As Washington Tries to Protect Tech, China Could Fight Back

As Washington Tries to Protect Tech, China Could Fight Back

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“The problem is that U.S. trade negotiators agreed to provisions allowing China to limit market access for U.S. companies unless they engaged in joint ventures,” said Michael R. Wessel, a member of the U.S.-China Economic and Security Review Commission, which Congress created to monitor the relationship between the two countries.

“Potential Chinese partners demand the family jewels,” he said. “Companies can say no, but too many give in to Chinese pressure to make a quick buck.”

The current trade frictions trace back to the Clinton administration.

When China was entering the W.T.O. in 1999 and 2000, American negotiators gave Beijing some leeway, a position later supported by the administration of George W. Bush. As a developing country, China was allowed extra protections, such as requirements that companies in critical industries work with Chinese partners. China, in return, promised to shed the extra rules gradually as its economy matured.

But Beijing did not open up, even as China evolved into an economic powerhouse. Quite the opposite has happened under President Xi Jinping, who has pursued a more nationalistic agenda than his reform-minded predecessors.

China now sees the technology sector as a critical piece of its industrial policy — a policy that Beijing is aggressively enlisting American tech giants to support and that the leadership will most likely go all out to protect.

Beijing’s demands have been partly driven by security concerns, particularly after disclosures by Edward J. Snowden, the former National Security Agency contractor, of electronic spying by the United States on China’s rapid military buildup.

China has also been explicit about its economic motives, seeking to dominate fast-growing global industries that could create millions of well-paid jobs for a generation of increasingly well-educated young Chinese.

Graphic

Building Trade Walls

The Trump administration faces the problem that China’s high trade barriers are allowed by the World Trade Organization, because China entered the group as a developing country and insists it still is one.



OPEN Graphic


In several cases, China’s strategy to control technology approaches the kind of oversight most countries reserve for industries serving the military or government.

New Chinese rules often force foreign tech companies into partnerships with local companies — in part to gain expertise, in part to assert control. Other guidance from the government has indicated that companies must invest more in China to continue to have access to the market. Apple has opened research and development centers in the country as part of a new charm campaign.

In the chip sector, a major initiative intended to lift Chinese capabilities has drafted America’s biggest makers of the electronic brains that run everything from smartphones to driverless cars. Over the past four years, America’s largest chip companies have entered into a dizzying network of partnerships unlike anything they have anywhere else.

Qualcomm works with a company in southwest China to develop server chips. In 2014, Intel signed agreements with two Chinese chip makers, Spreadtrum and Rockchip, to give it a leg up in the market for China’s smartphones and tablets. Last year, Intel agreed to a partnership with the influential Tsinghua University in China as part of a bid to make server chips that match local specifications.

IBM and Advanced Micro Devices have both licensed chip technology to Chinese partners with ties to China’s military. GlobalFoundries, a California-based company, joined forces with a local government in central China to build a $10 billion chip manufacturing plant there.

American technology companies can find themselves at a serious disadvantage in China unless they agree to cooperate with government-linked Chinese businesses.

Take cloud computing, the fast-growing business of leasing computer power to companies. Chinese laws require foreign companies to join with local partners and allow them only a minority stake. International businesses are also blocked from branding such services under their own names.

Both Microsoft and Amazon, dominant forces in cloud computing in the United States, have local partnerships in China. By contrast, China’s e-commerce giant Alibaba operates two data centers in the United States without any partner.

Another rule calls for data about Chinese consumers or business operations to be stored in China. Apple and Amazon recently set up data centers in China, again with local partners, to store more customer information in the country.

Against that backdrop, the call for trade action is attracting bipartisan support.

Senator Ron Wyden of Oregon, the ranking Democrat on the Senate Finance Committee, which handles trade issues, met with Mr. Lighthizer Wednesday morning and gave him a letter supporting a challenge to Chinese policies. “China’s forced technology transfer policies are among the key challenges facing U.S. innovators operating in China or otherwise competing with Chinese firms,” Senator Wyden wrote.

China can make its own play under global trade rules. Beijing can quickly demand binding arbitration — and could have a good chance of winning. China was allowed into the W.T.O. with very few limits on its ability to regulate services or foreign investment, two categories in which China was fairly weak when it entered the organization in 2001.

If China did win a W.T.O. case, it would then have the right to restrict American exports to the same extent that the United States restricts Chinese imports.

China consistently exports four times as much to the United States as it imports. Even so, China could penalize American companies like Apple and Starbucks that have very large operations that produce and sell in China with minimal imports from the United States.

“U.S. negotiators, I think, basically dropped the ball,” said Nicholas R. Lardy, a longtime trade expert at the Peterson Institute for International Economics, referring to the rules on services that were negotiated when China entered the W.T.O. “They didn’t think China was very important.”

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