IP and tech control will continue to inflame US-China relations, whatever the outcome of the trade talks

  • Neal Kimberley says investors hoping for a quick resolution of the current stand-off over trade should brace themselves for a protracted conflict, as both countries compete to protect their technological edge and strategic interests
PUBLISHED : Tuesday, 25 December, 2018, 2:03am
UPDATED : Tuesday, 25 December, 2018, 3:16am

Issues around intellectual property (IP) and forced technology transfers are key in China-US trade negotiations. The two sides may find common ground, but investors shouldn’t get too excited. Technology will remain a massive bone of contention between Beijing and Washington. 

What investors know is that Washington has raised a raft of grievances with Beijing about technology.

Regarding trade, Commerce Secretary Wilbur Ross told Fox Business News on December 5 that “the bigger question and the more complicated one and, I suspect, the harder one to ultimately get resolved is the whole thing about forced technology transfers, theft of intellectual property rights, cybersecurity breaches, the whole nine yards on stealing our technology”.

World Bank advises China to address US investment, tech concerns

In actuality, it might suit China to engage with the US on these issues. “With China moving up the value chain and becoming an innovation leader, we believe IP violation is becoming a domestic as well as an international problem,” analysts at US investment bank Jefferies Financial Group wrote earlier this month.

“Ten years ago, China was not an innovator and had little to gain from IP protection, 10 years from now, China will have the most IP to lose,” analysts at Jefferies wrote in a separate research note.

An examination of patent applications data is revealing. Data released on December 4 by the World Intellectual Property Organisation showed that 3.17 million patent applications were made globally in 2017. Of that total, China submitted 1.38 million, more than 40 per cent of the global total. In contrast, US patent applications totalled 607,000.

“In just a few decades, China has constructed an IP system, encouraged home-grown innovation, joined the ranks of the world’s IP leaders, and is now driving worldwide growth in IP filings,” said the organisation’s director general Francis Gurry.

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Additionally, a document unveiled by China’s National Development and Reform Commission on December 4 but dated November 21, before the recent meeting between President Xi Jinping and US President Donald Trump in Buenos Aires at the G20, imposed a total of 38 different penalties on various IP violations.

So, Chinese and US negotiators could conceivably find themselves on the same page when confronting these issues but, even if that proves to be the case, technology will remain a very divisive issue between the two nations.

Larry Brainard, chief emerging market economist at investment research firm TS Lombard, feels that while the Xi-Trump meeting has helped de-escalate trade tensions, the China-US economic conflict “has moved beyond trade into the area of technology”.

In truth, technology and geopolitics are entwined, and it is quite conceivable that Washington does not consider its own strategic interests are advanced by helping Beijing towards the technology goals enshrined in the Made in China 2025 initiative.

This year’s US Export Control Reform Act certainly gives room for Washington to bring in new curbs on exports of advanced technologies. The US Bureau of Industry and Security has sought public comment by January 10 “for identifying emerging technologies that are essential to the national security of the US”.

TS Lombard’s China policy analyst Eleanor Olcott noted last month that previous US administrations have considered that only exports of sensitive military technology to China constitute a “national security risk” but that Washington is now proposing to widen “this definition to include a wide array of emerging technologies, including AI, robotics and biotechnology”.

Columbia University’s Jeffrey D. Sachs has categorised Washington’s targeting of Chinese telecoms giant Huawei and its chief financial officer Sabrina Meng Wanzhou as “part of the Trump administration’s broader attempt to undermine China’s economy by imposing tariffs, closing Western markets to Chinese high-technology exports, and blocking Chinese purchases of Western technology companies”.

How technology is the latest frontier of US-China rivalry

Yet Chinese firms have proven able to supply hi-tech products and to do so at competitive prices. But the United States and other nations have concerns.

Such Chinese firms will accrue sensitive information during their legitimate overseas business activities. The fear outside China, whether justified or not, is that Beijing could employ legislation, such as the National Intelligence Law, to compel Chinese firms to share such information with security services.

Indeed, on December 12, Bill Priestap, the FBI’s assistant director of counter-intelligence, speaking before a Senate Judiciary Committee hearing in Washington, characterised China as “the most severe counter-intelligence threat” facing the US today.

Investors should be under no illusions. Technology is going to be a major bone of contention between Beijing and Washington for the foreseeable future, whatever the outcome of the current China-US trade talks.

Neal Kimberley is a commentator on macroeconomics and financial markets