Trade War Punctures China’s Pride in Its Technology

There is a big gap between the science and technology of China and those of the United States
By Yoko Kubota

China’s tech businesses have been on tenterhooks in recent months. Here, a Foxconn factory in Guizhou province. 

BEIJING—To the list of casualties in the trade battle between the U.S. and China add another: Chinese chest-thumping about the country’s prowess in innovation.
More sober assessments of China’s technological capabilities have emerged from China’s tech community in recent weeks, as the U.S. has ratcheted up pressure, threatening tariffs and export restrictions to punish Beijing for what it says are theft of technology and unfair trade practices.
“There is a big gap between the science and technology of China and those of the United States, as well as other Western developed countries. This is common sense, not a problem,” said Liu Yadong, the editor in chief of the government-run Science and Technology Daily, in a speech last week that set off debate on the internet.
China’s tech businesses have been on tenterhooks in recent months. 

Threats by the Trump administration to impose tariffs on as much as $450 billion in Chinese products and to restrict Chinese investment in the U.S. and American technology exports to China potentially stand to disrupt supply chains crucial to China’s telecommunications-gear makers, its microchip industry and aircraft manufacturing.
While President Donald Trump backed away from those investment and export restrictions on Wednesday, he said those issues would be addressed through existing institutions.
Some Chinese officials greeted the move with wary relief. 

A Commerce Ministry spokesman said Thursday that Beijing is watching developments in the U.S. and warned that investment restrictions would likely affect global perceptions about the U.S.’s business environment.
Still, disruptions loom. 

U.S. tariffs on $34 billion in Chinese goods kick in July 6, and China has vowed to retaliate dollar for dollar. 

The biggest casualty thus far in the trade fight is Chinese telecom-equipment maker ZTE Corp., which nearly stopped operating after the U.S. Commerce Department prohibited its access to American components because of sanctions violations.
Liu, the Science and Technology Daily editor, sought to address the foreign foundations of many Chinese industries at a seminar on China’s reliance on critical technologies.
“The house is built on other people’s foundation, but some insist that we have complete and permanent property rights,” Liu said, according to a transcript on the website of the newspaper, which belongs to the Ministry of Science and Technology. 

“What’s troublesome is that people with those kind of opinions have fooled leaders, the public and even themselves.”
His was a striking admission considering that state media and senior officials have played up China’s advances in innovation for much of the past year to meet Xi Jinping’s objective of making the country a global technology power. 

The government news agency Xinhua last year praised China’s “four great new innovations” in modern times: dockless shared bikes, high-speed rail, online payments and e-commerce. 

All were invented elsewhere, and China’s high-speed rail uses technology from Germany’s Siemens AG , Japan’s Kawasaki Heavy Industries Ltd. and other foreign companies.
In March, a government-produced documentary “Amazing China” lauded China’s advanced technologies in ports, bridges, cars and the internet.

ZTE nearly stopped operating after the U.S. Commerce Department prohibited its access to American components because of sanctions violations. 

“Our Amazing China also has areas that are not amazing,” Beijing Daily, the Communist Party’s official newspaper in the capital, said this week. 

It said that while China has made strides in development, “our shortcomings are more noticeable. 

Just one microchip is enough to put China in a corner, let alone other items.”
A core U.S. concern is what the Trump administration says are attempts by China to steal U.S. technology and use subsidies to build up national champions to conquer world markets. 

Particular criticism has been directed at Beijing’s “Made in China 2025” plan to dominate 10 cutting-edge areas including information technology and aerospace.
Given the glare, senior Chinese officials have recently started playing down “Made in China 2025” in meetings with the U.S. business community and European diplomats, people familiar with the matter said. 

Authorities have also ordered media to tone down coverage of the policy.
China’s State Council Information Office didn’t respond to a request for comment.
The shift in tone is more tactical and doesn’t mean China is scrapping its global technology ambitions. 

“The wrestling between the U.S. and China on technology issues is inescapable, and we for sure shouldn’t chicken out at this moment,” said Fang Xingdong, who runs ChinaLabs, a technology think tank. 

But, he said, China has said too much about the importance of Made in China 2025.
The U.S. is mistakenly targeting Made in China 2025, he said, because the real strength in China’s technology sector comes from market-oriented companies.
The Finance Ministry offered tax relief Thursday for companies in high-end manufacturing and technology sectors, particularly those in fields covered by “Made In China 2025.” 

In a notice, the ministry said it would refund to companies overpayment of value-added taxes, instead of applying the excess amount to next year’s tax bill, as in the past.
As part of the new messaging, Xi, senior officials and state media have said the trade fight should spur China to reduce its U.S. dependence, not curb its technological ambition.
“If the U.S. keeps providing us with core technology, it might hinder China’s technology development,” Liu, of the Science and Technology Daily, said in an interview. 

“If the U.S. does not provide, China will devote our own efforts to technology development, and the process to catch up might be shortened.”

