Why and How to Mount a Strong, Trilateral Response to China’s Innovation Mercantilism



Nigel Cory and Robert D. Atkinson | Information Technology & Innovation Foundation

The last few years have seen a seismic shift in views toward China’s mercantilism in the United States, the European Union, and Japan. This is most clear in issues around nonreciprocal market access, predatory state-funded and state-directed foreign investment, forced technology transfers, and theft of trade secrets. To its credit, the Trump administration has taken the lead in highlighting China’s harmful policies, and tried to use mainly bilateral leverage in getting China to change its approach. While the European Union and Japan may not like the rhetoric or the tools it is using, both agree with the Trump administration’s central point: China has not been living up to the rules it agreed to when it joined the World Trade Organization (WTO)—and in fact, has been moving away from becoming a more market-based economy—and that this has to change. The three parties need to recognize they must work together via a stronger, more comprehensive, and more proactive trilateral framework, as this is the best way to address the full spectrum of issues raised by Chinese innovation mercantilism. While China has progressed enough economically and technologically that it no longer fears bilateral points of pressure, it still sees collective action via a stronger trilateral framework as a real threat to its mercantilist strategy.

Stronger trilateral cooperation is needed today more than ever as the challenge regarding Chinese mercantilism going forward is different than it was over the last 15-plus years. That challenge was largely to low- and mid-tech manufacturing, wherein Chinese policies weakened traditional manufacturing in developed countries. Given China’s “Made in China 2025” industrial development strategy and panoply of other mercantilist trade and economic policies, it is no exaggeration to suggest that without aggressive, coordinated action, leading economies in Europe, Asia, and North America will, within two decades, likely face a world wherein their advanced-industry firms face much stiffer competition and have fewer jobs in industries as diverse as aerospace, automobiles, biopharmaceuticals, chemicals, electronics, digital media, Internet services, machine tools, semiconductors, and others. Policymakers in all three regions need to realize that the potential for China to fulfill its innovation mercantilist goals—and thus undermine their own advanced technology firms and sectors—is real and growing. If EU member states, the United States, and Japan, as well as all other countries, want the opportunity to benefit from their own efforts to support the development of advanced industries in their home countries, then they need to be paying much more attention now.

While China has progressed enough economically and technologically that it no longer fears bilateral points of pressure, it still sees collective action via a stronger trilateral framework as a real threat to its mercantilist strategy.

To be clear, the objective of a stronger trilateral strategy is not to punish China. Nor does this strategy seek to hold back its economic development, despite the fact the Chinese leadership will spin it that way. Indeed, it is in the United States’, Japan’s, and Europe’s own interests to have China increase its citizens’ per-capita incomes. However, how China goes about achieving this goal is a legitimate concern for other nations given China agreed to shared principles, and a broad set of rules, in joining WTO. Therefore, the goal is to use a collective, rules-based response to address the many modern trade issues raised by China’s mercantilist practices, which would form the basis for a revitalized global trading framework. This will involve using and enforcing existing WTO rules and processes in parallel with the development of new rules, processes, pressures, and norms (taking into account what gaps the former shows for the latter). The success of trilateral deliberations will be central to the three parties’ shared goal of restoring a genuinely open, innovative, and market- and rules-based global trading system.

Established in December 2017, the current framework—the Trilateral Meeting of Trade Ministers—has shown early progress following its initial five meetings. Without explicitly naming China, trade officials have discussed some core issues raised by Chinese innovation mercantilism, and made progress toward developing tangible outcomes on some of them. This potential early harvest points toward the utility of a broader, formal, and proactive agenda and set of engagements—in addition to those already underway with respective trade agencies. China has followed the trilateral discussions closely as it rightly realizes the potential implications.

It is by no means assured that an effective trilateral framework will lead to a rolling back of China’s mercantilist model. China may well only change strategic direction in response to domestic concerns, and therefore be impervious to external pressure. However, the three parties can certainly limit China’s policy options (and their effectiveness) by targeting those that have negative trade and economic consequences for the global trading system. This is where the three parties have the ability to shape and control the agenda. If new rules, norms, and mechanisms are agreed to and enacted by the three parties and their likeminded partners, the onus shifts to China and whether it wants to be a more responsible, rule-abiding, and constructive member of a modernized global trading system. If China continues to flout the rules, and refuses to respond to shared concerns about improving the global trading system, the case for more systemic changes to that system will at least be clear.

In this contest, China has several key advantages: its massive market size, state control of virtually all aspects of the economy and society, and an incredible “bank roll” to use to play nations off against each other. Nations know that if they “cut a deal” with China they can benefit—at least for a while until China no longer needs them—and avoid retribution that can come from challenging Chinese mercantilism. This “prisoners’ dilemma” is real and by no means easy to solve. It will require political courage and leadership, as well as keeping the focus on China instead of fighting battles between trilateral partners—such as unilateral, extra-WTO threats of tariffs on automobiles and steel. But if the three nations/regions can remain strong in their resolve to craft a lasting partnership, it will be easier for other nations, such as Australia, Canada, India, South Korea, and the United Kingdom, to join.

This report is not about Chinese innovation mercantilism tactics per se, which the Information Technology and Innovation Foundation (ITIF) has long reported extensively on in past reports and submissions. Rather, this report starts by arguing the case that addressing China’s mercantilist policies should be a strategic imperative for the United States, Japan, and the European Union— and a stronger trilateral framework is the most effective way to address these policies. This report highlights some issues already being discussed under the official-led trilateral trade framework, while suggesting other issues worthy of trilateral cooperation and coordination. It then analyzes three core challenges to effective trilateral cooperation—letting bilateral issues undermine or overshadow the need for trilateral cooperation, the likelihood of a punitive response from China, and the need to differentiate between protectionism and prosecution—and how the three parties should address and mitigate these concerns.


To view the original report, click here.