Challenging China’s Trade Practices

Introduction

The U.S. views of China’s nonmarket innovation practices are increasingly pessimistic, as these practices persist and the United States and allies and partners have yet to develop fully effective responses to ensure that our companies and workers can compete on a level playing field. Core Chinese practices, such as forced technology transfer, restrictive market access, and industrial subsidies, have been a concern for U.S. policymakers since before China’s accession to the World Trade Organization (WTO). Yet, twenty years on, China has intensified rather than modified these practices and has failed to live up to its WTO accession promise of moving towards a free market economy. It has expanded its nonmarket playbook to include cyber theft of intellectual property, talent acquisition, exploitation of the open U.S. academic environment, and economic coercion. At the same time, China’s homegrown technology development presents new challenges to U.S. innovation leadership, particularly in emerging technology areas where Chinese capabilities are not always dependent upon transfers of technology from the United States.

Against the backdrop of heightened geopolitical tensions between the United States and China, competition in the technology and innovation domains has direct implications for U.S. national security. The Interim National Security Strategy of the Biden Administration notes that China “is the only competitor potentially capable of combining its economic, diplomatic, military, and technological power to mount a sustained challenge to a stable and open international system.” It highlights the strategic competition with China, arguing that “economic security is national security” and implicitly bringing longstanding economic concerns with China, such as their nonmarket innovation policies, under the national security umbrella.

As the United States seeks an effective strategy to manage the economic and technological competition with China, it will lean heavily on national security-focused defensive tools, i.e., export controls, inbound investment screening, and potentially new authorities related to outbound investment controls. It is important to recognize the limitations of these tools to address China’s nonmarket innovation practices writ large. The U.S. toolkit of national security-focused defensive tools is designed to address specific risks arising from discrete commercial transactions. These tools set clear rules around the types of technology that may be transferred, either through an export or an investment transaction, but not the commercial terms on which the transfer occurs. In contrast, many of the U.S. concerns about China’s nonmarket innovation practices involve technology that may be legally transferred to China, but U.S. firms are pressured to do so on terms that provide an unfair advantage to their Chinese competitors. The use of an export or investment control may therefore not be wholly responsive to concerns around nonmarket innovation practices in all instances, though they can be an important part of a broader strategy.

Policymakers may want to use national security-focused defensive tools to restrict economic activity in a broader range of sectors, including in sectors that are economically significant or important for U.S. critical supply chains. When the national security tools work well, it is due to predictability in the policy process, a well-defined and bounded concept of what constitutes a national security risk, and buy-in from the private sector, which is ultimately responsible for the first line of compliance. The further the United States strays from a well-defined construct of national security, the higher the risk of engaging in purely protectionist behavior. It is therefore critical that the United States clearly define and bound the appropriate policy objectives of a more aggressive deployment of national security tools. Objectives should include maintaining U.S. technological leadership in domains that are directly or indirectly important for future U.S. military dominance, U.S. intelligence capabilities, and resilient operation of U.S. critical supply chains and physical and digital infrastructure, as well as preventing the use of technology to undermine democratic institutions and human rights. The United States should develop alternative approaches for addressing concerns with China’s nonmarket practices that do not have a connection to this expansive concept of national security and should consider the use of national security tools as just one part of a holistic strategy to address China’s nonmarket innovation practices.

Summary of Key Recommendations

STRONGER IMPLEMENTATION OF U.S. EXPORT CONTROL AUTHORITIES

• Congress should require that the newly confirmed Under Secretary of Commerce for Industry and Security conduct and report to Congress on the results of a top-to-bottom assessment of the emerging and foundational technology authorities provided under the Export Control Reform Act of 2018.

NEW AUTHORITIES TO REGULATE OUTBOUND INVESTMENT

• Congress should authorize a targeted set of new outbound investment controls, designed to work in tandem with export control authorities, that allow the United States to regulate the flow of U.S. capital into China that supports the development of technology that is against U.S. interests, addressing a gap in current U.S. authorities that focus on the transfer of technologies.

ENHANCED COOPERATION IN THE U.S.-EU TRADE AND TECHNOLOGY COUNCIL (TTC)

• In the TTC, the United States, the European Union (EU), and EU member states should:
  • Intensify work in the TTC export controls working group to develop export controls that extend beyond the traditional objectives of the multilateral export control regimes, leveraging the extraordinary allied coordination on Russia export controls to build momentum for a stronger export control approach to China.
  • Identify critical technologies of shared strategic importance to the United States and Europe, develop a shared understanding of national security risks associated with such technologies, and consider joint guidance for reviewing transactions involving such technologies under the U.S. and EU member state export control and investment screening mechanisms.
  • Develop shared approaches to identifying risks with and solutions to China’s practice of abusing its regulatory authorities to extract concessions from firms executing international deals that are also undergoing investment screening reviews in the United States or EU member states.
  • Explore EU willingness to establish outbound investment screening controls to accompany a new U.S. authority in this area.

A NEW MULTILATERAL INVESTMENT AND EXPORT CONTROLS REGIME

• The United States should begin the diplomatic process of establishing a new multilateral regime that addresses the reality with Russia and rises to the China challenge, working closely with a tight group of likeminded allies. The objectives of this regime, which would act as a successor to the Wassenaar Arrangement regime on dual-use technology, should include:
  • Promoting international security and common security of the member nations;
  • Preventing the destabilizing accumulations of conventional or emerging weapons globally and preventing the transfer of dual-use technologies important for such weapons to countries of concern;
  • Promoting technological leadership in science, technology, engineering, and manufacturing sectors, including in foundational and emerging technology areas, that are material to the national security and foreign policy of the member states; and
  • Supporting the protection of human rights and democratic institutions.

• The U.S. objective should be to include export controls and targeted outbound investment controls within the regime mandate, along with a mechanism for stronger coordination and sharing of information relevant to transaction reviews conducted by each member’s inbound investment screening mechanism.
• The United States should create a publicly accessible database of statistics that map trade and investment flows against export control classification numbers and encourage all partners to do the same.

Watch:

Watch the video of the hearing from the U.S.-China Economic and Security Review Commission.