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Why We Need the Tariffs

Making a trade agreement with China without enforceable penalties for cheating is a long-term ticket to economic oblivion.

The Trump administration has just imposed the second round of tariffs on Chinese goods, and the screams can be heard around the world.

The new tariffs are 25% on $325 billion in goods from China. They have created quite a stir. Farmers are complaining to their congressman that tariffs are killing their exports of soybeans and other crops. Manufacturers who import parts and materials from China are unhappy, and big-box retailers like Walmart and Target are panicking because prices are going up on billions of dollars of their Chinese imports.

All of these groups have legitimate arguments and want to negotiate a quick trade deal with China and return to business as usual.

But, is this really a practical long-term solution? I think not. Making a trade agreement with China without enforceable penalties for cheating is a long-term ticket to economic oblivion where everybody will eventually lose.

When China was allowed into the WTO in 2001, it was hoped that the nation would be encouraged towards democracy, Western liberal ideals, and the American rule of law. But it did not happen. China's authoritarian capitalist government has instead taken advantage of their competitors by ignoring trade agreements and implementing a comprehensive program to get their hands on foreign technologies using a wide variety of tactics such as:

1. Forced technology transfer. As a condition to access their markets, China forces companies to allow access to their proprietary technology.

2. Joint ventures. China also forces foreign companies to have a Chinese partner in a joint venture, which means sharing technology secrets with the Chinese partner.

3. Currency manipulation. Perhaps the most egregious strategy is that China manipulates its currency to make the dollar 25% higher, which makes its exports cheaper and U.S. exports to China artificially more expensive.

4. Subsidies. The Chinese government subsidizes Chinese companies to target specific industries like the wind turbine industry, where the Chinese government offers 40 different types of subsidy programs to their wind turbine manufacturers

5. Security reviews.The Chinese government can require security reviews of competitive technologies, which allows them to examine proprietary secrets and technologies.

6. Product testing. This is another practice that is designed to access proprietary technology under the excuse of safety or standards.

7. Anti-monopoly laws. This is basically extortion, where the government can impose fines in order to force foreign companies to share their IP. An example is Qualcomm, which was fined $975 million because of monopoly complaints from Chinese smartphone manufacturers.

8. Dumping. This occurs when China overproduces a product like steel, then dumps it into foreign markets at or below cost.

9.  Smuggling. In 2013, Homeland Security detained nearly 3,000 people, some but not all of them from China, for trying to smuggle weapons and sensitive technologies out of the U.S.

10. Ignoring Patents. Chinese leaders do not like America's patent laws and try to undermine them. So some Chinese companies ignore patents and copy the technology knowing that the laws are difficult to enforce.

11. Acquisition of U.S. Companies. China also tries to acquire targeted technologies by acquiring U.S. companies or buying their stock.

12. State sponsored intellectual property theft. IP theft includes cyber espionage, reverse engineering, counterfeiting, piracy, smuggling, and physical theft.

13. Evasion of export control laws. These are laws designed to prevent the export of sensitive U.S. technologies with military applications. The espionage used to acquire these military technologies is a state-sponsored program which ignores the Arms Export Control Act.

14. Espionage. The Chinese government funds ongoing programs to recruit operatives inside of U.S. companies to steal secrets. China has infiltrated, among many others, General Electric (wind turbine software), Monsanto (genetically modified corn), Avago (microchip technology), T-Mobile (core router software), Tennessee Valley Authority (nuclear material secrets), and Solar World (proprietary solar cell technology).

This is not a complete list of Chinese intellectual property tactics, but it illustrates what China views as acceptable business practices and what China will continue doing even if its leaders sign an agreement.

In testimony before the Senate Small Business Committee, Bonnie Glaser, the Center for Strategic and International Studies’ senior Asia advisor, said that “China steals more intellectual property than any other country.” Chinese theft, she added, is “the single biggest threat to U.S. technology”.

Tariffs alone won't stop China from stealing intellectual property, but they now at least have China's attention. Getting China to change will require severe penalties that hit them financially, such as:

1. Continuing the 25% tariffs.

2. Sanctioning individual companies that cheat, like the recent sanctioning of Huawei. On May 17, the U.S. sanctioned Huawei and its 67 affiliates in 26 countries to limit their access to U.S. suppliers. The Justice Department is also prosecuting Huawei for bank fraud, technology theft, and violating the U.S. Sanctions against Iran.

3. Levying import surcharges on products of companies that cheat.

4. Extending the statute of limitations on economic espionage cases.

5. Denying access to U.S. markets to Chinese companies who cheat.

China has a 10-year plan called Made In China 2025, which "seeks to leverage the power of the Chinese state to promote indigenous innovation, advances technological self-sufficiency, and creates comparative advantage in key strategic sectors on a global scale.” "

"Indigenous innovation" is a code phrase for innovation gained from others. Cities and counties receive subsidies and financial support from the government based on how much indigenous innovation they can bring into their geographic region, and it doesn't matter how they acquire the technology.

The 2025 plan includes the following goals:

1. Acquire key technologies and intellectual property from other countries

2. Capture the emerging high technology industries that will drive future economic growth.
It targets a wide variety of industries, including advanced information technology, automated machine tools and robotics, semiconductors, aircraft and aeronautical equipment, maritime vessels and marine engineering equipment, advanced rail equipment, electrical vehicles, electrical generation and transmission equipment, agricultural machinery and equipment, advanced materials, pharmaceuticals, and advance medical devices.

China has already swallowed the low-tech products we use to make. What they want now is our advanced technology products and all of the new technologies developed around them.

These technologies are found in America's advanced technology industries, including oil and gas, aerospace, biotechnology, life sciences, optoelectronics, communication weapons, computer systems, and software. The sector also includes nanotechnology, optics, additive manufacturing, advanced materials, advanced robotics, big data analytics, cloud computing, the Internet of Things, autonomous vehicles, and genomics. If we lose the technologies in these industries through IP theft or multinational companies outsourcing, we will lose our economic future.

We are at a crossroads. China needs all of our advanced technologies for their 10-year plan, and they don't want to invest in the research and development.

Despite the fact that farmers, retailers, consumers, and many manufacturers want the tariffs lifted, it would only be a temporary reprieve, and we will all lose in the end. We must either keep the tariffs in place or introduce financial punishments that make cheating very costly for the Chinese. We need short-term sacrifice to avoid long-term collapse. The future is now.

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