Coerced Tech Transfer: The Heart of the China Problem

June 27, 2019

Editors note: Pat Mulloy is a member of CPA's advisory board.

Trump moved into a bipartisan policy vacuum on China. The political mainstream needs a better strategy, or Trump and China will both be the winners.

[Patrick Mulloy | June 26, 2019 | The American Prospect]

China’s government uses foreign-ownership restrictions to pressure technology transfers from U.S. companies to Chinese entities, according to the U.S. Trade Representative.

President Trump has been widely criticized for raising tariffs on Chinese exports to the U.S. The president has indeed wielded tariffs as an all-purpose weapon. But in one key area, Trump has been right to take aggressive action, and on that front tariffs are useful but not sufficient. That area is the forced transfer of technologies from U.S.-based companies to Chinese “partners.”

China’s policy of coercing the transfer of trade secrets and technology is part of its larger strategy to achieve global supremacy in the entire range of advanced products and processes.

Under the Made in China 2025 program, China’s ten-year plan for targeting ten strategic advanced technology manufacturing industries, China expects to dominate in advanced information technology; robotics and automated machine tools; aircraft and aircraft components; maritime vessels and marine engineering equipment; advanced rail equipment; electric vehicles; electrical generation and transmission equipment; agricultural machinery and equipment; new materials; and pharmaceuticals and advanced medical devices.

On August 14, 2017, Trump directed the U.S. Trade Representative to launch an investigation under Section 301 of the Trade Act to determine, among other things, whether the Chinese government has coercively required the transfer of technology to enterprises in China, in violation of the usual norms and rules of trade and specific obligations China agreed to in joining the World Trade Organization. When a U.S. company invests in, say, Germany, or vice versa, the company is free to deploy its technology as it wishes. Government involvement in demanding technology transfer is out of the question. Section 301 gives the president broad power to retaliate against a foreign country that engages in discriminatory trade practices or violates U.S. rights under trade agreements.

On March 22, 2018, following extensive investigation, the USTR’s report concluded that China’s government uses foreign-ownership restrictions, such as joint-venture requirements and investment restrictions, to pressure technology transfers from U.S. companies to Chinese entities. The Chinese government also relies on its administrative licensing to force technology transfer in exchange for the approvals needed to establish and operate businesses in China. Foreign companies have no effective recourse in China’s courts or agencies and have been hesitant to report Chinese pressures and practices to their own public officials for fear of Chinese government retaliation and the loss of business opportunities in China.

In the auto industry, for example, the USTR found that U.S. companies cannot enter the market for electric cars unless they partner with a Chinese company in a joint venture that the Chinese partner controls. In aviation, the report noted that China uses its purchasing power to pressure technology transfer in exchange for the sale of aircraft and aircraft components to Chinese state-owned enterprises that dominate the purchase of planes in China. Another technology transfer mechanism used by the Chinese government is to require the disclosure of sensitive technical information in exchange for necessary administrative approvals.

Trump immediately directed the USTR to put increased tariffs on Chinese products, and to pursue dispute settlement in the WTO. On July 6 and August 23, 2018, the USTR imposed tariffs of 25 percent on $50 billion dollars of Chinese imports. The industries targeted by the tariffs included those benefiting from China’s 2025 practices, such as aerospace products, information technology, and advanced machinery.

The Chinese issued a white paper in September 2018 that dismissed the USTR findings and denounced the U.S. tariffs as protectionist. In response, that same month the president ordered the Trade Representative to impose 10 percent tariffs on an additional $200 billion of Chinese imports. These additional tariffs were to increase to 25 percent on January 1, 2019.

In December 2018, President Xi and President Trump met at a G20 meeting in Argentina, and President Trump agreed not to increase the tariffs on the $200 billion of products on January 1, as had been planned. Instead the two presidents agreed to begin immediate senior-level negotiations on “structural changes with respect to forced technology, intellectual property protection, and other matters.” Negotiations were to be completed on March 31 and, if not successful, U.S. tariffs on the $200 billion of Chinese imports were to rise to 25 percent. The negotiations were making progress and the Office of the Trade Representative announced on March 5, 2019, that it was postponing the additional tariff increase “until further notice.” Negotiations continued in March, April, and May at a very senior level, but on May 6 the USTR announced that Chinese negotiators had decided to “retreat from specific commitments agreed to in earlier rounds.” Tariffs on the $200 billion of Chinese imports then levied at 10 percent were immediately raised to 25 percent.

On May 13, Trump directed the USTR to begin a process that would enable him to raise tariffs on all remaining Chinese imports into the United States (worth roughly $300 billion) to 25 percent. The earliest the increased tariffs can go into effect is July 1. Presidents Xi and Trump will meet to discuss these trade matters at the G20 summit set to take place on June 28 and 29 in Osaka, Japan. Whether renewed negotiations will make progress is not yet clear. Senate Democratic leader Chuck Schumer and Richard Trumka, president of the AFL-CIO, as well as Republican Senator Marco Rubio have all urged Trump to be tough and not to sign an agreement that fails to remedy our structural trade issues with China.

