Nicholas Lardy on U.S.-China Trade Relations

Nicholas R. Lardy is the Anthony M. Solomon Senior Fellow at the Peterson Institute for International Economics. He joined the institute in March 2003 from the Brookings Institution, where he was a senior fellow from 1995 until 2003. Before Brookings, he was the director of the Henry M. Jackson School of International Studies at the University of Washington from 1991 to 1995. From 1997 through the spring of 2000, he was also the Frederick Frank Adjunct Professor of International Trade and Finance at the Yale University School of Management. He is an expert on the Chinese economy. On February 28, 2018, he spoke with William Shi CMC ’20.

What is a section 301 investigation? How is it different from other trade sanctions like anti-dumping measures that are designed to deal with unfair trade practices?  Does a positive finding in a 301 investigation give the president much greater discretion to impose sanctions than a conventional anti-dumping action?

As your question suggests, the 301 is quite different from anti-dumping duties or countervailing investigations. First of all, the 301 investigation is typically directed against a single country, whereas in many anti-dumping countervailing duty cases, many protections apply to the products across the abroad, regardless of the country they are coming from. This is also the case, in the recent investigation under section 232 on aluminum and steel. They apply globally to all countries. The 301 is directed against a single country. The other difference is once the protectionist action is taken under 301, it can apply to a very broad range of products coming from that single country, unlike other investigations, which typically focus on a single product.

Chinese laws and regulations force foreign firms to transfer technology and thus limit the access of foreign firms to its domestic market. Does section 301explicitly prohibit involuntary tech transfers? 

301 broadly deals with protections of intellectual property, so it can cover forced technology transfers, and other forms of abuse that lead to the loss of technology, trademarks, copy rights and so forth of foreign firms in the country.

It is argued that the 301 investigation as a unilateral action will escalate the tension on the trade issue, and the U.S. should resort to multilateral mechanism like the WTO's dispute resolution process to address trade dispute. Do you agree with this assessment, and how is WTO's resolution process compared with actions entailed in the 301 investigation?  In other words, will WTO provide the U.S. similar relief should China be found at fault?

I think under the provisions under the WTO, if the United States and the results of the 301 investigation decide China has not been following the rules regarding intellectual property, the first step before any protectionist measure is taken is that the two governments are supposed to enter into a bilateral discussion about the use on the matter. The United States will be presenting its case to the Chinese about why they thought China was falling short of its obligation to protect intellectual property. The Chinese will present their counterarguments, and it’s possible that in that process, the Chinese would agree to take additional steps to satisfy the U.S. government. If they don’t, the U.S. can go ahead and impose some kinds of protection. As I said, it can be very broad and cover a broad range of products. Because the claims of what the U.S. companies had lost to intellectual property thefts are very big numbers, they would be trying to impose restrictions on Chinese imports to roughly equalize the loss of U.S. companies’ for China’s failure to live up to its obligation to protect intellectual property. Another difficult thing is the heroic assumption you have to make even in estimating what the loss has been. It’s very difficult to estimate what the losses are because of the intellectual property violations. That country selling a ton of steel for less than 20 percent of the cost to produce is a very clear-cut case, and you can apply a tariff that offsets the extent to which the product is being sold below the fair value. There are some technical issues in those estimates, but they are very minor compared to the heroic assumption that goes into what the loss is in intellectual property violations. 

Some Chinese scholars argue that we should not overlook the importance of U.S. political barriers that restrict exports with dual-use technology to China. How significant are these political barriers in the U.S. trade deficit with China?

This again is a very difficult issue to evaluate. The scope of the restriction on dual-use technologies has been substantially reduced over the years. It applies to an increasingly small range of products. Before being exported, the dual-use technology has to get a license. If you look at the number of licenses that have been rejected by the U.S. government, it’s actually a very small number. From that piece of evidence, it would appear not to be a significant barrier to the sale of high-tech products to China. The counterargument of course is that if firms think it’s highly probable they are not going to get a license, they won’t apply in the first place. They will not pursue the sale of products to China, and they don’t apply for licenses. The truth is probably somewhere in between, the number of licenses turned down, which is huge, is probably not an accurate reflection of the extent to which the dual-use technology exports are restricted to China. But it’s very difficult to estimate what the amounts are. I hold the view that they are not important in the context of the massive deficit that the U.S. has in the trade with China.

How serious is the problem of forced technology transfers and IPR theft involving American firms that can be blamed on China?

