Why US accusations of IP theft by China don’t add up
Yu Yongding says America’s Section 301 trade investigation, based on rumour and half-truths, ignores the benefits that US companies have gained from their voluntary entry into China, China’s anaemic investment into technology in the US, and Beijing’s improvement in IP protection
“The weight of the evidence”, the report concludes, shows that China uses foreign-ownership restrictions to force US companies to provide their technologies to Chinese entities.
But the case is not nearly as strong as the report makes it out to be. For starters, because Chinese firms are not starved for capital – thanks to China’s chronic savings glut – gaining access to foreign technologies is their main motivation for trying to attract direct investment from abroad. Under WTO rules, they are free to seek technology transfer from their foreign partners on a commercial and voluntary basis.
Fortunately for China, foreign firms have been more than willing to enter its market, not least because of its preferential treatment of direct investment. In fact, for decades, foreign and domestic firms alike have willingly accepted China’s “market access for technology” strategy, which required foreign investors to “import” advanced technology in exchange for entering the Chinese market.
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That said, the earnings before interest and taxes of foreign enterprises in China had been worsening since 2009, but in 2017 the situation improved. This is an issue that the Chinese government must take seriously.
In any case, no one can claim that foreign companies were forced to operate in the Chinese market. The argument that US firms have been forced to transfer their technology to China thus lacks significance.
In fact, that argument was never backed by persuasive evidence. While the US trade representative, which compiled the Section 301 report, claims to have conducted many surveys, all respondents are anonymous and their assertions are little more than hearsay – nothing that would be admissible in a court of law.
And, even if regarded as true, such claims would not definitively prove that forcing foreign enterprises to transfer their technology is prevalent in China.
The Section 301 report’s accusations regarding outbound investment – namely, that China uses “government capital and highly opaque investor networks to facilitate hi-tech acquisitions abroad” – are similarly flimsy. The office of the US trade representative assumes that China’s government not only has a clearly defined investment strategy, but also that an army of obedient firms is willingly carrying it out.
The sectoral distribution of Chinese firms’ outward investment indicates that there is not even an effective market mechanism at work driving Chinese firms to invest in a rational way. Instead, companies are making independent – and often irrational – investment decisions, which sometimes lead to large losses.
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The final issue raised by the Section 301 report relates to cyber-enabled theft of IP and sensitive commercial information, which the US claims is carried out by the Chinese government. The report acknowledges that since 2015 – when China and the US agreed that neither would “conduct or knowingly support cyber-enabled theft of intellectual property, including trade secrets or other confidential business information for commercial advantage” – the number of detected incidents of Chinese cyber-espionage has declined.
Yet some US officials insist that this likely reflects a shift towards more centralised, practised and sophisticated attacks by a smaller number of actors.
The Section 301 report was, it seems clear, based on rumour, imagination and half-truths. The obvious question is how the Trump administration can base a policy decision as consequential as trade tariffs – which could trigger a catastrophic trade war – on such weak evidence. The obvious answer is that the report was intended to justify, rather than guide, the policy.
Trump’s trade war will not succeed in driving China to abandon its aspiration to catch up to the advanced economies. China is ready to fight a war of attrition.
Unfortunately, both sides – as well as the rest of the world – will incur heavy losses in the process.
Yu Yongding, a former president of the China Society of World Economics and director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, served on the Monetary Policy Committee of the People’s Bank of China from 2004 to 2006. Copyright: Project Syndicate