Economic War

This '301' Torpedo Is About To Sink The S.S. China
By Gordon G. Chang

On Friday, U.S. Trade Representative Robert Lighthizer formally initiated what some are calling “the first shot in a trade war with China.”
“After consulting with stakeholders and other government agencies, I have determined that these critical issues merit a thorough investigation,” Lighthizer said in a statement posted on the USTR site. “I notified the President that today I am beginning an investigation under Section 301 of the Trade Act of 1974.”
The 301 investigation will “determine whether acts, policies, and practices of the Government of China related to technology transfer, intellectual property, and innovation are unreasonable or discriminatory and burden or restrict U.S. commerce.”
Who needs an investigation? 

Chinese practices are blatantly predatory. 

Any administration at this time would have had to act.
The only question is the severity of the remedies the White House eventually adopts, perhaps in as few as two months. 

Those remedies should be severe if they are to be effective.
Last week, an “involved observer,” speaking anonymously to the Washington-insider Nelson Report, said it was “hard to imagine that an investigation won’t result in anything other than a broad indictment of China’s policies.”
Broad indictment it should be. 

China, often in violation of its trade obligations, has been requiring American companies to joint venture with local enterprises—thereby being force to share valuable technology with the Chinese partners—as a condition to market access.
Moreover, Beijing is increasingly using national security laws and regulations to take tech. 

“Central to Chinese cybersecurity law is the ‘secure and controllable’ standard, which, in the name of protecting software and data, forces companies operating in China to disclose critical intellectual property to the government and requires that they store data locally,” write Dennis Blair and Keith Alexander in their New York Times op-ed, aptly titled “China’s Intellectual Property Theft Must Stop.”
What the Chinese government cannot take by law, rule, or regulation, its enterprises steal, counterfeit, infringe, copy, or pirate.
And the Chinese take a lot. 

“All together, intellectual-property theft costs America up to $600 billion a year, the greatest transfer of wealth in history,” write Blair and Alexander. 

“China accounts for most of that loss.”
So what could be wrong with a Section 301 investigation? 

The investigation itself is not violative of America’s World Trade Organization obligations, but the remedies can be.
And that is why America’s trade experts are up in arms over the 301. 

Leading the charge is Chad Bown of the pro-China Peterson Institute for International Economics. 

“It became no longer necessary really for the United States that they have to use that law, because now we have an effective dispute settlement system under the WTO,” he told Xinhua News Agency, criticizing the Trade Act of 1974.
Despite what Bown told the official Chinese media outlet, the WTO’s dispute resolution procedure has been ineffective, especially in dealing with countries maliciously seeking to wound foreign competition.
Like China. 

China, almost from its accession to the global trading body in December 2001, has been implementing clearly non-compliant policies, knowing there will, for years, be no penalty. 

There are no penalties levied on a country for violations unless they persist after an adverse decision is handed down by a WTO dispute resolution panel.
That means a country can implement an obviously non-compliant policy, negotiate with the victims during a drawn out consultation period, stall some more, and wait for a decision to be issued. 

By the time the decision is issued, Beijing can injure—mortally—a competitor from another country.
So what is the solution? 

Consult ancient Chinese wisdom, specifically the Golden Rule of Confucius. 

To follow the advice of the ancient sage, America should treat China like China treats America.
Therefore, the Trump administration should impose harsh remedies on China for its various forms of intellectual property theft. 

And the president should be willing to adopt remedies that violate WTO rules if he thinks they will be the most effective.
If the president adopts non-compliant policies, Bown will almost certainly be outraged, but the U.S. can negotiate, stall, and drag out the eventual WTO proceedings. 

When an adverse decision is eventually handed down, the White House can remove the offending provision but then adopt another violative sanction. 

If Chinese trade officials complain of the new measure, Washington can repeat the process.
Moreover, as a practical matter, the United States may not have to repeal remedies that are found to violate WTO rules. 

China could very well decide not to complain.
Why might Beijing be so tolerant? 

There are four points to remember. 

First, last year America’s goods-and-services trade deficit with China, as most recently revised, was $309.3 billion. 

Trade deficit countries don’t have to worry about trade friction as they have little to lose.
America does not have much to lose, but let’s be realistic, the U.S. will be hurt in an escalation of the trade war the Chinese have been waging for decades. 

But let us also remember that after decades of misguided American trade policy, there are no longer any no-cost solutions.
Second, the U.S. does not have an economy geared to selling goods and services to China. 

China, however, has an economy increasingly geared to selling things to America.
Third, the American economy, for all its faults, is stable. 

China’s economy is slowing and heading, perhaps slowly but nonetheless surely, to a debt crisis.
Fourth, Washington can push China around. 

The American economy last year produced $18.57 trillion of gross domestic product. China claimed its 2016 GDP was $11.39 trillion. 

Bigger combatants have an edge in trade wars, especially when the gap is this large.
The U.S. holds the high cards. The only thing it lacks is political will.

To regain political will, all Washington has to do is realize that the World Trade Organization is like the League of Nations. 

The dream behind both bodies was noble, but the WTO is now, like the League was then, utterly incapable. 

Sometimes, the only way to defend multilateralism is to take unilateral action.
Beijing’s new line is that no nation wins a trade war. If Chinese leaders truly believe that, they will immediately stop nationwide theft of American intellectual property.

But if they will not put an end to such predation, Americans have no choice but to defend themselves.
The truth is that countries do win trade wars. And, in my view, the winner will be America.