The Trump administration’s proposed tariffs on steel and aluminum imports will target China, but not the way most observers believe. For the US, the most important bilateral trade issue has nothing to do with the Chinese authorities’ failure to reduce excess steel capacity, as promised, and stop subsidizing exports.
.. Trump no doubt sees potential political gains in steel- and aluminum-producing districts and in increasing the pressure on Canada and Mexico as his administration renegotiates the North American Free Trade Agreement. The European Union has announced plans to retaliate against US exports, but in the end the EU may negotiate – and agree to reduce current tariffs on US products that exceed US tariffs on European products.
.. But the real target of the steel and aluminum tariffs is China. The Chinese government has promised for years to reduce excess steel capacity, thereby cutting the surplus output that is sold to the United States at subsidized prices. Chinese policymakers have postponed doing so as a result of domestic pressure to protect China’s own steel and aluminum jobs.
.. Because the tariffs are being levied under a provision of US trade law that applies to national security, rather than dumping or import surges, it will be possible to exempt imports from military allies in NATO, as well as Japan and South Korea, focusing the tariffs on China and avoiding the risk of a broader trade war.
.. For the US, the most important trade issue with China concerns technology transfers, not Chinese exports of subsidized steel and aluminum.
.. Until a few years ago, the Chinese government was using the Peoples Liberation Army’s (PLA) sophisticated cyber skills to infiltrate American companies and steal technology.
.. Xi then agreed that the Chinese government would no longer use the PLA or other government agencies to steal US technology.
.. The current technology theft takes a different form. American firms that want to do business in China are often required to transfer their technology to Chinese firms as a condition of market entry.
These firms “voluntarily” transfer production knowhow because they want access to a market of 1.3 billion people and an economy as large as that of the US.
These firms complain that the requirement of technology transfer is a form of extortion. Moreover, they worry that the Chinese government often delays their market access long enough for domestic firms to use their newly acquired technology to gain market share.
.. The US cannot use traditional remedies for trade disputes or World Trade Organization procedures to stop China’s behavior. Nor can the US threaten to take Chinese technology or require Chinese firms to transfer it to American firms, because the Chinese do not have the kind of leading-edge technology that US firms have.
.. US negotiators will use the threat of imposing the tariffs on Chinese producers as a way to persuade China’s government to abandon the policy of “voluntary” technology transfers.