From day one when China first opened its markets, Beijing has been dogged by accusations that it forces U.S. firms to transfer technology to their Chinese business partners in return for access to the country’s 1.4 billion citizens.
By – Bao Fan
Since China first opened its markets, Beijing has been dogged by accusations that it forces U.S. firms to transfer technology to their Chinese business partners in return for access to the country’s 1.4 billion citizens.
Those charges are in the spotlight again after the Trump administration detailed plans to slap tariffs on at least $50 billion of Chinese goods in an effort to punish Beijing for its technology transfer policies, stoking fears of a trade war. After Beijing retaliated with its own set of tariff plans, investors worried that a trade skirmish could turn into a trade war,
with the S&P 500 SPX, +0.00% and the Dow Jones Industrial Average DJIA, +0.07% both
negative for the year.
As trade concerns looms over Wall Street, here’s a guide to why intellectual property features so prominently in trade tensions between U.S. and China.
How large are the economic losses from intellectual property theft?
The Commission on the Theft of American Intellectual Property estimates the annual costs from the loss of intellectual property ranges from $225 billion to $600 billion. Of this amount, it’s unclear how much can be attributed to Chinese businesses.
In a 2018 survey conducted by the American Chamber of Commerce in China, more than half of members reported that leakage of intellectual property was a larger concern when doing business in China than elsewhere.
How does China acquire intellectual property?
American firms have to agree to set up a partnership, or joint venture, with a Chinese company to sell their goods in China, with technology transfer thrown into the bargain. Though this type of quid pro quo is formally disallowed by the WTO, analysts say such negotiations are usually conducted in secret.
A paper by the St. Louis Federal Reserve in 2015 estimated that half of the technology possessed by Chinese companies came from foreign firms.
It’s not clear, however, if these joint venture arrangements are successful at putting Chinese firms on a level playing field with the rest of the world. Even after the advent of joint ventures, American and German automakers still outsell their Chinese competitors, although analysts say China is catching up.
National security experts say Chinese hackers have also long tried to steal trade secrets from U.S. defense contractors. This prompted former National Security Agency head Keith Alexander to describe Beijing’s practices as “the greatest transfer of wealth in history.”
But in 2016, FireEye, a U.S. cybersecurity firm, said breaches have seen a marked drop as Chinese hackers turned their attention to more traditional military targets elsewhere in Asia.
Then there’s the sale of counterfeit goods in China. Third-party vendors on internet retail platforms owned by the likes of Alibaba have often sold counterfeit goods, according to the U.S. Trade Representative. Alibaba, however, points out it has been more proactive at removing infringing listings, with its founder Jack Ma labeling the problem as a “cancer.”
How is the U.S. cracking down on China’s practices?
The U.S. has threatened to implement up to $50 billion of tariffs against China through Section 301 of the Trade Act of 1974, meaning the White House does not have to go through the arbitration process ran by the World Trade Organization. This comes after the U.S. Trade Representative’s probe into intellectual property theft in August 2017. But invoking Section 301 does mean the U.S. has to file a simultaneous complaint with the WTO.
WTO critics have shown frustration with what they see as an ineffectual and bureaucratic watchdog after China allegedly ran afoul of the organization’s intellectual property rules in the past without serious repercussions.
The Committee on Foreign Investment in the United States, an inter-agency committee authorized to review transactions that could result in control of a U.S. business by a foreign entity, has torpedoed several proposed deals that would have seen Chinese firms buy or acquire a controlling stake in U.S. companies on the basis that technology sensitive to national security may be siphoned away.
But this could change, however, as Congress looks into expanding the committee’s scope into more routine deals involving the transfer of technologies that don’t have implications for national security.
How strong is intellectual property law in China?
China is moving to strengthen intellectual property laws.
China granted a third of all new patents worldwide in 2015, and more and more overseas companies are looking to file patent-related cases in Chinese courts. A recent report by the Santa Clara University School of Law said that foreign firms filed 10% of the patent-related lawsuits in China, winning 70% of those cases and cutting against the widely-held belief that U.S. firms can’t get a fair shake in China.
Academics and lawyers say patent infringement is still widespread, but highlight Beijing’s resolve to strengthen its intellectual property laws, perhaps in recognition that domestic innovation is being held back by inadequate protections. This broader shift towards stiffer regulation also reflects China’s ambition to climb up the value chain as it looks to develop homegrown brands in films, semiconductors and cars, that are often occupied by U.S., Japan and other advanced economies.
One source of complaint for foreign firms is that China also employs a first-to-file patent system, in other words, the first firm to file a trademark will receive it, whether or not they originated the product. This has sometimes allowed Chinese companies to sue American firms like Apple for patent infringement even though the allegedly imitated product was designed by the U.S. company.
Read more: From 2018/09/25