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China-U.S. Trade Friction Facts
A white paper clarifies the facts and China's position on China-U.S. trade friction
 NO. 40-41 OCTOBER 4, 2018

A press conference on the China-U.S. trade friction white paper at the State Council Information Office in Beijing on September 25

On September 24, China published a white paper, The Facts and China's Position on China-U.S. Trade Friction, to clarify bilateral economic and trade relations, demonstrate its stance on the two countries' trade friction and pursue reasonable solutions.

The white paper comprises six parts: the mutually beneficial and win-win nature of China-U.S. economic and trade cooperation, facts about China-U.S. commercial relations, trade protectionist practices of the U.S. administration, its trade bullying practices, the damage caused by these improper practices to the global economy, and China's position.

The two countries are at different stages of development and have different economic systems. Therefore some level of trade friction is only natural. The key, however, lies in how to enhance mutual trust, promote cooperation and manage differences, according to the white paper. An edited excerpt of the document follows:

Crucial facts

Economic cooperation between the two countries is so huge, substantive and broad-based, with so many players, that it is inevitable for some differences and friction to emerge. The two countries need to take a comprehensive perspective, keep in mind their strategic interests and the international order, properly handle their differences by seeking common ground while shelving differences, and take practical steps to resolve their tensions.

The gap in trade in goods alone is not a good indicator of China-U.S. trade and economic cooperation. An objective assessment of the China-U.S. trade balance calls for a comprehensive and in-depth study, rather than a glance at the trade deficit in goods. It is not China's intention to have a trade surplus. Rather, the ratio of China's current account surplus to its GDP has declined from 11.3 percent in 2007 to 1.3 percent in 2017. The imbalance of trade in goods between China and the United States is more of a natural outcome of voluntary choices the United States has made in its economic structure and market in light of its comparative strengths. To resolve this issue, both sides need to make concerted efforts in restructuring. The United States turns a blind eye to various factors in its trade and economic cooperation with China, singles out the imbalance of trade in goods and blames China for the imbalance, which is unfair and unreasonable.

In today's world of greater globalization and widespread international production, bilateral trade and economic cooperation already extend beyond trade in goods. Trade in services and sales of local subsidiaries in the host country should also be included. If we give full consideration to these three factors—trade in goods, trade in services and sales of local subsidiaries in the host country—trade and economic cooperation deliver balanced benefits in general for China and the United States, with the latter reaping more net benefits.

The gap in China-U.S. trade in goods is a natural outcome of the U.S. economic structure and a result of the two countries' comparative strengths and the international division of labor. The persistent and growing gap in trade in goods between the two countries is a result of a number of factors, rather than China's intent.

The discussion of fair trade should not be detached from the principle of the mutual benefit of the World Trade Organization (WTO). The WTO principle of reciprocity takes into consideration different development stages by granting special, differential and more favorable treatment to developing members. This arrangement aims to attract new developing members, increase the WTO's representation and enhance the inclusiveness of the multilateral system, while respecting the right to develop of developing countries and regions. It enshrines the principle of mutual benefit in exchanging present favors for future openings. Developing members that are in the initial stages of development need appropriate protection for their industries to promote their sound growth, which will provide more opportunities for developed countries in time. This differential and more favorable treatment is in the long-term interests of all countries and regions, including developed members, and this is genuine global fairness.

China, having fulfilled its WTO commitments, has voluntarily engaged in unilateral tariff reductions to expand market opening. By 2010, all commitments in goods had been fulfilled, with the overall tariff level decreased from 15.3 percent in 2001 to 9.8 percent. Yet China did not limit itself to WTO commitments; it has promoted trade and investment liberalization through free trade agreements, given special treatment in tariffs to the least developed countries and significantly reduced import tariffs using provisional tariffs on several occasions.

The idea of "fair trade" and "reciprocal opening up" advocated by the United States ignores the existence of objective differences among countries in terms of stages of development, resources and competitive industries, and ignores developing countries' right to develop. It will create an impact on the economy and industries of developing countries, result in broader inequality and eventually prevent U.S. businesses from expanding their international market share and sharing development opportunities in developing countries.

China should not be accused of forced technology transfer as it is against the spirit of the contract. Since the adoption of reform and opening up, foreign enterprises have established partnerships with Chinese companies by voluntarily entering into contracts. They transferred production capacity and orders to China of their own volition so as to tap into the emerging market, save production costs, achieve an economy of scale and extend the term of profiting from technologies. These are voluntary behaviors based on business interests. It accords with neither historical facts nor the spirit of the contract to unjustly label bilateral transactions on a voluntary basis as forced technology transfer simply on the grounds of Chinese firms' technological advances.

Technology transfer in the course of cooperation between China and developed countries such as the United States is voluntary technology and industrial transfer initiated by the enterprises of developed countries keen to maximize their interests. The product life-cycle theory indicates that any kind of product goes through a life cycle from peak to decline due to the application of new technologies. While endeavoring to develop new technologies, multinationals continuously transfer technologies that are either obsolete or standardized to developing countries with a view to extending the term of profiting from old technologies, making room and sparing production factors for research and development (R&D) and the application of new ones, and indirectly sharing R&D costs. Therefore, technology transfer and licensing are a widely used business cooperation model.

