Why US-China trade talks are about more than trade

With trade talks between the United States and China at a make-or-break moment, the news media and investors are focused heavily on President Donald Trump’s threat to jack up tariffs on China Friday if the negotiations don’t go well.

That focus is fair enough. Stocks have already tumbled because of the fear. The tariffs would impose meaningful burdens on businesses and consumers in the world’s two largest economies.

Often left on the sidelines of this discussion, though, is something essential: Those two nations, while economically intertwined, are also rivals in a technology race that will shape their respective futures. That’s one reason why China apparently backtracked on its pledges in the trade talks last week – including new legal protections against the theft of intellectual property, or IP.

Mr. Trump’s tariff threats followed. And he’s not alone in the concern. In fact, while the president’s own checklist with China may revolve heavily around boosting U.S. exports, frustration over leakage of U.S. know-how to China has been rising from the White House to the Pentagon to corporate boardrooms. Some in Congress are, if anything, even more exercised about the issue of technology transfer than Mr. Trump.

“I commend the Trump administration for not allowing the status quo to go on, [but] I wish I had more confidence that the administration understood what was at stake, particularly as we think about technology and innovation,” Sen. Mark Warner, D-Va., said at a Monitor Breakfast with reporters Thursday. “While I think there is finally, finally the beginnings of a strategy on 5G [wireless networks], I think at least the White House was asleep at the switch for the first two years of this administration.”

Senator Warner said “there’s been a gradual awakening” in the private and public sectors to the problem, but that Mr. Trump and to some degree President Barack Obama before him have failed to rally a global coalition to address an issue regarding China that’s global in scope.

Last year, for example, one bill to guard against cyberthreats passed the House on a 362-1 vote.

“This issue of the Chinese forcing American companies to transfer technology or stealing American technology and IP is one of the few issues that enjoys broad bipartisan support,” says Timothy Heath, a security expert at the Rand Corp., a think tank near Washington. “And the difficulty is what do you do about it.”

An era of competition

This week Democratic leaders joined the president in confronting China.

Similarly, House Speaker Nancy Pelosi of California, while questioning some of Mr. Trump’s methods, said Wednesday: “In any trade agreement if you don’t have enforcement, all you’re having is a conversation, a cup of tea.”

“Hang tough on China, President @realDonaldTrump. Don’t back down. Strength is the only way to win with China,” Senate Majority Leader Chuck Schumer of New York tweeted on Sunday. That came after Mr. Trump had gone to Twitter with a “No!” to a Chinese “attempt to renegotiate.”

The heightened concern about safeguarding U.S. technology doesn’t necessarily mean the Trump administration will win major breakthroughs in a bilateral trade deal.

Rather, regardless of what any deal achieves, the two nations appear to have entered a protracted era of competing for technological advantage, in areas ranging from aerospace and telecommunications to artificial intelligence, all with big military as well as commercial implications. Managing tensions over the issue is an increasingly important part of the U.S.-China relationship, for both sides.

After a year of intense bilateral negotiations, Mr. Trump had voiced the expectation of a deal soon. With the recent setbacks, the question now is whether those hopes can be revived.

As a nudge, Mr. Trump may impose 25% tariffs on $200 billion in Chinese imports as soon as Friday morning. Yet, by some accounts, he’s been open to concessions on the technology issues in order to reach a deal.

“My concern is that he will perhaps agree to a less ambitious agreement in order to close a deal,” says Orit Frenkel, a former director in the Office of the United States Trade Representative and now president of Frenkel Strategies.

Given both his political promises and the rattled investors on Wall Street, “he feels a lot of pressure to have a deal,” she says. “I think he may compromise on some of the more ambitious asks,” including better market access for U.S. cloud-computing firms in China.

Senator Warner voiced similar concern.

“I am extraordinarily afraid that [he] is gonna do some deal with China where he maybe sells another $100-billion-plus of soybeans and declares victory, and we lose the challenge where the game is: intellectual property, emerging technologies like 5G, AI, quantum. And that would be a detriment not only to our country but to the West for decades to come,” he said at the Monitor Breakfast.

The backdrop for his concern: signs of an unprecedented push by China to catapult itself toward leadership in key technologies – a strategy that Beijing calls the “Made in China 2025” initiative. It’s a multipronged effort that has used channels ranging from legitimate investment to espionage.

“China has effectively used stolen IP to grow its gross national product (GNP) and has derived an incalculable near and long-term military advantage from it, thereby altering the calculus of global power,” a recent report from within the U.S. Navy stated.

Complicating the stakes

Although an actual war would likely be catastrophic for each side, both nations as potential adversaries feel the need to safeguard their futures. And the boundary between the economic and military is blurry.

“There’s a lot of different ways that conflicts are playing out,” says Evan Anderson, who leads a private-sector effort in Seattle to safeguard U.S. companies against IP theft. Cyber misinformation campaigns by Russia are one example. Efforts to pluck economic gems from rival nations are another.

“That’s the world that we’re currently living in. And I think we’re getting close to a place where we’ve woken up to that in the Western world,” Mr. Anderson says.

Senator Warner emphasized the goal of moving the discussion beyond the U.S. to include Europe, Japan, South Korea, and others in a multilateral effort – “to go as a group to China to say, ‘China you are a great nation, we want you part of the world community, but you’ve got to play by the rules.’”

It’s a hard task. Pledges have been made by China before, while enforcement and compliance have been lacking, experts say.

“China realizes that being a tech superpower is fundamental to its ambition so it wouldn’t be willing to make genuinely impactful compromises” in trade negotiations, says Alex Joske, who follows security issues related to China at the Australian Strategic Policy Institute’s International Cyber Policy Centre.

Even if the two nations reach a deal that includes some of the technology issues, “that’s just the beginning of the challenges both in terms of commercial competitiveness” and in the implications for security, human rights, and more, says Graham Webster, a cybersecurity expert at the New America Foundation.

“The reason for that is pretty simple,” he says. “Neither country has figured out what 5G, artificial intelligence, [and other] huge data-driven services are going to mean for our countries.”

In the U.S., some lawmakers including Senator Warner are proposing new laws to grapple with the issues, from privacy to election security. On China, he’s spearheading a bipartisan bill to set up a White House-based office to better track the cyberthreats and other risks inherent in global supply chains for the military.

Others say that, alongside any security measures, the most basic task for America is minding the health of its own society.

“Our country’s job is to do better innovation here at home,” says John Deutch, an MIT scientist and former director of the CIA. “China will overcome us,” he says, “only ... if we don’t pay attention to our own technology and economy.”