Ring Of Fire: Tremors and Eruptions in the US-China Trade War

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Ring Of Fire: Tremors and Eruptions in the US-China Trade War

Threats and counterthreats may well produce losers all round.

Ring Of Fire: Tremors and Eruptions in the US-China Trade War
Credit: Gage Skidmore

On April 5, 1815, Mount Tambora erupted on the island of Sumbawa in the Dutch East Indies, present day Indonesia. Located along the “Ring of Fire” – the seismic belt surrounding the Pacific Ocean – the volcano’s blast was one of the most severe in recorded history. Nearly 800 miles away in Java, Thomas Stamford Raffles, the lieutenant-governor of British Java and founder of colonial Singapore, mistook the thunderous bang for cannon fire. The eruption’s ash plume was so vast that it literally changed the world’s climate, lowering global temperatures for years. The following year, 1816, became known as the “Year without Summer” as the persistent chill from the sun-blocking ash cloud killed crops and disrupted commerce across the globe, from China to America. This foreboding environment inspired Mary Shelley to pen her masterpiece Frankenstein, a tale drawing upon human ambivalence and fear in the face of technology and industrialization.

Perhaps it was timely, then, that just over two hundred years later, on April 5, 2018, U.S. President Donald Trump likewise erupted in fury, announcing a new salvo in the U.S.-China trade war that threatens to cast a choking cloud over the global economy. This round in the dispute between Washington and Beijing should be distinguished from and elevated above prior iterations, which include the solar panel-sorghum episode and the tit-for-tat tiff involving U.S. steel and aluminum tariffs and corresponding Chinese tariffs on $3 billion of U.S. exports like pork and fruit. Instead, this fight more clearly represents the essential struggle between the United States and China over strategic technological breakthroughs and competing stations within the global economy.

As set forth in Trump’s National Security Strategy, the United States claims that in order to compensate for its “own systemic weakness” stemming from a “state-driven economic model,” China steals proprietary technology and early-stage ideas from the U.S. private sector, thereby undercutting American prosperity and hijacking the “innovation of free societies.” In Beijing’s version, as articulated by President Xi Jinping, China faces a unique set of challenges and has successfully adopted a strategy of “socialist modernization” to speed its development while preserving its independence. To the extent Western companies transfer technology to Chinese partners, Beijing’s narrative goes, they do so voluntarily in pursuit of enrichment within Chinese borders.

The truth may lie somewhere in between and may otherwise be irrelevant in this context. But before tackling the broader geostrategic issues at play, we should review the remarkable unfolding of events in the U.S.-China trade clash and specific grievances underlying the United States’ recent actions.

Trading Barbs

At first glance, the speed and timing of events seem surprising and haphazard, but this flashpoint in the U.S.-China trade war flared following a deliberate and calculated process initiated by the Trump administration under a Cold War era legal remedy.

On August 14, 2017, Trump issued a memorandum instructing the U.S. Trade Representative, Robert Lighthizer, to determine whether to investigate China under Section 301 of the Trade Act of 1974 (Trade Act) (19 U.S.C. 2411). Following inter-governmental deliberation, on August 18, 2017, the Office of the U.S. Trade Representative (USTR) initiated the Section 301 investigation into actions by the Government of China that “may be unreasonable or discriminatory and that may be harming American intellectual property rights, innovation, or technology development.” As part of its investigation, the USTR solicited feedback from the public and industry, including in a public hearing on October 10, 2017, and through receipt of over 70 written submissions, many from trade associations representing U.S. companies doing business in China. During the investigation, the Trump administration also requested consultations with the Government of China pursuant to Section 303 of the Trade Act (19 U.S.C. 2413).

Matters came to a head on March 22, 2018, when the USTR concluded the Section 301 investigation and issued its 215-page report. On this basis, Trump issued another memorandum ordering three separate actions: (1) directing the USTR to develop a list of Chinese products to be subject to proposed tariffs; (2) instructing the USTR to pursue dispute settlement before the World Trade Organization (WTO) to address China’s discriminatory technology licensing practices; and (3) ordering U.S. Treasury Secretary Steven Mnuchin to take actions to address concerns related to Chinese investments in strategically important sectors of the U.S. economy. In response, China’s Ministry of Commerce issued a stern warning: “China does not want to fight a trade war, but it is absolutely not afraid of that. We are confident and capable of meeting any challenge.”

