June 4, 2019

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Testimony of TechNet for the California Legislature Hearing Titled, "Impact of the U.S. Trade Dispute with China on California’s Economy"

Introduction

Chairman Levine, Chairwoman Eggman, Chairwoman Cervantes, and distinguished members of the Select Committee on International and Regional Agreements and the Assembly Agriculture Committee:

Thank you for this opportunity to testify on behalf of TechNet and our 80-company membership regarding the impact of the U.S.-China trade war on the California economy.

For the past year, the U.S. and China have been engaged in a costly trade war.  From the beginning, TechNet has strongly opposed the Trump Administration’s policy of sweeping tariffs to achieve its goal of compelling China to change its unfair trade practices.

Economic Consequences of Tariffs

California is now the world’s fifth largest economy.  A major reason for that success is that we are home to the world’s preeminent technology industry — which develops life-enhancing innovations that the rest of the world wants to buy.

Selling to more markets and customers abroad drives economic growth and job creation in the U.S. tech sector.  In fact, U.S. tech exports supported an estimated 858,000 American jobs in 2017.

California benefits the most from this.  Tech is the number one good our state exports.  Last year alone, we exported to 230 foreign markets.  Mexico was first, Canada was second, and China, the focus of today’s hearing, was third.

However, the tariffs increase the costs of making our products — often increasing the price tag.  Higher prices makes them more expensive — and harder — to sell abroad.

Competition abroad is fierce.  But we are confident that the U.S. tech sector, led by California’s most innovative companies, can compete with anyone on a fair and level playing field.  However, fair and level is not what we have when our foreign competitors do not have to deal with these tariffs and can offer customers products similar to ours at lower prices.

Tariffs are taxes that hurt all Americans — consumers, workers, and businesses of all sizes.  They slow the growth of U.S. economic output and weaken demand for American products at home and abroad.

In fact, one study shows that tariffs will slow U.S. economic output by $322 billion over the next decade.

Over the past year, China tariffs have led to higher prices for consumers on a wide range of products they have come to rely on.  They have disrupted supply chains and threatened long-term projects, such as data centers.  And they have shifted capital away from long-term investments in the next wave of innovation through R&D efforts.  I will briefly expand on these points.

China’s Unfair Trade Practices Must Change

We want to state clearly for the record that we believe China must be held accountable for its unfair trade practices — including intellectual property theft, forced technology transfer, cyberattacks, and cyber espionage.

We share the Administration’s goal of securing lasting and enforceable changes from the Chinese government that will protect American innovators and their ideas, allow U.S. companies a chance to compete on a more level playing field, and improve market access.

Tariffs, however, are not the solution.  Instead of pursuing tariffs on our allies and trading partners around the world, the U.S. should be working with our allies to pressure China to change its trade practices.

Higher Prices for Customers

Virtually no product involved in U.S.-China commerce has been left untouched by the tariffs.  This includes popular consumer products that Americans have come to rely on each day, like smart phones, connected devices, and computers.

California-based companies lead the world in the mobile phone and connected device industries.  When companies in this space compete, it drives down prices for U.S. consumers, including lower-income Americans who can increasingly gain access to cutting edge mobile devices.  Just as important, these products have become foundational technologies and critical productivity tools for a wide range of traditional industries — agriculture, manufacturing, health care, and other key parts of our economy.

But putting tariffs on U.S. mobile phones and other connected devices gives our competitors in Korea, China, and elsewhere a leg up — raising prices for U.S. devices while making it harder for companies across all sectors of our economy to leverage these innovative technologies.  This hurts someone living on a fixed income as much as it harms a farmer in the Central Valley looking for new mobile tools to prevent crop damage and improve yields.

Networking products that comprise the modern-day infrastructure connecting us have also been hit hard, including modems; routers; switches; optical and fiber-optic transceivers; network interface cards, adapters, and modules; access points, remote access points, and antennas; and beacons.

At a moment when we are engaged in a global 5G race, the tariffs are hitting the networking products that are needed for 5G’s infrastructure.

Tariffs also have a negative impact on small businesses that use online platforms to sell around the world.  Tariffs increase the costs of their inventory, and retaliatory tariffs hurt their ability to sell globally.

Tariffs on these and many other types of products do not just hurt the tech sector.  Because these items are essential in our increasingly connected world, these tariffs hurt all sectors and businesses of all sizes.

Impact on Ag Tech

I am proud to be here today with members of California’s agricultural community.

In recent years, TechNet has worked with elected officials and stakeholders in the Central Valley to identify ways the tech sector can be a more effective partner in promoting greater economic opportunity there.

It is clear that America’s farmers are among the most negatively impacted by the tariff war between the U.S. and China.  Their presence here today reminds us that tariffs on technology also harm other sectors of the U.S. economy that rely on innovative technologies to run their businesses more effectively.