Since the 1990s, Microsoft, Intel, Qualcomm, Procter & Gamble, GE, Lucent and other U.S. companies have set up R&D facilities in China in a bid to better adapt to and explore the Chinese market. Over the years, U.S. firms in China have earned handsome profits through technology transfer and licensing. They are the largest beneficiary of technological cooperation.

In the process of cooperation, the Chinese Government has never introduced policies or practices that force foreign-invested enterprises to transfer technology. Technological cooperation and other forms of commercial cooperation between Chinese and foreign businesses are entirely voluntary and bound by contracts. It generates real benefits for companies on both sides.

China's huge efforts and achievements with regard to intellectual property rights (IPR) protection should not be dismissed. China's attitude toward IPR protection is clear and firm. It has continued to reinforce protection through legislation, law enforcement and the judiciary, and has achieved some notable successes.

China has formulated and improved its laws and regulations on IPR protection, and enhanced protection of IPR. China built a fully fledged and high-standard IPR legal framework in a relatively short period, compared to the decades or more that developed countries spent setting up similar legal systems. China has put in place a complete regime of IPR protection, utilization and administration, spanning laws, planning, policies and enforcement agencies.

China has intensified judicial protection for IPR and given full play to judicial protection. In 2014, China set up three IPR tribunals in Beijing, Shanghai and Guangzhou to handle cross-regional IPR cases, including those related to patents. Since 2009, China has established 16 special judicial organs in Tianjin, Nanjing, Suzhou, Wuhan, Xi'an and other cities, enhancing the professional handling of IPR cases.

IPR administrative authorities have taken protective measures and intensified enforcement in a proactive manner. China adopts a dual-track protection system where IPR holders can seek not only judicial but also administrative protection.

U.S. businesses have benefited greatly from effective IPR protection in China. According to the U.S. Bureau of Economic Analysis of the Department of Commerce (DOC), China paid $7.96 billion in licensing fees to the United States in 2016. Statistics from China's National Copyright Administration, Ministry of Commerce and State Administration for Market Regulation suggest that from 2012 to 2016, China imported 28,000 copyrights from the United States. In terms of trademarks, from 2002 to 2016, the United States applied for over 58,000 trademark transfers in China, making up 4.54 percent of total transfers. In terms of culture, according to the State Administration of Press, Publication, Radio, Film and Television, in 2017, China imported 31 U.S. films at a cost of $650 million.

The Chinese Government's encouragement to Chinese businesses to go global should not be distorted as a government attempt to acquire advanced technologies through commercial mergers and acquisitions (M&A). It is consistent with WTO rules for the Chinese Government to encourage businesses to go global and engage in international economic exchanges and cooperation. As Chinese companies get stronger and the need for resource allocation and market expansion increases, a growing number of firms have started to expand overseas on their own initiative, a trend in line with economic globalization. Like other countries and regions in the world, the Chinese Government supports able and competent companies in outbound investment and in tapping into international markets while obeying the laws and regulations of the host countries as well as international rules. The government only provides services that facilitate this outbound investment and cooperation. The arbitrary U.S. conclusion that such support is a government act to acquire advanced technologies through commercial M&A is groundless.

In fact, among Chinese investments in the United States, those that seek to acquire technology represent a small share. According to the American Enterprise Institute, from 2005 to 2017, of 232 direct investments from China, only 17 involved hi-tech; the others were mainly in real-estate, finance and services.

China's subsidy policy complies with WTO rules and should not be attacked. As one of the tools to address market failure and imbalanced economic development, subsidies are widely used by many countries and regions, including the United States. Since China joined the WTO, it has actively pressed ahead with reform to ensure the compliance of domestic policies and conscientiously honored the obligations under the WTO Agreement on Subsidies and Countervailing Measures.

China complies with the WTO rules on subsidy transparency. As required, China has regularly notified the WTO of the revision, adjustment and implementation of its domestic laws, regulations and measures. By January 2018, China had submitted thousands of notifications, covering various areas of central and sub-national subsidy policies, agriculture, technical regulations, standards and IPR laws and regulations. In July 2016, in accordance with the relevant rules, the Chinese Government notified the WTO of sub-national subsidy policies between 2001 and 2014, covering 100 subsidy policies from 19 provinces and three municipalities with independent planning authority. In July 2018, China notified the WTO of the central and sub-national subsidy policies between 2015 and 2016, covering all the provincial-level administrative areas for the first time.

Damage to global economy

The U.S. Government has taken extreme trade protectionist measures, which have undermined the international economic order, caused damage to China-U.S. trade and trade relations around the world, disrupted the global value chain and the international division of labor, upset market expectations, and led to violent swings in the international financial and commodity markets. It has become the greatest source of uncertainty and risk for the recovery of the global economy.

