U.S. companies want something done about China’s trade practices, but fret over Trump’s approach to applying Section 301 tariffs on a powerhouse trade partner.
The Trump administration has proposed tariffs on $50 billion worth of goods to counter observed unfair intellectual property (IP) and technology transfer practices by China, marking the second instance in a month’s time that the executive branch ordered tariffs pursuant to domestic law.
Republican and Democrat U.S. lawmakers and domestic import- and export-dependent industry groups provided somewhat varied reactions to the announced tariffs, though they largely urged the administration to be cautious in assessing trade remedies.
Section 301 of the Trade Act of 1974 allows the Office of the U.S. Trade Representative (USTR) to broadly take action, including imposing tariffs, to counter any foreign country’s “unreasonable” acts, policies, and practices that have been found, through investigation, to have denied U.S. companies “fair and equitable” commercial treatment and market access.
USTR started a Section 301 investigation into Chinese IP and forced technology transfer policies in August, at the direction of President Trump. The agency released a report detailing the findings of its investigation on March 27.
During a March 22 White House address announcing the completion of USTR’s investigation, as well as potential trade action, Lockheed Martin CEO Marillyn Hewson said “we very much welcome” the administration’s actions to protect U.S. companies’ IP.
“This is a very important moment for our country, in that we are addressing what is a critical area for the aerospace and defense industry, and that is protecting our intellectual property,” she said.
After Trump’s announcement, Senate Finance Committee Ranking Member Ron Wyden, D-Ore., said he was “encouraged” that the administration is “focused on protecting the technologies that China publicly targeted.” He added that he looked forward to “close consultations” with the Trump administration on trade remedies to “ensure the administration gets real results that actually bring back American jobs.”
House Ways and Means Committee Ranking Member Richard Neal, D-Mass., said it came as no surprise that the administration found Chinese IP policies and practices to be unreasonable and harmful to U.S. commerce, but noted the absence of specificity on tariffs to be imposed and on apparently forthcoming Treasury investment restrictions on China “leaves us with more questions than answers.”
Finance Chairman Orrin Hatch, R-Utah, and Ways and Means Chairman Kevin Brady, R-Texas, urged the Trump administration to move cautiously with regard to any trade remedy, yet commended the administration in general for taking action.
“The challenge for every president…is how to punish China without harming our families, businesses, and farmers,” Brady said in a March 22 statement. “Tariffs are taxes, so the next 30 days of input are crucial to make sure we don’t punish American workers and families for China’s misbehavior.”
Trade Pain. Several industry groups also called for a cautious approach.
National Foreign Trade Council President Rufus Yerxa said in a March 22 statement that “selective use of trade and investment tools” should be in the mix only as part of a joint strategy by the U.S. and its trading partners to counter unfair Chinese IP-related practices.
“While we share many of USTR’s conclusions about the multitude of Chinese practices that are discriminatory and highly damaging to U.S. companies and technologies, we want USTR to focus on actions that will force China to address our concerns rather than to engage in an escalating conflict,” Yerxa said in a statement. “The most important step right now is to get buy-in from key trading partners—Europe, Japan and others—to our indictment of China’s behavior.”
Eighty-two footwear companies wrote a March 19 letter to Trump expressing “strong concerns” over potential tariff increases on footwear as part of any remedy imposed.
The letter noted that tariffs on footwear already average 11 percent, about 9.7 percent higher than the average tariff on all consumer goods.
Despite reports that USTR was considering Section 301 tariffs on footwear, USTR’s proposed tariff list released April 3 didn’t include any footwear products, drawing an expression of relief from American Apparel and Footwear Association CEO Rick Helfenbein.
“We are pleased with the administration’s decision to avoid adding tariffs to U.S. imports of apparel, footwear and travel goods from China,” Helfenbein said. “At the same time, we are concerned that the list includes tariffs on machinery used in our domestic manufacturing process. This would directly raise costs on domestic manufacturers and impact our ability to grow Made in USA.”
Further, the U.S. Chamber of Commerce “would strongly disagree” with any decision imposing “sweeping tariffs” on Chinese goods, chamber CEO Tom Donohue said in a March 15 statement.
“As we’re starting to see, tariffs could lead to a destructive trade war with serious consequences for U.S. economic growth and job creation,” he said. “The livelihood of America’s consumers, businesses, farmers and ranchers are at risk if the administration proceeds with this plan.”
