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Economic Forecasts

Trade Tiffs with China Heating Up

Beijing is getting a lot more aggressive with U.S. companies.

Look for U.S.-China trade relations to get much frostier this year. Having weathered the global recession and looking at GDP growth of 9.5% this year, China has concluded that the U.S. needs it far more than it needs the U.S. Beijing is determined to throw its weight around, economically and politically. That determination will only grow as the U.S. files more disputes against China with the World Trade Organization.

“The Chinese are now probing for areas where WTO rules are not as strong as they might be,” says Ambassador Alan Wolff, deputy trade representative under President Carter and now counsel with the law firm of Dewey & LeBoeuf LLP. “We’re going to head into a period of both sides testing the other.”

The flare-up over possible U.S. arms sales to Taiwan illustrates the potential for trouble. United Technologies Corp. stands to lose a lot if Beijing carries out its threat to sanction U.S. firms that sell weapons to what it considers a breakaway province. In addition to Sikorsky Aircraft, builder of the UH-60M Black Hawk helicopter, UTC owns elevator manufacturer Otis and air conditioner maker Carrier, both of which could lose a great deal of business if shut out of the Chinese market.

Beijing will tread carefully in punishing Boeing over sales of Patriot missiles to Taipei. Near term, it will tilt more purchases by state-controlled carriers away from the U.S. aircraft manufacturer to Airbus, but Airbus lacks the capacity to meet all of China’s long-range civil aviation needs. And there’s another consideration, as aerospace consultant Joel Johnson of the Teal Group Corp. explains: “A little over half their fleet is Boeing. If they retaliate against (Boeing) aircraft parts, they’re only screwing their own airlines.”

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Still, there’s a growing danger that the trade tensions will get out of hand. “This is threatening to go beyond a technical trade dispute,” says Pieter Bottelier, senior adjunct professor of China studies at Johns Hopkins University’s School of Advanced International Studies. “Once it becomes political, the whole situation becomes harder to control.”

China’s assault on U.S. intellectual property threatens greater damage. Under a new policy known as the National Indigenous Innovation Products Accreditation Program (Notice 618), Beijing is mandating that foreign firms seeking to do business in key high-technology sectors transfer their intellectual property and trademarks to Chinese-based companies. Initially, targeted sectors include computers, software, telecommunications and green energy technology, but the list will almost certainly be expanded. The policy is geared toward boosting the development of Chinese high-tech firms.

Compliance with Notice 618 means foreign firms must surrender their most valuable assets to Chinese manufacturers, whose low production costs would give them an edge in global competition. But refusal means exclusion from sales to the Chinese government and state-owned firms, together constituting much of the Chinese market. And as China has yet to sign the World Trade Organization’s Government Procurement Agreement, U.S. firms would have no legal recourse.

U.S. industry is not taking the threat lying down. A group of 19 trade associations has petitioned the Obama administration, highlighting the danger the policy poses to American competitiveness and asking it to intervene.

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Notice 618 has the potential to boomerang against China in a big way. U.S., European and Japanese companies will put up with a lot to stay in China, but if the price is a total loss of royalties, many will decide that enough is enough. Moreover, much of the global research and development supply chain would be unable to function within the strictures of China’s indigenous innovation program. That would force the abandonment of joint research efforts between China, the U.S. and other economies in a number of areas critical to China’s development, such as public health and renewable energy. The result of both developments would be to hinder, rather than advance, China’s capacity for innovation.