Trade War with China
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Hendrik_2000
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Excellent article by Stephen Roach ex morgan stanley chief via Vincent
Stephen S. Roach Apr 25, 2018
NEW HAVEN – On the surface, United States Trade Representative Robert Lighthizer appears to have made an ironclad case against China in the so-called Section 301 report issued on March 22. Laid out in a detailed 182-page document (which, with 1,139 footnotes and five appendices, would make any legal team blush with pride), the USTR’s indictment of China on charges of unfair trading practices regarding technology transfer, intellectual property, and innovation seems both urgent and compelling. It has quickly been accepted as foundational evidence in support of the tariffs and other punitive trade measures that President Donald Trump’s administration has initiated against China in recent months. It is powerful ammunition in a potential trade war.
But don’t be fooled. The report is wide of the mark in several key areas. First, it accuses China of “forced technology transfer,” arguing that US companies must turn over the blueprints of proprietary technologies and operating systems in order to do business in China. This transfer is alleged to take place within the structure of joint-venture arrangements – partnerships with domestic counterparts which China and other countries have long established as models for the growth and expansion of new businesses. Currently, there are more than 8,000 JVs operating in China, compared to a total of over 110,000 JVs and strategic alliances that have been set up around the world since 1990.
Significantly, US and other multinational corporations willingly enter into these legally-negotiated arrangements for commercially sound reasons – not only to establish a toehold in China’s rapidly growing domestic markets, but also as a means to improve operating efficiency with a low-cost offshore Chinese platform. Portraying US companies as innocent victims of Chinese pressure is certainly at odds with my own experience as an active participant in Morgan Stanley’s joint venture with the China Construction Bank (and a few small minority investors) to establish China International Capital Corporation in 1995.
Yes, as we joined with our partners in creating China’s first investment bank, we shared our business practices, proprietary products, and distribution systems. Yet, contrary to the assertions of the USTR, we were hardly forced into these arrangements. We had our own commercial objectives and wanted to build a world-class financial services firm in China. By the time we sold our stake in 2010 – at a rather attractive return to Morgan Stanley shareholders, I might add – CICC was well on its way to attaining those goals.
The second area where the USTR’s Section 301 report is problematic is its portrayal of China’s focus on outward investment – its “going out” strategy – as a unique state-directed plan aimed at gobbling up newly emerging US companies and their proprietary technologies. In fact, the report devotes more than twice as many pages to charges concerning China’s supposed external technology theft via such acquisitions – which are framed as a blatant grab for America’s most precious assets – as it does to internal transfers through JVs and alleged unfair licensing practices.
As such, the Made in China 2025 campaign is presented as prima facie evidence of a devious socialist plot to attain global dominance in the great industries of the future: autonomous vehicles, high-speed rail, advanced information technologies and machine tools, exotic new materials, biopharma and sophisticated medical products, as well as new power sources and advanced agricultural equipment.
Never mind that industrial policies are a time-tested strategy for developing countries seeking to avoid the dreaded middle-income trap by shifting from imported to indigenous innovation. China is accused by the USTR of sponsoring a unique strain of state-directed, heavily subsidized industrial policy unfairly aimed at snatching competitive supremacy from free and open market-based systems like the US, which are supposedly playing by different rules.
Yet even developed countries have relied on industrial policy to achieve national economic and competitive objectives. It was central to Japan’s so-called planned rational development state, which underpinned its rapid growth in the 1970s and the 1980s. The Ministry of International Trade and Industry perfected the art of state-subsidized credit allocation and tariffs to protect Japan’s sunrise industries, an effort that was matched by Germany’s equally impressive Wirtschaftswunder, augmented by strong support for the Mittelstand of small and medium-size enterprises.
And, of course, it was US President Dwight Eisenhower who in 1961 drew attention to America’s powerful military-industrial complex as the linchpin of state-sponsored, taxpayer-funded innovation in the US. NASA-related spinoffs, the Internet, GPS, breakthroughs in semiconductors, nuclear power, imaging technology, pharmaceutical innovations, and more: all are important and highly visible manifestations of industrial policy the American way. The US simply does it though its federal defense budget – where outlays of close to $700 billion this year are more than the combined total earmarked for defense in China, Russia, the United Kingdom, India, France, Japan, Saudi Arabia, and Germany.