The Trump Administration should understand that in addition to the crops being targeted, higher tariffs on technology products that America’s farmers increasingly use to manage water, detect diseases, and make better decisions are hurting them as well.  This includes robots, sensors, cameras, fuel cells, and specialized batteries, as well as cloud computing and artificial intelligence applications.

In addition to farms, our products are being put to use each day to enhance communication, efficiency, and productivity — in offices, factories, schools, hospitals, airports, and across all state government entities.

These tariffs are taxes on all of them.  They serve as impediments to purchasing the latest and greatest technologies to enhance their work.  Tariffs have also been incredibly disruptive to some of the most significant infrastructure investments being made by tech companies in California and across the country today: data centers.

Data Center Tariffs

Last year, TechNet highlighted the specific harm caused by tariffs on servers, transmission devices, and other key computing components that make up the digital infrastructure needed to build and operate data centers.

Data centers are the lifeblood of an increasingly data-driven economy and can be found in every state.

One study shows that, once operational, the average data center generates $32.5 million worth of local economic activity each year.  During the construction phase, each data center generates nearly $10 million in revenue for state and local governments, while employing an average of 1,688 workers.

Tariffs on essential data center components, such as servers and transmission devices, threaten to stall this engine of economic growth.  They disrupt supply chains, increase costs through de facto taxes, and inject uncertainty into business operations and local economies that host data centers.

Data centers are complicated supply chain projects that rely on the absolute certainty of receiving key components in a timely and cost-effective way.  If critical pieces continue to be held up for delivery at a later date with higher, more unpredictable costs, companies would be incentivized to make investments and create jobs in other countries where such needless uncertainty does not exist.

In essence, these tariffs not only hurt the American tech sector the administration is working to protect from China’s unfair trade practices; they hurt many more workers across various sectors whose operations rely on cloud computing and data management tools.

Impact of Tariffs on Research and Development

Another area I want to briefly highlight is research and development.

R&D is the lifeblood of innovation.  Some of TechNet’s member companies spend billions of dollars each year in R&D to develop new products and enhance existing ones.

Overall, the U.S. is currently the global leader in R&D spending, investing more than $5 in R&D for every $1 spent by Chinese companies — according to a 2018 report from PriceWaterhouseCoopers.

However, these tariffs are taxes.  And when taxes on the private sector go up, it means operating costs go up and tough decisions have to be made about competing priorities.  One of the consequences of this sustained trade war is having less money to invest in R&D.

The future of U.S. innovation depends in part on ensuring that those R&D investments continue to grow in developing the next great American ideas and emerging technologies.

When all is said and done, the impact of tariffs on R&D investments may be the most damaging consequence of all.  We do not know what kinds of technological breakthroughs we will cede to our international competitors by forfeiting investments in the next wave of innovation.  And by the time we find out, it could be too late for us to catch up.  These R&D investments not being made today will hurt our economy, our workers, and our global leadership role for years to come.

Mexico Tariffs

Distinguished chairs and members of both committees:

Although the focus of today’s hearing is on the tariffs policy related to China, we would be remiss if we did not also highlight the deep concerns and strong opposition we have to the Trump Administration’s newly proposed tariffs on Mexico, which were announced last Thursday.

Mexico is our neighbor, our trading partner, and our ally.  The California and Mexican economies have been linked for centuries and generated enormous economic opportunity on both sides of the border, for both of our populations.  In fact, Mexico is California’s number one trading partner.

The value of California’s exports to Mexico has risen more than 20 percent over four years — to $30.7 billion in 2018, according to the California Chamber of Commerce.

TechNet opposes these tariffs on Mexico and we urge the Trump Administration to abandon this plan.

Conclusion

In conclusion, this prolonged trade war is hurting American consumers, workers, and job creators across all sectors.  China must be confronted about its unfair trade practices, but high tariffs on 100 percent of Chinese imports will have a devastating impact on the long-term health of the U.S. economy.

At the end of this month, President Trump is expected to meet with Chinese leader Xi Jinping at the G-20 Summit.  We are hopeful that this face-to-face meeting between the leaders of the world’s two largest economies will lead to a breakthrough.  We urge them to listen to the concerns from California, the world’s fifth largest economy, which are being so well articulated here today.

In the meantime, TechNet and our partners will continue to urge both the Chinese and U.S. governments to work strenuously to resolve this situation and end the tariffs.

We thank you for holding today’s hearing and encourage members of the California Assembly and Senate, our statewide office holders, and leaders across every sector of our state’s business community to speak up about the damage these tariffs are inflicting on our economy and the need for them to end in a trade deal that benefits California and the U.S. economy.

Thank you.

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