Bay Area Council Blog: China Archive

trade war

Endgame: Tariffs, Technology and China

This opinion piece by Bay Area Council Economic Institute Senior Director Dr. Sean Randolph appeared in the Silicon Valley Business Journal in April 2018.

The United States and China are aggressively sparring over tariffs, trade and technology. The real issue isn’t about the lists of tariffs that each side has announced, but what endgame both sides expect. As an investor in China and a major destination for investment from China, for Silicon Valley the outcome matters.

Let’s be clear that the latest tariffs aren’t a Trump protectionist fluke. Action is needed. China is building an innovation system based not just on its considerable capabilities, but also on laws and policies designed to extract technology from foreign partners.

One of those strategies, Made in China 2025, identifies priority technology sectors where China plans to lead global markets, displacing foreign technologies as rapidly as possible. Where it can’t develop those technologies independently, the plan calls for China to acquire them. In the meantime, Western companies are required to store their China-generated data on government servers, take on Chinese joint venture partners as a condition of doing business, and transfer their technology and source code.

This is happening as China’s market is off limits to companies such as Facebook, Google and Twitter, and key sectors are reserved for Chinese companies. Internet technologies must be “secure and controllable” — by the government. All of this inherently advantages Chinese companies and disadvantages foreign ones.

There are two types of tariffs announced by the United States: first, industry-specific tariffs on steel and aluminum, imposed on national security grounds (a risky precedent); and second, tariffs to address the bilateral trade deficit and rebalance the technology playing field. There, the Trump administration announced an initial tranche of $3 billion, which was met by a $3 billion response from China. Then the U.S. announced a $50 billion list, met again by $50 billion from China, after which President Trump suggested another $100 billion. What happens next?

What should happen is that both sides go into a room and make a deal. The tariff announcements are designed to get China’s attention, show we’re serious, and get them to negotiate. Past administrations from both parties have repeatedly tried negotiation, but with little lasting effect. The Trump team has chosen to show its muscle up front.

This can work, and taking a tougher stance with China has bipartisan support. But there are risks. Tariffs are a crude tool, with little connection to technology policy. And undisciplined U.S. tactics could backfire if both sides actually implement the tariffs.

Last year, California exported $16 billion in goods to China, many of which show up on China’s list. California’s agricultural interests — high-value nuts, wine and grapes — are particularly vulnerable. The aircraft industry, cars and chemicals are also targets. Higher steel and aluminum prices will increase the cost of everything from building materials to Teslas to craft beer cans.
Trump has said “it’s easy to win a trade war.” That’s wrong — in a trade war, everybody loses. As the world’s two largest economies, China and the United States have to live together. President Xi’s statement this week that China will accelerate its market opening is a signal that China understands the game.

In the end, the U.S. should press for a market opening that’s not just near-term and tactical, but long-term and structural. The best strategy would be to orchestrate our trading partners in a united front against China’s trade infractions, initially in the World Trade Organization, and bilaterally target Chinese restrictions with reciprocal measures — if negotiations are unproductive.
But we have the process we have. It’s in the administration’s court now to manage the process, make a deal, and minimize the damage that California and other businesses will suffer from a real trade war.

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Opinion: What ZTE Deal Tells Us About Chinese Technological Prowess

(This OpEd by Bay Area Council Economic Institute Senior Director Sean Randolph ran in the San Francisco Chronicle on Sunday, June 17.)

By Sean Randolph

The interdependence of the United States and China is easily lost in the political debate and headlines. The future of trade between the world’s two largest economies depends on policies that recognize that interdependence and the national interests behind them. ZTE is a case in point, where the United States has penalized the company for its actions, and President Trump has correctly decided not to shut it down. ZTE also tells us something about the technological race that both countries are engaged in.

China is climbing the innovation ladder. Whether from the standpoint of government investment in science; internationally-cited scientific articles; R&D on artificial intelligence; advances in mobile commerce; the strong position of companies like Alibaba, Tencent and Huawei; or the explosive growth of domestic accelerators and venture capital, China’s capacity to innovate is advancing with its economy. At some point, the technology gap between the United States and China will significantly shrink.