The U.S. challenge emerged on April 3, 2018, when the USTR published a proposed list of Chinese products, covering 1,300 separate tariff lines targeting industries ranging from aerospace to pharmaceuticals to robotics. Under the proposal, these products valued at nearly $50 billion, or approximately 20 percent of Chinese exports to the United States would be subject to an additional 25 percent duty. Before becoming effective, proposed tariffs are subject to an extensive notice-and-comment period and further discretionary review.

Nevertheless, within hours China had pushed back forcefully with a reciprocal $50 billion tariff threat aimed at high-profile U.S. exports involving politically-sensitive constituencies. On April 4, 2018, China proposed a duty rate of 25 percent on 106 items within 14 categories of commodities originating from the United States, including automobiles, soybeans, and aircraft – representing a respective $10 billion, $12.4 billion, and $16.3 billion in U.S. exports to China, according to the Peterson Institute for International Economics. In developing this list, China seemed to signal both strength – by targeting American agricultural products and the farming belt, a key constituency in Trump’s political base – and moderation – by not including heavy wide-bodied U.S. aircraft, like the newer models of the B-737 fleet or the B-787 Dreamliner.

Such determined restraint was quickly met by bombast. The following day, at an event in West Virginia, Trump declared China’s response unacceptable and instructed U.S. trade officials to consider a new $100 billion round of tariffs on Chinese products. In reaction to this provocation, on April 6, 2018, Beijing issued a stark threat that China would fight back “at any cost” with fresh tariffs.

Even so, Beijing appeared stunned that Trump failed to share China’s sentiment that the “U.S. has ignored the economic and trade cooperation with mutual benefit and win-win results which has been lasting for 40 years.” It may be more surprising that the chief protagonist in the trade dispute is a seventy-one year old president who acts like a disruptive technology causing tremors in previously dormant fault lines in U.S.-Chinese economic relations.

Art of the Steal

Trump’s grievances center on Chinese trade practices impacting technology transfer, intellectual property, and innovation. The Trump administration’s Section 301 report identifies four areas of specific concern, which may be summarized as China effectively stealing cutting-edge technologies and trade secrets from U.S. companies in targeted sectors of the economy.

First, the USTR’s report details an unfair regime of forced technology transfer, implemented through formal and informal practices and policies. The Trump administration alleges that through foreign investment restrictions, U.S. companies seeking to operate in China must engage in a joint venture with a Chinese partner, most often a state-owned enterprise – following the so-called “Changan” model named after the joint venture between Ford Motor Company and Chongqing Changan Automobile (Changan). In selected sectors, such as aerospace and information technology, Chinese regulations require, among other restrictions, that the terms of the joint venture include that the Chinese party maintain the controlling interest. The Chinese partner maintains operational control of the joint venture and even staffs the new company with personnel from its own existing competing operation. This controlling pressure is reinforced through Chinese administrative and licensing requirements. According to the Section 301 report, these imbalances in the joint venture relationship result in a direct or indirect demand for technology transfer from U.S. companies in order to gain market access.

Second, forced technology transfers also occur, according to the Trump administration, through discriminatory licensing restrictions under Chinese technology import-export regulations. The Section 301 report claims that Chinese licensing regulations deprive U.S. companies of the ability to set market-based terms in licensing arrangements, including indemnification requirements in terms of infringement and rights to technology improvements by the licensee. For example, Article 29(3) of China’s Regulations on Technology Import and Export Administration prohibits U.S. licensors from restricting their Chinese licensees from using the transferred technologies, which could include valuable information protected not only by patent laws but also by trade secret protections. Moreover, the term of the contract is limited to ten years, even though the U.S. licensor may have a patent or intellectual property rights to the technology that extend beyond this period. The net effect of these limitations, in the Trump administration’s view, is that Chinese companies are able to “free ride” on their U.S. counterparts’ research and development in virtually any imported technology transfer arrangement.

Third, the Trump administration claims that the Chinese government directs and unfairly facilitates the systematic investment in, and acquisition of, U.S. companies and assets by Chinese companies, as a means of obtaining intellectual property and generating large-scale technology transfer in industries deemed important by state industrial plans. As part of China’s “Going Out” strategy, Chinese companies, under the direction or influence of the Chinese government, invest in technologically-sensitive sectors and engage with U.S. technology centers. In order to transfer knowledge and technology, the Trump administration cites Chinese government-backed research centers and “talent bases” in Silicon Valley, directly funded and partnered (e.g., joint laboratories) with academic research institutions. The Section 301 report further tracks Chinese inflows in sectors like U.S. automobiles, aviation, electronics, energy, health and biotechnology, industrial machinery (including robotics), and information and communication technology.

