Dealing with China's high-tech ambitions and its methods

President Donald Trump’s handling of the trade relationship with China poses a threat both to the US and to the world economy — but even his harshest critics agree with him on one thing. China’s bid to dominate the high-tech industries of the future often bends or breaks the rules of liberal international commerce, and needs to be checked.

What’s important, and what this administration finds so difficult, is to be smart about it.
 

Through its “Made in China 2025” blueprint and assorted plans and directives, China’s government aims to move the country up the manufacturing value chain and dominate advanced technologies such as robotics, artificial intelligence, semiconductors and biomedicine. In this effort, China has advantages — an enormous (and relatively closed) domestic market, a capacious budget for supporting preferred industries, and a technocratic government facing no organized domestic opposition.

To be clear, China isn’t wrong to harbor such ambitions. And, so far as the basic economics goes, its success needn’t disadvantage the US or any other country. The US didn’t get rich in the last century at Europe’s expense: Its innovations raised living standards everywhere. That’s what trade and commerce do. In a well-functioning global system, successful economies prosper together.

China isn’t playing by the rules. It wants access to other countries’ markets and technologies but is slow to grant access to its own. And its technological push has often relied on questionable or outright illegal methods — from rampant cyber-theft of commercial and military secrets, to subtler violations of the spirit if not always the letter of the country’s obligations as a member of the World Trade Organization.

The 200-page report produced by the US Trade Representative’s office as part of its investigation of Chinese intellectual-property theft is a litany of such complaints. Companies report (mostly anonymously, for fear of retaliation) various forms of pressure to make them share technology with their Chinese joint-venture partners. Permits are withheld and approvals delayed. Demands are made through private channels, with no paper trail to prove a breach of China’s WTO commitments. Foreign companies that give way may find themselves competed out of the market once their former partners have mastered the technology for themselves.

China also uses internal and semi-official documents to set demanding self-sufficiency targets — which do not comport well with WTO undertakings. In sectors such as telecommunications and aviation, companies are directed to source 70 percent of their core components domestically by 2025. The government supports its tech companies with tax rebates, cheap financing and direct capital injections, often without reporting the money as subsidies, as generally required by the WTO. Such aid can make up more than 10 percent of operating revenue at some robot and machine-tool makers.
 

Opaque government funds have been used to underwrite venture-capital investments in and mergers with companies dealing in sensitive technology. In the case of German machine-maker Aixtron, one state-backed Chinese company abruptly withdrew a critical order, sending Aixtron’s share price plummeting; another state-backed Chinese firm swooped in with a takeover bid.

Where foreign technology isn’t required or desired, China has closed key sectors to outside competition. Foreign cloud-service providers have to share technology with and market their services through Chinese partners. Firms such as Google and Facebook remain banned on the mainland, and foreign technology companies can’t bid for government IT contracts.

China isn’t the first country to bend or break the rules of liberal trade — but the sheer scale of its economy makes the consequences for other countries harder to overlook. A measured response is justified. Tariffs, though, are the wrong instrument. They punish American consumers, workers and businesses as much as they hurt China. And they’re a threat to global growth, especially if they provoke a cycle of action and retaliation. The Trump administration should tailor its responses more carefully.

Competition with China need not be a problem. Approached in the right spirit, it’s an enticing opportunity. If both sides follow the rules, both will gain.