66 Finance and economics The EconomistApril 14th 2018
A
FTER weeks spent threatening tariffs on
an ever-greater share of Chinese im-
ports, President Donald Trump seems to be
in a more conciliatory mood. On April 10th
a speech by the Chinese president, Xi Jin-
ping, prompted him to tweet a prediction:
“We will make great progress together!”
Many besides Mr Trump share that
hope. If China offers him a deal that he is
willing to sign, a trade war may still be
averted. Or sense may prevail, as it did last
month, when American allies such as Can-
ada and Mexico were exempted from ta-
riffs on steel and aluminium. But such opti-
mism shades into naivety. China hawks in
the American administration have long
seethed over aspects of the relationship
with China that rarely feature on Mr
Trump’s Twitter feed. Those problems pre-
date his presidency. And they do not look
easy to resolve.
The rules-based system of internation-
al trade works best for problems that are
clearly defined, and when it is easy to
judge the success or failure of a remedy. Ta-
riffs, and laws that discriminate against for-
eign firms, are classicexamples. Some of
the Trump administration’s gripes with
China, published in a 182-page report on
March 22nd, fall into this category. (The re-
port was the result of an investigation into
China’s trade practices under Section 301
of the Trade Act of 1974, which grants the
right to threaten tariffs if unfair practices
are uncovered.)
For example, it claims that Chinese law
discriminates againstAmerican compa-
nies by undermining their freedom of con-
tract in several ways. Chinese firms can ne-
gotiate with each other over the terms of
technology-licensing agreements, but for-
eign licensees must bear all the risk of oth-
ers suing for intellectual-property infringe-
ments. Joint ventures must grant the
Chinese partner the right to use the foreign
partner’s technology even after their
agreement has expired. Such complaints
will be considered by the World Trade Or-
ganisation (WTO) and judged against the
commitments China made when it joined
in 2001.
But resolving America’s other gripes
will be harder—whether in theWTOor as
part of a bilateral deal. Some are not to do
with China’s written laws, but with its un-
written rules and informal procedures.
Upon joining theWTO(and a further eight
times since 2010) China’s government
pledged not to make handing over technol-ogy a condition for market access. But the
Americans say Chinese officials continue
to pressure firms to do so.
Such a claim is hard to prove—all the
more so, given the opacity of China’s regu-
latory processes. And experience suggests
that any deal would be devilishly difficult
to enforce. The Chinese authorities can say
that contracts involving technology trans-
fer were signed voluntarily. They can make
life hard for any foreign company that
dares say otherwise. Robert Atkinson of
the Information Technology and Innova-
tion Foundation, an American think-tank,
accuses the Chinese of playing rope-a-
dope, allowing the American administra-
tion to exhaust itself in ultimately futile
complaints. He thinks that it should give
up on the rules and focus instead on re-
sults, for example byarranging for Ameri-
can firms to inform it “off the record” of
Chinese infractions. But any such flexible,
unclear arrangement would be fiercely re-
sisted by the Chinese.
Half of the Section 301 report concerns
Chinese investment in America. The
Americans take issue with Chinese firms’
acquisitions of American ones, such as
Lexmark, a printing company, in 2016, and
Mattson Technology, which produces
equipment for making semiconductors, in- In both cases the purchase price was
well above market value. The Chinese
maintain that these were fair transactions
on the free market; the Americans suspect
that they were directed and supported by
the Chinese government in a bid to domi-
nate strategic sectors. Any mutual agree-
ment to curb such purchases would have
to outline a legitimate role for the state. But
China’s model of state-directed capitalism
makes it hard to distinguish between pub-
lic and private affairs.
At the heart of the disagreement is Chi-
na’s industrial policy. The Americans sus-
pect the Chinese government of enticing
their firms with the promise of a vast con-
sumer market, only to use regulatory pres-
sure to strip them of their bargaining pow-
er and expose them to the theft of intellec-
tual property by forcing them into joint
ventures. They spy a plot to undercut and
eventually surpass American industry.
The Section 301 report relays the story
of SolarWorld, a maker of solar panels that
claims its trade secrets were stolen. The re-
sult was that cheap Chinese competitors
flooded the market, costing it more than
$120m in sales and revenue. The Ameri-
cans worry that unless the Chinese gov-
ernment changes its ways, other American
industrieswill soon lose out to China, too.
But what the Americans see as unfair
the Chinese see as the path to develop-
ment. From their point of view, bringing in
American firms is a roaring success. A
study analysing joint ventures in China in
1998-2007 found that they boosted both
the Chinese partner and the industry in
which it was active. Ventures with Ameri-
can firms were more fruitful than those
with firms from Hong Kong or Japan.
During his speech this week, Mr Xi re-
peated old promises to cut tariffs and relax
investment restrictions in some sectors.
The American vision is of more sweeping
change. According to Bloomberg, a news
service, secret bilateral talks broke down
after the Americans demanded an end to
Chinese subsidies for high-tech industries.
It is hard to imagine a deal that reconciles
these fundamental differences. That leaves
a choice—between an agreement that is
shallow and fragile, or conflict. 7US-China tradeDrawing the battle lines
The nature of America’s gripes with China makes a deal hard to imagineTrade warriors at work