After Tariffs, Trump to Punish China for Intellectual Property Theft

Steel and aluminum tariffs to protect defense industry, U.S. infrastructure from Beijing 'economic aggression'

Xi Jinping Donald Trump
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March 12, 2018

President Trump's coming tariffs on foreign steel and aluminum imports are the first step in targeting China's unfair trade practices, according to a senior White House trade official.

The next phase in the president's bid to level the international playing field on trade will be punishing Beijing for illicit intellectual property theft and seeking legislation to impose greater reciprocity in trading practices.

"The next action on the president's plate will be the Section 301 action which is designed, in a laser beam way, to address the issue of forced technology transfer, theft of intellectual property, and China's bid through the China 2025 architecture plan to capture the emerging industries of the future," the senior official said.

The administration's trade team is concerned that if China takes control of industries of the future, such as robotics and artificial intelligence, "America will not have a future, at least economically," the senior official said in an interview. "So that's where we're going next."

The new White House National Security Strategy facilitated the get-tough approach by designating China as a strategic rival.

"The strategy basically acknowledged that our trade with China was not peaceful engagement, but rather that China was engaged in strategies of economic aggression designed to capture global markets, protect their own market, acquire intellectual property and IP of the world, dominate traditional manufacturing industries, and to a large extent take control of a lot of core natural resources of the world," the senior official said.

China is engaged in a systematic effort to advance their economic interests at the expense of the United States and other nations.

"The president is certainly committed to addressing that and we will begin to do that with the Section 301 actions when they come," the senior official said.

Trump in August ordered U.S. Trade Representative (USTR) Robert Lighthizer to conduct the Section 301 investigation, a provision of the 1974 Trade Act that gives the president broad authority to punish foreign governments for stealing technology and other practices that harm American businesses.

The official did not say when the Section 301 action will occur. An announcement is expected in the next several weeks.

On Sunday, White House National Trade Council Director Peter Navarro said action on China's intellectual property theft would come soon.
"China is a very bad actor when it comes to trade practices across a lot of things, but nothing’s more important in the near term than addressing the theft of our intellectual property and the forced technology transfer of our technologies," Navarro said on Fox Business Network.
Navarro said the president is committed to halting the IP theft and Lighthizer is working on a plan "we will be releasing shortly to address that head on."

The 301 action is expected to punish China for its policies that force American companies to transfer valuable technology as the cost of doing business with China.

Among the remedies being considered is the imposition of sanctions or tariffs on more than 100 Chinese products. The action also could restrict China from buying or making large investments in U.S. businesses.

The administration plans for Section 301 action also will seek to retaliate based on China's so-called Made in China 2025 plan. The plan calls for China to comprehensively upgrade Chinese industry using high technology.

The USTR has conducted only two 301 actions on China related to its intellectual property theft, in 1991 and 1994.

China is considered among the most aggressive states engaged in stealing foreign technology and other intellectual property.

Beijing uses cyber attacks, spies, and purchases of companies to obtain U.S. intellectual property.

A USTR report to Congress last year on China's compliance with World Trade Organization rules said China's intellectual property practices pose "serious barriers to U.S. exports and investment."

"Thefts of trade secrets for the benefit of Chinese companies have occurred both within China and outside of China," the report said.

"Offenders in many cases continue to operate with impunity. Particularly troubling are reports that actors affiliated with the Chinese government and the Chinese military have infiltrated the computer systems of U.S. companies, stealing terabytes of data, including the companies’ intellectual property for the purpose of providing commercial advantage to Chinese enterprises."

The senior official spoke to the Washington Free Beacon on background in explaining the national security rationale for the tariffs announced last week.

The tariffs will add a 25 percent tax on foreign steel and 10 percent on foreign aluminum. The tariffs will go into effect March 23.

On tariffs, the Trump administration imposed the measures, despite opposition from both Republicans and Democrats who favor unrestricted free trade, based on concerns the defense industrial supply chain could not meet the needs of the military during a war or other national emergency.

