Bills
| 3.23.22

Should the U.S. Punish Illegal and Malicious Economic Actions by China? (H.R. 704)

Do you support or oppose this bill?

What is H.R. 704?

(Updated June 6, 2021)

This bill — the Fair Trade with China Enforcement Act — would take a number of actions to safeguard U.S. assets from Chinese influence and possession and blunt the impact of Chinese economic aggression in the form of intellectual property theft and malign investment. Among its provisions, the bill would impose taxes on certain economic activity involving China and restrict the use of certain Chinese corporations, namely Huawei and ZTE, as federal telecommunications contractors. A breakdown of its various provisions can be found below.

Specifically, this bill would:

  • Prepare duties on, and impose Chinese investor shareholding caps on US companies producing goods targeted by the Made in China 2025 plan;
  • Prohibit the export of national security sensitive technology and intellectual property, including quantum computing, high-capacity computing, artificial intelligence, biotechnology, robotics, semiconductor, and lithium battery manufacturing, to China;
  • Impose a shareholder cap on Chinese investors in U.S. corporations;
  • Impose taxes on multinational corporations’ income earned in China at a rate similar to the estimated lost value of stolen IP and technology;
  • Prohibit the U.S. federal government, its subsidiaries, and its contractors from purchasing telecommunications equipment or services from Huawei and ZTE, two Chinese state-owned enterprises that have been accused of seeking to infiltrate and compromise U.S. networks.

This bill would also make it U.S. policy to reduce the import of finished goods from China that are covered by the Made in China 2025 plan and encourage its allies to also reduce their imports of the same goods. It’d also make Made in China 2025 products included in the definition of a countervailable subsidy.

This bill would also update the U.S.-China income tax treaty signed in the 1980s to tax China on its investments in the U.S., including its holdings of the U.S. national debt.

Finally, this bill would clarify the Foreign Sovereign Immunity Act for U.S. courts and expand the scope of foreign government-backed businesses that can be held liable.

Argument in favor

Anti-competitive and illegal behavior is part of the Chinese government’s strategy for helping state-owned enterprises and domestic companies gain dominance in key industries. This hurts American businesses and workers, so the U.S. government should retaliate by taking actions like imposing taxes on Chinese businesses equal to China’s intellectual property theft.

Argument opposed

The Chinese government’s playbook for encouraging domestic companies is the same one that was used by the U.S. at the beginning of the industrial revolution and South Korea during the “Asian Tigers” period of the late 20th century. It’s unfair to punish China for using practices that have been uncontroversial for other countries.

Impact

U.S. federal government technology purchases; U.S. companies with national security sensitive technology and intellectual property; China; Chinese investors in the U.S.; multinational corporations in China; Huawei; ZTE; the U.S.-China income tax treaty; and the Foreign Sovereign Immunity Act.

Cost of H.R. 704

A CBO cost estimate is unavailable.

Additional Info

In-Depth: Rep. Michael Conaway (R-TX) reintroduced this bill from the 115th Congress to safeguard American assets from Chinese influence and possession and protect American businesses from China’s tools of economic aggression:

“Beijing’s Made in China 2025 initiative has made it clear that the Chinese government’s objective is to drive American companies out of business and move their technology and jobs to China at any cost, including the use of illegal trade practices. This legislation takes the important step of barring the sale of national security sensitive U.S. intellectual property and technology to China, as well as ensuring that China is paying its fair share in taxes. This bill also keeps the focus on the national security threats posed by Huawei and ZTE, as China frequently uses commercial technology as a vessel to spy on the U.S. government. Allowing them access to our networks would be an enormous security risk and a massive mistake.”

When he introduced this bill in the 115th Congress, Rep. Conaway said China was taking advantage of the U.S. in trade matters:

“China has taken advantage of our trading relationship, becoming increasingly aggressive with illegal trade practices in an attempt to specifically undermine and drive American companies out of business. This presents significant national security and economic risks to the United States. President Trump has made strides towards improving our trading position with China, and the Fair Trade with China Enforcement Act will build on those efforts to ensure that America’s own best interests are protected from Chinese aggression. This legislation prohibits the sale of national security sensitive U.S. intellectual property and technology to China, and protects the U.S. from China’s attempts to weaken the U.S. economy. Chinese commercial technology is a proven vehicle for the Chinese government to spy on the U.S. government, and this bill includes my legislation to prohibit the federal government from purchasing or leasing Huawei or ZTE products or services. In today’s changing global environment, American national security and economic interests must come first.”

