Can Trump's tariffs keep China from becoming the global technology leader? - Washington Post

President Trump is expected within days to turn his “America First” trade policy from protecting the blue-collar industries that symbolized the America of his youth to safeguarding the cutting-edge innovations that will shape the nation’s future, slapping steep tariffs on Chinese products he says were designed with improperly acquired U.S. technologies.

The $60 billion in new import taxes  — coupled with the president’s rejection last week of Broadcom’s proposed $117 billion takeover of Qualcomm as a threat to national security — reflects a rethinking of the U.S. economic relationship with China.

In Washington, there is mounting bipartisan alarm over China’s state-backed drive to overtake the United States in artificial intelligence, semiconductors, quantum computing and other digital pillars of economic and military power.

By scrutinizing more closely potential Chinese investments in the United States and erecting punitive trade barriers, the president intends to confront China over its practice of stealing trade secrets or compelling American companies to surrender them in return for market access. Many analysts, however, fear that Trump’s brash strategy is poorly designed to change China’s predatory behavior and preserve America’s innovation edge.

“The Trump administration seems to be doing a good job of making China look like the victim, reducing any sympathy for the U.S. and reducing the chance that others will stand shoulder to shoulder with us once the trade measures are unleashed,” said Scott Kennedy, director of the project on Chinese business at the Center for Strategic and International Studies.

While there is broad support in the corporate community for a tougher U.S. stance toward China, Trump’s critics say he erred by first tackling other trade issues.

Earlier this month, citing a rarely used national security provision in U.S. trade law, the president imposed tariffs on imported steel and aluminum. Though billed as a response to massive Chinese excess production, that action angered U.S. allies in Europe and Asia, which are major U.S. sources of the industrial metals.

“By going with steel first, we’ve alienated all of our allies we needed to go with us on China’s treatment of intellectual property rights,” said Jeff Moon, a former U.S. assistant trade representative.

Imposing new tariffs on Chinese goods would pressure Beijing by depressing Chinese exports and factory employment. But Tom J. Donohue, president of the U.S. Chamber of Commerce, said such import levies also would amount to “damaging taxes on American consumers” and would erode much of the pocketbook gain from Trump’s tax cut.

If Trump opts for a 25 percent tariff on all Chinese electronics, the cost to the U.S. economy over 10 years would total $332 billion, according to the nonprofit Information Technology and Innovation Foundation.

“If you’re serious about this, it’s worth taking the pain,” said Derek Scissors, a research scholar at the American Enterprise Institute, who was involved in the administration’s initial China discussions last year.

After initially expecting China to liberalize as it grew more prosperous, U.S. officials have concluded it has instead chosen an authoritarian path that makes it a strategic adversary.

China this month abolished presidential term limits, clearing the way for President Xi Jinping to rule indefinitely. The country’s strongest leader since Mao Zedong, Xi shows an enthusiasm for a dominant state role in the economy as well as a more muscular military threatens “to erode the free and open international order,” Adm. Harry Harris, commander of the U.S. Pacific Command, said this month.

The goal of Trump’s new trade measures is to persuade Beijing to stop strong-arming U.S. companies into surrendering technical secrets in return for market access.

Qualcomm, which got 65 percent of its annual revenue from China last year, is among scores of U.S. companies that have handed over technical secrets in ostensibly voluntary transactions that critics say were anything but.

In 2016, the San Diego-based developer of advanced computer chips committed to license its proprietary technology to a joint venture controlled by the provincial government of Guizhou.

The agreement came several months after Qualcomm settled a Chinese government antitrust investigation by paying a fine of nearly $1 billion.

The antimonopoly law that Chinese authorities cited in their 2015 probe is often used as “an industrial policy weapon” to pressure multinationals into sharing technology with their Chinese partners, according to ITIF.

Even before the Guizhou deal, Qualcomm had teamed with China’s largest semiconductor maker and Huawei, a telecommunications vendor the U.S. government says has hidden links to the Chinese government, in a venture aimed at improving China’s chip-making abilities.

Qualcomm declined to comment, beyond a 2016 news release that said the joint venture would produce “world-class server chipsets.”

The investment illustrates the coercive approach Beijing has used to siphon technology from iconic American companies such as General Electric, IBM and Boeing, analysts said.

“This is the price of doing business in China,” Rob Atkinson, ITIF president, said via email.

China’s treatment of foreign intellectual property may have been only an irritant when it manufactured low-tech products such as toys or clothing and assembled electronics for export. As Beijing covets global leadership in advanced technology, its industrial policies have grown into a threat to American economic and military pre-eminence.