Again, this is a very difficult question. Because clearly, on one level, you can say there is no such thing as the forced technology to China. If foreign companies do not want to introduce technology to China, they can just stay out of the market. Typically, this occurs in the context of direct investment, the setting up of the production facilities that involve the use of the company’s technology. No company has to produce in China. No company has to invest in China. On one level, you can say there is no such thing as forced technology transfer. The reality is that firms use their technology as a tool for negotiating the entry into the Chinese market. I think a lot of the technology transfer is not completely voluntary. The Chinese want foreign companies to invest, and foreign companies want to bring their technology to China so that they can produce and sell products to people in the domestic market. So it’s inevitably part of a package, particularly in the early days when most of foreign investments in China were in the forms of joint ventures. When a joint venture is set up, each side has to evaluate what it contributes to the venture. U.S. multinationals and multinationals based in other western countries put a price on their technology. Okay, we are going to have a 100 million-dollar joint venture, and I’m going to bring some equipment, but the contribution to the joint venture is not only the equipment but also the technology that underlies the whole manufacturing process. The Chinese are going to put a value on the land or factory that builds in the structure of operation. In these arrangements, the foreign firm is implicitly compensated for the technology they are transferring to China. Maybe there are some cases where the company is so desperate to get into the Chinese market that they bring their technology that they rather not provide for fear that they are going to be stole or copied. There are probably some cases of forced technology transfer. I think the vast majority technology that have gone to China has been voluntary in that U.S. companies and U.S. multinationals and multinationals based in other countries are entering into the transactions voluntarily with the expectations that they are going to make a profit. If they don’t think they are going to make a profit, or the technology is not appropriately valued in the joint venture, they don’t have to enter into the agreement and invest in China.

In your judgment, what might be the most likely 301 sanctions the Trump administration will take once the 301 investigation produces a finding unfavorable to China?

I think it’s almost impossible to predict, but as I mentioned earlier, there is a potential the sanctions and restrictions on imports on Chinese products into the U.S. market could be quite far-reaching, much more far-reaching than all current anti-dumping and countervailing duties cases that are currently applied against China. I think they affect about six percent or seven percent of China’s exports into the U.S. market, as we saw in several dozen cases where protection is still being applied. But 301 could affect much broader range of products. It could be more restrictive than all other anti-dumping and countervailing duties cases where China is restricted. It’s entirely entirely up to the administration to decide what the range of products will be affected.

How would China respond?  Could Chinese response lead to a full-blown trade war?

I think high-level officials in China have said explicitly they are going to retaliate, if this approach is used. We have to recognize 301 cases have been extremely rare. I believe there was only one case in the last sixteen or seven teen years where a 301 has been used to impose restrictions. This is not a frequently used tool. It is not well understood. I think it’s more likely to be interpreted by the Chinese as a purely protectionist move on the part of the United States. When they do a detailed investigation, they are making arguments about subsidies or selling below costs. You can argue about the details and how these calculations are done, but typically it only affects a narrow range of products. The 301 in theory could be a tariff across the board that everything China sells to the U.S. market. The Chinese are probably going to retaliate.

The Chinese government appears to be very concerned with the outcome of the 301 investigation and potential sanctions.  Are there things Beijing can do to forestall a trade war with the U.S.?

I think there are concerns, and they should be concerned. I think initially the Chinese underestimated the risk of the meeting President Xi and President Trump in Mar-a-Lago last year. It’s considered to be so successful from the Chinese point of view. They came to the conclusion although Trump had used a lot of very strong language in the campaign, he was not likely to initiate far-reaching sanctions. But that was a too optimistic interpretation. The fact that the Trump Administration started the 301 investigations in August of last year after the Mar-a-Lago summit was a warning to the Chinese that the risk of Trump doing something is actually increasing. Liu He, a new member of the Politburo of the Chinese Communist Party was in Washington this week, meeting with the U.S. trade representatives Robert Lighthizer. The focus of the meeting is almost entirely on trade. There are some speculations he would explain the Constitutional Amendment that is going to eliminate the two-term limits of the president and vice president of China. I don’t think that’s what Liu He was going to do. His trip was scheduled prior to the decision to amend the Constitution. One of the things Mr. Liu is trying to do is to get the U.S. administration to agree to resume the Comprehensive Economic Dialogue. There was only one meeting of the dialogue under President Trump, and no other meeting has been scheduled. Some high-ranking officials have said the talk has been suspended, and they advance the view going on for several administrations the deficit the United States has with China is getting bigger, and the negotiation has failed to lead to a satisfactory outcome, so they have said specifically the negotiation is suspended.

William Shi CMC '20Student Journalist

Featured Image “President Donald Trump speaks at the American Center for Mobility, Wednesday, March 15, 2017, in Ypsilanti Township, Michigan” by Dan Scavino via Wikipedia Commons.

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