By the late 2000s, it had come to seem too successful, and a threat: The West was struggling then with a major financial crisis (largely of its own doing). Today, the long-standing principle that knowledge transfers are good all-around is being questioned. Do they continue to serve the global interest and should they still be encouraged - even when it comes to China? Or should China be treated as an exception? It is in a class of its own, by dint of both its size and the state's involvement in its economy.
American negotiators have long complained that China's foreign investment practices are unfair. A report of the Commission on the Theft of American Intellectual Property, published in 2013 and often cited since, estimated that China accounted for 50 per cent to 80 per cent of all international intellectual property theft. In its 2018 report, the Office of the United States Trade Representative accused China of using joint ventures to funnel technology to Chinese companies and of failing to protect foreign companies' intellectual property rights.
But the reality is more complex.
Yes, American companies have been granted access to some 35 restricted sectors in China - like car production, oil exploration, nuclear power, telecommunications, banks and medical institutions - only on the condition that they transfer know-how to local partners. Chinese companies are developing electric vehicles with support from Renault-Nissan and Ford. Amazon.com and Microsoft are being asked to partner - and share technology - with Chinese companies before they can sell cloud-computing services in China.
And yes, DuPont and General Motors have sued their Chinese joint-venture partners for misappropriating trade secrets. Outright theft also has sometimes occurred, including in the defence sector, of information about bombers and missile systems.
But to say all these things in the same breath is to risk conflating inadequate rules with violations of existing rules that may be adequate, and government policy with the behaviour of private actors. Officials in the Trump administration suggest that China's foreign-investment requirements themselves amount to theft. In many instances, however, technology is being transferred between companies in the context of consensual, negotiated business agreements.
Also, violations or near-violations are par for the course during certain stages of a country's development. That fact doesn't make them acceptable, but it offers useful context for thinking through how best to react to them. Other rapidly growing economies, including Japan and South Korea in the 1980s, were also accused of unfairly securing technology from foreign partners (or subsidising their exports). But as those countries' incomes rose and their own capacity to innovate developed, they started complying with the rules - typically when per capita income reached US$25,000.
China, at its current growth rates, is more than a decade away from achieving that income level. And yet it has already made more progress than is usually acknowledged towards protecting intellectual property rights. AmCham China's 2019 China Business Climate Survey Report noted that 59 per cent of the more than 300 American companies it interviewed said that China's enforcement of intellectual property rights had improved over the last five years; 37 per cent said it had stayed the same. (China is growing up in other respects, too. Both the IMF and the United States Treasury have recently determined that the Chinese government is not manipulating its currency. And its current account surpluses have virtually evaporated.)
That said, penalties for, say, infringing patents remain weak in China and enforcement is lax. The National People's Congress passed a foreign-investment law in March, but it offered too little on implementation. In fact, the United States' latest tariffs were prompted by its perception that the Chinese government was backtracking on its commitment to incorporate into Chinese law major terms of the two countries' draft agreement to end the trade war.
The fundamental question, therefore, is this: Are China's current technology-transfer policies fair, given both past international practice and the country's extraordinary development? Or, to put the point more provocatively, did China's growth break the international economic order?
The answer partly depends on the existence, or not, of globally accepted guidelines. Just last year, in its World Economic Outlook report, the IMF again highlighted the vital role that the diffusion of technology worldwide has played in driving growth globally. And China now accounts for almost one-third of global growth every year, according to Bloomberg.
A more innovative China also doesn't mean a less competitive America. For one thing, as the Harvard economist Robert Lawrence has pointed out, developed countries and developing ones generally do not compete in the same product lines. The economist, Zhang Jun, and others have also argued that much of China's technological capacities are overstated anyway. Many of the more sophisticated components used in products that China exports to the West (think iPhones) are made elsewhere and merely assembled in China.
Curbs on America's exports of "emerging and foundational technologies" - notably to do with artificial intelligence or fifth-generation (5G) telecommunications networks - will curtail knowledge flows to China. But they will also damage America's capacity for innovation, American tech experts have argued. (Likewise, Mr Trump's decision last week to ban, on security grounds, foreign tech equipment in American telecommunications systems could hurt American companies.) Technology transfers from the most developed states to less developed ones remain beneficial all-around, including for the most developed states - even if the unique features of China's remarkable growth require adapting existing norms and regulatory mechanisms to better manage those transfers.
The Trump administration, which instinctively recoils at multilateral initiatives, is unlikely to want to turn to the WTO or the World Bank. (It should, though, not least because the United States has usually fared well by WTO rulings.) The next best opportunity to at least broach these issues will be during the Group of 20 summit meeting in Osaka, Japan, in June. China's growth may seem like a challenge to the world's economic order, but it is other states' reactions to it that could threaten the system. NYTIMES
- The writer is a senior fellow at the Carnegie Endowment for International Peace and the author of "Cracking the China Conundrum: Why Conventional Economic Wisdom Is Wrong".