Trade secret theft — most from China — costs the U.S. economy $225 billion to $600 billion annually, a blue-ribbon commission on intellectual property concluded last year.

The data-rich digital economy “has created national security vulnerabilities never before seen,” Heath Tarbert, assistant treasury secretary for international markets and investment policy, told the U.S.-China Economic and Security Review Commission earlier this month in a written submission.

In 2015, the Chinese government unveiled a $300 billion program aimed at developing dominant national firms in 10 advanced technologies. The made-in-China 2025 blueprint targeted sectors the United States had long dominated, such as semiconductors, and aimed at steadily reducing China’s dependence upon foreign companies.

China already has gained ground. Its spending on research and development, measured as a percentage of national output, has quadrupled over the past 20 years and is now about three-quarters of the U.S. share, according to the Federal Reserve Bank of St. Louis.

China boasts the world’s fastest supercomputer and leads the United States in the use of technologies such as mobile payment systems. Chinese researchers, spurred by generous government subsidies, apply for almost twice as many patents as their American counterparts, though some are of questionable quality, the St. Louis Fed said.

China has long prioritized acquiring foreign technology, including through cybertheft and economic espionage. In December, Micron Technologies accused United Microelectronics Corp. of Taiwan and China’s Fujian Jinhua Integrated Circuits Co. of conspiring to steal its advanced integrated circuits technology.

The companies enticed employees at Micron’s Taiwan unit into divulging trade secrets in “one of the boldest schemes of commercial espionage in recent times,” Micron alleged in a lawsuit in federal district court in San Francisco. The scheme was designed to save Fujian Jinhua, a start-up funded by the provincial government, hundreds of millions of dollars in research costs on a new line of dynamic random access memory chips, the suit alleged.

“They have set their sights on overtaking us by legal and illegal means. … Technology’s probably going to be the next battlefield,” said Michael Wessel, a member of the U.S.-China commission, a congressionally chartered body that is investigating risks posed by China’s push into next-generation technologies.

A key U.S. concern — reflected in the Trump administration’s unusually swift veto of the Broadcom deal — is the race to dominate in the 5G wireless technologies that are expected to revolutionize commercial applications of the Internet.

These technologies, scheduled to begin deployment as soon as next year, ultimately will lead to the proliferation of Internet-linked sensors for applications such as crop monitoring, remote medical care, autonomous vehicles and enhanced broadband services.

The economic stakes of the “Internet of things” are enormous. By 2035, routine use of 5G technologies is expected to spawn more than $12 trillion in global output and 22 million jobs, according to an unclassified 2017 study for the National Intelligence Council.

Trump killed Broadcom’s takeover of Qualcomm after the interagency Committee on Foreign Investment in the United States, which evaluates potential acquisitions of U.S. companies, identified unspecified national security concerns about the deal.

If Broadcom had absorbed Qualcomm, it was expected to sharply reduce the U.S. company’s research and development spending, leaving Huawei as the acknowledged global 5G leader, analysts said. That raised the prospect of American homes and businesses one day being outfitted with millions of sensors running on Chinese electronics, potentially allowing Chinese hackers to seize control of critical elements of the U.S. economy or military.

“We should worry deeply about our dependence upon technology from foreign sources and we should worry about China more than any other place,” said Jeff Stern, a managing director of Chain Security, a Reston, Va.-based company that analyzes global supply chain studies.

The failed Broadcom deal is the latest in a series of potential acquisitions of U.S. technology companies by Chinese buyers that CFIUS rejected, a trend that began before Trump took office. Last year, the president also nixed a group of Chinese investment funds’ proposed $1.3 billion purchase of Lattice Semiconductor.

Over the past four years, Chinese investors have completed 98 deals in the U.S. information technology industry valued at nearly $13 billion, according to the Rhodium Group.

On Capitol Hill, lawmakers are eyeing legislation — backed by Trump — that would expand CFIUS reviews beyond outright acquisitions to include minority stakes by foreign investors and any transfer overseas of intellectual property.

Some analysts say a more fundamental recalibration of the Sino-U.S. economic relationship is needed. After 40 years of steadily thickening economic ties, the U.S. and China now should negotiate a “managed disengagement,” said Dan Rosen, a partner at the Rhodium Group, a New York-based consultancy.

Most of the $650 billion annual goods and services trade between the two countries should be preserved, he said. With friction multiplying, diplomats should conduct a case-by-case assessment to identify the technology links that raise irreconcilable national security issues.

“We need a deconfliction dialogue for our economic relationship,” Rosen said.

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