US Planning To Open "Third Front" In China Trade Spat

In news that broke (conveniently, we should add) shortly after the market closed on Monday, the Wall Street Journal is reporting that the White House is gearing up for what would be the third front in its nascent trade spat with China.

As the paper points out, Trade Representative Robert Lighthizer is preparing a fresh trade complaint - again under Section 301 of the Trade Act of 1974 - the same section of the trade act under which the US filed its complaint about China's intellectual property abuses, aka the first salvo in the US's trade war.

This time, Lighthizer is aiming at China's unfair restrictions on US companies trying to establish a foothold in China in high-tech industries like cloud computing. As a general rule, China requires foreign firms to partner with a domestic firm in a "revenue-sharing agreement" before they can gain entry to the Chinese market. By comparison, the US allows Chinese firms like Alibaba to function almost totally unfettered.

China

To be sure, Lighthizer has yet to decide whether to go ahead with the complaint, leaving the tariffs on steel and aluminum and the investigation into IP abuses as the only concrete actions that the White House has taken to hold China accountable for what Trump has described as decades of abuses on trade (threatening to impose tariffs on $150 billion in goods doesn't count).

The trade representative has yet to decide whether to go ahead with the complaint, the individuals said, which would be in addition to recent moves to ratchet up pressure on China, including the imposition of tariffs on a total of $150 billion in Chinese imports. But USTR, which has taken the lead in the China trade fight, views China’s restrictions on cloud computing as providing a clear-cut example that might garner public support.

Beijing requires U.S. cloud-computing firms, such as  Amazon.com Inc. and Microsoft Corp. to form joint operations with Chinese companies and license their technology to the Chinese partners. The USTR has said in reports on Chinese trade practices that Beijing withholds licenses that would allow U.S. firms to operate independently in China.

As a result, U.S. companies can’t market their cloud-computing services in China or sign up customers directly. Chinese firms, such as Alibaba Group Holding , by comparison, are allowed to operate in the U.S. without restriction.

“Some non-Chinese companies are reluctant to participate in China’s cloud market due to the number of restrictions,” said K.C. Swanson, director of global policy for the Telecommunications Industry Association. “Meanwhile the U.S. has no restrictions on foreign participation in our markets, it’s a clear-cut reciprocity issue.”

Cloud-computing firms deliver computer services, including storage, software and analytics, over the internet, a service that is considered one of the most promising, high growth parts of the tech industry.

A spokeswoman for USTR declined to comment.

Should USTR go ahead with the complaint, it would become the third major action the U.S. has taken to further open the Chinese market—and would increase the risk of retaliation from Beijing. The U.S. has levied tariffs on imports of Chinese steel and aluminum, which has resulted in China hitting about $3 billion in U.S. imports to China with tariffs.

After reaffirming that China is on a "watch list" of possible currency manipulators (an issue that President Trump has suddenly taken up, ignoring a number of factors), WSJ says the Treasury is putting together restrictions on Chinese investment that could also be employed to prohibit Alibaba from offering cloud-computing services in the US or block the company's expansion in another way.

Of course, Beijing has another edge in the burgeoning US-China trade war: US business groups, which have vehemently opposed the White House's measures as counterproductive and akin to a tax on US businesses and consumers.

Last week, Trump applauded Chinese President Xi Jinping for touting several planned market liberalizations, including allowing automotive companies to operate in China without a domestic partner - a measure that had previously been touted by China's top finance minister, Liu He.

While China has said this wasn't intended as a "concession" to Trump, it's possible that China could expand these liberalizations to include tech firms without losing face. Though that remains a big "if".

If the recent past is any guide, expect to hear a response from China in the not-too-distant future (read tonight).