Technology Transfer and the US-China Trade War
Photo Credit: AP
By Tai Wei Lim

Technology Transfer and the US-China Trade War

Jun. 28, 2018  |     |  0 comments

In the clash of the titans between the US and China, with a potential trade war looming in the background, trade in advanced technology and their intellectual property rights (IPR) protection appear to be at the core and center of this disagreement. In slapping China with a USD 50 billion tariff (China retaliated with its own list of tariffs of US goods, amounting to USD 50 billion), US President Donald J. Trump and his administration are making it clear that they are serious about protecting US interests and fair trade. Besides the unfair trade practices from its perspective, the US is determined to stop advanced technologies from falling into the hands of Chinese competitors to protect American interests.


Some implications go beyond mere economic, commercial and business incentives to enforce IPR for advanced technologies. Because many such technologies are potentially dual-use in nature, the prevention of the weakening of the US’ military advantage and dominance, particularly as the leader of the free world, has become a matter of national security. There is therefore some prioritization on the US part to be more hardline on policies that are essential for preventing the US from losing its technological lead and edge at a time when its main challenger and interdependent global stakeholder is fast rising, especially in the technology field.


The US accuses China of technological theft through lax IPR enforcement. This theft runs into billions of dollars, according to the US. The United States Trade Representative’s seven-month study of China’s intellectual property lapses/theft as well as the Commission on the Theft of American Intellectual Property’s report cited losses of a few hundred billion USD on a yearly basis. Besides what the US considers as illegal Chinese means to obtain technologies, American companies and the US government have also targeted Chinese practices of compulsory joint ventures (JVs) for accessing the Chinese consumer market and technology transfers as the loss of IPR for their advanced technologies.


There are two interpretations of Chinese JVs in the West. One interpretation conceptualizes JVs as genuine vehicles to enter the Chinese market while others accuse the Chinese partners of forcing their American counterparts to enter into JVs. The most extremist reading of the situation argues that the Chinese government is actively asking its companies to get foreign companies to transfer their technologies to Chinese companies.


The historical purpose of JVs was to help China transition from a centrally planned economy to a market driven capitalist economy by using JVs to ease the transfer of technologies from foreign firms investing in China to their Chinese partners. This helped kick-start China’s post-Maoist industrialization program. Such processes helped China integrate into the world trading system and manufacture products for export to the rest of the world. But some critics are now questioning the continued relevance of this model.


The Western mass media has accused Chinese groups of hacking into US technology outfits. The US has recorded thefts of source code by Chinese entities and has begun to observe and take notice of Chinese purchases of high-tech companies in the West. For critics of China’s technological progress, national security is the most important priority, and sensitive dual-use technologies are seen as vulnerable and in danger of falling into hands of strategic rivals. The US has stopped the Qualcomm-NXP deal due to national security concerns. Chinese telecommunications companies like Huawei and ZTE are also restricted from selling their products to the US defense industries and they may be subjected to further measures. The backlash against Chinese companies accused of theft of IPRs has started in some quarters in the West.


For the West, including the US, the intense participation of the Chinese state in monitoring the development and use of advanced technologies is a matter of concern. The Chinese have instituted the 2017 cybersecurity legal procedure that allows the state to go through technology hardware and services under the name of national security. The US has criticized this plan as affecting trade and perpetuating unfair benefits to China. Some in the US do not like the idea of Chinese regulators or authorities compelling foreign companies to submit their technologies for the state’s scrutiny due to reasons of national security.

China has been strengthening its patent protection, trademark observance and copyrights implementation. Its efforts need to be recognized.

For those US companies forced to expose their technologies (including blueprints or source code) this way, critics argue that this goes beyond mere IPR theft and are in fact state-sponsored attempts to access private sector-developed technologies. The US is preparing an official complaint to the World Trade Organization to protect its national security and its sensitive technologies. At the same time, many forces are holding back the pressure to increase the trade tensions as a full-scale trade war can hurt both sides equally. At the point of this writing, iconic American motorcycle manufacturer Harley Davidson has been badly hurt by the tariffs imposed on US exports by China.


China needs to watch US moves closely as they can influence European actions as well. The Europeans have their own set of complaints against China in the area of IPR. The last thing that the Chinese want is for Brussels and Washington to gang up and take coordinated actions on China’s IPR record. China also has obligations under the World Trade Organization and it needs to be careful about not contravening any of these obligations. What the West is really seeking in terms of technological transfer and trade is the concept of reciprocity. Western companies want to compete in China on the same terms that Chinese companies operate in the US and Europe.


Beijing’s responses to the charges have been fast and furious. The Chinese government responded that its cybersecurity legislation was designed to protect private personal information and prevent online crimes, and not to extract technologies from foreign companies. Chinese President Xi Jinping himself is ramping up a national campaign to shore up IPR protection. In his December 2015 trip to Singapore, Xi clearly included IPR as an item China wished to learn from Singapore’s experience.


China’s Ministry of Commerce and Premier Li Keqiang are echoing this sentiment of respect and enforcement of IPR as well. China appears to be making efforts to combat IPR infringements. Enforcement of IPR is important as these rights spur inventors, designers, creative workers, researchers, academics, and entrepreneurs to come up with innovative new products, ideas and services. To be fair, China has been strengthening its patent protection, trademark observance and copyrights implementation. Its efforts need to be recognized.


Overall, regardless of whether IPR is implemented for Chinese or non-Chinese firms, intellectual property was ultimately created to protect creative innovators. They can carry on with their work without fear that their hard work, efforts and time will be taken away by others who can make the same products at a cheaper price without incurring the costs of research and development.


IPR itself is not without its critics, as poor countries are disadvantaged when technological access is locked up in legal rights like patents by developing economies. Because these technologies are perpetually locked into ownership by well-capitalized Western companies from highly developed economies, it is difficult for developing economies to develop their own technologies or at least develop generic low-cost versions of those technological products.


Ultimately, both Western and Chinese firms have been victims of hacking, cyber theft, and IPR theft. Thus, the general advice to all parties is to do due diligence when entering any external markets. US and Chinese companies may end up collaborating on projects given their respective strengths in different sectors, and may combat IPR violations or cyber theft together.

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