The Trump administration further argues that in addition to undermining U.S. competitiveness in strategic sectors, Chinese state intervention distorts the global market place through inefficient mergers and acquisitions that artificially inflate the prices of potential acquisition targets and pair lesser Chinese firms with more productive U.S. partners. Ultimately, Chinese market distorting policies, as advanced through the Made in China 2025 program, blunt U.S. innovation and corrode its distinct competitive advantage.

Fourth, the Trump administration found that for over a decade, the Chinese government has conducted and supported cyber intrusions into U.S. commercial networks targeting confidential business information held by U.S. firms. As reported by the USTR, through these cyber intrusions, Beijing has gained unauthorized access to a wide range of commercially valuable business information, including trade secrets, technical data, negotiating positions, and sensitive and proprietary internal communications. The Section 301 report highlights the commercial cyberwarfare conducted by the Chinese People’s Liberation Army (PLA) General Staff Department, Third Department (3PLA). For instance, United States Steel Corporation was subject to extensive hacking, seemingly in retaliation for the company’s petition for U.S. trade remedies against imported Chinese steel products. The Trump administration notes that such actions have a serious impact on U.S. employment, citing a think tank report that such cybercrime annually cost the United States approximately 200,000 jobs.

Tectonic Friction

The Trump administration described the $50 billion in tariffs as an “appropriate” level in terms of the estimated “harm to the U.S. economy” and as a way to “obtain elimination of China’s harmful acts, policies, and practices.” Additionally, the Chinese product list was derived from an “extensive interagency economic analysis” designed to “minimize the impact to the United States” while targeting products that “benefit from Chinese industrial policies, including the Made in China 2025 initiative.

Given the careful calculation leading to the initial Section 301 tariffs, on what basis can we attribute Trump’s latest threat of $100 billion worth of tariffs against China? After all, by tripling his initial threat, Mr. Trump has already targeted 30 percent of Chinese exports to the United States (totaling $130 billion). If the Chinese responded in kind, with a $100 billion rejoinder, then all U.S. exports to China would be subject to tariffs. In other words, escalating billion dollar tariff threats would quickly run their course.

As I discussed on CGTN America, the easy answer is found in Trump’s ego: The president simply cannot not let an immediate rebuttal go unchallenged and, indeed, the stakes must be raised instantly and substantially. However, as I noted, there is more to the dynamic than Trump’s fire and fury.

A more complex explanation is found in the underlying tension between two competing positions and visions of economic development. The United States is an advanced industrialized economy that relies upon liberal, free market principles to spur innovation and grow the economy. In contrast, China seeks to occupy a similar position in global commerce, but though a managed economy led by national champions, often state-owned enterprises, and a top-down industrial policy. While there are missing nuances in this characterization, this fundamental difference should be the starting point for any level-headed approach to addressing the dispute.

Most certainly, exchanging competing tariff lists based on technocratic calculations will not assuage the seismic friction stemming from the shifting of two tectonic plates in international relations. In this regard, Trump’s brash and outlandish threats should be interpreted as demands (albeit inarticulate ones) for negotiating a new “grand bargain” with Beijing. Such an approach may be unconventional, disruptive, and costly, but then again this is the Trump presidency. Xi appears to be acknowledging this gesture in his announcement at the Boao Economic Forum to further liberalize the Chinese economy.
As with the Year without Summer, the clouds forming over the Pacific mean that the summer of globalization has passed. What will be the terms of survival in the coming winter? It remains to be seen. I would not doubt the United States’ spirit of innovation and adaptation, nor China’s resiliency and determination. The parties may not forthrightly agree on a “win-win” scenario, but they can quickly achieve a “lose-lose” outcome. Therefore, Trump and Xi should act judiciously in pursuit of their nationalistic objectives and recall the undoing of Shelley’s Victor Frankenstein, who in a fit of vainglory, and in the absence of empathy, created an uncontrollable and disastrous monster.

Roncevert Ganan Almond is a Partner and Vice-President at The Wicks Group, based in Washington, D.C. He has counseled government authorities in Asia, Europe, the Middle East, Africa, and Latin America on issues of international law. He served as an aide to Hillary Clinton’s 2008 presidential campaign, but is not currently affiliated with any campaign. The views expressed here are strictly his own.