But not yet.

It’s easy to think of China as a relentless juggernaut whose growth and technological competitiveness is preordained. Besides the technology generated from market competition  China has adopted a suite of Chinese industrial policies designed to create national champions, dominate or lead in key strategic sectors, and extract technology from foreign companies — a cause for deep concern in the U.S. and other economies, which is now being challenged bilaterally and in the World Trade Organization. But even if they went unchallenged, having these policies doesn’t mean that Chinese technology is on a par with that of the United States — or soon will be.

Take, for example, the explosive growth of venture investment in China. Last year it reached levels approaching that of the United States. But as impressive as this may be, it’s important to understand the large role that government money plays. Unlike the United States, where venture investment is overwhelmingly private, much of the venture capital deployed in China comes from government entities.

More than $230 billion reportedly has been deployed so far, including most recently  as much as $15 billion in the semiconductor sector. While this is significant, and leverages private investment, its source suggests that Chinese and U.S. venture numbers aren’t strictly comparable.

Or take Chinese cell phone maker ZTE, the fourth-largest provider of smart phones in the United States and producer of a range of consumer electronics and telecommunications infrastructure equipment. Two months ago, the United States barred American companies from selling components, including semiconductors, to ZTE, because of the company’s violation of Iran and North Korean sanctions (an issue unrelated to the current tariff dispute). Soon after that ZTE, one of China’s leading technology companies, announced that it would stop major business operations.

How could that happen?

Because ZTE depends heavily on U.S. companies such as Qualcomm for the semiconductors in its phones and on other U.S. suppliers for an array of critical components. Despite years of enormous government investment designed to vault China to the forefront of chip design, nearly 90 percent of the $190 billion in chips used in Chinese products are either imported or produced in China by foreign-owned companies, and the sophistication of its production continues to lag. The proposed U.S. cutoff may prod China to accelerate its efforts to upgrade the quality of domestically produced chips, but for now it’s still just a goal.

So what are we to make of this? One takeaway is that while innovation in China is accelerating, in key fields U.S. companies are continuing to innovate faster. Notwithstanding the government’s support and the sophisticated capabilities of companies Tencent, Alibaba and Huawei, the lead in innovation is still anybody’s game and the United States continues to hold strong cards.

The other takeaway from the ZTE case is that when it comes to trade and technology, the United States and China are deeply intertwined. ZTE phones sold in China and around the world, and counted in U.S. trade statistics as Chinese exports, in fact incorporate high levels of U.S.-made content. Much the same can be said for Huawei, whose products are largely made with externally sourced components.

President Trump is right to make a deal that helps keep ZTE in business. The penalties it imposes are draconian and appropriate. Our goal should not be to bring down a high-profile pillar of China’s economy. The world’s two largest economies, and their  companies are deeply connected in ways that are both challenging and beneficial. Finding a way of operating that recognizes the interests of both sides will be essential for the future.

Sean Randolph is senior director at the Bay Area Council Economic Institute and author of its recent report “Chinese Innovation: China’s Technology Future and What It Means for Silicon Valley.”

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CONDOLEEZZA RICE, DAVID BROOKS & #METOO LEADERS WOW PACIFIC SUMMIT

The timing was ideal. As President Trump met with North Korean leader Kim Jong Un in Singapore, guests at the Bay Area Council’s 2018 Pacific Summit on Tuesday were sitting down to hear from former Secretary of State Condoleezza Rice on what it all meant. In a lengthy conversation with Andrew Westergren, Senior Vice President and Global Head of Strategy and Corporate Development for Visa, in front of almost 200 top executives and other leaders, Rice candidly acknowledged the unconventional way in which the summit came together but also said it was worth a try given the failure of past efforts. Rice also gave her insights and analysis about the tumultuous G7 meeting in Canada, talked about U.S.-China relations as a trade war looms and provided insights into the motives and agenda of Russia President Vladimir Putin.