Yes, the USTR is entirely correct in underscoring the role that innovation plays in shaping any country’s future. But to claim that China alone relies on industrial policy as a means toward this end is the height of hypocrisy.
Cyber-espionage is the third leg of the stool in the USTR’s case against China. In this area, there can be no mistaking the evidence underscoring the role played by China’s People’s Liberation Army as a major actor in cyber intrusions directed at US commercial interests. These problems were, in fact, so serious that President Barack Obama presented top-secret evidence of state-sponsored computer hacking to President Xi in September 2015. Since then, most reports point to a reduction in Chinese incursions. Unfortunately, the evidence cited in the USTR report in support of cyber-related trade violations largely predates that confrontation.
In short, the USTR’s seemingly impressive Section 301 report is a biased political document that has further inflamed anti-China sentiment in the US. As a result, Chinese-sponsored intellectual property theft is now taken as a given by an America that increasingly sees itself as a victim. Yes, like the rest of us, the Chinese are tough competitors, and they don’t always play by the rules. For that, they need to be held accountable. But the case made by the USTR is an embarrassing symptom of a scapegoat mentality that has turned America into a nation of whiners.
Stephen S. Roach Apr 25, 2018
NEW HAVEN – On the surface, United States Trade Representative Robert Lighthizer appears to have made an ironclad case against China in the so-called Section 301 report issued on March 22. Laid out in a detailed 182-page document (which, with 1,139 footnotes and five appendices, would make any legal team blush with pride), the USTR’s indictment of China on charges of unfair trading practices regarding technology transfer, intellectual property, and innovation seems both urgent and compelling. It has quickly been accepted as foundational evidence in support of the tariffs and other punitive trade measures that President Donald Trump’s administration has initiated against China in recent months. It is powerful ammunition in a potential trade war.
But don’t be fooled. The report is wide of the mark in several key areas. First, it accuses China of “forced technology transfer,” arguing that US companies must turn over the blueprints of proprietary technologies and operating systems in order to do business in China. This transfer is alleged to take place within the structure of joint-venture arrangements – partnerships with domestic counterparts which China and other countries have long established as models for the growth and expansion of new businesses. Currently, there are more than 8,000 JVs operating in China, compared to a total of over 110,000 JVs and strategic alliances that have been set up around the world since 1990.
Significantly, US and other multinational corporations willingly enter into these legally-negotiated arrangements for commercially sound reasons – not only to establish a toehold in China’s rapidly growing domestic markets, but also as a means to improve operating efficiency with a low-cost offshore Chinese platform. Portraying US companies as innocent victims of Chinese pressure is certainly at odds with my own experience as an active participant in Morgan Stanley’s joint venture with the China Construction Bank (and a few small minority investors) to establish China International Capital Corporation in 1995.
Yes, as we joined with our partners in creating China’s first investment bank, we shared our business practices, proprietary products, and distribution systems. Yet, contrary to the assertions of the USTR, we were hardly forced into these arrangements. We had our own commercial objectives and wanted to build a world-class financial services firm in China. By the time we sold our stake in 2010 – at a rather attractive return to Morgan Stanley shareholders, I might add – CICC was well on its way to attaining those goals.
The second area where the USTR’s Section 301 report is problematic is its portrayal of China’s focus on outward investment – its “going out” strategy – as a unique state-directed plan aimed at gobbling up newly emerging US companies and their proprietary technologies. In fact, the report devotes more than twice as many pages to charges concerning China’s supposed external technology theft via such acquisitions – which are framed as a blatant grab for America’s most precious assets – as it does to internal transfers through JVs and alleged unfair licensing practices.
As such, the Made in China 2025 campaign is presented as prima facie evidence of a devious socialist plot to attain global dominance in the great industries of the future: autonomous vehicles, high-speed rail, advanced information technologies and machine tools, exotic new materials, biopharma and sophisticated medical products, as well as new power sources and advanced agricultural equipment.
Never mind that industrial policies are a time-tested strategy for developing countries seeking to avoid the dreaded middle-income trap by shifting from imported to indigenous innovation. China is accused by the USTR of sponsoring a unique strain of state-directed, heavily subsidized industrial policy unfairly aimed at snatching competitive supremacy from free and open market-based systems like the US, which are supposedly playing by different rules.
