Are electronic components a pawn in trade disputes?

The findings of the investigation by the Office of the US Trade Representative into China’s acts, policies and practices related to technology transfer and intellectual property and innovation, concluded that they are ‘unreasonable or discriminatory and burden or restrict US commerce’.

This is hardly a surprise as anecdotal evidence has pointed to this for the last 20 years at least. What is new however is that we now learn that a wide range of electronic components may get caught up in any trade dispute between the US and China and become subject to tariffs. 

Much of the growth in the global economy has resulted from increased international trade, balanced by the inter-dependency between competing nation states. When needed, light regulation has been provided primarily by the Organisation for Economic Cooperation and Development (OECD) and the World Trade Organisation (WTO).

Until recently China was known principally for manufacture and assembly and almost never for design and innovation. As consumers we have all benefitted from the 'China Effect', which has made a huge range of goods ranging from phones to furniture available at very low prices.

Economists put much of the China Effect down to the country’s lower ‘factor costs’, the most important of which are cheap and plentiful labour and easy access to capital. A few years ago, China’s leaders decided they wanted the country to be known not only for 'Made in China', but increasingly for 'Designed in China'.

Combined with high technology manufacturing processes, focused government industry subsidies and artificially regulated exchange rates, China’s capital and labour advantages enabled the country’s economy to grow much faster than the rest of the world, overtaking Japan to become the World’s second largest global economy behind the US.

In Western Democracies governments generally maintain a light touch on their ‘market economies’. The little political bias they apply to their industrial policy-aims act as a form of guidance to predominantly independently owned and managed organisations. In contrast, many Asian democracies have a ‘managed market economy’ focus where Governments exercise a more direct influence over their industrial goals.

The fact that independently owned and managed internationally-based organisations operating in China must establish joint venture organisations in partnership with State Owned Enterprises (SOE) to gain access to their market is seen as unfairly hampering US companies from trading in China.

No surprise then that the US Trade Representative (USTR) launched an investigation. In its 182-page report released on the 27th March 2018 it establishes that the China Government acts are 'unreasonable or discriminatory and burden or restrict US commerce' because:

• China directly or indirectly requires US companies operating in China to engage in joint ventures and transfer technology or Intellectual Property (IP) to Chinese companies.
• China deprives US companies of the ability to establish market-based prices for licensing and in other technology related negotiations, undermines US companies control of their technology in China.
• China directs systematic investment in technology companies to obtain their technology and IP unfairly.
• China seeks unauthorised intrusion into US commercial computer networks to enable the theft of IP, trade secrets or confidential information.

As result the office of US Trade Representative proposes a new tariff of 25% on $50bn worth of Chinese products imported into the US. Imports of steel and aluminium have recently grabbed the news headlines but further analysis of the US Government’s Notice of Determination of Action Pursuant to Section 301: China Acts, Policies and Practices Related to Technology Transfer, Intellectual Property and Innovation reveals that many electronic components are also included.

Released on 3th April, the current list contains over 1,400 imports, including all tantalum, aluminium, ceramic, paper or plastic capacitors, many carbon, composition or film resistors, fuses, relays, LEDs, transistors, thyristors, and lithium, air zinc or silver oxide primary cell batteries. It also includes some consumer products, together with many automotive products and industrial equipment.

On the 6th April, following a Chinese tit-for-tat proposal to levy tariffs on $50bn of US imports ranging from soya beans to aircraft, the US Government went on to increase its tariff to $100bn of Chinese imports. Fortunately, no tariffs will be implemented by the US until a 60-day public consultation process has been completed.

It is unfortunate but probably necessary that the US Government has now deemed it necessary to drag technology, market access and abuse of IP issues into a looming trade war with China, the underlying issues of which have been known about for a long time and could (should?) have been promptly addressed by previous administrations, if necessary with the assistance of NGOs.

It is however my personal opinion (and not that of the organisations I represent) that the US Government is right to take action on these issues and that the Governments of the UK and other nations, should also demand reform of Chinese Government trade practices.

History has shown that trade disputes are highly contagious and are rarely in the best interests of the world economy or its citizens. Hopefully ‘raising the stakes at the table’ will encourage China and the US and other governments and NGOs to seek and rapidly identify a solution acceptable to all, but until a resolution is arrived at everyone involved in the global electronic components supply network needs to ensure they have the necessary systems and processes in place to operate effectively in a market environment complicated by numerous and significant import tariffs.

If it happens, some headaches are inevitable.