The United States currently imports 90 percent of its steel and a major problem has been China flooding the international market with cheap steel and aluminum in ways that are destroying the American steel and aluminum industries.

"For steel, the relevant issue is we've lost about a third of the workforce," the senior official said. "We've shut down an enormous amount of furnaces, and these tend to be very high paying jobs."

Both industries cannot sustain their businesses and are unable to modernize.

"So then the question is do you want to defend, to save them? The top line there is the president said we don't have a country without an aluminum and steel industry," the senior official said.

Unlike 2002, when then-President George W. Bush briefly imposed tariffs on foreign steel, the current action was based on an assessment by the Commerce Department that American national security is in danger from an overreliance on foreign steel and aluminum.

Figures published by Commerce on the two industries show that the single largest need for steel is for ships and submarines. A submarine needs 10,000 tons of steel and an aircraft carrier requires 60,000 tons.

Greater U.S. steel will be needed for the Trump administration's planned buildup of both naval forces.

Other defense industry steel and aluminum goes into nearly all weapons systems, including attack helicopters, F-35 jets, jet engines, tanks and armored vehicles, down to bomb shell casings, vehicle parts, guns, and ammunition.

Leo W. Gerard, president of the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Services Workers International Union (USW) told Commerce in testimony that China, despite claims of curbing overcapacity, increased steel production 36 million tons in 2016.

China’s overall operating capacity is estimated to have risen to 1 billion tons, from about 965 million tons in 2015.

Beyond defense, both metal industries are vital for infrastructure as well, such as pipelines.

"The argument for me is economic security is national security and we have a lot of other things we need for the economy in order to have a strong country. Economic security is national security," the senior official said.

Declining steel and aluminum industries also reduces the skilled U.S. workforce and causes larger trade deficits. The loss of jobs and factories also diminishes the tax base.

The targeted tariffs are designed to increase rates of return for the industries so they can sustain their business and make future investments.

On China's overcapacity in the steel and aluminum production, the senior official said Beijing has "basically weaponized in ways that allows them to attack global markets and grab market share."

The U.S. government imposed anti-dumping duties on China but the Chinese have circumvented the curbs by using sales to third countries that then market the steel and aluminum at lower prices.

The administration chose tariffs over a separate agreement with China on limiting their production of steel and aluminum because it would take five to seven years for the curbs to have an impact.

"And that's assuming contrary to much of our historical experience that the Chinese would actually abide by whatever agreement that we reached with them," the senior official said.

The goal of the U.S. tariffs is that "the tariffs themselves will pressure these other countries to in turn pressure China," he said, adding that the main mission is to defend the American steel and aluminum industries.

Another problem in dealing with China is that Beijing is maintaining a dual economic system, operating a state-controlled system while allowing some aspects to appear market-controlled.

"The USTR is challenging WTO on China on their insistence that they be treated as a market economy," the senior official said. "That change in designation would be extremely harmful to the world, not just the United States."

Chinese Foreign Minister Wang Yi last week threatened a trade war with the United States after the tariffs were announced. "History has shown that fighting a trade war has never been a correct way to solve a problem," he said in Beijing.

On the issue of trade reciprocity, the administration plans legislative action focused on targeting China's unfair practices.

President Trump said during his state of the union speech in January that American trading relationships will be both fair and reciprocal. "The era of economic surrender is over," he said.

"It's simply not fair that China has a 25 percent tariff on Fords going to China while we have a 2.5 percent tariff on Geelys coming to the United States," the senior official said, referring to the Chinese-made cars.

High Chinese tariffs, in addition to blocking U.S. exports to China from the auto industry, also encourage U.S. companies to jump the tariffs by investing in new plants in China.

That permits easier selling by American companies in the Chinese market but the cars are made by Chinese and not American workers.

Additionally, companies such as Ford, General Motors, and Tesla must transfer technology when they build companies in China.

"So even if they make a few bucks in the initial period of entry into the Chinese market, the technology that they transfer to the Chinese competitors creates competitors that over time overwhelm U.S. industry, and we've seen that in different industries already," the senor official said.

The administration may seek help from Congress with legislation on the issue.