Eliminating the forced transfer of technology and production to China is critical

Late last month, the Office of the United States Trade Representative (USTR) issued its “Findings on the Investigation Into China’s Acts, Policies, and Practices Related to Technology Transfers, Intellectual Property, and Innovation Under Section 301 of the Trade Act of 1974”. The report re-confirmed previous findings concerning China’s reliance on forced transfer of technology and production from U.S. aerospace companies in return for market access. Just this week, USTR released its list of proposed tariffs on Chinese products.

While the findings of the report and the proposed tariff list represent steps forward in addressing this critical matter, findings and proposed lists alone won’t stop China from engaging in this unfair trade practice. The Trump administration should move quickly to implement a comprehensive strategy which includes:

  1. Placing tariffs on Chinese aerospace parts, components, and subassemblies that cost U.S. jobs;
  2. Filing a complaint (preferably joined by the European Union) at the World Trade Organization (WTO) against China’s unfair trade practices regarding forced transfers and subsidies to its aerospace industry; and,
  3. Making the elimination of forced transfers of technology and production a priority in bilateral and multilateral dialogues, including discussions over the U.S.-EU Transatlantic Trade and Investment Partnership (T-TIP).

Transfers of production and technology from U.S. aerospace and related companies are a serious matter. Among other things, they cost U.S. aerospace jobs and lead to a further decline in our aerospace industrial base in at least four different but related ways: First, jobs that may be associated with the transfer of technology and production are lost; second, the skills that accompany the transfers are lost leading to a further decline in our industrial base; third, future jobs are lost as China (and other countries) utilizes the transfer from the United States to create and strengthen their own aerospace companies that compete directly with U.S. companies; and fourth, the technology and production that would have led to more U.S. jobs through the development of innovative products is lost.

While China continues to utilize every tool available to establish a strong aerospace industry, up until now, the United States has done little to stop China from forcing the transfer of technology and manufacturing to develop its own industry. Far from implementing any strategic policy to stem this transfer, the U.S. government has largely left it up to U.S. aerospace companies to either comply with China’s forced transfer demands, or be shut out of China’s market. While the precise details of these transactions are not public, numerous reports shed light on how China plays the world’s two large commercial aircraft producers, Boeing and Airbus, against one another.

Boeing reports that its “activity in China contributes $800 million to $1 billion annually in direct support of China’s economy, including procurement from our extensive supply base, joint venture revenues, operations, training, and research and development investment.”

The company also reports that “more than 9,000 Boeing airplanes fly throughout the world with parts and assemblies built in China. China has a role in every one of Boeing’s commercial airplane models: the 737, 747, 767, 777, and the newest and most innovative airplane, the 787 Dreamliner.”

In 2015, Boeing announced that it had sold 300 planes to China. At the same time, it also announced that it would be “teaming” with the Commercial Aircraft Corp of China (COMAC) to build an aircraft completion center for the 737. As reported by the Wall Street Journal, “The new plant would be Boeing’s first big manufacturing facility overseas and would mark a milestone for its presence in China…” The head of the Machinists Union District 751 in Seattle pledged “to fight for jobs threatened by [the] proposed factory in China…any job moved out of Washington, where most Boeing planes are built, would be a loss for American workers.” He stated, “It’s a tough pill to swallow to see our jobs being used as bargaining chips to win orders…”

Not to be outdone by Boeing, Airbus, the only other large commercial aircraft manufacturer in the world, reported , “Components produced by Chinese companies are currently found on all production Airbus commercial jetliner types. The total value of the Airbus and Chinese cooperation reached around $500 million in 2015.”

And Airbus is “offering an industrial partnership with China on the A380 if Chinese airlines place orders for the world’s largest passenger jet…”

Given all of the technology that has been transferred to China from Western aerospace companies, it is not surprising that China is now developing its own large commercial aircraft to compete directly with Boeing and Airbus.

The People’s Daily reported that China would be “capable of producing 150 domestically made jumbo planes each year, with overall output reaching 3,000 planes.” Although Western companies are seeking to become suppliers to the program, even if they are successful, questions remain regarding how much of those contracts will be supported by production outside of China. As reported in the China Daily, “With more than 100,000 components required for the plane, more than 240 local Chinese companies have served as suppliers and manufacturers for the C919. More than 460,000 people have been involved in its research and development…”

Efforts to stop China’s demand that U.S. aerospace companies transfer technology and production are long overdue. The Trump administration should move quickly to place tariffs on Chinese aerospace parts, components and subassemblies that cost U.S. jobs. While, the list of U.S. tariffs recently proposed does contain airplane parts, it is not yet known which precise parts will be subjected to tariffs. In making its final determination, USTR should give great weight to placing tariffs on parts, components and subassemblies that are already produced in the United States. It should also give weight to placing tariffs on parts, components, and subassemblies that were produced in the United States prior to being transferred to China.

USTR should also move ahead and file a WTO complaint against China’s forced transfer of technology and production based on its unfair trade practice. It should also make every effort to convince the European Union, which faces the same demands, to join in the complaint. The Trump administration should also file a WTO complaint against China for illegal subsides to its aerospace industry, especially given the billions of dollars it has directed to the development of its own large commercial aircraft, the C-919.

Efforts to prohibit forced transfers should also be made a priority in all trade agreements and dialogues with other countries, including the proposed T-TIP. If the United States and European Union were to agree to prohibit these transactions with respect to China (and each other), then U.S. and EU aerospace companies will be able to compete on the quality and price of their goods, not on who can give away more technology and production to China.

Some skeptics dismiss alarms over China’s reliance on forced transfer of technology and production to grow its own aerospace capacity. For them, China does not have the skilled workforce, technology, and ability to produce products of a quality to compete with the United States, or the European Union for that matter. Skeptics made the same argument years ago with respect to Japan, only to see Japan become a significant aerospace supplier. Japan now produces leading edge technology like the wings for the Boeing 787—production that could have been undertaken in the United States. And 50 years ago, the notion that Europe would be home to one of the top two commercial aerospace companies in the world would have been hard to believe. Nevertheless, the skeptics remain, even though China has already met significant tests with the development of its own aerospace industry.

The Trump administration’s report on 301 and its initial announcement concerning proposed tariffs on certain Chinese aerospace products is a start. But, in order for these actions to be effective, they must also be combined with a comprehensive strategy that includes multilateral efforts to stop China from pitting one country’s aerospace industry against another’s. If this multilateral action is not achieved, China will continue to keep forcing western aerospace companies to transfer technology and production to them.