The Trump Administration has launched a broad campaign attacking China and indirectly the international economic order. This approach has traction because of popular support in the United States for disengaging with China and skepticism about multilateralism more generally. Although more diverse, views on China have also become more negative in Europe and elsewhere. Disengaging from China, however, is not a realistic option—the costs would be a less innovative world and slower growth for both developed and developing economies.

Global economic tensions originated from President Trump’s punitive tariffs targeting mainly China but also several other major economies. The Phase One agreement between the U.S. and China prevented the tariff war from getting any worse but left most of the tariffs in place. A year later many trade experts have concluded that the tariff fuelled trade war did little to improve America’s trade balance or its economic competitiveness. Moreover, in a pandemic-driven global recession, tariffs and restrictive trade practices are the worst policies that nations should be practicing.

Many observes now realize that this trade war is not really about trade. China does account for the largest share of America’s trade deficit, but many experts don’t believe that bilateral trade deficits are a problem in themselves — they’re just a symptom of other issues. Whether Mr. Trump is misguided in doggedly pursuing tariffs or using them as leverage with the Chinese government, America’s continued drive to levy penalties is less about fixing a trade problem than about U.S. firms complaining about China unfairly forcing the transfer of foreign technology to its own companies. For the hardline U.S. security minded, however, this conflict is more about a competition between two great powers and cutting off China’s access to western technologies. But unlike Russia whose vast resource-based wealth gives it the financial independence to behave non-cooperatively with its neighbors, China’s economic success hinges on its strong global and regional trade and investment links. Thus, China has a strong incentive to preserve a rules-based multilateral system.

American negotiators who parse the trade vs. tech issue tend to overlook an essential fact: The international trade and financial system that was set up after World War II — with the creation of the World Bank, the International Monetary Fund and, much later, the World Trade Organization (all nurtured and dominated by the United States) — actively encouraged “technological spillovers” from developed economies to developing ones. In fact, under the W.T.O.’s agreements on intellectual property, developed countries are under “the obligation” to provide incentives to their companies to transfer technology to developing countries.

Such transfers were seen to be in the West’s interest, too: far better that poor countries achieve self-sustaining growth than be dependent on foreign aid, the thinking went. But China did much better than achieve self-sustaining growth.
By the late 2000s, it had come to seem too successful, and a threat: The West was struggling then with a major financial crisis (largely of its own doing). Today, the long-standing principle that knowledge transfers are good all-around is being questioned. Do they continue to serve a global public good and should they still be encouraged — at least when it comes to China? Or should China be treated as an exception: After all, it is in a class of its own, by dint of both its size and the state’s involvement in its economy.

U.S. negotiators have long complained that China’s foreign investment practices are unfair. It is often accused of theft of American intellectual property and in particular of using joint ventures to funnel technology to Chinese companies.
But the reality is more complex.

Yes, American companies have been granted access in some 35 restricted sectors — like auto production, telecommunications, banks and medical institutions — on the condition that they transfer know- how to local partners. Chinese companies are developing electric vehicles with support from Renault-Nissan and Ford. Amazon and Microsoft are being asked to partner — and share technology — with Chinese companies before they can sell cloud-computing services in China.
And yes, DuPont and General Motors have sued their Chinese joint- venture partners for misappropriating trade secrets. Outright theft also has sometimes occurred, including in the defense sector, of information about bombers and missile systems.

But to say all these things in the same breath is to conflate inadequate rules with violations of existing rules that may be adequate, and government policy with the behavior of private actors. In many instances, technology is being transferred between companies in the context of consensual, negotiated business agreements.

Also, violations or near-violations are par for the course during certain stages of a country’s development. That fact doesn’t make them acceptable, but it offers useful context for thinking through how best to manage them. Other rapidly growing economies, including Japan and South Korea in 1970s and 1980s, also were accused of unfairly securing technology from foreign partners (or subsidizing their exports). But as those countries’ incomes rose and their own capacity to innovate developed, they started complying with the rules.
China, in fact, has been making more progress than is usually acknowledged toward protecting intellectual property rights. AmCham China’s 2019 China Business Climate Survey Report noted that 96 percent of the more than 300 American companies it interviewed said that China’s enforcement of intellectual property rights had improved or stayed the same over the last five years. China is growing up in other respects, too. Both the IMF. and the United States Treasury have recently found that China is not manipulating its currency. And its current account surpluses have virtually evaporated.)

That said, the penalties in China (for, say, infringing on patents) remain weak and their enforcement is lax. The National People’s Congress of China passed a foreign-investment law in March, but it offered too little on implementation.

The fundamental question, therefore, is this: Are China’s current technology-transfer policies fair, given both past international practice and the country’s extraordinary development? Or, to put the point more provocatively, did China break the international economic order?

The answer partly depends on the existence, or not, of globally accepted guidelines. In its 2018 World Economic Outlook report, the IMF. again highlighted the vital role that the diffusion of technology worldwide has played in driving growth globally. And it’s the growth of China, as well as that of emerging market economies that will continue to be the major driver of global growth in the coming years.

A more innovative China also doesn’t mean a less competitive America. For one thing, as the Harvard economist Robert Lawrence has pointed out, developed countries and developing ones generally do not compete in the same product lines. Other economists have also argued that much of China’s technological capacities are overstated anyway. Many of the more sophisticated components used in products that China exports to the West (think iPhones or even Huawei’s communication devices) are made elsewhere and merely assembled in China.

Curbs on America’s exports of “emerging and foundational technologies” — notably to do with artificial intelligence or fifth- generation (5G) telecommunications networks — will curtail knowledge flows to China. But they will also damage America’s own capacity for innovation, American tech experts have argued.

(Likewise, Mr. Trump’s actions to ban, on security grounds, foreign tech equipment in American telecommunications systems could also hurt American companies.)

There is now a general consensus among the major powers that international institutions like the IMF, World Bank, WTO and WHO are no longer equipped to deal with new era issues that have become contentious such as e-commerce, technology transfer and the role of state enterprises along with the pandemic induced recession. But aside from the Trump administration, most observers see the solution to be restructuring and strengthening these institutions rather than weakening them.

For the United States and other western powers, any chance for securing better outcomes requires changing the environment for engaging China – in terms of both the political atmospherics for foreign policy interactions and the framework for reforming the multilateral system. Given the broad political support needed to do so, the Group of 20 summit meetings might provide the right venue to begin the process. China’s economic ambitions may seem like a challenge to the international economic order, but it is the United States’ reactions to it that are actually threatening the system.

This note is a revised version of the author’s article in the New York Times, titled “Did China Break the World Economic Order?,” dated May 17, 2019.

This article is an extract taken from the Parliamentary Network publication ‘Just Transitions’. You can download a pdf version of the full document here.