With national attention intensely focused on the issues of sexual harassment and discrimination, the timing was also perfect for a lively conservation with two leaders of the #MeToo movement. Janet Liang, President of Kaiser Permanente Northern California, moderated the discussion with Adama Iwu, Vice President of State Government and Community Relations for Visa, and Tina Tchen, former Chief of Staff to First Lady Michelle Obama and Partner at Buckley Sandler. Iwu was honored as a Time magazine Person of the Year for her work in founding We Said Enough, a group focused on exposing and changing a culture of sexual harassment and discrimination in the California legislature. Tchen is a leader of Time’s Up, which works to support women who have suffered sexual harassment or discrimination. The three gave their personal insights on the #MeToo movement and the cultural and institutional changes that must occur in order to end sexual harassment and discrimination.

The audience also was treated to sobering and humorous remarks from renowned New York Times columnist David Brooks. Brooks, in his comments and in a Q&A with McKinsey & Co. Senior Director and West Coast Regional Manager Kausik Rajgopal, talked about cultural and political divides in the U.S. and how a sense of community that has united people in the past has been replaced by tribalism, which by its nature divides people.

See photos of the Pacific Summit>>

The conversations continued later in the afternoon in smaller group discussions, with PwC Managing Partner Jeanette Calandra moderating a conversation with Tchen, UPS Northern California District President Rosemary Turner leading a discussion with Dr. Rice and TMG Partners leader Denise Pinkston guiding a talk with Brooks. Bay Area Council CEO Jim Wunderman opened the summit with insights about the Bay Area’s run of economic success and the housing and transportation challenges that threaten to pull the rug out from under it.

The Bay Area Council extends its thanks to Visionary sponsor Kaiser Permanente and the many other sponsors whose support is critical to funding our public policy and advocacy. See a full list of all Pacific Summit sponsors. Our thanks also to the Kohl Mansion for hosting us.

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STATE ECONOMIC STRATEGY BILL ADVANCES

California is a global innovation and economic powerhouse, but currently does not have a statewide, comprehensive plan to grow its economy. That would change under legislation (AB 2596) that the Bay Area Council is sponsoring with the Greater Sacramento Economic Council and Valley Vision. AB 2596, authored by Assemblymembers Ken Cooley, Kevin Kiley and Sharon Quirk-Silva, would authorize the creation a statewide economic development plan to grow jobs, better coordinate economic activities across counties and regions and boost the state’s competitiveness. Having a clear, unified strategy can also help protect the state against future economic downturns and ensure that economic opportunities are being spread more evenly across the entire state. AB 2596 on Tuesday won unanimous approval by the Assembly Jobs, Economic Development and the Economy Committee and now heads to Assembly Appropriations. Just ahead of the vote, an OpEd by Council CEO Jim Wunderman and Greater Sacramento Economic Council CEO Barry Broome that ran in the Sacramento Bee argued for passage of the bill. To add your company to the growing list of our AB 2596 supporters, please contact Director for Government Relations Cornelious Burke.

Read the OpEd in support of AB 2596>>

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Council’s Board Welcomes Senator Feinstein and Mayor Schaaf

U.S. Senator Dianne Feinstein and Oakland Mayor Libby Schaaf met with the Bay Area Council’s Board of Directors Thursday to discuss a range of pressing issues, from healthcare reform and homelessness to infrastructure investment and public safety. Board Chairman and Kaiser Permanente Chairman and CEO Bernard J. Tyson welcomed both leaders to a packed room at Kaiser’s Oakland headquarters. Feinstein updated the Board on her efforts to ban assault weapons, an issue she has championed for decades. She also discussed the importance of making Deferred Action for Childhood Arrivals (DACA) permanent as well as her interest in leveraging public private partnerships to repair and rebuild the nation’s aging and crumbling infrastructure.

