Intellectual property theft, not metal, is the real trade war in US sights and it's a much bigger worry

Updated

In the world of global trade the $US2 billion worth of steel the US imports from China is small beer. The $US130 billion worth of electrical goods shipped in from China is not.

Key points: White House is expected to launch action against China over allegations of intellectual property theft worth trillions

The immediate target is likely to be $130bn worth of Chinese electrical goods exported to the US each year

Retaliation from China would likely target agricultural exports, which could hit Australian farmers.

Nor is the estimated $US600 billion the US is said to be missing out on through its bright ideas being appropriated illegally offshore.

Having issued battle orders for a steel and aluminium trade fight in front of some hard-hatted metal workers assembled at the White House, President Donald Trump is now likely to move onto the real battle front — allegations of Chinese intellectual property (IP) theft.

The metal tariff started with a few tweets fired off across (largely) Chinese bows.

Now the tweets are fulminating at another trade issue — Chinese knock-offs of everything from high-tech electrical components to low-tech Converse sneakers.

America's big weapon

The Trump White House may soon have its "casus belli" to justify a much bigger assault on Chinese trade, and with it a much more likely platform to spark a much bigger conflagration in global trade as the largest and second largest economies on the planet face off.

Back in August last year Mr Trump ordered US Trade Representative Robert Lighthizer to investigate China's alleged theft of US intellectual property.

The results of that investigation are expected shortly, along with recommendations for action.

Mr Trump and his recently departed, anti-protectionist economics advisor Gary Cohn made no secret what the result would be, telling anyone who would listen that China forces US businesses to transfer intellectual property as a cost — a tariff if you like — of doing business there.

The other thing that is not a secret is the weapon it has in its trade arsenal to deal with such matters.

The so-called Section 301 law is the mother of all trade weapons built in the Cold War and vastly more protectionist era of the 1970s.

It gives the president the authority to unleash unilateral measures on a trading partner, if it is deemed to be harming US business interests.

It is a cluster bomb of measures including outright trade sanctions, import quotas, tariffs, blocked take-over provisions and anything else that could be dreamed up to damage the target's economy.

It also allows the US to sidestep many of the niceties of World Trade Organisation rulings on such things.

China's trade surplus grows, so does the US deficit

Certainly trade figures released this week by both the US and China will do little to change Mr Trump's view on China and trade.

The US trade deficit widened by $56.6 billion in January.

China went the other way. Its long running surplus grew by 42 per cent to a three-year high of $US34 billion in February — Chinese statisticians are a bit quicker than everyone else to draw their conclusions.

Of that surplus around two-thirds, or $US21 billion, was provided by the US.

Overall, China's trade surplus with the US continues to grow. Against Europe, China still runs a significant surplus, but it is relatively steady, while it remains pretty well "in balance" with the rest of the world.

In the 12 months since Mr Trump moved into the White House, the US trade deficit with the rest of the world has blown out by an eye-watering $US556 billion.

IP theft worth trillions

While tallying up the impact of IP theft is difficult, the New York Times recently had a stab at it, suggesting $US600 billion a year was about the cost to the US, with China responsible for the vast majority of it.

At that rate over the years — in fact in just two years — the tally becomes trillions. The US will allege it has been going on for decades.

While China has deemed Mr Lighthizer's investigation "reckless", it nonetheless uncovered about 1,600 instances of IP theft involved in goods exported to the US during a joint China/US customs actions last year.

The joint task force fingered online giant Alibaba flogging about $200 million of phoney Converse sneakers in the US, while another 36 suspects were arrested for peddling dodgy Rolex watches, Gucci clothes and Louis Vuitton bags.

At the time, which was just before Mr Trump's visit to China last year, China's customs office issued a statement saying it would "actively promote increased cooperation with customs administrations of all countries and regions to jointly fight and comprehensively manage" IP rights.

That concession is unlikely to buy much time if, as expected, Mr Lighthizer's report is damning.

Retaliation would be rapid

Recent reports out of the US suggest Section 301 will be initially dropped on the $US130 billion worth of electrical goods China ships to the US each year.

While taxing what are effectively steel off-cuts from the smoky, old Chinese industrial complex could probably be ignored in Beijing, not so an attack on China's vision for a high-tech, high-margin, low-polluting future.

It would inevitably provoke retaliation, with US farmers likely to be the immediate collateral damage.

Soon you would have not only excess steel and aluminium washing around the world's trade routes looking a shore to wash up on, you can add all manner of grains and agricultural produce as well.

Pretty soon prices tumble and everyone piles in throwing up more trade barriers.

Once those sorts of huge distortions are put into the $850 billion worth of goods traded between China and the US each year, who knows what the outcome would be on everyone else.

One of the few certainties in such a situation is Australia, with its small domestic market, its heavy reliance on being a price-taker in commodity exports and no leverage in such battles, would get absolutely hammered.

Topics: trade, united-states

First posted