"Just remember, we’re twice the size — our economy — twice the size of China,” US President Donald Trump told reporters June 1. The president is catastrophically misinformed.
In terms of purchasing power parity, China’s economy overtook the US in 2013, according to the World Bank. Trump meant that China is small enough to be bullied by the United States. That might be the worst estimation of relative strength since Napoleon III launched a war on Prussia in 1870.
The United States proposes to undertake a trade war while it needs to borrow $1 trillion a year to fund its government deficit for many years to come, and must borrow a large portion of that money overseas.
The most practical man of business, John Maynard Keynes wrote, might be the mental slave of a defunct economist. Sadly, the president appears to be the mental slave of a living one, namely White House trade adviser Peter Navarro, whose just-published report blames China’s economic success on “aggressive acts, policies and practices that fall outside global norms and rules.”
Navarro’s report denotes a shift in Trump’s thinking; a month ago, the US president overruled his own Commerce Department’s ban on chip sales to China’s telecommunications giant ZTE, and proposed instead a fine and other controls. After the US Senate repudiated the compromise in an 85-10 vote Monday night, though, Trump appears to have decided to do his opponents one better, and show that he is tougher on China than anyone else.
Navarro’s report complains that China acquires US technology through open sources (that is, freely available publications) and puts it into a data base. It also complains that China reverse engineers American products, a practice that it concedes “may not be illegal.”
And it claims that the 300,000 Chinese who study or work in the United States are stealing American secrets, although it offers no estimate of how many of them do this or how many secrets are stolen. It cites past reports documenting state-sponsored Chinese hacking of American data, although it makes no attempt to estimate how much of China’s growth can be attributed to data theft.
What Navarro does not mention is that China today pays more money for the use of intellectual property than any country in the world, according to World Bank data. China steals a lot of technology, although probably a great deal less than it did in the past. But it also pays for technology. No doubt Chinese companies should pay more than the $25 billion or so per year registered by the World Bank in 2016.
Fifteen years ago, when China began its shift towards high-tech electronics, Chinese companies earned a well-deserved reputation for data piracy. In 2003, when China’s top telecommunications company Huawei confessed to lifting computer code from Cisco, the Chinese firm had little R&D of its own.
Today Huawei spends $14 billion a year on R&D and projects that its spending will rise to $20 billion a year. It also owns about a tenth of critical patents for 5G mobile broadband. Microsoft’s capital spending is about $10 billion a year. Huawei has more intellectual property to protect than all but a handful of American companies.
What Navarro dubs “China’s six strategies of economic aggression” include:
1: State-sponsored IP theft through physical theft, cyber-enabled espionage and theft, evasion of US export-control laws, and counterfeiting and piracy.
2: Coercive and intrusive regulatory gambits to force technology transfers from foreign companies, typically in exchange for limited access to the Chinese market.
3: Economic coercion through export restraints on critical raw materials and monopsony purchasing power.
4: Methods of information harvesting that include open-source collection; placement of non-traditional information collectors at US universities, national laboratories, and other centers of innovation.
5: Talent recruitment of business, finance, science, and technology experts.
6: State-backed, technology-seeking Chinese investment.
Corporate espionage, to be sure, is criminal behavior, and the Chinese government, as well as individual Chinese companies, have been caught red-handed in the past. But most of the alleged “aggression” is legal behavior. Gathering open-source information isn’t a crime. Neither is hiring experts, unless the experts have stolen the intellectual property of their previous employers.
Nor is it a crime to acquire tech companies. China is entirely within its rights to bid for know-how on the open market, and the United States is entirely within its rights to block some market transactions on grounds of national security.
Least credible among Navarro’s allegations is the supposed risk from Chinese nationals working in the United States. His report states:
“More than 300,000 Chinese nationals annually attend US universities or find employment at US national laboratories, innovation centers, incubators, and think tanks. Chinese nationals now account for approximately one third of foreign university and college students in the United States and about 25% of graduate students specializing in science, technology, engineering, or math (STEM) … The national and economic security risks are that the Chinese State may seek to manipulate or pressure even unwitting or unwilling Chinese nationals into becoming non-traditional information collectors that serve Beijing’s military and strategic ambitions.”
This is an astonishing statement: It implies that China has nefariously inserted its students into American graduate schools at the expense of other prospective candidates. Without foreign and especially Chinese students, most American graduate programs in physics, mathematics and engineering would shut down for lack of interest.
During the past year, American graduate programs in physics report a steep across-the-board decline in foreign student applications, and some universities are not sure they will be able to sustain their programs unless the foreign students come back. They won’t if the US brands them as spies.
Without Chinese scientists and engineers, US doctoral programs in computer science would shrink. Four out of five doctoral candidates in computer science at US universities are foreigners; Americans go straight into the industry with a bachelor’s degree, while the foreign students stay for advanced training. Navarro complains about “Chinese talent recruitment,” which, he avers, has been a success:
Chinese government sources claim over 44,000 highly skilled Chinese personnel have returned to China since 2009 through talent plans. As noted by China Daily, which is owned by the Chinese Communist Party: “China has more than 300 entrepreneurial parks for students returned from overseas. More than 24,500 enterprises have been set up in the parks by over 67,000 overseas returnees.”
As a partner in a Hong Kong investment banking boutique, I met a number of Chinese scientists who studied in the United States and then made their fortunes in tech startups at home. Most of them told me the same story: They would have been happy to stay in the United States, but had trouble securing visas and obtaining financing.
They also felt the hostile hand of the American authorities. China, meanwhile, enticed them with free office space, government contracts, cheap financing, and above all a booming IPO market.
Navarro can’t have it both ways: You can’t treat Chinese students in the United States as prospective hostiles, and complain when they go home with their doctorates. And you can’t maintain the quality of American graduate programs without them, because not enough Americans qualify.
China now graduates four times as many bachelor’s degrees in science and technology than the United States and twice as many doctorates – not counting the Chinese students who earn degrees in the United States or other foreign countries.
A third of Chinese undergraduates major in engineering, versus only 7% in the United States. China now spends more than 2% of its GDP on R&D, compared to just 1% a decade ago, and within a few years will spend more than the United States.
There is plenty of Chinese misbehavior to address. But the danger to the United States does not arise from criminal activity on the part of China, but the entirely legal Chinese policy of acquiring technology for hard money, fostering innovation at home, and training top-quality technologists.
There is not a word in Navarro’s report, nor indeed in any other utterance by the Trump Administration, about American policies to promote innovation, investment, and scientific education. It is less a program than a pout by a soon-to-be-surpassed superpower in decline.