China Tries To Whitewash Aggressive Trade Practices

October 02, 2018

“White Paper” Offers Cliches and Feelgood Rhetoric, Not Substance

By Jeff Ferry, CPA Research Director

Last week, China’s State Council, effectively the Cabinet of the Chinese government, issued a “White Paper” on trade, to argue its case in front of the world that China is playing by the rules of free trade and the current trade dispute is all the fault of the US.

The 71-page report said little that was new. The report had two main focuses. The first was to argue that China has been playing by the World Trade Organization (WTO) rules and is a free trader. The second was that China does not engage in intellectual property theft or forced technology transfer.

The report, titled “The Facts and China’s Position on China-US Trade Friction” claims (pg. 69) “China is firm in observing and upholding the WTO rules. China supports an open, transparent, inclusive and non-discriminatory multilateral trading system…China supports necessary reform of the WTO and firmly opposes unilateralism and protectionism.” The report goes on to point out that as China became the world’s number one manufacturing nation and number one exporter of goods, the US also increased its exports to China. It points out that China’s income per head, at $8,643 is still only one seventh that of the US. It claims to be the world’s largest developing country.

Yet the facts since China joined the WTO in 2001 tell a very different story. When China joined the WTO, it made promises to move to a market economy and compete on a free market basis with advanced nations.  President Bill Clinton promoted China’s WTO accession, saying it would make them “more like us.”

That never happened. On the contrary, China took entry into the WTO as the beginning of an opportunity for “aggressively subsidizing targeted industries in order to dominate global markets,” according to a 2013 article, “How Chinese Subsidies Changed the World,” published in the Harvard Business Review by two American academic experts in China’s industrial strategy, Usha and George Haley. Their extensive research documented that China’s steel industry benefited from $27 billion in energy subsidies between 2000 and 2007, the period in which China rose to become the world’s number one steel producer. In paper production, the Chinese industry received $33 billion in government subsidies.

This massive program of government subsidy changed the basic character of both the Chinese economy and global trade patterns. What many people think they know about the Chinese economy is wrong. People often say China is a manufacturing giant because it has cheap labor. Yet what the Haleys discovered was that Chinese industrialization rejected the traditional labor-based model in favor of a different model. The Haleys explained: “In the Chinese industries we studied—solar, steel, glass, paper, and auto parts—labor was between 2% and 7% of production costs…Production mostly came from small companies that possessed no scale economies. Yet Chinese products routinely sold for 25% to 30% less than those from the US or the European Union…In 2000, labor-intensive products constituted 37% of all Chinese exports; by 2010 this fell to 14%.” The Chinese achieved domination in steel, paper, and other industries through targeting, subsidies, a currency manipulated to below-market levels, and import controls.

The Chinese government took on the challenge of “comparative advantage” taught by economists in virtually every university in America—nations should specialize in what they have a competitive edge in producing—and rejected it. They chose to specialize in what they believed would make China a superpower, and they have shown remarkable success, transforming a desperately poor, backward peasant dictatorship into the world’s number two economic power (and still, of course, a dictatorship).

Technology Transfer, Joint Ventures, and IP Theft

None of this is discussed in this week’s Chinese government White Paper propaganda exercise. The second key point the WP focuses on is the claim that China does not engage in forced technology transfer.  Says the WP (pg. 30): “the Chinese government has never introduced policies or practices that force foreign invested enterprises to transfer technology. Technological cooperation and other forms of commercial cooperation between Chinese and foreign businesses are entirely voluntary and bound by contracts. It generates real benefits for companies on both sides. The recent accusations by the US administration about China’s IPR protection are unrealistic and completely dismissive of China’s tremendous efforts and achievements in this regard.”

In reality, there are two parts to China’s technology transfer: the part that could be called legal but coerced and the part that is definitely illegal.

China has a point when it claims that American multinationals have voluntarily entered into agreements to set up joint ventures in China and transfer technology to their Chinese partners as the price they are willing to pay to enter the Chinese market. Many US multinationals agree to these deals for short-term benefit in the knowledge that once China has sucked out all the technology knowledge it needs, it will begin favoring domestic suppliers. For example, Apple recently fell from its number two rank in cellphone sales to number three, displaced by China’s Huawei, and Chinese efforts to make Apple’s life difficult in the China market have been apparent for some time. Not just American multinationals, but European multinationals too are increasingly concerned about coerced technology transfer. In a 2017 report, the European Chamber of Commerce in China said: “foreign companies are often pushed to transfer technology as the price of market entry, which is in contravention of its commitments as a member of the World Trade Organization…as domestic companies begin to catch up technologically, market access for foreign companies will become increasingly difficult.”

Finally, there are the illegal forms of technology transfer, including industrial espionage, reverse engineering, and evasion of US export control laws. A June report by the White House Office of Trade and Manufacturing Policy identified 27 different “vectors” or techniques by which China’s economic aggression threatens our intellectual property and the US economy.  William Evanina of the US Office of the Director of National Security, estimated in 2015 that cyber-espionage is costing US industry an astonishing $400 billion a year. Most estimates suggest that 90% or more of that espionage originates in China.  Earlier this year, we publisheda review of what we called the “Top Ten Cases of Chinese IP Theft” which targeted products from microchips to wind turbines to genetically modified seed corn to paint additives. In many of these cases there was clear evidence of Chinese government involvement.

Nor does China appear to have modified its behavior since President Trump took a more aggressive tone on trade.  In the past three monthsalone: a Chinese-born Apple engineer was arrested for walking out of an Apple lab with stolen circuit boards; a Chinese-born Glaxo SmithKline biochemist pleaded guilty to stealing secrets relating to cancer research from the Pennsylvania lab where she worked; and a Chinese-born electrical engineer was arrested in Chicago, charged with gathering information on retired American scientists and selling it to a Chinese intelligence officer.

A superficial White Paper painting China as a country committed to fair play cannot whitewash this pattern of behavior. The US and China are heading towards economic disengagement unless China modifies its behavior. And if that happens make no mistake: China will be the loser and the US will be the winner.

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  • Thomas Crumm
    Well said