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U.S.Trade War With China?

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China Power

U.S.Trade War With China?

“The U.S. should not have to compromise its national security to uphold free trade – but following China’s example is not the way to do it.”

A good way to directly or inadvertently start a trade war with China would be to take on the economic development goals expressed in the Five-Year Plan. After all, China's leaders see continued economic growth as the key to their survival. 

Conscious that massive investment in heavy industry is unsustainable, Party planners have focused for years on “innovation.”  In the future, they believe, China must change from manufacturing goods for multinational companies to selling products developed by Chinese companies under Chinese brands.  Thus, China's leaders hope to avoid the “middle income trap” and a prolonged recession that could fatally undermine the legitimacy of the Party.

After the first five years of the “indigenous innovation” policy, it has become known in the international business community as a massive scheme for protectionism and technology theft.  Dealing with its impact remains a top priority for American trade negotiators.  But a few Chinese companies have emerged as global brands during this period, establishing a niche in international markets as reliable low-cost alternatives – PC maker Lenovo, the appliance company Haier, and the network equipment manufacturers Huawei and ZTE.

So the way that the U.S. has dealt with Huawei and ZTE, pillars of China’s economic development, over the past year is remarkably ill-advised.  Friday's Wall Street Journal suggests that American regulators are taking a page from China's protectionist playbook – using vague national security concerns, secret hearings, and behind-the-scenes pressure on private companies to exclude Chinese competitors from American markets.  This is hardly consistent with Washington’s efforts to open Chinese markets to American IT equipment – an issue which dominates.

Most recently, U.S. regulators have pushed Japanese and American telecom operators Softbank and Sprint to swear off using Chinese-made equipment as a condition of their proposed merger. The move was driven by concern about Chinese hacking and intellectual property theft.  This follows a move by Congress two weeks ago that added language to a budget resolution strongly discouraging government agencies from buying IT equipment from companies “owned, directed or subsidized by the People's Republic of China.”

As the Journal shows, the decision in the Sprint-Softbank deal was suggested by the national security apparatus, and doesn't appear to have followed any set rules – it differs from the deal worked out by the Federal Communications Commission  in the T-Mobile/Metro PCS deal also under negotiation.  Federal officials have evidently settled on a ban that isn't a ban:

“Because of concerns about violating trade rules, any constraints wouldn't specifically exclude gear from Huawei, which Softbank has used in its home market of Japan, or ZTE, a person familiar with the process said. Nor would they explicitly give the government a veto, this person said. But U.S. officials have made no secret of their distrust of the Chinese companies and are aiming to make sure their equipment doesn't become a core part of U.S. telecom infrastructure, the people said.

"You have to find a way to say, 'Don't buy from the Chinese,' without saying, 'Don't buy from the Chinese,' " said a person who has spoken with Sprint.”

The national security concerns may well be justified. Still, given the available public evidence – the net effect of the Sprint-Softbank vetting procedure is likely to be undermining many of the United States' top priorities with China.  Using non-transparent processes to avoid World Trade Organization rules will only confirm widespread Chinese suspicion that American talk of international norms is a tool to constrain Chinese development.  Huawei is a particularly critical example – as one of the champions of China's current development goals, it is a high priority for China's leaders.  If global rules cannot protect it from backhanded treatment, Beijing is much more likely to give up on global trade agreements and turn to tit-for-tat protectionism.

Government meddling in the procurement decisions of private companies undermines another key goal of our relationship with China: reaching an agreement on the government procurement protocol of the WTO, under which governments that are party to the protocol agree not to discriminate against other members’ companies in sourcing.  China's accession to the Government Procurement Agreement, however, has been held up for more than a decade by legal technicalities regarding the question of State-Owned Enterprises.  China would prefer not to consider them as part of the government, which would allow them to keep “buy Chinese” policies, while the U.S. argues that their role in carrying out public projects makes them part of the government.  If the American government can ban private companies from using Chinese products in infrastructure, that severely blurs this line.

The U.S. should not have to compromise its national security to uphold free trade – but following China's example is not the way to do it.  Rather, it should develop transparent procedures that allow companies like Huawei and ZTE to clear their names – and which can serve as models for procedures American companies could deal with overseas. 

Hundreds of billions of dollars of U.S. trade are at stake with these issues: U.S. companies have struggled for years to overcome protectionist measures loosely justified by national security (a report from the U.S. Trade Representative covers China's restrictions on foreign IT) – in the IT field, Microsoft, Google, and Intel, have all been cast as possible American Trojan horses, while cultural exports like Hollywood movies and Facebook contend with the charges of ideological infiltration – in Chinese eyes, another form of national security.

Huawei and ZTE are national champions, and the Chinese state has frequently proved willing to bend over backwards on their behalf in domestic affairs.  Their access to the U.S. market could be a huge step for China's development goals – which could give Washington substantial leverage to get concessions on free trade or security issues.  But to get those concessions, the U.S. will have to show that it is negotiating in good faith – and to convince China's leaders that its concerns about security are not excuses to exclude China from its market.