After implementing retaliatory tariffs on April 2 in response to generally global U.S. Section 232 tariffs on steel and aluminum, China on April 4 proposed 25 percent tariffs on 106 items imported from the U.S. worth about $50 billion in 2017, in response to the Trump-proposed Section 301 tariffs.
U.S. products on the latter Chinese list include soybeans, corn, wheat, cotton products, beef, whiskey, tobacco, SUVs, and several chemicals and chemical-related products, including plastics.
China will announce final measures and the effective time of the retaliatory tariffs at a later point, the country’s Commerce Ministry said.
“We urge the U.S. to cease and desist, make cautious decisions, and avoid placing China-U.S. trade relations in danger with the purpose of hurting others that eventually end up hurting itself,” the Chinese Embassy in Washington said in a March 23 statement, referencing the Section 301 tariff proposal.
Based on its Section 301 investigation, the Trump administration has proposed 25 percent tariffs on about 1,300 tariff lines, covering products estimated to be worth a combined $50 billion in annual trade for 2018. These products particularly touch China’s aerospace, information and communication technology, robotics and machinery sectors.
In the interim, USTR said it will accept public comments on the proposed product list through May 11, and will lead an interagency hearing May 15 on the matter. May 22 is the due date for post-hearing rebuttal submissions. USTR will issue a final determination on products subject to additional duties after completing the public notice-and-comment process.
Innovation Tactics. During the March 22 White House address, Trump noted the U.S. is pressing China in bilateral discussions to help reduce its trade deficit with the nation by $100 billion, about one-quarter of the total U.S. trade deficit with China.
“We’ll see where [the negotiation] takes us,” Trump said. “But in the meantime, we are sending a Section 301 action.”
USTR’s 215-page report noted China had committed on at least eight occasions since 2010 to not use technology transfer as a condition for market access, and to allow technology transfer decisions to be independently negotiated by businesses.
But the investigation found that the transfer regime continues, “notwithstanding repeated bilateral commitments and government statements.”
In its official publications, the Chinese government has indicated its technology-related industrial policies, and showed a proclivity for “re-innovation” of foreign technologies, USTR’s report stated.
This is actually part of an effort by China to progressively reduce its dependence on foreign technology to advance its economy toward becoming a global science and technology powerhouse, and move it away from its traditional identity as a low-cost manufacturing hub, the report added.
USTR cited “more than 100 five-year plans, science and technology development plans, and sectoral plans over the last decade” that advance China’s foreign technology transfer policies, including the “seminal document articulating China’s long-term technology development strategy,” the National Medium- and Long-Term Science and Technology Development Plan (MLP) Outline (2006-2020).
The outline recognizes China’s “relatively weak indigenous innovation capacity,” as well as “weak core competitiveness” of Chinese enterprises, and that the country’s “high-technology industries ‘lag’ those of more developed nations,” USTR said.
The document also highlights 11 key sectors and 68 priorities within the sectors for technology development, and establishes a goal to reduce dependence on foreign technologies to below 30 percent by 2020, the Section 301 review said.
MLP Section 8(2) calls for enhancing the “absorption, digestion and re-innovation of introduced technology” to move China toward its science and technology goals, USTR said.
China’s foreign ownership restrictions include joint venture requirements and equity limitations to pressure U.S. technology transfers to Chinese entities, and its administrative review and licensing procedures for technology investments require or pressure technology transfers, which weaken the global competitiveness of U.S. firms, USTR said in a statement summarizing the report.
On top of the proposed tariffs, the U.S. on March 23 requested World Trade Organization (WTO) consultations, the first step in the WTO’s dispute process, over China’s allegedly unfair IP requirements.
Under WTO rules, if consultations don’t resolve a matter within 60 days of the request, any party involved may request that the matter be formally adjudicated by a WTO dispute resolution panel.
The U.S.’s WTO complaint states that Chinese regulations require foreign license holders of technology imported into the country to indemnify Chinese licensees for all liability for infringement resulting from the use of technology transferred to China.
The complaint points to the 2002-effective Regulations of the People’s Republic of China on the Administration of the Import and Export of Technologies, as amended Jan. 8, 2011, as the problematic policy forcing that IP practice.
That set of regulations also requires any improvements in imported technology to be the property of the party making the improvement, which means less favorable treatment for foreign IP holders than Chinese IP holders, the complaint said.
Furthermore, those regulations ban imported technology license contracts from restricting a Chinese party from improving the technology or from using the improved technology, the consultation request said.
Another problematic policy is the 1979-effective Regulations for the Implementation of the Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures, as amended in 1990, 2001 and 2016, the U.S. said.