Yet even developed countries have relied on industrial policy to achieve national economic and competitive objectives. It was central to Japan’s so-called planned rational development state, which underpinned its rapid growth in the 1970s and the 1980s. The Ministry of International Trade and Industry perfected the art of state-subsidized credit allocation and tariffs to protect Japan’s sunrise industries, an effort that was matched by Germany’s equally impressive Wirtschaftswunder, augmented by strong support for the Mittelstand of small and medium-size enterprises.
And, of course, it was US President Dwight Eisenhower who in 1961 drew attention to America’s powerful military-industrial complex as the linchpin of state-sponsored, taxpayer-funded innovation in the US. NASA-related spinoffs, the Internet, GPS, breakthroughs in semiconductors, nuclear power, imaging technology, pharmaceutical innovations, and more: all are important and highly visible manifestations of industrial policy the American way. The US simply does it though its federal defense budget – where outlays of close to $700 billion this year are more than the combined total earmarked for defense in China, Russia, the United Kingdom, India, France, Japan, Saudi Arabia, and Germany.
Yes, the USTR is entirely correct in underscoring the role that innovation plays in shaping any country’s future. But to claim that China alone relies on industrial policy as a means toward this end is the height of hypocrisy.
Cyber-espionage is the third leg of the stool in the USTR’s case against China. In this area, there can be no mistaking the evidence underscoring the role played by China’s People’s Liberation Army as a major actor in cyber intrusions directed at US commercial interests. These problems were, in fact, so serious that President Barack Obama presented top-secret evidence of state-sponsored computer hacking to President Xi in September 2015. Since then, most reports point to a reduction in Chinese incursions. Unfortunately, the evidence cited in the USTR report in support of cyber-related trade violations largely predates that confrontation.
In short, the USTR’s seemingly impressive Section 301 report is a biased political document that has further inflamed anti-China sentiment in the US. As a result, Chinese-sponsored intellectual property theft is now taken as a given by an America that increasingly sees itself as a victim. Yes, like the rest of us, the Chinese are tough competitors, and they don’t always play by the rules. For that, they need to be held accountable. But the case made by the USTR is an embarrassing symptom of a scapegoat mentality that has turned America into a nation of whiners.
Hendrik_2000
Lieutenant General
We must rely on ourselves to develop the core technology. Xi visit Wuhan.Pep talk to rally the troop
The next step in making breakthroughs in science and technology lies in abandoning illusions and relying on ourselves, Chinese president Xi Jinping said on Thursday. Xi made the remarks while visiting a technology company in Wuhan, capital of central China's Hubei Province.
The next step in making breakthroughs in science and technology lies in abandoning illusions and relying on ourselves, Chinese president Xi Jinping said on Thursday. Xi made the remarks while visiting a technology company in Wuhan, capital of central China's Hubei Province.
From what I've heard ZTE hired a Jewish lawyer to defend them in a case that involved tech transfer to Iran :O.
Jura The idiot
General
Hendrik_2000
Lieutenant General
Csis is not exactly China friendly But even they see the futility of trying to retard China advances via CMP
Thye try before with CNC machine then during clinton time with satellite technology the result is you are creating a new competitor
ZTE and Building America’s Competitors
April 24, 2018
Last week’s draconian sanctions on Chinese telecom supplier ZTE follow a long-standing tradition in U.S. export controls: taking actions that help build the United States’ competitors and hurt U.S. companies.
To be clear, ZTE had violated the terms of its agreement and deserved to be punished. But the seven-year ban on U.S. components will only encourage foreign suppliers to rush into the space vacated by U.S. companies. It will reinforce the Chinese government’s desire to replace U.S. suppliers with Chinese companies. And it will lead others to begin to make things they did not make before, causing permanent harm to the market share of U.S. companies.
