There's a new global technology race. It needs better trade rules

Competition to lead the Fourth Industrial Revolution is fierce. Governments and firms across the globe are engaging in legitimate - and illegitimate - acts to get a foothold in a particular technology, to pioneer commercial application, and to gain share in new markets. Advanced economies, which for many decades have pushed the boundaries of technological development, are now joined by China and other emerging countries.

As we progress towards a more "multi-polar" technology world, commercial friction has increased, taking centre stage in the trade arena. While some disputes around technology transfer and intellectual property are long-standing, recent unilateral action to respond to such tensions risks disrupting trade and investment flows, and straining the multilateral trading system.

At the same time, it erodes the business environment for innovation progress and increased productive economic activity. To sustain a global trade system which enables continued technological advancement, differences are more effectively solved by negotiation and conflict resolution, anchored in rules-based frameworks, as argued in the World Economic Forum's Future Council on Trade & Investment note 'Trade Rules for the Global Tech Race'.

The US and China are at the centre of the debate. In March 2018, the US' unilateral investigation under Section 301 of the Trade Act of 1974 found fault with alleged Chinese investment restrictions to force technology transfer; discriminatory technology transfer licensing processes; policies to support investment by Chinese firms in US businesses to obtain cutting-edge technologies; and cyber intrusions and theft.

To seek redress, the US proposed a combination of measures, including the threat of levies on up to $150 billion of Chinese imports, the activation of the World Trade Organization (WTO) dispute settlement mechanism against China’s technology licensing practices, and potential restrictions on Chinese investment in US firms. China responded with a threat of retaliatory tariffs on a range of US products, and filed a WTO complaint against the US over the tariffs that would be imposed under Section 301.

Escalating trade frictions unnerved investors, rattled financial markets, disrupted supply chains and alarmed farmers and consumers. Were the US and China to move ahead with the unilateral imposition of tariffs - above WTO bound rates - further damage could follow. The world’s two major economies would be taking trade dispute resolution into their own hands. Others could soon be tempted to copy them. With no global parameters to determine when the point of conflict has been successfully addressed, the battle could drag on.

There is a view that trade actions by the US and China are really aimed at increasing their respective leverage for sealing a grand deal of mutual interest. In April 2018, China announced plans to open up its economy further, including by lowering tariffs on cars, accelerating liberalization of financial and insurance services, creating a more attractive investment environment and strengthening protection of intellectual property rights. Furthermore, following high-level talks between the two governments in May 2018, China committed to expanding its imports of US goods, mostly farm and energy products, while planned tariffs linked to the Section 301 investigation were put on hold - though that course had been reversed at the time of writing.

Systemic issues are at the centre of this high-stakes trade spat. China’s switching of purchases to US producers risks diverting trade from other countries and signals the return to a trading system in which power and politics, rather than market competition, allocate resources. It is not yet clear if it has generated a positive outcome for global innovation. It does not seem to have made it possible for more countries to engage on what the future of trade rules should look like.

Sustained engagement to manage frictions and define parameters for trade to enable innovation, which in turn drives more trade and prosperity, is critical. This includes strengthening and modernizing the WTO with a technology-related trade negotiating agenda, coupled with a more effective monitoring system, and reforms to the dispute settlement system. Alternatives should also be explored for rules-based frameworks at the regional and bilateral levels, anchored in the multilateral trading system.

Unfortunately, continued trade frictions are likely in the short term, even if bilateral patches are found, and broader talks would take time. It is the way to go, however. The alternative is not only ineffective in the long term, it is dangerous. Tensions around trade and technology risk spilling into other areas. In explaining the importance of the Atlantic Charter - the genesis of the multilateral trading system - Winston Churchill highlighted the peace and security origins of the system: "it is not in the interests of the world that any nation should be unprosperous or shut out from the means of making a decent living for itself and its people by industry and enterprise". This is as relevant in the 21st century as it was in 1941.