Time for constructive confrontation with China

Near the top of this week’s bilateral agenda between the United States and China, President Obama is right to express U.S. ire with China’s brazen, multi-year campaign of cyber espionage, in which it has vacuumed up troves of precious data from a wide range of U.S. industry, government and university sources. But the truth is that cyber theft of industrial secrets is merely an outward manifestation of a broader pattern of misbehavior that is integral to China’s aggressive, mercantilist strategy for becoming an economic superpower. It is time to confront China in a way that makes all of this stop.

{mosads}Notwithstanding Chinese President Xi Jinping’s cordial meetings on Tuesday and Wednesday with U.S. tech leaders, China has for years aggressively threatened foreign competitors with serious penalties, up to and including exclusion from the Chinese market, unless they hand over valuable intellectual property (IP). It has pumped up its tech enterprises with massive subsidies. And it has erected a vast array of contorted rules and regulations inside its borders in a quest to skew the terms of competition and gain absolute advantage in key industry sectors ranging from semiconductors to biotechnology.

It wasn’t supposed to be this way. When China joined the World Trade Organization (WTO) in 2001, experts hailed it as a sign that China would embrace market-based economic principles and commit to the core tenets guiding liberalized trade and globalization. The WTO’s director general at the time, Mike Moore, gushed that “China’s decision to join the WTO is momentous. Committing itself to WTO rules will entrench market-based reform and strengthen the rule of law. … China’s opaque and arbitrary trade and investment rules will become transparent, stable, and more predictable.” Moore assuaged those concerned that China might not live up to its commitments by arguing that “a more open China brings benefits for everybody. … China knows it has to stick to its WTO commitments. If it doesn’t, the U.S. or any other WTO member government can use the organization’s dispute-settlement procedures to ensure it does.”

Fifteen years later, none of that has come to pass. In fact, there is a yawning gap between China’s WTO commitments and its actual practices — and it continues to grow. For example, China promised to stop requiring transfers of technology as a condition of market access, but it hasn’t. It promised to shrink its state-owned industries as a share of its total economy, but it hasn’t. And it promised to significantly reduce intellectual property theft, but it hasn’t. There is a long list of these kinds of broken promises, revealing the WTO’s enforcement practice for what it is: a paper tiger.

The irony is that in making a mockery of the global trade system, China is harming not just foreign competitors like the United States, but also itself. In a properly functioning global trading system, countries are supposed to focus on innovating to differentiate themselves in fields where they have comparative advantages, and then trade for things that other countries are better at producing. But by systematically flouting WTO rules, China has signaled that it will instead seek absolute advantage in industries of its choosing primarily by innovating in the dubious field of mercantilism — that is, by using the state’s vast regulatory power to dictate market outcomes. This may be a path to short-term profit, but it comes at the expense of long-term economic growth.

The United States cannot wait for China’s ruling officials to wake up to the error of their ways, however. It must forcefully push back. The administration in recent years has tried applying diplomatic pressure through regular, Cabinet-level dialogue, but this has so far failed to persuade China to change its behavior. In fact, in the last three years, China has continued to ramp up its punitive actions against U.S. tech companies. So now it is time for a new policy of constructive confrontation. The strategy should be to put less emphasis on legalistic engagement and more on achieving tangible results.

Among other elements, a policy of constructive confrontation should hold China accountable for achieving specific goals, such as significantly reducing its trade surplus and curbing theft of foreign IP. The administration and Congress should increase personnel and resources for the White House and U.S. Trade Representative to better assess and respond to other countries’ economic development strategies, in part by adding trade enforcement capacity. Congress should require Chinese entities to license their technologies on the same terms that China requires U.S. companies to license theirs. (What’s sauce for the goose should be sauce for the gander.) Congress also should do more to help U.S. companies resist forced technology transfers, and the United States and Europe should cut off scientific cooperation with China until it cleans up its act.

President Xi, reportedly, “is obsessed with strategic rivalry with the United States.” So anything less than this kind of constructive confrontation would be foolhardy. Marshaling a forceful response, on the other hand, would be good for the United States and the entire global economy — including China — because it would force China to innovate in something other than mercantilist industrial policy. That is the only way for a country to develop legitimate comparative advantages that it can trade on for its own and others’ benefit.

Atkinson is president of the Information Technology and Innovation Foundation (ITIF). Ezell is ITIF’s vice president for global innovation policy.