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China Uses the World Trade Organization to Legitimize Its State and Chinese Companies’ Anti-Competitive Activities

ArmchairTechInvestor, July 31, 2018, by Brad Peery

Book-Simon and Schuster: China vs. U.S. 2018, A Police State vs. A Democracy. Expected publishing date: September 1, 2018
Book on Amazon.com: Trump’s Political Agenda and Achievements

Blogs
www.ArmchairTechInvestor.com, China vs. U.S. Issues
www.ArmchairPolitician.US, Trump Political Achievements

This is the first of three ArmchairTechInvestor posts examining trade and defense issues the U.S. has with the World Trade Organization, the EU and NATO.

China World Trade Organization History
China joined the World Trade Organization (WTO) in 2001. An old system, the Catalogue for Guiding Foreign Investment in Industries remains in place. The Catalogue, revised most recently in 2015, divides China’s economy into four categories for foreign investment purposes: prohibited; restricted; permitted; and, encouraged.

U.S.-World Trade Organization (WTO) Issues
The WTO was established to facilitate worldwide trade and has 164 members. China became a member in 2001. At that time China was categorized as an emerging country. Today, they are clearly no longer in that category, but still have protections accorded to such countries. President Trump has taken the position that the WTO is lethargic in addressing current issues. Trump has articulated issues that do not cover the whole range of free trade abuses, particularly by China. His stated issues are:
• A disputed settlement process;
o He has criticized the body’s dispute settlement process and asserted the right to ignore rulings that it believes violate U.S. sovereignty;
• Institute penalties for dumping;
o China, has steel and aluminum industries that are state-sponsored. China sits on a massive supply of these goods, and its trading partners have accused it of undercutting prices;
• Improve the dispute mechanism system;
o The WTO has been criticized by member nations for being slow to resolve disputes, a problem the organization has acknowledged. A dispute between the EU and China resolved last year took seven years to litigate. Failure to come to timely decisions allows potentially illegal trade practices to continue for years, critics say. Trump could press the WTO to add resources to the dispute process, and to put time limits on decisions.

Additional China WTO issues:
• Intellectual property theft, with no legal means of addressing the issues;
• Non-tariff barriers and subsidies have proliferated;
• Loans are given by state-owned banks on easy terms with low interest rates
• Use is made of the 2008 Anti-Monopoly Law to force companies that have substantial market share possibilities to transfer of intellectual property to enter the China market.
All of the above abuses violate WTO agreements, but companies that press their case at the WTO are being threatened with denial of access to the China market if they file an action at the WTO.

China-U.S. Technology War
The technological war with China has begun. It remains to be seen whether U.S. companies can do business in China without giving away their technology. The U.S. is pushing back on the Chinese theft of the intellectual property of U.S. companies. By 2018, a growing number of American companies “have complained that China has pressured them into sharing their technology ways”.

China’s Internet Monopoly
U.S. and other foreign tech companies are severely restricted in accessing the China market. The restrictions vary by sector, but the most onerous restrictions are on providing Internet access to their databases and search services to their customers.

Only three Chinese companies, Alibaba Group Holding, Baidu and Tencent Holdings, are allowed to directly access the Internet in mainland China. All foreign companies must use these companies to access the Internet, providing Chinese companies with an Internet monopoly.

China’s Internet Domination-Electric Vehicles
Alibaba Group Holding is one of three companies, including Tencent Holdings, and Baidu that dominate e-commerce, social media, and mobile payments. With China moving toward what could be mostly an all-electric automobile market by 2030, providing a variety of subscription services to vehicles is viewed as an extremely large market opportunity in China, but also perhaps elsewhere. For example, Renault is forecasting that it could achieve a fivefold increase in revenues by 2023 as a result of its ability to sell automobiles on Alibaba’s platform.

OK-China Companies-U.S. Security Threats
The U.S. is finally standing up to an aggressive China by confronting large Chinese companies that are trying to enter the U.S. market, and could threaten U.S. security. Companies such as ZTE and Huawei are finally being restricted because of the business they do in the U.S. could provide a Chinese government security threat.

China-Semiconductor Industry Domination Objectives
**China announced plans to significantly improve the competitiveness of its state and Chinese semiconductor companies when it launched a $21.8 billion semiconductor development fund in 2014. A U.S. Trade Representative’s report on March 22, 2018 declared the 2014 fund as an effort by government agencies and state-owned companies to meet Chinese national strategic objectives.

China has also announced a new fund that could total about $47.4 billion. Important semiconductor industry sectors it will support are likely to include microprocessors and graphic processors. The objective is to reduce China’s dependence on foreign semiconductor products from companies such as Qualcomm, IBM and Nvidia.
**China Plans Fund to Boost Semiconductors, Wall Street Journal, By Yoko Kubota, May 5, 2015

Qualcomm Is Being Attacked by China
In 2013, Chinese government officials invaded the Beijing and Shanghai offices of Qualcomm. After a 15-month investigation, regulators saddled the company with a $975 million fine. In addition to the fine, Qualcomm:
• Was branded a monopoly;
• Was forced to reduce prices;
• Had to move more of its technical manufacturing to China;
• And, help boost the technological abilities of Chinese companies.

