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Trump’s China Deal Creates Collateral Damage for Tech Firms

WASHINGTON — Among the corporate titans recognized last week by President Trump during a White House signing ceremony for his China trade deal was Sanjay Mehrotra, the chief executive of Micron Technology, whose Idaho semiconductor company is at the heart of Mr. Trump’s trade war.

Micron, which makes memory chips for computers and smartphones, is precisely the kind of advanced technology company that the Trump administration views as crucial to maintaining a competitive edge over China. After Micron rebuffed a 2015 takeover attempt by a Chinese state-owned company, it watched with disbelief as its innovations were stolen and copied by a Chinese competitor and its business was blocked from China.

China’s treatment of American companies like Micron fed Mr. Trump’s decision to unleash a punishing trade war with the world’s second-largest economy, a fight he said would halt Beijing’s use of unfair practices to undermine the United States. But that two-year conflagration may wind up being more damaging to American technology companies.

The initial trade deal announced last week should make operating in China easier for companies like Micron. The deal contains provisions meant to protect American technology and trade secrets and allow companies to challenge China on accusations of theft, including older cases like Micron’s that precede the agreement.

But Mr. Trump’s aggressive trade approach has also accelerated a technology arms race between the two countries, putting American companies like Micron at risk as the two nations try to decouple their economies. In an effort to reduce its reliance on American components, China has expedited efforts to produce its own semiconductors, driverless cars, artificial intelligence and other technologies. Those efforts, along with the Trump administration’s desire to restrict the sales of American tech products to China, could hurt the very companies Mr. Trump set out to protect.

“Let’s be clear, the trade war has been very bad for the semiconductor industry in several ways,” said Robert D. Atkinson, president of the Information Technology and Innovation Foundation, a think tank funded by the tech industry. “It’s like China woke up and said, ‘We’ve relied too much on the United States.’”

The trade deal does nothing to curtail China’s use of subsidies, industrial plans and state-owned companies, which have helped it build formidable industries in steel, wind turbines and solar panels. Those state-directed efforts, which put many American manufacturers out of business, are now being harnessed for high-tech industries.

The Trump administration is constructing its own walls around American technology, reducing access to the lucrative Chinese market out of security concerns. It is restricting exports of sensitive technologies, barring sales to certain Chinese companies and blocking Chinese entities from investing in the United States.

The administration is considering further restricting sales to Huawei, the Chinese telecom company that relies on components from Micron and other American suppliers. And the China trade deal leaves tariffs on more than $360 billion in Chinese goods in place as Mr. Trump tries to push American companies to bring manufacturing back home.

Semiconductor sales to China, which represent more than half the global chip demand, have fallen, and semiconductor stocks have been whipsawed by the trade war.

Mr. Trump and his supporters say that conflict is no longer avoidable, and that the president’s unconventional approach is necessary to take on a growing threat from China. Officials across the administration look with suspicion on Chinese industrial plans, including Made in China 2025, which called for $300 billion in financing and other support for 10 advanced industries, including semiconductors.

American officials worry that gaining an advantage in semiconductors would give China both a commercial and military edge.

Chips, which serve as the tiny sensors, brains and memories of all high-tech devices, are crucial to next-generation telecom networks, supercomputers, artificial intelligence and driverless cars, as well as military ships, satellites and aircraft. They are also one of the United States’ largest exports, along with airplanes, oil and cars.

While China’s ability to make chips is still far behind the United States’, the Chinese government, its state-owned enterprises, and provincial and private equity funds have been pumping billions of dollars into the industry, particularly the kind of memory chips that Micron makes. In areas where Chinese companies cannot develop or buy technology, companies say, some will simply steal their intellectual property.

For the Trump administration, which was looking for a fight with China, Micron’s story proved a formative one. As officials prepared an investigation into Chinese intellectual property theft that would ultimately spiral into the trade war, Micron provided a “camera ready” case that fit everything the administration was looking for, one industry executive said.

In 2015, Micron was the target of a $23 billion takeover attempt by a Chinese state-owned company, but the overture was withdrawn over United States national security concerns. In 2016, another Chinese state-owned company, Fujian Jinhua Integrated Circuit, allegedly worked in concert with a Taiwanese company to steal the American company’s designs and market them as their own.

