FROM WIRED | MARCH 31, 2018
LAST WEEK, THE White House announced plans to levy tariffson up to $60 billion of Chinese imports. The primary, and legal, rationale hinges on the little-used Section 301 of a 1974 trade law that permits retaliation against countries that infringe US intellectual-property rights. Determined to halt what it perceives as a steady decline relative to an emergent China, the Trump administration and not a few voices in Congress are embracing a tough-on-China approach that they believe will at long last reassert American primacy. It will not; the strategy and the tactics of this trade war are a classic case of fighting not just the last war but fighting it on the adversary’s terrain.
To be fair, the Chinese government quickly promised to re-evaluate some of its trade practices and to crack down on Chinese companies that demand intellectual-property transfers as a condition for US and foreign companies doing business in China. That raises at least the possibility—as Treasury Secretary Steven Mnuchin suggested in subsequent interviews—that the Trump administration will refrain from imposing tariffs and succeed in using the threat as a cudgel to bring China to the negotiating table.
Still, given that these announced tariffs echo plans for duties on steel and aluminum imports as well as Trump’s longstanding position that the US is losing on trade, it’s clear that the White House is itching to reject decades of trade consensus in favor of a more nationalist approach.
There’s little question that China, having long demanded the transfer of intellectual property as a condition for many companies doing business in the Middle Kingdom, has played fast and loose with intellectual property laws and made good use of the coerced knowledge transfer. A set of very public and punitive tariffs, however, will not reverse what has already been transferred and will not do much to address the challenge of China today, which is no longer a manufacturing neophyte. The blueprints for the Nike shoes of 2010, the flow-charts for just-in-time manufacturing, the IP for robots, and the software for inventory controls cannot be uncopied. Tariffs might punish China for what it did, but America will not be enriched by them. American prosperity depends on what we will make in the future, not on what we made in the past.
That’s certainly where China is focusing, on the future. China is no longer the economic equivalent of a high-school student consuming knowledge and copying best-in-breed techniques. China is becoming an innovation powerhouse in its own right, designing and making everything from sophisticated drones (DJI now controls about 75 percent of the $15 billion commercial drone market) to advanced artificial intelligence systems to an ecosystem of mobile payments and processing (dominated by Alibaba subsidiary Alipay and Tencent’s WeChat Pay) far ahead of any US digital banking or payment infrastructure. As a result, slapping on punitive tariffs designed to retaliate for intellectual property infringements is largely anachronistic.
This is not just a Trump issue. The presumption that more rigorous intellectual property protections will “level the playing field” needs to be challenged. As any tech executive will attest, no company can thrive on its past IP for very long. Qualcomm, for instance, was once considered unassailable because of its wealth of patents for wireless communication. But it has proved very assailable, and would have been bought by up-and-coming rival Broadcom had the White House not intervened. A new program, a better design innovation can give a company a few years head start over competitors, but unless it zealously and aggressively spends on the next new thing, others will soon develop their own variants at lower costs and higher efficiency.
The idea, then, that China is succeeding because it has stolen US intellectual property misreads what is happening. Yes, China certainly took advantage of past knowledge transfers, but it is doing much more than copying.
China has followed a model of state-driven capitalism, replete with massive public investment in infrastructure, substantial protections for domestic industries, barriers to foreign competitors, and a closed financial system. It has also championed state-driven R&D, which is now pouring tens of billions of dollars into artificial intelligence research(much of it driven by the security apparatus and the military) and clean energy, just as the US government spent heavily on applied research during the Cold War. The result has been an economic juggernaut that is poised to become the world’s largest economy within a few years.
The US has followed a rather different model of open trade, porous capital and financial systems, fewer barriers to foreign competition, less state intervention and more emphasis on entrepreneurship and innovation aided by state spending in vital areas such as technology and healthcare. The result has been considerable affluence, the world’s largest and most dynamic economy for decades, and a very high per-capita income.
The move toward punitive tariffs assumes that such an open system cannot compete against a closed system. Perhaps, but an open system certainly cannot compete against a closed system by becoming more closed.
Rather than attempting to set back the proverbial clock, the US could and should focus on bolstering what it does best—creating and deploying systems and services that rely on sophisticated technology and platforms and that can only excel with highly skilled workers and nimble capital. If China is spending oodles on AI, then the United States should be matching that, with government incentives to channel and augment private capital. If China is racing ahead on 5G cellular technology and clean-energy technology, then America ought to marshal its considerable advantages in university and government research labs with more funding and more urgency. Some punitive action against China may be warranted and even force some changes, but it won’t make America great.
Rather than trying to create a more closed economy than can compete with the industries of yesterday, the US should focus on what will make the nation competitive tomorrow and decades from now. That could entail a larger federal research budget, and more guarantees for first-loss capital, as well as increased wooing of foreign skilled workers and graduate students who have proven to be such a bonus to innovation in the United States over the past decades.
At the height of the American century decades ago, government, companies and universities acted as a triad for innovation. Companies and universities led (outside of purely military research) but the government often acted as a catalyst. In China, government has been the driver, with private tech companies only recently joining the mix. That is not a model the United States could emulate, but a more focused role for government as a catalyst is feasible and desirable.
If the US truly wants to remain economically strong and competitive, it must focus on its advantages rather than obsessing about its weaknesses. Such an approach would emphasize American strength rather than obsessing over China’s. It would start with what has actually made American great and treat China’s emergence as an economic power as a secondary concern to whether the United States can remain one. One of the great strengths of the United States in addition to its economic openness was the degree to which Americans marched to the beat of their own cacophonous drummers rather than paying too much heed to what others were doing. Connecting to the maverick independence that fueled America’s emergence will serve the 21st century United States; trying to punish China will not.