China needs to obey the law

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Many have rushed to judge the proclamation by President Trump of a still incomplete China trade agreement, but overhyping the deal or winning only minor concessions are small blemishes. The true failure has nothing to do with the ostensible deal. The true failure is continuing to let China break our laws or bending them ourselves for the sake of business.

Policy toward China consisted of many meetings and fake progress for years. The Trump administration took a vital step by recognizing there is a serious problem here. Yet it still substitutes talking for enforcing American laws and rules on intellectual property, export controls, and financial disclosure. While these laws are warped, there can be no trade win.

The weapon of choice for President Trump has been tariffs. Consumers pay, but the costs are a drop in the bucket compared to $14 trillion in annual consumption spending in the United States. Moreover, tariffs are fitting here in the sense that Beijing partly closes its own market by not allowing competition with state enterprises. It is the goal of tariffs that is flawed. Beijing agreeing to buy more American goods is just a bandaid. The United States should stop chasing handouts and instead insist on competing more freely, facing far fewer Chinese subsidies. The starting point is fully disclosing those subsidies. Beijing has never done this, despite its commitments to the United States and other countries.

Last year, the United States trade representative applied tariffs to foster improvement in intellectual property practices. Intellectual property coercion violates global obligations, and theft of course violates American laws. But across the board tariffs are actually a poor punishment for this because they hit all exporters based in China, not just those implicated in intellectual property coercion and theft. This must be accounted for.

A much superior policy would target the Chinese firms that benefit the greatest from intellectual property violations. Punishing only the guilty creates the right incentives for the guilty and innocent alike. American losses from intellectual property coercion and theft could run in the hundreds of billions of dollars every year, involving dozens of criminal acts. There is an American initiative to turn this behavior into criminal cases. Yet actions taken by the Trump administration against Chinese firms on intellectual property grounds can be counted on one hand.

Despite Huawei having a known history of intellectual property theft, the United States only applied sanctions due to its dealings with Iran. The punishment, which is inclusion on the entity list, bans unlicensed firms from supplying Huawei directly from the United States. Firms can move production offshore and supply Huawei from there. The same applies to Chinese surveillance companies that have been added to the entity list.

To enforce the law, the United States can move to block all businesses with intellectual property thieves or slap them with significant financial sanctions. Instead, the Trump administration is asking Beijing to change Chinese laws and regulations, even though the Communist Party can override all of these at will. The United States is effectively outsourcing protection of American intellectual property to the Communist Party.

Overlapping with intellectual property are export controls, which are the single most important element of trade policy. Illegal transfer of advanced American technology, with both economic and military uses, is most likely to occur in China. Export controls can address this, as well as technology transfers in other countries. Last year, Congress passed legislation in overwhelming numbers directing that export controls be tightened.

The Bureau of Industry and Security at the Commerce Department is late implementing the new regulations. No one is in charge and there is little prospect of anyone being in charge. Some American industries have used this as an opportunity to lobby for profits over national security. The likely result then is weak export controls and continued technology transfer to China despite the intent of Congress. As with intellectual property, the Trump administration demands Beijing halt illegal technology transfer, while its own commitment to do so has remained at best uncertain.

A final subversion of our laws is found in financial disclosure requirements for stock market participation. American regulators have identified some 200 Chinese companies as failing to provide information required to be listed on our exchanges. This is a function of sweeping protection of what the Communist Party considers state secrets and dates back many years.

The American financial community at home and abroad often responds that rules are too expensive to enforce when it comes to China. This is a fundamental weakness within our policy in the United States. No future promises from Beijing stack up to the ongoing undercutting of our laws.

Derek Scissors is a resident scholar focused on China and economics with the American Enterprise Institute in Washington. He is chief economist of the China Beige Book and creator of the China Global Investment Tracker.

Tags Business China Donald Trump Government International Policy Technology

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