On July 22, the United States’ (US) State Department announced that it had ordered the Chinese government to close its consulate in Houston, in what the Chinese government has deemed an “unprecedented escalation.” A State Department spokesperson cited the protection of American intellectual property and private information as the reason for this move. It has reportedly given the Chinese Consulate until July 24 to move out its employees. Local media has reported that Chinese Consulate employees have been burning documents in the building’s courtyard. The Chinese government has responded by announcing it had ordered the US consulate in Chengdu to be closed with one foreign ministry spokesperson suggesting that the outpost was being used for espionage purposes.
The move marks the latest manifestation of deteriorating relations between both countries. Unsurprisingly, the Trump administration’s accusation that China is to blame for the coronavirus pandemic, and its sanctions of Chinese figures for human rights violations in Xinjiang and meddling in Hong Kong, have fraught the bilateral relationship. Still, the State Department’s accusation of China’s ongoing intellectual property theft may come as a surprise given that, earlier in the year, both countries had signed a trade deal that supposedly addressed this topic in an attempt to lessen the devastating effects of the trade war.
Background: The US-China Trade War
Tensions between the United States and China began flaring before President Trump took office in January 2017. Prior to the 2016 presidential election, candidate Donald Trump repeatedly accused China of stealing American intellectual property and utilizing unfair trade practices. At the Republican National Convention, Donald Trump pledged that he would stop China’s “outrageous” intellectual property theft and currency manipulation while looking into renegotiating its trade deals. At the time, the Chinese government lambasted the Republican candidate and his party for throwing “groundless” accusations at them and meddling in its internal affairs.
The concern of Chinese theft of intellectual property and unfair trade practices is not new. In 2015, Chinese Premier Li Keqiang announced a strategic plan to ensure that China becomes a dominant manufacturer in high-technology industries. The project came to be known as “Made in China 2025,” and it aims to use government subsidies to assist state-owned businesses in competing/outperforming their Western counterparts by 2025. In addition to providing support, the Chinese government has promoted cyber espionage to facilitate intellectual property theft as an additional means to hasten their companies to compete with their Western counterparts. In 2017, the US Trade Representative Office estimated that China had stolen between $225-$600 billion in American intellectual property, with the primary sources coming from counterfeit goods, pirated software, and use of stolen trade secrets. In the same year, the Office of the Director of National Intelligence estimated that Chinese cyber operations account for $400 billion stolen from US companies. In total, since 2014, China has seized an estimated $1.2 trillion from the US. Chinese universities are the primary source of the proliferation of stolen intellectual property, for once a theft is made, the information is sent to various Chinese universities to apply for patents on the technology. Once there is a patent, the Chinese government proceeds to distribute it to multiple companies. These actions have resulted in the US repeatedly accusing China of lacking adequate intellectual property protections, including effective civil enforcement procedures in their courts to settle violations. Still, not all of China’s foreign intellectual property acquisition comes from illicit activities. China has increasingly become one of the largest foreign investors in US startup companies in recent years. China has invested a combined $24 billion or 13% of worldwide investments in the US, with the majority washing into innovative technological fields. Employing these resources could allow Chinese firms to acquire majority shares within a US company and access American intellectual property, which it can then send back to China under a 2014 law that mandates Chinese citizen cooperation with its national intelligence agencies, which can include a transfer of technology.
Similarly, China’s trade laws contain very stringent rules governing foreign access to Chinese markets, which forces US companies to form joint ventures with Chinese firms. In creating these agreements, US companies often have to transfer their intellectual property to meet their counterpart’s demands to access Chinese markets. A study by the National Bureau of Economic Research found that these agreements are responsible for the most technologically advanced procedures and products Chinese firms acquire. These actions perpetrated by the Chinese government have stressed trade relations between the US and China, which then-candidate Trump utilized for his to-be administration’s hard stance on China.
In July 2018, President Trump heightened the trade row between both nations by imposing $34 billion in tariffs on Chinese goods entering the country. China responded by equally imposing $34 billion tariffs on US goods. In the following two months, both countries employed a tit-for-tat strategy that saw them invoking tarrifs equating $250 billion on each other. These actions created uncertainties throughout global markets that have hurt businesses and impacted the global economy. These uncertainties and fear of a slowed economic expansion prompted the Federal Reserve to cut interest rates for the first time in a decade. President Trump has defended his actions stating that it would spur consumers to buy American products by making imported goods more expensive. Furthermore, restating a campaign pledge, Trump has advocated that it will stop unfair trade and transfers of intellectual practices. In response, China has accused the US of waging the most massive trade war in recent history.