This is not the first time this kind of action has backfired. In the Clinton administration, the United States decided it did not want to sell satellites to China or satellite components to European companies that sold satellites to China. It declared that commercial satellites and their components were a munition, a weapon. This meant that any satellite that had a U.S. component, no matter how small, or any sale, no matter how harmless the customer (and most customers were NATO allies), required approval in the form of a license from the United States before export. A multimillion-dollar satellite with a $12 U.S. component now had to go through a cumbersome licensing process for export anywhere in the world. In the case of China, since the United States has a ban on arms sales to China, satellites from U.S. companies, whether made in Europe or the United States, were banned entirely for export.
European companies and governments did not take this change lightly. No other country regarded commercial satellites as a munition, nor did the United States try to persuade them otherwise or get the multilateral export control regime (the Wassenaar Arrangement) to treat satellites as weapons. The process of finding replacement suppliers began almost immediately.
The U.S. action did not block the development of China’s space program or prevent European satellite exports to China. The immediate effect was to encourage the Europeans to make components that they had previously bought from the United States, and within a few years European companies were advertising “ITAR-free” satellites (ITAR being International Traffic in Arms Regulations, the regulations that govern the export of munitions and that ban exports to China). An ITAR-free satellite could be sold without any need for U.S. approval. A few European governments even subsidized their companies to go into the satellite component business, creating permanent competitors for U.S. companies and damaging their market share without any benefit to U.S. security. An earlier episode involving machine tools, known as “Toshiba Konigsberg,” contributed to the demise to the U.S. machine tool industry, so that the United States ended up depending on foreign suppliers for this key industrial equipment.
In the 1960s, or even the 1970s, the United States could get away with this kind of blanket proscription. It made technology that no one else could duplicate. That is no longer true. The diffusion of technological capabilities around the work began more than 20 years ago, and the rate of diffusion continues to increase. Just this week, China’s president, Xi Jinping, called for China to redouble its efforts to close the gap with the United States in advanced technologies.
There are very few technologies where we still have a monopoly, and though it is in our national interest to prevent exports that improve China’s technological base, we should not delude ourselves that this will frustrate Chinese ambitions. At best it may slow them, but it will not prevent their efforts to close the gap. China may not retaliate directly or immediately, as it still needs some U.S. technology for mobile phones, but it will not allow ZTE to go under. Foreign suppliers will offer ZTE substitute goods if they make them and look to build substitutes if they do not.
The U.S. Commerce Department’s anger at ZTE’s violations is understandable and justified, and it fits with the narrative of the Trump administration’s trade and technology dispute with China. But the results of these actions can be counterintuitive. A more strategic course might have been to impose large, additional fines on ZTE without cutting off U.S. suppliers. Fines would punish ZTE and avoid the market distorting risks. U.S. technological leadership is diminishing as other countries become more adept at creating advanced technology, but our actions can affect and limit the pace and scope of this. The goal should not be to accelerate technological competition; ZTE’s punishment, however well deserved, may have the opposite effect.
James Andrew Lewis is a senior vice president at the Center for Strategic and International Studies in Washington, D.C.
Thye try before with CNC machine then during clinton time with satellite technology the result is you are creating a new competitor
ZTE and Building America’s Competitors
April 24, 2018
Last week’s draconian sanctions on Chinese telecom supplier ZTE follow a long-standing tradition in U.S. export controls: taking actions that help build the United States’ competitors and hurt U.S. companies.
To be clear, ZTE had violated the terms of its agreement and deserved to be punished. But the seven-year ban on U.S. components will only encourage foreign suppliers to rush into the space vacated by U.S. companies. It will reinforce the Chinese government’s desire to replace U.S. suppliers with Chinese companies. And it will lead others to begin to make things they did not make before, causing permanent harm to the market share of U.S. companies.
This is not the first time this kind of action has backfired. In the Clinton administration, the United States decided it did not want to sell satellites to China or satellite components to European companies that sold satellites to China. It declared that commercial satellites and their components were a munition, a weapon. This meant that any satellite that had a U.S. component, no matter how small, or any sale, no matter how harmless the customer (and most customers were NATO allies), required approval in the form of a license from the United States before export. A multimillion-dollar satellite with a $12 U.S. component now had to go through a cumbersome licensing process for export anywhere in the world. In the case of China, since the United States has a ban on arms sales to China, satellites from U.S. companies, whether made in Europe or the United States, were banned entirely for export.
