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  August 29th, 2017 | Written by

Free Trade Support for Trump’s China Action

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  • To free traders, focusing on a trade result like a deficit is a mistake.
  • When America’s partners are engaging in truly open trade, there is nothing wrong with the US running a deficit.
  • China does not engage in open trade; it seeks gains at the expense of its partners.

The Trump administration announced an investigation into Chinese actions to coerce the transfer of intellectual property from American companies and individuals, as well as steal it outright. There is a long way to go and many mistakes are possible. But this is a good initial response to predatory Chinese economic policies.

The first thing to note about the investigation is it’s not an investigation of trade deficits. To free traders (like me), focusing on a trade result like a deficit is a mistake. When America’s partners are engaging in truly open trade, there is nothing wrong with the US running a deficit.

China does not engage in open trade; it seeks gains at the expense of its partners. What the administration has rightly started to do is focus on a trade practice — not a result — that hurts Americans. Coercive transfer and theft of intellectual property (IP) may be the single biggest economic harm China inflicts on the US.

This is because innovation goes far beyond making computer chips faster or creating new apps. Innovation is finding ways to do more without working or spending more. It can apply to any industry and come from any individual, not just scientists or computer engineers.

According to the US patent and trademark office during the Obama administration, industries which rely on IP employed 28 million people in 2014 and helped support 17 million other jobs. The industries added $6.6 trillion in value to the economy. Innovation also plays a role in other industries which are not IP-intensive.

For trade, IP-intensive goods exports exceeded $840 billion in 2014, about half the US total. The share, however, fell a bit from 2010. Beijing’s policies threaten the exports and competitiveness of the industries employing tens of millions of Americans. This policy has been clear and sustained: acquire others’ innovation by all means available.

The means include (1) legal purchase; (2) coerced transfer of IP, in violation of World Trade Organization principles; and (3) theft. The Trump administration is investigating practices 2 and 3. Since coercion and theft have nothing to do with free trade, American retaliation would not be a violation of free trade principles.

Comparative advantage says countries should focus on what they do best. For the US, this is innovation. When China talks about becoming more innovative, though, there is no mention of market-based competition with America or anyone else. Instead, there is document after document of government edicts, with government money and regulations to back them up. China vows to become the global leader in sectors it deems strategic, for example robotics, by hook or by crook. Plans to ultimately suppress foreign competition go back more than a decade.

If this investigation is the first step, what’s the second? Both coercion of American companies and outright IP theft are long-standing Chinese practices, but they call for different responses.

Chinese companies which use stolen IP are fencing stolen goods. They and their affiliates should be barred from exporting to or investing in the US, including through third parties. If other countries adopt a similar approach, Chinese companies that use stolen IP would be cut off from most of the global economy while those Chinese firms obeying the law can trade and invest freely. This is exactly the right outcome.

Coercion may have an even bigger impact than theft but is trickier. No one wants their property stolen but some American firms may believe access to China is worth transferring technology. It may be, but the choice must not be coerced. The best US response is to close off a sector or two that Beijing considers valuable, either adding sectors to that or reopening depending on the Chinese reaction.

In both instances, the US government needs the cooperation of American companies, companies which fear retaliation by Beijing and do not trust Washington to protect them in the long term. This points to the main challenge for the Trump administration.

The challenge is not abandoning our principles — retaliation against theft and coercion fits our principles. The challenge is being patient with the investigation and with American companies. China has attacked our innovators for 15 years and we’ve done nothing. The problem cannot now be solved in two years. We’re only at the stage of gathering facts, which will take time. But at least we’ve started.

Derek Scissors is a resident scholar at the American Enterprise Institute (AEI), where he focuses on the Chinese and Indian economies and on US economic relations with Asia.