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Technology as an Enduring Roadblock to a Real Trade Deal

Nov 01, 2019

There has been much fanfare about the possibility of the U.S. and China closing in on the first stage of a trade deal. Chinese and American negotiators have both signaled agreement on a number of early albeit minor provisions, including ramped up Chinese purchases of U.S. agricultural products. But aside from the stubborn fact that there’s been no major agreement on existing tariffs, one roadblock stands in the way of a thoroughgoing deal: technology. The viewpoints of the U.S. and Chinese governments on technology transfers are fundamentally opposed. The U.S. government views China’s acquisition of advanced technology as a serious threat to its economic dominance and military advantage, while China pursues technological development for precisely those reasons. Unless one side is willing to blink and substantially modify its goals, or at least ignore them for a time, no comprehensive deal can be struck. 

From what we know thus far, the proposed “Phase 1” of a U.S.-China trade deal is rather modest. China has committed to buying more than $40 billion in U.S. agricultural products a year, an over 50% increase from pre-trade war highs. The U.S., in exchange, promised to cancel a 5% tariff hike on $250 billion in Chinese imports. China has also allegedly agreed to some opening of its financial services sector, some changes in the ways it protects foreign intellectual property, and some guidelines on currency devaluation. Missing from the agreement is any movement on most of the existing tariffs and trade restrictions imposed by both countries, or a meeting of the minds about subsidies to state-owned companies. 

Optimism about the deal helped boost financial markets in the U.S. to all-time highs in spite of the remaining concrete barriers to further progress. Indeed, domestic economic pressure and mounting fears of a global recession likely helped propel both China and the U.S. to work toward some version of a deal to ease investor anxiety. China’s growth continues to slow markedly in almost all sectors, including industrial production and consumer spending. The U.S. Federal Reserve has cut interest rates, propped up the repo market, and restarted quantitative easing in an ominous signal of increasing strain on the financial system. Optimism about a $50 billion trade deal will obviously not be enough to propel global capitalism through the headwinds it is currently facing. But even this sliver of optimism may be premature. 

Since the onset of the trade war, the U.S. and China have repeatedly sparred over technology transfers, intellectual property protection, and spying. The U.S. government argues that China essentially steals U.S. technology with cyberespionage, corporate acquisitions, and joint ventures that require American companies to share their technical knowhow. China – echoing the classic laissez faire line – states that foreign companies ‘freely choose’ to invest in China and conduct business with its firms. This back-and-forth takes place alongside the U.S.’s narrowing lead in its economic and military competition with China, stoking anxieties that Chinese ambitions to become a global leader in hi-tech industries will displace American companies. Even Mark Zuckerberg has gotten in on the action, arguing that U.S. regulations on Facebook’s currency ventures risk ceding the initiative to China. 

It doesn’t take genius to understand why China and Chinese firms are keen to acquire the U.S.’s technological capacity. The classic dependency trap that most peripheral economies face is an inability to parley foreign investment into a move up the production ladder to higher tech, and more valuable, goods. China is one of few countries to have successfully negotiated this transition thus far. For its part, the U.S. developed its own manufacturing sector by going to great lengths to ‘steal’ patents and skilled engineers from the United Kingdom, the 19th century’s economic powerhouse. The UK likewise tried to ban technology transfers to its rising competitor with about the same degree of success as today’s United States. Any sort of “moral” argument about technology transfers should be discarded out of hand; the issue is one of opposed interests. The leading economy wants to limit technology transfers to retain its competitive advantage, and the rising economy needs to do the opposite. The reason an enduring deal on the subject is very difficult to reach should be pretty apparent. 

One interesting factor is the disagreement on technology restrictions between the U.S. government and many American firms, and even within the Trump administration itself. Congress passed a law last year requiring export controls on advanced technologies, and China hawks within the administration have pushed for an expansive list. Companies like Google, Microsoft, Raytheon, and GM all hit back against the proposed controls, seeing them as a barrier against doing business where and how they please. Previous restrictions have been flouted outright. During the U.S.’s row with Huawei earlier this year, U.S. firms like Intel and Micron semi-openly evaded the government’s ban on doing business with the Chinese telecom. Altogether, the disagreement mirrors a longstanding split within the Trump administration and U.S. capital at large, with uncompetitive manufacturers favoring tariffs and protectionism and the booming tech industry favoring lowered trade restrictions. 

It thus seems unwise to place bets that U.S. plans to restrict technology transfers to China will succeed. America’s largest firms wield massive political power and generally get away with doing as they please. As we have seen over and over again this year, U.S. companies are willing to bend domestic laws and bend over backwards to continue doing business in the world’s largest growing market. China likewise has many tools in its arsenal to continue promoting technology transfers. The Chinese government can easily write new laws and promise to enforce IP protections, all while selectively ignoring its own legislation and encouraging completely legal acquisitions of small U.S. tech firms. Unless China hawks in the administration accept all of this, the chances of a real deal and end to the trade war are low indeed.

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