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US Trade Charges against China Should be Based on Hard Facts

Aug 22, 2018
  • He Weiwen

    Senior Fellow, Center for China and Globalization, CCG

Trump Administration’s unilateral tariffs on Chinese goods are largely based on two reports:  the USTR 301 investigation report and a White House Office of Trade and Manufacturing Policy report of June 2018. Both reports accuse China in an extremely systematic way of “theft” or “compulsory transfer” of technology and IP. Hundreds of citations are used to support their findings.

The citations link to reports of other American institutions, and are not backed by hard facts. Therefore, it is difficult to know if the charges and findings are true.

The June report said that “In its 2017 Member Survey, the U.S.-China Business Council reports that “tech transfer to gain market access is an acute issue for those who face it; nearly 20% of respondents to a U.S.-China Business Council 2017 Member Survey have been asked to transfer technology during the past three years”. This is incomplete. The USCBC 2017 Member Survey shows that, when asked if they have been asked to transfer technology during the past three years, 81% of them said no. In other words, only 19% had the problem. When asked who had asked them to transfer technology, 67% of the 19% said “the Chinese enterprises”. In other words, only 33% of the 19% (6% of the total) were said to be requested by the Chinese government. But the report left out this important part. Even the USCBC Member Survey did not give the specifics of these alleged forced tech transfers. No judge could give a ruling without this basic evidence.

The June report asserts that “China uses foreign ownership restrictions to force or induce the transfer of technology and IP, often as a condition of access to the Chinese market.” One citation states: “As noted by the U.S. Department of State: ‘China maintains a more restrictive foreign investment regime than its major trading partners, including the United States - broad sectors of the economy remain closed to foreign investors.’” Again, it is a comment, not fact. Another citation states: “China requires all foreign electronic vehicle (EV) companies wishing to manufacture automobiles in China to form joint ventures with Chinese companies with minority stakes. The foreign company must transfer EV technology to Chinese enterprises as they are building up their Chinese brands.” Must they?

The June report states that “China uses ownership restrictions to force or induce the transfer of technology and IP, of as a condition of access to the Chinese market.” However, ownership restrictions are used in many countries, out of different considerations. They might be related to the development stages of the local industry, or national security. The restrictions usually change when conditions change. They do not have anything to do with compulsory technology transfer. Aux Group, based in Ningbo, China, acquired a hospital in Melbourne, Australia. Its ownership was restricted to 20% of the total share, and it was not allowed to sit on the hospital board. The Australian Government Foreign Investment Review Board (FIRB) said this was because patients’ personal information is a matter of national security. When working at the Chinese Consulate General in New York in 2002, I had exchanges with a few American law firms and learned that foreign investors’ share in US basic telecom services are restricted to no more than 20%, out of national security concerns. Again, it had nothing to do with compulsory technology transfer. In the EV case, I attended the World Manufacturing Convention in Hefei, Anhui Province late May, where Jianghuai-Volkswagen, a joint venture between Germany and China, announced its first EV car (E20x). There was no complaint from Volkswagen of any compulsory technology transfer. On June 28, the Chinese government abolished ownership restrictions on new energy cars, and Tesla was the first American auto maker that had announced a new investment plant, 100% owned by Tesla.

The USTR 301 report stated that Chinese joint-venture requirements prohibit foreign investors from operating in certain industries unless they partner with a Chinese company, and in some cases, unless the Chinese partner is the controlling shareholder.

The USTR does not give any evidence of this, however, but just cites other sources: a book by Thomas J. Holmes of the Federal Reserve Bank of Minneapolis, and various articles and reports, including one of its own reports in 2016.

No hard facts were presented in any of the citations.

It is almost impossible to review all the hundreds of citations in the two reports. The examples shown above already give good food for thought. If both governments talk on those issues, the US side could only present allegations, and the Chinese side could easily deny them all. It will be very difficult to work out a solution. Hence, a joint ad hoc working group should be set up to check the basic charges of the two reports, based only on hard facts and relevant WTO rules. If both sides agree to this approach, there will be common ground. Both sides could try to reduce the risks of trade war escalation, and strive towards a sound solution.

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