A provision of that policy provides a Chinese joint-venture party the right to continue using technology transferred under a technology transfer contract after the expiration of the contract, the complaint said.
The U.S. said these regulations violate rules outlined in the 1995 WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement).
For example, China’s joint venture regulations deny foreign patent holders their exclusive rights, including by providing a Chinese joint-venture party the right to continue to use technology transferred under a technology transfer contract after the expiration of the contract, the U.S. complaint explained.
In a March 22 proclamation responding to USTR’s Section 301 investigation, Trump also called for Treasury to use available executive branch statutory authority to “address concerns” about China-directed or facilitated investments in U.S. industries or technologies “deemed important.”
The proclamation directs the treasury secretary to report Treasury’s progress on the matter to the White House by no later than May 21.
U.S. actions up to this point have not been effective in persuading China to change its unfair commercial practices, which the country uses to gain a competitive advantage over other economies, National Economic Council Deputy Director Everett Eissenstat said during a March 22 call with reporters.
“The remedies were carefully weighed,” he said. “The end objective of this is to get China to modify its unfair trading practices, and it has been something that has been ongoing for quite some time.”
White House Director of Trade and Industrial Policy Peter Navarro said on the call that the traditional process of U.S. bilateral economic dialogues with China has failed to produce tangible results over the last 15 years, including Trump’s meeting with Chinese President Xi Jinping at his Mar-a-Lago, Fla. estate in April 2017.
Dawn of the ‘petro-yuan’? Trump’s proposed China tariffs could be aiming at more than IP violations, including threats to the petrodollar. If the U.S. follows through on imposing tariffs on China, the remedies would indicate that the Trump administration is looking to offset the impacts of not just China’s IP practices, but also the country’s moves for global dominance in areas such as cutting-edge technology and oil trading, according to Chris Blasi, founder of Neptune Global Holdings, an international bullion exchange.
China, the world’s biggest oil importer, on March 26, launched the first crude oil futures contracts denominated in Chinese yuan. The main currency for oil futures contracts until now has been the dollar, a standard resulting in the coinage of the term “petrodollar.”
“The dollar has been the world reserve currency since the end of World War II,” Blasi said in a March interview with the Adam Smith Project. “That is being challenged, and has been for a number of years. What’s happening now with the ‘petro-yuan’ is just the latest salvo, and one of the more significant ones.”
Blasi indicated that through the proposed tariffs the Trump administration might be seeking to shield the U.S. from shocks stemming from a potential weakening of the dollar’s primacy, and protect the U.S. from China’s agenda to lead the future’s most critical industries, like technology, one of the few in which the U.S. holds dominance.
A White House spokesperson told the Adam Smith Project that the proposed tariffs were pitched solely as a response to unfair Chinese IP and technology transfers.
While other analysts also downplayed the notion that Trump’s Section 301 tariff proposal had any link with currency matters, they indicated that the tariffs are a pivotal event in the broader framework of the U.S. and China’s economic and security relationship.
Robert Scott, director of trade and manufacturing policy research at the liberal-leaning Economic Policy Institute, in an interview said China’s oil contract amounts to “small change” in the grand scope of global trade, and it’s unlikely that the yuan displaces the dollar or the euro as a leading world reserve currency.
Deterring China’s unfair IP practices could be one of a handful of objectives of the proposed tariffs, Scott said.
“I think there may be more to the tariffs; I would not go so far as to suggest that it has anything to do with China’s efforts to become a significant world currency, in terms of having goods and assets denominated in yuan,” he said. “Those are two separate issues. China, for several years…has attempted to be accepted as a leading financial power.”
Douglas Holtz-Eakin, president of the conservative-leaning American Action Forum, also dismissed any direct link between the tariffs and China’s oil futures contract. While the oil contract to be denominated in yuan is a major financial accomplishment for China, it remains to be seen “if there’s a lot of take-up for this,” as oil has almost always been primarily sold in dollars, he said.
In addition to countering unfair IP practices and offsetting the yuan’s growing prominence, Blasi said it’s possible that there are other strategic aspects behind Trump’s proposed tariffs, as China’s Belt and Road Initiative and its “Made in China 2025” policy document, respectively, indicate China’s drives to develop into an infrastructure and high-tech superpower.
“The future is going to be who controls [artificial intelligence], robotics, and quantum computing,” Blasi said. “The U.S. is basically saying, ‘Look, we’ve been getting poached.’”