Qualcomm, a worldwide leader in semiconductor technology, was threatened by an unfriendly takeover by Broadcom, a Singapore-based company. The U.S. blocked the acquisition on national security grounds. There were several concerns. The acquisition of Qualcomm could have reduced U.S. superiority in semiconductors. It could also have reduced the U.S. lead in next generation 5G broadband networks. Qualcomm has a large business in China, and China has threatened to block Qualcomm has made an offer to acquire NXP Semiconductors, an important part of its growth strategy. The acquisition has been stalled by an antitrust review. In early May, 2018, “Chinese officials said that Qualcomm will have to make more concessions to compensate for the market power it would enjoy after completing the deal, without providing details.”

China has used the national security threat issue as a way to protect Chinese companies. China is still considered to be an emerging country under the World Trade Organization rules, showing how antiquated is the WTO.
*Qualcomm May Be Collateral Damage in a U.S.-China Trade War

U.S. Automobile Companies in China
U.S. Automobile companies are effectively banned from competing in China. U.S. Automobiles are taxed at a rate of 25%, that effectively makes U.S. produced automobiles uncompetitive in China. There are also Chinese policies that are anticompetitive, even for companies that want to establish manufacturing plants in China.

China Automobiles
Encouraged industries, make up about 75% of the Catalogue, but automobiles are an example of how China protects certain local companies. China views automobiles as a strategic industry, because it is important to China’s development of high tech manufacturing. In addition to the 25% tariff on imported automobiles, any company wishing to manufacture cars in China must work with a Chinese joint venture partner. This requirement can lead to those joint venture companies stealing the intellectual property of their partners. China has said it may ease auto industry regulations within 8 years. Tesla has fought the intellectual issue by setting up a manufacturing plant in Singapore and paying a 25% tariff to sell vehicles manufactured there in the China mainland. Sales of imported cars were 4%, of the 24.4 million vehicles produced in 2016, about the same as 15 years earlier.

China-Economy-Growth and U.S. Trade
China’s growth rate is targeted by the government at about 6.5% in 2018.
• Substantial reorganization of the economy is occurring;
• Risky lending practices are being addressed;
• There is trade tension with the U.S. based upon tariffs the U.S. has adopted on steel and aluminum;
• Ignored in these discussions are often the tariffs China places on imported goods, such as a 25% tariff on foreign manufactured automobiles;
• Also ignored are restrictions China places on goods it considers to be vital to its national defense.
o This is allowed by the WTO under obsolete designations given to China in the early 2000s.

U.S.-World Trade Organization (WTO) Issues
The WTO was established to facilitate worldwide trade and has 164 members. China became a member in 2001. At that time China was categorized as an emerging country. Today, they are clearly no longer in that category, but still have protections accorded to such countries. President Trump has taken the position that the WTO is lethargic in addressing current issues. Trump has articulated issues that do not cover the whole range of free trade abuses, particularly by China. His stated issues are:
• A disputed settlement process;
o He has criticized the body’s dispute settlement process and asserted the right to ignore rulings that it believes violate U.S. sovereignty;
• Institute penalties for dumping;
o China, has steel and aluminum industries that are state-sponsored. China sits on a massive supply of these goods, and its trading partners have accused it of undercutting prices;
• Improve the dispute mechanism system;
o The WTO has been criticized by member nations for being slow to resolve disputes, a problem the organization has acknowledged. A dispute between the EU and China resolved last year took seven years to litigate. Failure to come to timely decisions allows potentially illegal trade practices to continue for years, critics say. Trump could press the WTO to add resources to the dispute process, and to put time limits on decisions.

Additional China WTO issues:
• Intellectual property theft, with no legal means of addressing the issues;
• Non-tariff barriers and subsidies have proliferated;
• Loans are given by state-owned banks on easy terms with low interest rates
• Use is made of the 2008 Anti-Monopoly Law to force companies that have substantial market share possibilities to transfer of intellectual property to enter the China market.
All of the above abuses violate WTO agreements, but companies that press their case at the WTO are being threatened with denial of access to the China market if they file an action at the WTO.

China Trade-World Trade Organization (WTO)
China has used the national security threat issue as a way to protect Chinese companies. China was admitted to the WTO in 2002 and is still considered to be an emerging country under the World Trade Organization rules, showing how antiquated is the WTO. The WTO’s agreements are outdated, and lawsuits can take a very long time.
*Tackling China’s Protectionism, Wall Street Journal Editorial, March 20, 2018

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