The U.S.-China Rivalry Is, More Than Ever, a Fight Over Tech

By CECILIA KANG and ALAN RAPPEPORT

The chip maker Qualcomm is the target of a hostile takeover bid by Broadcom, a proposal that the United States government has said could give Chinese rivals an advantage. 

WASHINGTON — As the United States and China look to protect their national security needs and economic interests, the fight between the two financial superpowers is increasingly focused on a single area: technology.
The clash erupted in public on Tuesday after the United States government, citing national security concerns, called for a full investigation into a hostile bid to buy the American chip stalwart Qualcomm — a review that is often a death knell for a corporate deal.
The proposed acquisition by the Singapore-based Broadcom would have been the largest deal in technology history, creating a major force in the development of the computer chips that power smartphones and many internet-connected devices. 

But a government panel said the takeover could weaken Qualcomm and give its Chinese rivals an advantage.
“China would likely compete robustly to fill any void left by Qualcomm as a result of this hostile takeover,” a United States Treasury official wrote in a letter calling for a review of the deal.
The fight over technology is redefining the rules of engagement in an era when national security and economic power are closely intertwined.

China, under Xi Jinping, has launched an ambitious plan to dominate mobile technology, supercomputers, artificial intelligence and other cutting-edge industries, putting huge resources behind an effort that it considers crucial to the country’s government, military and economy. 

Beijing wants to build its own technology champions and is encouraging companies to acquire the engineering, expertise and intellectual property from big rivals in the United States.
The aggressive push has set off alarms in Washington, with policymakers and lawmakers fearful that American giants could lose their edge. 

President Trump is now building up the country’s defenses, as the government investigates violations of American intellectual property rights and intensifies scrutiny of overseas deals.
The secretive panel that is reviewing the Qualcomm deal, the Committee on Foreign Investment in the United States, or Cfius, has taken on a central role in the resistance to Chinese investment. 

The panel, which is led by the Treasury Department and made up of representatives from multiple agencies, has the authority to block foreign acquisitions of American companies for national security reasons; it has effectively killed several acquisitions linked to Chinese buyers over the past year. Lawmakers are also calling to expand the powers of Cfius to reflect the broader scope of China’s interests.

[ What is Cfius? It is the “ultimate regulatory bazooka,” according to an executive who works on mergers and acquisitions. Read more about the panel here » ]

“The Trump administration turbocharged it,” Tony Balloon, the head of the corporate China practice at the law firm Alston & Bird, said, referring to Cfius. 

“There is now a recognition in government that foreign investors, particularly from China, are getting more and more sophisticated on how they get access to technology in the U.S.”
With Qualcomm, the government has articulated its evolving vision for global economic leadership.
The company, which is a major supplier to the United States government, is a leading player in the race to build the next generation wireless technology, known as 5G. 

These high-speed mobile networks will form the infrastructure backbone that ultimately connects home appliances, streetlights and driverless cars to the internet. 

And Qualcomm’s chips will be in the multitude of devices and machines that will run on those networks.
“Having a well-known and trusted company hold the dominant role that Qualcomm does in the telecommunications infrastructure provides significant confidence in the integrity of such infrastructure as it relates to national security,” the Treasury official wrote in the letter.

Huawei’s display at the Mobile World Congress last month in Barcelona. The Chinese telecom-equipment giant was cited by the United States as a benefactor of the a Qualcomm takeover.

The government specifically cited Huawei, the Chinese telecom-equipment giant, as a potential competitor that could move into a breach created by a merger. 

The Chinese company has spent heavily on 5G, and the government said it owns 10 percent of the essential patents.
“It is the new paradigm,” said Paul Triolo, head of global technology policy at Eurasia Group, a geopolitical risk consulting company. 

“That implies technologies with 5G, artificial intelligence, biotech and automation are now considered more sensitive and part of a national innovation base that needs to be protected.”
Broadcom said it was cooperating with Cfius, saying it was “making the combined company a global leader in critical 5G and other technologies.” 

Qualcomm, in an earlier statement, said the review was a “very serious matter.”
The letter and the call for an investigation reflect the newly forceful position of Cfius.
In most cases, the panel weighs in after a deal is announced. 

With Qualcomm, Cfius is taking a proactive role and investigating before an acquisition agreement has even been signed.
Cfius has stymied several deals in the past year.
MoneyGram, the money transfer company, and Ant Financial, the Chinese electronics payment company, called off their merger in January, citing regulatory concerns of Cfius. 

If the deal had gone through, Ant Financial would have had access to reams of financial data, which could have created security problems. 

Ant Financial has said that consumer data would have stayed in the United States.
Last year, the White House blocked a Chinese-backed investor from buying Lattice Semiconductor, which is a supplier to the United States government. China Venture Capital Fund Corporation, which was part of the investment group, is owned by state-backed entities.
“It’s very much an expansion of what is considered to be national security,” said Tai Ming Cheung, director of the Institute on Global Conflict and Cooperation at the University of California at San Diego. 

