Biden must do better than Trump’s tariffs in challenging China on intellectual property
Last Wednesday morning, as President Trump’s reelection prospects took a turn for the better, China’s currency took a beating. The country’s offshore yuan fell by 1.4 percent against the U.S. dollar, its largest one-day drop in years. Traders bet a second term for Trump meant an ongoing trade war with China. The currency largely recovered on news that former Vice President Joe Biden had later gained the upper hand. Was the market too optimistic? Can Biden really walk back the U.S.-China trade war?
Most observers expect that President-Elect Biden will keep Trump’s China tariffs in place. Not because they’re working, mind you, but because Biden will face pressure to look tough on Beijing. That said, something has to give. Trump’s tariffs are under fire at home and abroad. What’s Plan B?
Recall, first, that Trump’s tariffs were originally meant to get China to change its errant ways on intellectual property (IP). Next came the idea of rolling back “Made in China 2025,” a ten sector industrial policy that Beijing debuted in 2015. Trump also linked tariffs to reversing the trade deficit, and even slowing the flow of fentanyl from China. Tariffs, of course, can’t do any of this. Biden has to move beyond Trump’s tariffs and refocus on IP.
Two IP problems are especially vexing: “forced-technology transfer,” notably through joint-venture requirements; and subsidies, often in the form of government-funded research and development (R&D). Neither problem is uniquely Chinese, and the United States isn’t the only country looking for solutions. With that in mind, here are two proposals.
First, the U.S. needs a bilateral investment treaty (BIT) with China. President Obama was close to getting a deal. The U.S. “Model BIT” has explicit language prohibiting forced-technology transfer. It lets investors seek compensation for direct or indirect expropriation of their IP. And it gives them the right to argue their case before a neutral arbitral body like the World Bank, as opposed to a Chinese court. Forced-technology transfer is often more an investor rights than a trade issue. A U.S.-China BIT would add substantially to the toolkit available to American owners of IP.
Second, the U.S. should get American companies more access to all China’s government-funded research and development (R&D). The U.S. can challenge any and all illegal subsidies at the World Trade Organization (WTO). But where these subsidies are legal, let’s get U.S. firms access to the resulting R&D. After all, China leads in key technologies like artificial intelligence. Sure, “Made in China 2025” should be WTO legal. But let’s not discount the value of getting in on technology spillovers from China.
Far-fetched? Not at all. Consider, for example, the 1986 U.S.-Japan Semiconductor Trade Agreement (STA), which helped avert a trade war over memory and other chips. The last of the STA’s 12 paragraphs called on Japan to ensure that its R&D programs, funded “in whole or in part” by the government, be “open” to “foreign capital-affiliated semiconductor companies” on a “full national treatment basis.” Japanese firms already had access to U.S. labs, for example, so the key to the STA was to make the flow of ideas reciprocal. This, in turn, encouraged the U.S. to increase its own spending on semiconductor R&D.
Or consider the case of China’s subsidies on autos and auto parts. In 2012, while on the campaign trail, Obama told Ohio auto workers that he was tougher on China than his rival, Mitt Romney. As proof, Obama let the crowd know he had just filed a WTO case. Yet the Automotive Aftermarket Industry Association had doubts. It warned the United States trade representative “to recognize the increasingly global integrated nature of the automotive aftermarket” and was worried about “unintended consequences to a significant sector of the U.S. economy.” American companies benefitted from China’s auto and auto parts subsidies, giving them mixed motives in this case. That’s the point.
If Biden keeps Trump’s tariffs in place, it won’t be because they’re working. If he wants to get serious about IP, though, a U.S.-China BIT, and an agreement modeled on the STA, would do wonders for America’s creative economy.
Marc L. Busch is the Karl F. Landegger Professor of International Business Diplomacy at the Walsh School of Foreign Service, Georgetown University, a nonresident senior fellow at the Atlantic Council and host of the podcast TradeCraft.