Many critics of the Trump administration’s Section 301 trade actions against China contend the U.S. should not attempt to deal with China’s mercantilist trade practices unilaterally by imposing tariffs but rather should work with other allies such as the EU and Japan to negotiate with China or bring a WTO case to remedy the problem. In December 2017, the EU, Japan, and the U.S. announced an alliance to take on China more aggressively over trade issues, including forced technology transfers.

The idea of bringing an all-encompassing WTO case against China is fanciful at best. In fact, since China joined the WTO in 2001, the U.S. has brought 23 cases in the WTO against China covering a wide range of important policies and practices that violate its WTO commitments. Even though the U.S. has routinely prevailed in these WTO disputes, they take years to litigate and often require further efforts when China resists complying with WTO panel or appellate body rulings. China also threatens reprisals against companies that cooperate with the U.S. government in bringing WTO cases, so a lot of the worst abuses are never the subject of formal complaints. As the Office of the Trade Representative observed in its 2018 report to Congress, the WTO was designed for countries that were truly committed to market principles—not for an enormous country determined to maintain a state-led non-market system.

A better alternative was first proposed by the U.S.-China Economic and Security Review Commission, in its very first report to Congress in 2002. The commission, a bipartisan think tank for Congress, recommended that the U.S. government create a corporate-reporting system so that, among other things, our policymakers would better understand the extent and kind of transfers of manufacturing, technology, and R&D facilities that U.S. companies were putting into China. Such a reporting system has never been implemented due to corporate resistance to the concept. Having such a system in place would help American officials better police China’s forced technology policies.

Former Senator Jim Webb, in 2012, introduced a bill that would have prohibited U.S. firms from transferring technologies that were developed with U.S. government assistance to China without the express permission of the U.S. government. In doing so, he noted that General Electric transferred valuable avionics technology to the Aviation Industry Corporation of China even though the transferred technology had been developed as a beneficiary of federal research projects. Such an approach makes sense particularly if the corporate-reporting system were in place to help enforce it. Our policymakers could then assist U.S. companies in resisting Chinese pressures to transfer technologies developed with U.S. government assistance or that they consider their “crown jewels.”

Robert Lighthizer, our current Trade Representative, noted in his 2010 testimony before the China Commission that “our policy makers significantly misjudged the incentive for Western businesses to shift their operation to China.” We must change those incentives in our current negotiations with the Chinese through increased tariff threats, but we also must make major domestic policy changes. Among them is strengthening the Foreign Agents Registration Act. China uses U.S. corporations and law firms to lobby against measures it does not want our government to adopt to counter its mercantilist trade practices.

Raising tariffs on Chinese imports into the United States can be tactically useful, but tariffs will not be enough to counter China’s forced technology practices. We must adopt what Senators Rubio and Warner call an “all of government approach” that includes measures such as those described above. Even more important to addressing our China trade problem is understanding that our corporations are operating in a system that compels them to focus solely on making profits for their shareholders. Top corporate officials get significant financial rewards for achieving these objectives. Our nation must develop policies to counter foreign practices designed to entice our corporations to serve their interests, as the Chinese have succeeded in doing.

We must, as the noted corporate expert Ralph Gomory has advocated for years, find the means to align the interests of U.S.-based corporations with the national interest, which includes keeping and creating well-paying high-tech jobs in this country and not transferring huge chunks of our productive capabilities out of the country.

One incentive to help slow the outsourcing of jobs and technology by our large multinational corporations might be to reduce taxes on corporations that add to U.S. jobs and GDP by producing in this country, and to put higher taxes on corporations that earn their profits by producing abroad to serve foreign markets and also shipping back here to undermine American producers. Another would be to revise the charters given to our corporations to make sure they consider factors other than shareholder value when making trade and investment decisions. Senator Elizabeth Warren last year introduced legislation along those lines that was entitled the Accountable Capitalism Act. Senator Marco Rubio has also cited such problems created by the focus on shareholder primacy. Another measure we should consider is granting U.S. companies an antitrust defense for coordinating trade and investment strategies against a country like China that is trying to extort concessions from them. We should also put “snapback” clauses in trade agreements with China that can be invoked without lengthy proceedings in the WTO or elsewhere if the agreements are violated.

As the director of national intelligence, former Senator Dan Coats, recently told the Senate Intelligence Committee, “China’s actions reflect a long-term strategy to achieve global superiority.” It is quite clear that the transfer of technology to China has assisted China’s extraordinary industrial, technological, and overall economic growth. It is contributing to a shift in a balance of power in Asia and worldwide that is against our national-security interests, and is hurting the standard of living of a vast number of our citizens. We must take concerted action to stop practices like forced technology transfers that are aiding these results so detrimental to our society. Reforming the behavior of U.S. corporations will be a key part of any such effort to counter China’s technology transfer policies.

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