The US further warned that it would invoke more tariffs unless China agreed to negotiate a fairer trade deal for both countries. Further escalation would have meant that virtually all China’s exports to the US would be subject to duties. These actions have already affected global economic growth, with the International Monetary Fund (IMF) projecting that the US-China trade war could shave 0.5% from global economic growth by 2020. The IMF further stipulated that this downturn could be a result of adverse effects on confidence, asset prices, and investments that followed from the trade conflict.
The trade war has had an impact on both countries’ economies. For the US, it has affected American consumers with higher prices of imported goods due to US tariffs on China. The trade war has also forced Chinese firms to absorb a portion of the duties’ cost by reducing their prices of exported goods. As a result, China has experienced a decline in exports of tariffed products by about 25% or $35 billion in the first half of 2019. These numbers demonstrate that while the trade war does affect China’s economy, Chinese firms are holding on and maintaining 75% of their exports to the US. Still, by placing tariffs on Chinese products, the US is ensuring that exporting Chinese firms do not remain competitive, which has caused some trade diversion. Imports from countries not directly involved in the trade war increased by $21 billion in the first half of 2019, demonstrating a net loss of about $14 billion from the exporting Chinese firms. The diversion has primarily benefited Taiwan, Mexico, and the European Union, which have gained billions in exported goods as the US looks away from Chinese products.
It would not be until another round of tariffs that both countries would complete a preliminary trade deal. On January 15, 2020, the US and China signed a trade agreement that promised to bolster better relations for both countries. Under the agreement, China pledged to boost US imports by $200 billion above 2017 levels and strengthen its intellectual property rules, including by improving its civil and criminal procedures to combat online infringement, counterfeit goods and pirated software. Additionally, China would commit itself to removing any pressure on foreign companies to transfer over their intellectual property to conduct business in its markets and refrain from supporting Chinese firms in investing in foreign companies to acquire their technology. In return, the US would halve some of its tariffs to 7.5 % on $110 billion of Chinese goods, but maintain 25% duties on roughly $250 billion worth of Chinese goods that is primarily used by manufacturers to make finished goods. Additionally, the US will suspend any plans to impose tariffs on $160 billion of Chinese imports. Though a significant step, critics have argued that it did not resolve many critical issues, such as China’s state subsidies, which have helped Chinese firms compete with and outpace US firms. This most significantly impacts the US’ technological sector, which has seen a steep rise in competition from their Chinese counterpart as part of its “Made in China 2025” policy. Additionally, to China’s dismay, the deal neglects Huawei, a cornerstone of the trade dispute that has continuously lobbied countries to adopt its 5G equipment for their telecommunications networks despite potential national security risks. The move comes as countries pivot away from 4G networks to increase data speed and bandwidth, enabling innovative smart devices.
The Huawei Row
As alluded to above, Huawei presents another point of contention for the United States and China and one of the primary sources of conflict in the trade dispute. In May 2019, the United States added the telecommunications giant to its Entity List, effectively barring US firms from transacting with it unless approved for a license. Six months later, the Federal Communications Commission (FCC) declared Huawei a national security risk and placed it under its list of national security threats, which prevents telecommunications carriers from using the $8.3 billion Universal Service Fund (USF) to purchase equipment and services for internet services from it. The USF is used to provide affordable internet coverage in poor and underserved areas, and Huawei had reportedly been making inroads with telecommunications partners in rural communities. The FCC defended its actions, citing the national security risks of adopting Huawei technologies since the Chinese firm is obligated to cooperate with the government of China, including sharing customer information, under the country’s National Intelligence Law passed in 2017. This action came shortly after the US requested Canada to arrest and extradite Huawei’s Chief Financial Officer Meng Wanzhou on charges of violating US sanctions against Iran and stealing technology from T-Mobile. Relations between the US and Huawei soured further when the US successfully appealed to the United Kingdom to stop purchasing 5G kits for its telecommunications infrastructure and phase out all Huawei equipment by 2027. Two weeks prior, the FCC designated Huawei as a national security threat, which officially placed it among other entities that US telecommunications carriers cannot buy equipment or services for their operations.
Unfortunately for both countries, the ongoing pandemic and accusations of human rights violations in Chinese provinces have suspended any possibility of the US and China working on a new trade deal.