Such measures undermine the multilateral trade rules and the international economic order. In advancing toward civilization, humanity has widely accepted an international governance system based on rules and credibility. Countries, big or small, strong or weak, should respect each other, engage in equal-footed dialogue and jointly safeguard international rules in the spirit of the contract. This is fundamental to promoting global trade and investment and boosting global growth. However, the recent steps taken by the U.S. administration that are contrary and even destructive to the existing multilateral trade rules seriously undermine the current international economic order.

The U.S. administration has issued open criticism of the rules and operation mechanism of the WTO on various occasions. It has refused to endorse the multilateral trading system and at the same time has adopted a negative attitude toward global economic governance, which caused the failure of the APEC trade ministers' meetings, in both 2017 and 2018, to reach consensus on supporting the multilateral trading system. In particular, the U.S. administration's objection to writing "opposition to trade protectionism" into the ministers' statement was met with opposition from every other APEC member. The U.S. lashed out at the WTO appellate body and repeatedly blocked the appointment procedures of the body, resulting in an understaffed appellate body and pushing the WTO dispute settlement mechanism to the brink of paralysis.

Such measures obstruct world trade and the recovery of the global economy. As globalization moves forward, the economies of the world are increasingly connected through trade, which has become a major engine of global growth. According to the World Bank, the international economy's dependence on trade rose from 17.5 percent in 1960 to 51.9 percent in 2017.

The global economy has just emerged from the shadow of the 2008 global financial crisis and the recovery is yet to be solid. In this context, the U.S. administration's actions to instigate large-scale trade frictions and impede the flow of world trade will undoubtedly affect the recovery of the global economy. In order to mitigate the protectionist moves of the United States, countries are left with no choice but to take countermeasures. This will disrupt the world economic and trade order and hold back global recovery, damaging the interests of companies and people of all countries and pushing the global economy back into recession.

According to Global Economic Prospects published by the World Bank on June 5, 2018, a broad-based increase in tariffs worldwide will have major adverse consequences, which could translate into a decline in global trade amounting to 9 percent by 2020. The impact would be more severe on emerging markets and developing economies, particularly on those with large trade or financial market linkages with the United States.

U.S. trade protectionism will impact the global value chain. In a deeply integrated global economy, countries form a highly efficient global value chain and share in the dividends of economic globalization through division of labor by harnessing their respective strengths in technology, labor and capital. Companies, especially multinational ones, minimize their production costs and raise the quality of their products and services through global allocation of resources, thus achieving a win-win result for themselves and for consumers.

By raising tariffs and erecting trade barriers, the U.S. administration has provoked trade frictions worldwide. U.S. multinational corporations are being threatened with the "traitor" label and punitive taxes if they do not move their operations back to the United States. Such moves will seriously undermine or even break the global value chain, and jeopardize the normal flow of trade and resource allocation across the world. And because of the interconnections between countries through trade and economic links, they will also produce extensive spillovers and reduce the efficiency of the global economy. For example, the automobile, electronics and aircraft sectors, among others, are all supported by complex, massive industrial chains. Economies on the supply chain, including Japan, the EU and the Republic of Korea, will all be adversely affected by contracting trade. Even U.S. suppliers will not be immune from the subsequent ripple effect.

Trade protectionism will ultimately hurt U.S. interests. Thanks to economic globalization, economies, particularly the larger ones, are highly interdependent. Ultimately, the trade wars unilaterally initiated by the U.S. administration will not only hurt other economies but also undermine U.S. interests.

It will push up manufacturing costs and affect U.S. jobs. A Peterson Institute for International Economics report contends that since 95 percent of the Chinese products hit by higher tariffs are parts and electronic components used in end products made in the United States, raising tariffs on these Chinese products will only damage U.S. businesses.

It will drive up prices in the United States and harm consumers. Consumer goods account for a considerable share of U.S. imports from China. The figure (excluding food and automobiles) stood at 46.6 percent in 2017, according to the U.S. Department of Commerce's Bureau of Economic Analysis. For many years, the import of inexpensive yet quality products from China has been key to the low inflation in the United States.

It triggers countermeasures from trading partners and will in turn hurt the U.S. economy. The trade war waged by the U.S. administration against China and many other important trading partners has led to countermeasures and will cause huge losses to some regions, industries and firms in the United States. As of the end of July 2018, major U.S. trading partners including China, Canada, Mexico, Russia, the EU and Turkey had all announced countermeasures against U.S. trade protectionism and had filed lawsuits with the WTO.

The U.S. Chamber of Commerce has pointed out that a trade war will hit some U.S. states. For example, Texas could see $3.9 billion worth of exports targeted by retaliatory tariffs, South Carolina, $3 billion, and Tennessee, $1.4 billion.

It erodes investors' confidence in the U.S. economic environment and results in less net foreign direct investment into the United States. As trade frictions escalate, companies feel less confident and more hesitant about investment.

Copyedited by Rebeca Toledo

Comments to zhouxiaoyan@bjreview.com

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