According to Taiwanese authorities, Fujian Jinhua used Micron’s proprietary designs to build an enormous $5.7 billion microchip factory in China. In 2018, the Department of Justice charged the Chinese company and others with stealing trade secrets from Micron, and the Commerce Department blacklisted it for national security concerns.

The same year, a Chinese court temporarily blocked Micron from selling some products in China, after Fujian Jinhua and another company accused Micron of patent infringement.

Through 2017 and 2018, Micron employees met repeatedly with administration officials, sometimes with the National Security Council and National Economic Council. The company’s case was discussed in internal planning meetings attended by Robert Lighthizer, the United States trade representative, and Peter Navarro, a top Trump trade adviser.

In July of last year, Mr. Trump met at the White House with Mr. Mehrotra of Micron, as well as the chiefs of Intel, Google and Broadcom, to discuss the trade clash with China and the administration’s policies toward Huawei.

Two months later, in an address to the United Nations, Mr. Trump described the Micron theft as a rationale for the trade war.

“To advance the Chinese government’s five-year economic plan, a company owned by the Chinese state allegedly stole Micron’s designs, valued at up to $8.7 billion,” the president said. “Soon, the Chinese company obtains patents for nearly an identical product, and Micron was banned from selling its own goods in China. But we are seeking justice.”

“For years, these abuses were tolerated, ignored or even encouraged,” Mr. Trump added. “But as far as America is concerned, those days are over.”

Chip makers initially supported the Trump administration’s willingness to take on China. Companies had long grumbled about intellectual property theft and unfair treatment in the Chinese market, but they had little recourse: Going public about their troubles could spook investors and invite Chinese retaliation.

Then, in April 2018, the administration announced $50 billion in tariffs that would directly hit semiconductor companies by raising prices for imported equipment and materials. A chip finished in China would be subject to a 25 percent tariff, even if its components had been made in America.

The tariffs caught the industry by surprise. The Semiconductor Industry Association, a trade group, pushed back, telling the United States trade representative in July 2018 that the tariffs would “undermine U.S. technological leadership, cost jobs, and adversely impact U.S. consumers of semiconductor products and the U.S. semiconductor producers.”

Some industry executives grew more nervous as Mr. Trump escalated his trade fight and the prospect of an economic rupture between the United States and China became more real. Chinese customers shifted their purchases to suppliers in South Korea, Taiwan and elsewhere.

Mr. Trump’s trade pact did ink some victories — it includes greater protections for companies like Micron, including preliminary injunctions and expanded legal recourse for theft of trade secrets. It also contains new promises from China to refrain from pressuring American businesses to transfer their technology to Chinese companies, and it allows American companies to sue individuals, including former employees and hackers.

Semiconductor companies said they would press the administration to make more gains in the next phase of negotiations, including subsidies, which Mr. Trump said he plans to address. Just getting China to acknowledge and agree to forgo unfair practices was progress, they said.

In a statement, Micron said it applauded the deal. “We look forward to additional discussions between the countries on significant issues that are important to Micron and the semiconductor industry, such as intellectual property protection and subsidies,” said Jon Hoganson, Micron’s managing director of global government affairs.

But the fight has spilled over into more damaging areas. Last May, the Commerce Department placed Huawei, which makes handsets and telecom equipment, on a national security blacklist that bans it from buying some American products. Other Chinese technology companies were added to the list, and the government began planning which types of advanced technologies it would no longer allow companies to export overseas.

Micron had so far experienced limited effect from Mr. Trump’s tariffs since it does not ship the products it makes in China to the United States. But Huawei’s blacklisting was potentially devastating — 13 percent of Micron’s microprocessor sales are to the Chinese company.

In its fourth-quarter earnings call with investors last September, Micron warned that the clash could damage its bottom line.

“We see ongoing uncertainty surrounding U.S.-China trade negotiations. If the Entity List restrictions against Huawei continue and we are unable to get licenses, we could see a worsening decline in our sales to Huawei over the coming quarters,” Mr. Mehrotra said. Micron’s stock sank 11 percent after his remarks.