“This is about China’s efforts to invest and acquire key parts of the U.S. innovation system.”
Cfius could soon have even more muscle.
There is new legislation to broaden the jurisdiction of Cfius; it has bipartisan support in the Senate. The Trump administration has expressed support for rewriting the rules governing Cfius, and Steven Mnuchin, the Treasury secretary, said last year that the administration was working closely with the House and the Senate.
The bill, proposed by Senators John Cornyn, a Republican from Texas, and Dianne Feinstein, a Democrat from California, would give Cfius the authority to assess some types of joint ventures, minority investments and real estate transactions near military bases. 

The legislation would also widen the definition of “critical technologies” slated for potential review to include “emerging technologies that could be essential for maintaining the U.S. technological advantage over countries that pose threats, such as China,” according to a news release on the bill.
Adding to the scrutiny, the United States Trade Representative has also opened an investigation into whether China is “harming American intellectual property rights, innovation or technology development.” 

One concern is that American companies have been forced to hand over technology, create joint ventures and otherwise help homegrown players, in exchange for access to the Chinese market. 

Qualcomm, for example, has been working with the Chinese government to develop drones, artificial intelligence and mobile technology.
Technology companies are stuck in the middle of the fight between the United States and China. While there are concerns about Chinese encroachment, the industry also recognizes that such deals are the price for entry to the world’s second-largest economy. 

Companies have protested the proposed changes to Cfius, saying an expansion of its powers could be misused and that the new definitions of emerging technologies are unclear.
IBM has said the bill would limit the “ability of American firms to do business abroad while empowering foreign competitors to capture global markets.” 

The Information Technology Industry Council, a tech trade group, has lobbied against the changes, saying they add complexity for Silicon Valley companies that often have intricate business ties in China.
“They are between a rock and a hard place,” said Rob Atkinson, president of the Information Technology and Innovation Foundation, a think tank that is sponsored by technology firms like Microsoft. 

“The Chinese government says you have to do this to operate here. The U.S. says, but you can’t do that.”

Chinese Peril

France's newly elected president wants to curb Chinese takeovers in Europe's strategic industries
Reuters
French President Emmanuel Macron attends a ceremony marking the 77th anniversary of late French General Charles de Gaulle's appeal of June 18, 1940, at the Mont Valerien memorial in Suresnes.

French President Emmanuel Macron vowed on Thursday to convince China’s closest allies in Europe that curbing foreign takeovers in strategic industries was in their interest, warning EU governments not to be naive in global trade.
Smaller eastern and southern European economies that are dependent on Chinese investment have rejected any steps against Beijing, even going as far as to block EU statements criticising China’s human rights record.
But Macron, at his first EU summit, said being an attractive destination for investment did not mean exposing Europe to what he termed “the disorder of globalisation”, as he seeks to make good on a campaign pledge with a so-called protective Europe.
“Things are changing because we see the disorder of globalisation and the consequences in your own country. I want to build an alliance around this idea,” Macron told a news conference during the summit of EU leaders. 

“I am for free trade ... but I am not for naivety.”
State-owned ChemChina’s US$43 billion purchase of Swiss pesticides and seeds group Syngenta, Beijing’s biggest overseas sale to date, has deepened concerns in Europe that the bloc is ceding control of its advanced technology, EU diplomats said.
Macron, who defeated the anti-Europe, far-right leader Marine Le Pen last month, said that he had always been a defender of globalisation and free trade during his time as minister but that leaders should hear from workers hit by globalisation.
The issues of globalisation and “social dumping” took centre-stage in France’s campaign after Le Pen used the relocation of a Whirlpool factory in northern France to Poland to paint Macron as a globalist who did not care about workers.
A free-trade advocate, Macron let several national corporate champions be taken over by foreign firms as a minister. 

But since his election he has sought to drum up support in Europe for what he calls a “protection agenda”.
Logo of Syngenta on it's plant in Muenchwilen.

He has found some support from Germany and Italy. 

EU leaders will agree on Friday to allow the European Commission to explore ways to limit foreign takeovers in areas such as energy, banking and technology, where China seeks Europe’s know-how.
In a statement, leaders will ask the Commission “to examine the need and ways to screen investments from third countries in strategic sectors, while fully respecting members states’ competences,” a reference to national sovereignty on the issue.
Berlin, Paris and Rome are upset that the Commission, the bloc’s competition regulator, approved ChemChina’s purchase of Syngenta while China maintains restrictions on EU investment.
Chinese direct investment in the European Union jumped by 77 per cent last year to more than 35 billion euros (US$38 billion), compared with 2015, while EU acquisitions in China fell for the second consecutive year, according to the Rhodium Group.
But free-trade advocates such as Sweden want to avoid any measures that might contradict the bloc’s rejection of the protectionism promoted by US President Donald Trump.