European companies and governments did not take this change lightly. No other country regarded commercial satellites as a munition, nor did the United States try to persuade them otherwise or get the multilateral export control regime (the Wassenaar Arrangement) to treat satellites as weapons. The process of finding replacement suppliers began almost immediately.
The U.S. action did not block the development of China’s space program or prevent European satellite exports to China. The immediate effect was to encourage the Europeans to make components that they had previously bought from the United States, and within a few years European companies were advertising “ITAR-free” satellites (ITAR being International Traffic in Arms Regulations, the regulations that govern the export of munitions and that ban exports to China). An ITAR-free satellite could be sold without any need for U.S. approval. A few European governments even subsidized their companies to go into the satellite component business, creating permanent competitors for U.S. companies and damaging their market share without any benefit to U.S. security. An earlier episode involving machine tools, known as “Toshiba Konigsberg,” contributed to the demise to the U.S. machine tool industry, so that the United States ended up depending on foreign suppliers for this key industrial equipment.
In the 1960s, or even the 1970s, the United States could get away with this kind of blanket proscription. It made technology that no one else could duplicate. That is no longer true. The diffusion of technological capabilities around the work began more than 20 years ago, and the rate of diffusion continues to increase. Just this week, China’s president, Xi Jinping, called for China to redouble its efforts to close the gap with the United States in advanced technologies.
There are very few technologies where we still have a monopoly, and though it is in our national interest to prevent exports that improve China’s technological base, we should not delude ourselves that this will frustrate Chinese ambitions. At best it may slow them, but it will not prevent their efforts to close the gap. China may not retaliate directly or immediately, as it still needs some U.S. technology for mobile phones, but it will not allow ZTE to go under. Foreign suppliers will offer ZTE substitute goods if they make them and look to build substitutes if they do not.
The U.S. Commerce Department’s anger at ZTE’s violations is understandable and justified, and it fits with the narrative of the Trump administration’s trade and technology dispute with China. But the results of these actions can be counterintuitive. A more strategic course might have been to impose large, additional fines on ZTE without cutting off U.S. suppliers. Fines would punish ZTE and avoid the market distorting risks. U.S. technological leadership is diminishing as other countries become more adept at creating advanced technology, but our actions can affect and limit the pace and scope of this. The goal should not be to accelerate technological competition; ZTE’s punishment, however well deserved, may have the opposite effect.
James Andrew Lewis is a senior vice president at the Center for Strategic and International Studies in Washington, D.C.
Jura The idiot
General
Jura The idiot
General
now noticed the tweet
China opposes being listed on the Priority Watch List of the 2018 Special 301 Report on released unilaterally on Thu, and urges US to give a more objective, fair, and friendly evaluation of IPR protection and law enforcement efforts made by China and other countries: MOC
China opposes being listed on the Priority Watch List of the 2018 Special 301 Report on released unilaterally on Thu, and urges US to give a more objective, fair, and friendly evaluation of IPR protection and law enforcement efforts made by China and other countries: MOC
I've pointed out a while back in SDF that most if not all US bans on Chinese technologies in the last twenty years ended up backfiring and helping China in the longer term:
The ban to use commercial Chinese launchers to launch any satellites with US components. It hurt Chinese launchers' market share for some years, but the Chinese ended up developing turn-key satellites projects, from satellites, launch and operation services, and started to export them around the world.
The US stopped the Israel from exporting AWACS to China. China ended up developing its indigenous AWACS KJ-2000 in a few years. China has since developed several generations of AWACS: KJ-2000, KJ-200, KJ-500 and has exported AWACS to Pakistan. China is now developing KJ-600 for its carriers.
The US has banned Intel to export its CPUs to use on China's supercomputers. This has caused some delays in China developing its next generation supercomputers, but it eventually successfully developed Tianhe 2 Supercomputer using its own CPUs and still maintains the world's fastest supercomputer with Tianhe 2.
In each case, China ended up in a stronger position, developing its own respective industrial infrastructure to support indigenous industry.
At this stage, Chinese business should learn to hedge their reliance to any American supplier as any sanction can happen on a whim. For smart business, It may even be best to avoid American suppliers for core components if possible as good risk management policy. The American government is really not in a position to complain either as they brought it up upon themselves. Let the US provide assurances against sanction if they want their industry to be competitive.
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