Micron, Intel and other companies with global operations initially found a way to keep selling to Huawei since the rule did not restrict products containing less than 25 percent of certain types of American content. But the Commerce Department is considering lowering that threshold and expanding the number of goods subject to the ban, according to five people with knowledge of the plan.

Like other Chinese companies, Huawei has worked to curtail its dependence on America. By substituting parts from Japan and other countries, the company has recently produced handsets and telecom equipment that do not contain any American components.

Its internal semiconductor unit, HiSilicon, has also developed replacements for advanced chips that Huawei once bought from American companies. Huawei said its 2019 sales topped $120 billion, representing 18 percent growth over the year before — less than its initial target, but not by much.

American companies say they are sympathetic to the administration’s complaints about China. But they must compete globally, and they are not willing to forgo access to China, the hub of the global electronics supply chain and probably one of the world’s fastest growing markets for decades to come.

Jim McGregor, the chairman of Greater China for APCO Worldwide, said the trade war and other restrictions were already shaping investment decisions by American technology companies. When deciding where to put their money next, many companies have quietly been looking to invest outside the United States to secure access to China.

“You’ve got to be there, no matter what the president says,” he said.

Raymond Zhong contributed reporting from Beijing.


NYT > Business > Economy

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China Trade Deal Details Protections for American Firms

WASHINGTON — The trade deal that President Trump will sign on Wednesday includes commitments by China to curtail practices that American firms complain put them at a disadvantage and force them to hand over valuable intellectual property to Chinese firms, according to several people with knowledge of the deal.

Those concessions, along with China’s agreement to buy $200 billion worth of American goods and to allow greater access to its markets, are expected to be announced at a White House ceremony for the signing of the long-awaited trade deal.

As part of the agreement, China has promised to punish Chinese firms that infringe on or steal corporate trade secrets, satisfying a concern of American businesses. China will also refrain from directing Chinese companies to obtain delicate foreign technologies through acquisitions, including halting purchases by state-owned enterprises that “harm” American interests. American officials say Beijing has used the practice to leap to the forefront of advanced industries, like semiconductors.

Another primary concern of American companies — a requirement that they turn over technology as a condition of doing business in the country — is also addressed in the deal. China has agreed not to force companies to transfer technology, which it has done by requiring joint ventures with Chinese firms and forcing companies to license their intellectual property at low prices.

Trump administration officials say the deal to be signed on Wednesday is only the first step in talks that are expected to help cool tensions between the world’s two largest economies and start to stabilize relations after more than a year of escalating threats from both sides. Mr. Trump has said the second phase of the agreement would be negotiated “at a later date.”

To prevent China from violating the agreement, the administration will continue to have tariffs on $360 billion worth of goods, along with the threat of future tariffs if China reneges on its promises. The deal does not include any agreement for future tariff reductions, according to a spokesman for the Office of the United States Trade Representative.

The success of the deal hinges on whether China will follow through on its commitments on paper — something Trump administration officials and China hawks say it has failed to do in the past. Some critics say China’s promises appear both broad and vague and overlap with other changes it has been pursuing anyway.

Still, the concessions may go at least part of the way toward resolving some of the business community’s concerns about China’s treatment of foreign firms and the kind of unfair trade practices that Mr. Trump said his administration would end.

The agreement was “more positive” than expected, Myron Brilliant, the executive vice president of the U.S. Chamber of Commerce, said at a news conference in Beijing on Monday. He added that striking an agreement had calmed tensions in a long-running trade war.

“We are pleased from what we’ve heard,” Mr. Brilliant said.

Administration officials say the tariff threat gives the deal more teeth than previous pacts with China. But it also raises the possibility that both countries could wind up back in the same type of tit-for-tat trade war that has inflicted economic damage across the globe.

Text of the trade deal has not been made public in either English or Chinese. It appears to include significant concessions, but it remains to be seen how the pact’s legal language will translate into action.

For instance, China has yet to admit that it ever forced foreign companies to transfer technology to Chinese firms, said Derek Scissors, a resident scholar at the American Enterprise Institute. Reading the agreement from the Chinese perspective, he said, they have committed to continue doing the same thing they have always been doing.

