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On high-stakes trip to China, U.S. officials confront tech along with trade

On high-stakes trip to China, U.S. officials confront tech along with trade
Treasury Secretary Steve Mnuchin speaks during a discussion at the Milken Institute Global Conference Monday, April 30, 2018, in Beverly Hills. (Jae C. Hong / Associated Press)

Chinese state media filled with images last week of President Xi Jinping, high above the Yangtze River, peering through binoculars at the world's largest dam. He couldn't have found a larger prop.

"Just think if we had relied on outside help to build the Three Gorges Dam!" official outlets quoted Xi as saying.

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As President Trump's economic advisors travel to Beijing this week, that desire for self-reliance is key to the trade tensions. While China wants to end dependence on foreign technology, White House officials charge it's trying to control the future of cutting-edge industries.

Xi's pointed comment followed the Trump administration's recent decision to ban U.S. companies from doing business with ZTE, China's second largest maker of telecom equipment, for seven years. The move effectively cripples a company that uses Qualcomm's microprocessors and Google's Android operating system.

The team arriving to discuss this Thursday includes all the stars -- Treasury Secretary Steven Mnuchin, Trade Representative Robert Lighthizer, Commerce Secretary Wilbur Ross, trade advisor Peter Navarro, and economic advisor Larry Kudlow. Beijing hasn't announced who will lead the Chinese side, but it will presumably include Xi's top economic advisor, Liu He, who visited the White House in March.

Both sides will seek to avert a trade war. But disagreements over China's increasing tech prowess -- reinforced by the ZTE case -- could stymie a deal.

"I don't think we're going to see a breakthrough," said Chen Dingding a professor of international relations at Jinan University in Guangzhou. "It isn't about one country violating the rules; it's really about the competition between these two countries."

ZTE's run in with the U.S. government started before the trade dispute. The company agreed to pay $1.19 billion last year for violating U.S. sanctions by shipping telecom equipment to Iran and North Korea. The Commerce Department now says the Shenzhen-based company misled authorities and failed to punish all responsible.

Commerce officials denied the ZTE ban was related to an investigation into the country's intellectual property practices. But it fits into the administration's focus on China's tech ambitions, including proposed U.S. tariffs on $50 billion in Chinese goods such as aircraft parts and medical devices. The Justice Department is exploring whether Huawei, ZTE's larger rival, violated U.S. sanctions tied to Iran, according to the Wall Street Journal, and the trade agency is considering an investigation into its cloud computing practices.

These actions would hit at the heart of Made in China 2025, the country's blueprint to create an economy built on electric cars, microchips and other advanced manufacturing.

The ZTE sanction was China's wake-up to intensify that effort, said Louis Kuijs, head Asia economist at Oxford Economics in Hong Kong, who previously worked for the World Bank in China. "They were really quite shocked at the sudden realization of how vulnerable Chinese companies are."

ZTE called the decision "extremely unfair" and warned it would impact the company's livelihood. State-media rallied to its side, with little recognition that the company had, in fact, pleaded guilty to the initial violation. Nor did it mention that China blocks American technology, including Facebook, Twitter and Google.

State media turned the company's loss into a propaganda victory. Countless articles declared the U.S. a protectionist power and reinforced Xi's goals to build domestic aircraft carriers, high-speed trains and commercial planes. Xinhua News Agency referred to the incident as "a technology war in essence."

Social media posts called for a boycott on American goods and a banner offering free meals to ZTE employees went viral. "If it were not because of ZTE's strength and ability to represent China it would not have been punished like this," it said.

Privately, Chinese officials slammed ZTE's behavior as "stupid and passive," according to an internal government report that temporarily appeared on the news portal Sina. But publicly, they've used the action to ramp up support for domestic high-tech industries like semiconductors.

"We hope America doesn't fancy itself clever, or it will only reap bitter fruits from what it has sown," Ministry of Commerce spokesman Gao Feng recently told reporters.

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The ZTE response underscores China's dedication to not only develop next generation technologies, but also set the standards for them. Trump's advisers view this as a national security threat.

Officials have accused China of forcing American companies to reveal trade secrets for access to the world's largest population. They fear leaders also will heavily subsidize key industries, leading to dominance in crucial sectors.

"These are things that if China dominates the world, it's bad for America," Lighthizer told a Senate committee in March.

But U.S. officials don't agree on how to respond, making this week's meetings even more uncertain.

"The best one can expect from the visit...is a greater appreciation by China of the depth of American concern," said Scott Kennedy, a China expert at the Center for Strategic and International Studies in Washington.

"China seems to still believe the dispute can be resolved by simply committing to buy more U.S. products and modestly improve the country's investment environment. That's not nearly enough."

Right now, both sides keep talking past each other. Where the U.S. calls for fairness, China sees hypocrisy. After years of deriding China's trade practices, officials contend, the U.S. is now the bully.

Mao Tse-tung was shuttering universities in China the decade researchers invented the Internet in Silicon Valley. The country views itself as merely catching up.

"Simply by enforcing those initial sanctions, the U.S. is saying, 'if you want to do business with us, you have to play by our rules,'" Trivium China, a Beijing-based research firm, wrote in a recent report. "The Chinese don't like the rules that the U.S. established. They want to create their own."

This week's talks may indicate some progress toward easing trade tensions, analysts say, and both sides aim to come away with something to show-- or tweet.

Chinese officials may offer some concessions, such as easing restrictions and further opening markets. But it's unlikely much will get resolved on the more consequential issue: the future of global technology.

"Both sides clearly know the main target is tech," said Jue Wang, a China scholar at Leiden University in the Netherlands. "So it depends on how well the Chinese government can resist an attack from the U.S, and how well it can negotiate."

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Kemeng Fan and Nicole Liu in The Times' Beijing bureau contributed to this report.

Meyers is a special correspondent.

Twitter: @jessicameyers

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