Investing to expand and improve the region’s congested transportation system was also a top issue as Feinstein emphasized the need for a new crossing south of the Bay Bridge. Tyson thanked Feinstein for her great leadership and urged Council members to join a business delegation we’re leading to D.C. in May to promote California’s importance to the nation as some critics frame the Golden State as out of control.

Feinstein also gave warm praise for Mayor Schaaf, who described the progress Oakland is making in turning around years of crime and addressing a complicated homeless problem. Schaaf also highlighted a measure she is championing for the November ballot—the Oakland Children’s Initiative—that would invest in expanding access to early education and other early childhood programs. She touted the huge returns that early childhood investments have in increasing employment opportunities and avoiding expensive social and public safety costs. This is an issue that has long been a priority for the Council, whose executive leadership has expressed early support for Schaaf’s November measure as she works to get it placed on the ballot. The Council extends its gratitude to Kaiser Permanente for hosting our meeting.

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ON ONE HAND: GROWING CHINESE INVESTMENT IN THE BAY AREA MEGAREGION

As business and economic connections deepen across the Bay Area megaregion so do opportunities to attract greater foreign direct investment in everything from infrastructure to agriculture. The Bay Area Council’s China Initiative team highlighted those opportunities during a recent meeting with business leaders from the Greater Sacramento Economic Council (GSAC). The Council described its more than 10 years of experience building robust ties between China and the Bay Area and outlined how we can leverage the inbound services we offer to bring new investment in such booming sectors as agriculture, biotechnology, and manufacturing.

GSAC’s board of Sacramento CEOs and elected officials agreed that cooperating with the Council to attract and direct Chinese investments aligned with the broader joint megaregional strategy, which argues for improving economic development structures that cross regional lines. To this end, the Council is excited to work more closely with GSAC President and CEO Barry Broome to maximize opportunities for our intertwined economies. For more information about the Council’s work in China and inbound investment services, please contact Global Initiatives Manager Laurent Arribe.

Photo by New York Times

WITH RECORD BUDGET PROPOSAL, GOV. BROWN SEES RAIN IN THE FUTURE

There hasn’t been a lot of rain so far this winter, but Gov. Jerry Brown had the wet stuff on his mind this week (Jan. 11) when he released a $190 billion budget proposal that ups the state’s “Rainy Day Fund” by $5 billion to $13.5 billion. The reserve is designed to protect California against future economic downturns, which Brown believes is coming sooner rather than later. Still, the budget represents a record for California and includes a $7 billion increase over the previous spending plan. The Bay Area Council applauded many of the spending priorities, which include $4.6 billion for commute improvement projects from last year’s SB1 (Beall) legislation that the Council supported.

The plan invests $245 million to expand and protect affordable housing under SB2 (Atkins), another bill the Council supported last year. Brown proposed another $277 million for housing in anticipation of the passage of a statewide housing bond measure expected to appear on the November 2018 ballot. The spending plan also continues the Governor’s efforts to pay down the overall state debt and makes a small dent in the state’s massive pension liability shortfall. The Council is continuing to analyze the plan and will be weighing in directly as it now moves to the legislature, which has a June deadline to approve it.

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2018 POLICY AGENDA TARGETS HOUSING, TRANSPORTATION, WORKFORCE

Behind the Bay Area Council’s continuing advocacy, the California legislature this year took its first (albeit modest) actions to address the state’s historic housing crisis. Much, much more needs to be done, and the Council’s Executive Committee and Board of Directors, under the leadership of Chair and Kaiser Permanente CEO Bernard J. Tyson, this week approved a 2018 policy agenda that calls for escalating our work to achieve deeper, stronger and more effective reforms for spurring the tsunami of new housing the state so badly needs. Already, the Council is identifying new legislation for 2018 that can speed the approval and bring down the cost of new housing.