“We’ve had the Chinese agree in this public fashion to things we think were important before, and it hasn’t made a difference,” Mr. Scissors said.

Clete Willems, a partner at Akin Gump who helped to advise on trade policy until he left the administration last year, said the deal would fulfill three of the four major conditions laid out in the administration’s initial report that justified tariffs on Chinese goods. That included a requirement that China not direct its companies to acquire sensitive foreign technology.

Mr. Willems said the deal also contained new language protecting trade secrets, including a promise to set up judicial proceedings and criminal penalties for Chinese entities that steal confidential business information. It would also provide greater patent protection for the pharmaceutical sector.

The one major concern outlined in the administration’s report that was not addressed in the trade deal is cybertheft, Mr. Willems said. China had rebuffed American demands to include promises to refrain from hacking American firms in the text, insisting it was not a trade issue.

“We didn’t fix every single problem with China in this agreement, there is no question about that,” Mr. Willems said. “But what was done is really significant.”

Some analysts have expressed skepticism that a broad threat of tariffs on the overall Chinese economy would really deter Chinese companies bent on gaining a technological edge by stealing trade secrets.

Senator Chuck Schumer, the New York Democrat, sent a letter to Mr. Trump on Tuesday expressing “serious concern” about the potential for entering into a weak trade deal.

“China pledging to make short-term purchases of American goods will not address the fundamental problems that undermine long-term U.S. economic opportunity, prosperity, and security,” he said.

The Trump administration itself has cited China’s failure to live up to its agreements. In March 2018, the Office of the United States Trade Representative detailed a pattern of failed promises by the Chinese government to no longer force foreign companies to transfer technology to Chinese firms. China had failed to live up to that commitment “on at least eight occasions since 2010,” the trade office said.

The deal also includes large purchasing agreements that Mr. Trump has said will raise exports and shrink the American trade deficit with China, but that experts say might be hard to achieve.

As part of the agreement, China has committed to purchasing an additional $200 billion of goods over the next two years. That total includes $50 billion of new oil and gas exports, $32 billion of new agriculture, $78 billion of additional manufactured goods and $38 billion of new services, according to three people briefed on the deal.

Some trade experts have said the agricultural export commitments, which would translate to $16 billion in new shipments a year, would be difficult to meet without rerouting shipments to other countries.

But the targets for manufacturing and services, which include tourism and education, may be even harder. The number of Chinese students coming to the United States has been trending downward. And exports of manufactured goods, which will include Boeing airplanes, medical devices, automobiles and auto parts and factory equipment, are set far above current levels.

The agreement also includes substantial changes to Chinese regulations surrounding food, which Robert Lighthizer, Mr. Trump’s chief negotiator, discussed in a briefing with reporters in December. The changes will reduce barriers for products including meat, poultry, pet food, seafood, animal feed, baby formula, dairy and biotech, likely increasing American exports to China in those categories.

The first-phase agreement does not address some of the administration’s bigger concerns about China’s economic practices, including its use of subsidies and state plans to build domestic industries that flood the global market with low-priced products, often driving American competitors out of business. Critics say the practice has undermined American industries like steel and solar panels, and could prove detrimental to high-tech manufacturers of electric vehicles, computer chips and robots.

The Trump administration, which had hoped to curtail state subsidies as part of a trade deal, tried to head off criticism on Tuesday morning by announcing progress on a multilateral effort to address these practices.

Mr. Lighthizer met with ministers from Japan and the European Union in Washington, and resolved to press for changes at the World Trade Organization that would ban many of the subsidies that China provides to its industries.

He said the three would work together to restrict a variety of unfair subsidies and funds provided through state-owned enterprises, which the W.T.O. had previously ruled were not subject to its subsidy rules. Both are practices China has relied on.

Jennifer Hillman, a trade expert at the Council on Foreign Relations who has worked at both the trade office and the W.T.O., said the statement represented “great promise to correct one of the major problems with the W.T.O. rules: its inability to discipline subsidies.”

“What remains to be seen is whether these good ideas can be brought into a formal agreement that is binding on China and others,” she said.

Keith Bradsher contributed reporting from Beijing.


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