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Trump’s Tough China Tack Wins Over Skeptical CEOs

December 26, 2018

Editors note. The administration now has support from business leaders on addressing China’s tech theft. But they still don’t get the threat of our trade deficit with China. 

When President Trump first threatened to levy major tariffs on China, business leaders worried the administration was using the wrong weapon on the right target.

[John Stoll | December 8, 2018 | WSJ]

It wasn’t the flood of washing machines coming in and the trickle of Fords going out that raised the ire of America’s CEOs. They wanted something done about counterfeiting, allegations that the Chinese were stealing U.S. intellectual property and investment rules Beijing leans upon that force technology transfers.

Getting China to play by the rules has proven tough over past decades. International bodies—such as the Word Trade Organization—have insufficient power. Export controls and indictments are tools to address theft, but they work only in specific situations and can require cooperation from U.S. companies that may be reluctant to rock the boat.

It’s becoming clear Mr. Trump’s prolonged tit-for-tat trade fight may represent American business’s best shot at addressing those long-standing grievances.

“Calling the abuser an abuser to their face is the first step,” Basheer Junjua, chief executive of San Francisco software development firm Calculi, told me this past week at The Wall Street Journal’s CEO Council in Washington.

U.S.-China tensions have rattled markets. The Dow industrials started the past week strong after positive news on the trade front but plunged as doubts about a favorable outcome re-emerged. The arrest of a senior executive of networking-gear maker Huawei Technologies Co. on Wednesday intensified negotiations on trade.

The dozens of CEOs gathered for the Journal’s meeting in the capital, however, suggest business leaders have shifted their view of Mr. Trump’s confrontational approach. They now say they are encouraged that the administration recognizes complex problems demand sophisticated solutions.

National Security Adviser John Bolton outlined how negotiations could take a turn over a 90-day cease-fire China and the U.S. agreed to this past week. Speaking to the CEO Council, he proposed a rule that says there will be no imports into the U.S. of products or services based on the theft of American innovation.

“That’s not a tariff question,” he said. “That’s a way of defending intellectual property from the United States.”

Mr. Bolton insisted the administration can’t ensure fair trade without getting China to agree to a broad set of reforms.

“Let’s take a show of hands,” Mr. Bolton said to the assembled CEOs. “How many of you believe in free trade?” Several hands went up. “How many of you believe that free trade means allowing the Chinese to kick us around, steal your intellectual property and not respond to it?”

No hands went up.

When critics accuse the administration of not pursuing a free-trade policy by goading the Chinese, he concluded, “I say if there’s going to be free trade, they’re going to have to live by it.”

Jeremie Waterman, the president of the U.S. Chamber of Commerce’s China Center, said the White House has a supportive audience in the business community when it comes to confronting China. When Mr. Trump came to office, there was “a frustration that had been building over a number of years.”

Many companies across many sectors have rushed to China, seeking a new market for goods and a lower cost for manufacturing. As they did, it became increasingly clear what price they had to pay to enter the most populous nation in the world.

“The allure of a billion-plus-people market is an allure for every company,” Mr. Janjua, the Calculi CEO, said. “However, they made the rules say ‘if you want to come work with us you have to put all the technology on the table.’ ”

The trade-off is costly. Earlier this year, the White House published research estimating an annual cost of between $250 billion and $600 billion to the U.S. economy from China’s counterfeit goods, pirated software and theft of trade secrets. By comparison, the National Science Foundation estimates the U.S. spends an average of $445 billion in annual research and development.

Several experts say past administrations attempted to address alleged abuses but lacked resolve. For instance, many companies and regulators figured China would eventually act like the rest of the countries in the WTO.

“People were making a bet which direction China would take, and it looked like China would follow global rules,” said James Andrew Lewis, a vice president at the Center for Strategic and International Studies, a bipartisan research organization in Washington. When it comes to trade, Mr. Lewis says China’s strategy to win at any cost often overshadows the desire to be seen as a good citizen of the world.

Abigail Grace, a researcher at the Center for New American Security, a bipartisan think tank in Washington, said the Obama administration was initially reluctant to call China out on specific allegations of theft or counterfeiting. That’s because it was trying to get Beijing to cooperate on various multilateral agreements.

“If one pushed China too hard on individual issues, it would jeopardize those broader goals,” Ms. Grace said.

President Obama took a harder line with China during his second term when it became clear Chinese President Xi Jinping wasn’t going to open the Chinese market up as much as initially hoped, she said. Getting the support of American business was tough, Ms. Grace said, because “companies were hesitant to admit this type of rampant IP theft was taking place because of how shareholders might respond.”

Mr. Lewis, a former foreign service officer in the State and Commerce departments, said reforms could be messy, particularly because of the interconnectedness of supply chains or joint ventures.

For example, his organization is preparing to publish a report on whether the next generation of cellular networks, known as 5G, is viable without China’s help.

He said companies like China’s Huawei or ZTE Corp. “can’t make products without U.S. technology.”

Can Western firms pull off 5G without Chinese partners? “The answer is yes, but it is going to cost a lot more.”


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