Restrictions on Investment and Technology Are More Disruptive Than Tariffs, Experts Say

May 28, 2019 Updated: May 28, 2019

WASHINGTON—The U.S.–China trade dispute has escalated recently with both sides slapping new tariffs on each other. While tariffs have a meaningful effect on the world’s two largest economies, restrictions on investment and the flow of technology will be much more disruptive, experts claim.

Many Chinese businesses and the regime’s leadership grasp that this isn’t just a tariff war, according to Adam Posen, president of Peterson Institute for International Economics (PIIE), a Washington-based think tank.

“Tariffs are tariffs, but investment barriers and the flow of intellectual property are actually much more important,” he told reporters, following PIIE economists’ recent meetings with Chinese officials in Beijing.

The current dispute between Beijing and Washington has turned into a “tech war,” he said.

The Trump administration recently banned Huawei from importing U.S. technology, which was considered a major escalation in the trade war between the United States and China. The decision forced several U.S. firms, including Google, Microsoft, Qualcomm, and Intel, to suspend their business with the company. However, the U.S. government later eased the ban by issuing a 90-day temporary license.

“The tariff threats, which arguably affect a much larger amount of trade, did not really change the messaging very much in Beijing,” said Martin Chorzempa, a research fellow at the PIIE.

“But once this [Huawei] case was announced, we went from talking about trade frictions to talking about a trade war. And now we have these highly nationalist films about fighting the United States in the Korean War playing on the state media,” he explained.

According to Chorzempa, this issue is “the No. 1 thing” in China and is being used by the Chinese regime to drive anti-U.S. sentiment to gain more political power.

The Trump administration’s increased crackdown on Chinese investment in the United States also amplifies the effect of the trade war, according to the PIIE. The new U.S. legislation, which was signed into law in 2018, granted more power to regulators to monitor Chinese investments in the United States.

Regulators such as the Committee on Foreign Investment in the United States and the Federal Communications Commission have increasingly blocked deals for national security reasons. As a result, the Chinese foreign direct investment in the United States fell 84 percent in 2018 compared to the previous year.

“Having an ongoing environment of tariffs and the uncertainty and, more so, the associated hostility and concerns about cross border tech flows is something that diminishes useful investment, diminishes productivity growth in a meaningful way,” Posen argued.

He said the direct effects of tariffs were meaningful but not huge. However, the medium-term effects of the trade war on investment and, therefore, productivity is substantial for both countries.

“Clearly, we are much further away from a deal than we were at the end of April and partly because of the increased friction on the investment front and the high-tech front,” said Jeffrey Schott, a senior fellow at the PIIE, focusing on international trade policy and economic sanctions.

“And that may make it harder to close a deal, but I don’t think the door’s shut,” he added.

According to Schott, Chinese are buckling down for a long trade war and they aren’t ready for a deal in June. And China’s recent retaliation was strategic, he said, as they avoided raising tariffs on U.S. goods that are significant for Chinese consumers and companies.

China announced on May 13 that it would increase levies ranging from 5 to 25 percent on 5,140 U.S. products, worth about $60 billion. These new tariffs, however, don’t include essential products for Chinese companies, as well as foods that many people in China consume, such as fresh pork, soybeans, wheat, and sorghum.

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