March, 2018

Trump expected to restrict Chinese investment in U.S. tech firms

Original article: The Wall Street Journal

The Trump administration is expected to soon implement new restrictions on Chinese investment in U.S. tech firms, making it more difficult for China to acquire sensitive American technology. The restrictions come as Washington and Beijing are embroiled in an escalating trade dispute focused on China's alleged misappropriation of U.S. intellectual property. 


In the context of the Sino-American trade dispute, tariffs have received the most attention. Economists fear that Washington's new tariffs on Chinese imports could spur a vicious wave of protectionism worldwide, dragging down global economic growth. That's possible - but not likely at this point. Washington's tariffs are targeted, and China's retaliation is equally targeted. 

In our view, tariffs have limited utility, and won't resolve China's massive trade surplus with the U.S. Far more important in the escalating trade spat is Beijing's alleged theft of U.S. intellectual property. Some of that alleged theft, analysts say, has occurred during cyber hacking attacks. Additionally, U.S. companies say that they have been forced to transfer technology to their Chinese joint-venture partners in exchange for access to China's vast market. Some U.S. firms have been pushed out of joint ventures once their Chinese partner acquired the technology it wanted, experts say. 

Thus far, Beijing has not publicly acknowledged any misappropriation of American IP. In fact, the Chinese leadership has consistently said it is improving the overall IP environment in China. Broadly speaking, that's true. China is taking many steps to safeguard intellectual property, from more active pursuit of counterfeiters to toughening legal punishment for trademark infringement. But in a contentious gray area like forced technology transfer, there is less apparent progress. 

That's why the Trump administration plans to make reciprocity the core of the U.S.-China commercial relationship, according to The Wall Street Journal. That could mean Chinese firms in America face the same restrictions on investment that their U.S. counterparts face in the PRC, right down to the requirement of forming a joint venture with a local partner in certain industries. 

It's not a new idea: APCO Greater China chairman James McGregor, a China expert who has resided in the country since 1989, has been urging reciprocity for years. Long before most China hands expressed concern about Sino-U.S. trade, McGregor suggested in a May 2010 Washington Post commentary that Beijing's "indigenous innovation policy" aimed to appropriate foreign technology for re-engineering by local firms - in exchange for access to the China market. "American business has to figure out how to balance out today's profits with tomorrow's threat," he said. 

In March, during an interview with the U.S.'s National Public Radio, McGregor said that if U.S. firms cannot continue develop self-driving cars in China, then it's not fair for Baidu to be able to do so in Silicon Valley. He urged prudence - not "demonizing" Chinese entrepreneurs - and frank discussion about reciprocity.  "We've got to look at what our companies can't do in China and talk about that Chinese companies can't do that here," he said. 

We don't expect economic ties to crater between the world's two largest economies as a result of greater reciprocity. There are plenty of industries which do not involve sensitive technology where the two countries can continue to trade and invest freely. In a February essay, Dan Rosen, an expert on the Chinese economy and head of the research firm Rhodium Group, said that two-way FDI flows between China and "the advanced economies" could continue and possibly even grow in textiles and apparel, non-strategic foodstuffs, and raw materials trade which has "a diverse global marketplace of buyers and sellers."

Meanwhile, the future will see more open competition between Beijing and Washington for global technological dominance. Beijing will not relinquish its ambitious Made in China 2025 initiative, even if Washington throws up roadblocks. For American tech firms with heavy China exposure, risk management will require unprecedented attention.  

Beijing excels at playing the long game. Can the Trump administration and U.S. businesses do the same? They will have to if they expect China to alter its most controversial trade practices, experts say. "If you’re talking about actually changing Chinese behavior, it’s a long, painful process,” Derek Scissors, a China trade expert at the American Enterprise Institute, told Reuters in March.