The 2018 agenda also prioritizes ridding the scourge of traffic fom the Bay Area’s roads and highways and getting more commuters out of their vehicles and into ferries, carpools, shuttles and other forms of transit. The Council is gearing up now for a campaign to win passage of Regional Measure 3, a $4.4 billion transportation investment plan that is expected to hit the June 2018 ballot. Rounding out the Council’s top policy priorities for 2018 is building a stronger workforce pipeline to meet the future needs of the region’s employers. The Council’s Workforce of the Future Committee is making immense strides to better align educators and employers to close the region’s yawning middle skills and talent gap, as well as creating new career opportunities for underserved youth.

Along with the top three policy priority areas, the 2018 agenda includes gender equity and workforce diversity, healthcare, advanced communication infrastructure, China and global innovation, carbon reduction and renewables, and water and climate resiliency.

The policy agenda was approved Thursday (Dec. 7) during a meeting hosted by new member Santa Clara University. The Board also welcomed state Sen. Jim Beall Jr. and applauded him for his incredible leadership as the author this year of SB 1, which invests $52 billion in statewide transportation improvements, and SB 595, which authorized the vote on Regional Measure 3. Beall talked about both measures and outlined his plans for new legislation for delivering transportation projects faster and at lower cost. The Council will be working closely with Sen. Beall on that project delivery legislation.

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COUNCIL HEADLINES CHINA’S MAJOR INNOVATION WEEK PRESIDED OVER BY PREMIER LI KEQIANG

For over 10 years, the Bay Area Council has helped expand bilateral trade and investment between the Bay Area and the fast-emerging technology and innovation hub of Yangpu District in Shanghai, which is now the host city for China’s annual Mass Entrepreneurship and Innovation Week presided over by Chinese Premier Li Keqiang. And, last week, the Council led some of the region’s top clean energy innovators to participate in the major summit, including California Clean Energy Fund and startup incubator 500 Startups, where delegation members spoke at the week’s headline conference. In his keynote address at the Sino-US Green Innovation Forum, Council CEO Jim Wunderman highlighted the role the Bay Area plays in propelling the Yangtze Delta Region to a knowledge-based, hi-tech economy. In partnership with the Yangpu District’s government, the Council has helped over 50 Californian companies grow their presence in the Asian market.

Also this month a delegation of Bay Area life science companies and researchers traveled to China to explore business development and expansion opportunities. Organizations such as BIOCOM and Twist Bioscience expressed the unique benefits and opportunities that come with working in China – a process simplified by the Council’s China Initiative platform. Ongoing projects such as the Council’s Global Innovation Center in Nanjing and partnership work in Hangzhou will continue to expand economic opportunities between California and the Yangtze Delta Region as it continues to transform its industrial economy into a globally competitive, innovation hub. To engage in our China initiative, please contact Chief of Global Business Development Del Christensen.

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COUNCIL WELCOMES BEIJING MAYOR, SIGNS MOU EXPANDING ECONOMIC COOPERATION

The Bay Area Council this week was honored to welcome Beijing Mayor Chen Jining to the Bay Area as he attended a ceremony for the signing of a memorandum of understanding (MOU) that takes a step forward for a possible new Council office in China’s capital city. The visit by Mayor Chen, former President of prestigious Tsinghua University and Chinese Minister of Environmental Protection, and a delegation of top level Chinese economic and innovation officials highlighted the Council’s deep and growing relationships in China as we work to expand bilateral trade and investment. The MOU between the Council, world-famous Zhongguancun Science Park, which serves as Chinese headquarters for such U.S. companies as Google, Oracle and Intel, and Council of Industry and Technology Alliances in Z-Park marked a significant step forward in our work to expand economic connections with Beijing. The MOU calls for exploring the creation of a new think tank, developing a research and development platform and establishing branch offices both here and in Beijing. Council CEO Jim Wunderman joined Wang Chengwen, Vice Chairman of the Council of Industry and Technology Alliances in Z-Park, and Zhai Lixin, Director General of the Administrative Committee of Zhongguancun Science Park, in signing the MOU. To engage in our China initiative, please contact Chief of Global Business Development Del Christensen.