Trade conflict presages technology battle
The trade conflict between the United States and China swings
wildly between escalation and thawing. Events are following each
other in rapid succession. There is a growing realisation that there
are no winners in a prolonged conflict. Moreover, further escalation
threatens to do great harm to the global economy. At first sight,
the growing trade deficit in the United States appears to justify
the hard trade policy of the US government. But that interpretation
does not stack up. Fundamentally, the debate is not about free
trade, but about technology. Technological leadership will determine
economic leadership in the future. As a consequence, the
confrontation between China and the United States, and by extension
the economic power struggle between the West and the emerging
economies, will not be an overnight sensation but a quest stretching
for years in search of a new and workable model for future
globalisation. What we are currently experiencing is merely a
foretaste of the major challenges posed by the structural redrawing
of the global economic map. Only better international protection of
international property rights offers a structural solution.
Looking at the trade balance differently
Recent figures show that the US trade deficit increased further in
February 2018 to 57.6 billion USD. The main reason is the imbalance in
trade relations with China. US President Trump has repeatedly referred
to the unfairness of this deficit. At first sight, this appears to be
a justified concern: the American trade deficit with China is a
long-standing and structural problem. Yet the trade balance tells only
part of the story. A substantial proportion of so-called Chinese
exports to the United States comprises products that are actually made
by US multinationals in China, which are then exported to the United
States. Throwing up trade barriers against Chinese products could thus
threaten the interests of American companies. Even if the tariff
increase already announced and any similar moves in the future largely
spare American ‘made in China’ products (which is technically
possible, but difficult), the current trade conflict still threatens
to bring severe consequences for US multinationals operating in China,
because the possibility cannot be ruled out that China will throw up
other kinds of trade barriers, such as red tape, regulations and
excessive inspection procedures, to make it more difficult for Western
companies to enter or operate in the Chinese market. This is an area
where China already has a very bad reputation.
Not trade, but technology
The relatively mild response from China has led many to hope for a rapid thaw in the present trade conflict. That hope is not very realistic. It seems more likely that the dispute will move away from trade issues to focus on the heart of the matter: technology. China cherishes economic ambitions which go well beyond its present role as ‘factory of the world’. China wants to join the great world powers by focusing more on the production and export of products with high added value. This ‘Made in China 2025’ strategy requires access to technology in a broad sense: knowledge, product and process innovation, new technical insights, etc., and in many sectors.
China is seeking this access to technology through several channels. In an early phase of its development, China made intelligent use of joint ventures with Western companies to achieve knowledge transfers. The weak protection of intellectual property has been a thorn in the flesh of Western companies for many years, but their legal battle in China has produced little in practice. International legal principles, including through the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) under the aegis of the World Trade Organisation, also offer inadequate protection. These Chinese imitation practices have gradually taken on bigger proportions as more international companies have set up bases in China. Trade serves as an access portal for technology. President Trump has referred explicitly to the unauthorised appropriation of American technology by Chinese companies. Thanks to additional support from the Chinese government in the form of a ‘China first’ industrial policy, Chinese companies are succeeding in rapidly copying and implementing foreign technology. This is no longer an innocent strategy of a developing country.
A second arm of the Chinese quest for technology takes the form of
an active foreign acquisition policy. Nervous reactions in the West
show that no one likes to sell out to Chinese investors, but the
latter are often willing to pay high prices, even if there are no
other prospective investors, as happened for example during the
European debt crisis. Various initiatives have been taken or are in
preparation, both in the United States and the European Union, to curb
the Chinese access to technological or strategic sectors. This
protectionist attitude is understandable given China’s intentions.
The real solution
Denying China access to foreign technology or foreign markets threatens to put a brake on future global economic growth. Taking that route means everyone loses. Finding a genuine solution tothe current conflict demands a more structural approach.
In principle, China could simply accept the proposed US tariff increases. As trade between China and the US becomes more balanced, the tensions could ease. However, that is not a solution either, because it does not tackle the core of the problem.
China must commit to better protection of intellectual property. A more prominent role in the global economy also brings more responsibility. Proper international protection of intellectual property will in time have a positive effect on innovation and investments in research and development at the global level. This is not an obvious solution for China, however, from either a strategic or cultural perspective. Yet it offers the only guarantee for creating a fair starting point for future cooperation and further globalisation. Robust protection rules would also make future Chinese investments in the West less politically sensitive. In exchange for better protection of intellectual property, China could gain permanent access to Western technology, or technological cooperation between the West and China could become possible.
Modernisation and extension of TRIPS appears to offer a good starting point for achieving this international protection. The advantage of a multilateral agreement is the clarity it gives to all countries. That is useful, given that other emerging economies are in a comparable situation to China, or will be in the future.
Although the solution is clear, reaching it is anything but
straightforward. Whilst waiting for a structural solution, conflicts
such as the present trade tussle will become the norm. Western
countries will have to accept that they are no longer able to dictate
the multilateral rules of the game, while some emerging economies
will, at least partly, have to reconcile themselves with practices
that are common in Western market economies. The search for the best
of both worlds needs to begin urgently.