President Donald Trump‘s threat to hike tariffs on technology imports from China strikes at the heart of Beijing’s state-led blueprint for prosperity and restoring the nation’s greatness.
For four decades, China has leaned on foreign companies to hand over technology – or help potential Chinese rivals develop their own – in exchange for market access. That helped make China a leader in fields from mobile phones to high-speed rail to wind turbines, but also fueled complaints that China was improperly benefitting from those tactics.
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Chinese officials say they are willing to negotiate. But the political importance of the industrial policy Washington wants Beijing to change suggests Trump will face intense resistance.
WHAT’S CHINA’S GAME?
China’s tactics have long frustrated the United States, Europe, Japan and other trading partners. But they avoided an open confrontation because China also was a growing market for power generation, telecoms, aerospace and other technology.
Sentiment against Beijing has mounted following complaints by foreign companies they are being squeezed out of promising industries as China develops its own suppliers.
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“For them, it’s a success story. To change that to something else, I don’t know how the system would be willing to do that, because it is so successful,” said Joerg Wuttke, a former president of the European Union Chamber of Commerce in China who has worked in this country for three decades.
“There will be attempts to appease the United States, but it’s not going to work,” said Wuttke. “We are entering a new phase of uncertainty.”
WHAT IS THE FUSS ALL ABOUT?
Other governments, not just the U.S., say China’s tactics violate the spirit of free trade. Many complaints centre on investment or regulatory issues that aren’t part of its World Trade Organization commitments.
A builder of Japan’s Shinkansen bullet train, Kawasaki Heavy Industries, complained that after it licensed rail technology for use in China, local manufacturers tried to sell it abroad.
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Beijing pressed automakers to shift to using Chinese components suppliers by imposing import taxes on autos assembled in local factories with foreign-made parts. By the time a WTO panel ruled in 2008 that violated China’s market-opening pledges, automakers had shifted to local suppliers and were teaching them how to make better parts.
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U.S. authorities also accuse China’s government of using or encouraging cyberspying and theft of technology and business secrets.
More recently, Western governments are on edge about state-financed Chinese purchases of semiconductor, robotics and other companies while foreign buyers are barred from acquiring most assets in China. In Europe, that has prompted complaints the continent might be losing its competitive edge.
Earlier, Washington filed a World Trade Organization complaint accusing Beijing of imposing unfair contract terms on foreign suppliers and allowing its companies to keep using their technology once a license expires.
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In September, Trump blocked the Chinese purchase of a U.S. maker of semiconductors in September. The same month, the president of the European Union’s governing body announced plans for the 28-nation trade bloc’s first “investment screening” system.
WHAT IS THE U.S. STRATEGY?
Trump’s opening salvo was approval of possible 25 per cent tariffs on $50 billion of Chinese aerospace, computer and other technology. The U.S. Trade Representative’s Office said that was in response to Chinese policies that “coerce American companies into transferring their technology” to Chinese enterprises. It said products picked for tariffs were those that benefited from such tactics.
Beijing fired back with its own $50 billion list of American goods including pork and steel pipes for a duty increase. Trump ratcheted up pressure by announcing he might seek higher import taxes on an additional $100 billion of Chinese goods.
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The Trump administration might launch a similar investigation of Chinese cloud, financial and value-added telecoms services, researchers for consulting firm Eurasia Group said in a report.
“We remain concerned that the tariff imposition process could spiral dangerously out of control, given that this trade action is really less about trade and more about China’s rise as a technology leader,” the researchers said.
WHAT ARE THE CHANCES FOR COMPROMISE?
Chinese leaders launched market-style reform in the 1980s but never abandoned the idea the ruling Communist Party would guide development and state-owned companies would dominate the economy.
Even today, China is the most closed major economy. Foreign or private competitors have little or no access to industries including banking, oil and gas, telecoms, airlines, coal mining, steel and railways. Foreign automakers and other companies must work through state-owned partners, sharing technology and developing their skills.
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Leaders declared in 2013 that market forces would prevail in decision-making, but countered that by saying state industries would still dominate and the party would intensify control of government-owned companies.
“One of the difficulties is that the compromises primarily have to come from the Chinese side,” said Lester Ross, a lawyer in Beijing for the firm WilmerHale and chairman of the American Chamber of Commerce in China’s policy committee.
“I don’t think the Chinese leadership likes to see itself in that position,” he said. “It sees itself as a rising power – a rejuvenated country with great ambitions to rise to the top of the world. And it doesn’t see any real obligation to make concessions unless they are absolutely in their own interest.”