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Trump Tariffs Primarily Hit Global Supply Chains and Harm US Technology Firms

The Trump administration’s Section 301 tariffs are an ineffective response to US concerns about China’s high-technology.

In this policy paper by the Peterson Institute, Mary Lovely and Yang Liang argue that the Section 301 tariffs introduced on Chinese goods to stop forced technology transfer are ineffective; basically, using 20th century tools to fight 21st century problems. Ultimately, these actions damage the global supply chain harming US technology companies much more than the Chinese companies they are trying to punish.

Of the many causes of conflict between the United States and China, disagreements over the treatment of American intellectual property may be the most difficult to resolve. The administration charges that by various means, including forced technology transfers between joint venture partners, reverse engineering, patent violation, and industrial espionage, China has been and continues to subvert global trading rules and norms to unfairly acquire American technology. Such misappropriation, it further alleged, reduces the return to American innovation, diverts American jobs to China, and contributes to the bilateral trade imbalance.

In response, this April, the USTR proposed a list of Chinese exports that could be subject to additional US tariffs of 25%. The list targets products in sectors that USTR determined “benefit from China’s industrial plans,” such as Made in China 2025, including aerospace, information and communication technology, robotics, and machinery.

However, unlike textbook examples of trade, in which goods are completely made within the borders of one country and shipped to another, much of what the United States imports from China contains value created in other locations, including American intellectual property. Moreover, much of the actual goods exchanged are capital goods or industrial parts and supplies and are themselves destined for further use in production.

Also over the past two decades, US firms have been able to "unbundle" production; reducing costs by directing and managing foreign suppliers, whether operating at arm’s length or as affiliates abroad, and allowed America firms to source across countries in line with comparative costs. Some of these flows take the form of subcontracting and licensing agreements, in which innovating firms transfer blueprints and technologies to lower-cost locations without investing directly, much of which entails sharing intellectual property. However, Mr. Trump's tariffs largely tax these types of firms i.e. foreign enterprises operating in China or domiciled in other advanced economies (all US allies). The Trump Administration may be sanguine about the pain inflicted by these firms, but ultimately, it will be US companies that get hurt.

For full paper, please see below.

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