Rep. Tim Ryan (D-OH), an original cosponsor of this bill in both the 115th and 116th Congresses, adds that the imbalanced U.S.-China trade relationship imperils both U.S. national security and the U.S. economy:

“Our imbalanced trade relationship with China poses profound national and economic security risks to the United States. The bipartisan Fair Trade with China Enforcement Act would help correct our trade imbalances with China and give American workers a level playing field to compete and succeed. This legislation would further strengthen the American position by safeguarding our assets from Chinese influence and possession, and blunting China’s tools of economic aggression. While the United States is operating in a 24-hour news cycle, China has a long term plan reaching 50 to 100 years. We need to get ahead of the game and strengthen our economy, and this legislation will put us on that path forward.”

In June 2018, Sen. Marco Rubio (R-FL), the Senate sponsor of this bill in both the 115th and 116th Congresses, said:

“Re-balancing America’s relationship with China is one of the great challenges of the 21st century. Without strong, consistent, and strategic action to assert our national interests, China threatens to supplant the United States to undermine our security and prosperity. The Fair Trade with China Enforcement Act targets China’s tools of economic aggression to make clear the United States will stand up for its workers on the international stage.”

In remarks last spring, Sen. Rubio added, “How America responds to the growing threats posed by China is the single most important geopolitical issue of our time, and will define the 21st century.”

President Trump has expressed his belief that any final U.S.-China trade agreement will be negotiated directly between himself and Chinese President Xi Jinping.

Chinese leaders argue that their commitment to a state-led industrial policy is needed to increase incomes for Chinese citizens and enable them to compete in the fast-moving global marketplace. To make this point, Chinese leadership points to China’s average per capita income: at around $8,000 a year, it’s far below that of the developed world (the U.S. has a per capita annual income of $56,000).

Chinese leaders also contend that their current policies mirror what other successful developed nations have done in the past. In the early days of its industrialization, the U.S. used tariffs and other government support to nurture native industries. Similarly, the rapid development of the “Asian tigers,” such as South Korea, in the twentieth century, relied on extensive state support. Additionally, analysts point out, China is drawing inspiration from contemporary industrial policies in Japan and Germany, which have sought to integrate new information technologies into their manufacturing sectors.

However, many European and U.S. policymakers say China is different because Chinese subsidies are more distorting, the country’s economy is less open to competition, and market access is more restricted.

This bill has two bipartisan House cosponsors, including one Democrat and one Republican. Its Senate companion, sponsored by Sen. Marco Rubio (R-FL), has one cosponsor, Sen. Tammy Baldwin (D-WI).

Last Congress, the House version of this bill had three bipartisan House cosponsors, including two Democrats and one Republican, and didn’t receive a committee vote. Two Senate companion bills (S.3361 and S.2826, both called the Fair Trade with China Enforcement Act), both introduced by Sen. Rubio, also both failed to receive committee votes.


Of Note: Released in 2015, the Chinese government’s “Made in China 2025” plan is a ten-year state-led industry policy seeking to make China dominant in global high-tech manufacturing. It uses government subsidies, mobilizes state-owned enterprises, and pursues intellectual property acquisition to catch up with, and then surpass, Western technological prowess in advanced industries. The Council on Foreign Relations (CFR) notes:

“For the United States and other major industrialized democracies, however, [Made in China 2025’s] tactics not only undermine Beijing’s stated adherence to international trade rules but also pose a security risk. Washington argues that the policy relies on discriminatory treatment of foreign investment, forced technology transfers, intellectual property theft, and cyber espionage, leading President Donald J. Trump to levy tariffs on Chinese goods and block several Chinese-backed acquisitions of technology firms.”

CFR reports that policymakers and security officials in the U.S. and other countries are especially concerned by Made in China 2025’s potential national security implications:

“Policymakers and security officials in the United States and other developed countries increasingly see China’s efforts to become a dominant player in advanced technology as a national security problem. The Pentagon warned in 2017 that state-led Chinese investment in U.S. firms working on facial-recognition software, 3-D printing, virtual reality systems, and autonomous vehicles is a threat because such products have “blurred the lines” between civilian and military technologies. In April 2018, U.S. intelligence agencies said that Chinese recruitment of foreign scientists, its theft of U.S. intellectual property, and its targeted acquisitions of U.S. firms constituted an ‘unprecedented threat’ to the U.S. industrial base. More broadly, policymakers worry that China’s state-led model and its ambition to control entire supply chains—for instance, the cobalt industry, which powers most modern electronics—means that entire industries could come under control of a rival geopolitical power. A June 2018 White House report warned that China’s economic moves threaten ‘not only the U.S. economy but also the global innovation system as a whole.’”

From the corporate perspective, companies based outside China complain of asymmetry in investments: China is free to invest in foreign countries, but foreign companies selling to and operating in China are highly constrained by investment requirements and other regulations.


Media:

Summary by Lorelei Yang

(Photo Credit: iStockphoto.com / IvancoVlad)