Tuesday, May 14, 2019
In trying to hammer out a trade agreement with China, the Trump administration may be drawing inspiration from classic rock, specifically The Who's anthem "Won't Get Fooled Again."
Fed up with China for breaking past promises, the administration is insisting on provisions designed to force the Chinese to live up to any commitments they make in trade talks that entered an 11th round on Thursday.
In fact, top U.S. trade negotiator Robert Lighthizer and Treasury Secretary Steven Mnuchin this week accused the Chinese of already reneging on concessions they'd made earlier in the negotiations.
In retaliation for that alleged backsliding, the United States is poised to dramatically escalate the trade war between the world's two biggest economies at 12:01 a.m. Friday Eastern time—by raising import taxes on $200 billion in Chinese goods from 10 percent to 25 percent.
And President Donald Trump said he's preparing to slap 25 percent tariffs on another $325 billion in Chinese imports, covering everything China ships to the United States.
The two countries are battling over U.S. allegations that China steals technology and pressures American companies into handing over trade secrets, part of an aggressive campaign to turn Chinese companies into world leaders in robotics, electric cars and other advanced industries.
The U.S. currently is levying 10% tariffs on $200 billion of Chinese imports and 25 percent on another $50 billion. The Chinese have retaliated by targeting $110 billion in U.S. products and are threatening more sanctions if Washington goes ahead with its plan to raise tariffs Friday.
When the talks began last year, it appeared that the Chinese might try to appease Trump by agreeing to buy lots of American products—especially soybeans and liquefied natural gas—and put a dent in America's massive trade deficit with China, a whopping $379 billion last year.
But as the talks dragged on, it became increasingly apparent that "a heap of soybeans isn't going to get the job done," said Amanda DeBusk, chair of the international trade practice at the law firm Dechert LLP and a former U.S. Commerce Department official.
Business groups, disappointed that China didn't fully open up to foreign competition after joining the World Trade Organization in 2001, are pressuring the administration to hold out for a deal that requires China to abandon predatory trade practices, stop subsidizing homegrown companies and treat foreign firms more fairly.
"It was way past time to confront China on many of these problems," said Michael Wessel, a member of the congressionally created U.S.-China Economic Security Review Commission and president of The Wessel Group consulting firm. "They've been allowed to skate for far too many years."
Reaching a deal with China to end the tariff war would be only the first hurdle for the Trump administration. Next would come the hard part: enforcing the agreement.
"The details will matter a lot," said Dean Pinkert, partner at the law firm Hughes Hubbard & Reed and a former member of the U.S. International Trade Commission. "In regard to the 'structural' issues—including intellectual property and forced technology transfers—what sort of enforcement mechanism will be established? Who gets to judge whether structural commitments are being honored? "
The Trump administration wants Beijing to accept an enforcement mechanism with penalties to make sure it carries out its commitments.
U.S. officials say they must be cautious because Beijing has made empty promises before: A 2018 report by the Office of the U.S. Trade Representative, for instance, found that China has promised eight times since 2010 not to force foreign companies to transfer technology to China. Yet the coercion continued, the U.S. said.
"They didn't comply and aren't complying with their WTO obligations, and they aren't following through on the commitments they've made repeatedly over the last decade," said trade lawyer Stephen Orava, a partner at King & Spalding.
Enforcement would require lifting the lid of secrecy on Communist Party policies toward acquiring technology, subsidizing industries and shielding them from competition.
But China is likely to balk at accepting intrusive monitoring of its behavior, something that President Xi Jinping's government likely would see as a violation of Chinese sovereignty.
Meantime, the U.S. is pushing to keep tariffs in place as leverage to pressure China to comply with any agreement.
Xi's government has yet to make clear whether it is really willing to scale back ambitious plans to turn China into a technological superpower, something Chinese leaders see as a route to prosperity and global influence.
Beijing is willing to tweak the plans, but the Communist Party wants to keep its dominant economic role.
Chinese officials deny Beijing steals or pressures companies to hand over technology, despite what security experts say is a mountain of evidence the ruling party rewards those who acquire it and sometimes directly carries out theft.
For decades, the ruling party has showered Chinese businesspeople, academics and others who "localize foreign technology"—the official euphemism for unauthorized copying of foreign know-how—with promotions, research grants, money and public praise.
Security researchers say the government operates a network of research institutes and business parks to turn stolen technology into commercial products.
In 2013, three Chinese scientists at New York University were charged with sending U.S. taxpayer-financed research on magnetic resonance imaging to a Chinese government-run institute.
The following year, five members of China's military cyber warfare unit were indicted on U.S. industrial spying charges.
Chinese companies "benefit from cyber espionage," the U.S.-China Economic and Security Review Commission said in a report this month.
"Chinese government efforts to encourage and direct firms to acquire technology from the United States are likely to continue as Beijing seeks to further develop its domestic high-tech industries," the report said.
Obtaining foreign technology is a theme that runs through Chinese law and government. Ending tactics that irk Beijing's trading partners would require changing a thicket of rules, regulatory habits and incentives to local officials to promote technology development.
That includes a 2008 law that allows penalties for foreign companies deemed to be abusing control over technology. Businesspeople say Beijing uses that to pressure foreign companies to cut prices of patent licensing or drop complaints that Chinese partners have stolen technology.
Automakers and competitors in other industries are also required to work through joint ventures with state-owned local partners that cannot function unless the foreign company supplies technology and teaches a potential Chinese competitor to develop its own.
Analysts say the U.S. has been pushing China to write its commitments into law, and Beijing has been resisting. China specialist Derek Scissors, resident scholar at the conservative American Enterprise Institute, said the real "standoff is about how public the Chinese changes are going to be. The U.S. wants them entirely public. China is not willing to make high-profile public changes."
In the end, any enforcement plan is likely to fall short—unless Beijing decides it's really time to change. "Enforcement at the end of the day requires China to be transparent and abiding by its agreements. I can't think of any structure in law or diplomacy that can enforce that," said James McGregor, chairman for Greater China at the government relations firm APCO Worldwide. "It has to come from within China and a real desire to change its system."
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