How the US and China can find common ground in an era of techno-nationalism

The White House and Beijing have reached an agreement on a “phase one” trade deal with most of the last-minute attention focused on agricultural purchases and tariff reductions. Among the key structural issues that may not have been adequately addressed is Washington’s concern about theft of intellectual property rights, which, according to President Donald Trump, costs the nation US$600 billion annually, an accusation denied by China.

Many in America’s security establishment also see China’s aggressive actions as part of broader efforts to erode America’s great power status. Thus, the transfer of technology to China is viewed not only on its commercial merits but also as a potential national security risk.

The new agreement, however, has left unaddressed the tensions surrounding US restrictions on sales of hi-tech equipment to China and its innovative ambitions, as exemplified by its 5G initiative. The ever-expanding view of the dangers of technology transfer has blurred the debate over IPR protection.

Underpinning US-China technology competition is the recognition that innovation-driven growth is central to long-term economic development. Because many people can make use of the same idea, broad dissemination of knowledge is beneficial.

Notwithstanding recent disagreements over technology transfer, the two countries have pursued similar growth objectives at comparable stages in their development, using IPR protection as a policy tool towards that end. The crux of the debate over IPR is the trade-off between access to knowledge and incentives to innovate.

Having reached the innovation frontier, the US understandably wants a strong system to protect IPR. If protection is too lenient, ideas are essentially free and copying goes unchecked, providing little incentive to undertake costly investment in new technologies. Instituting more stringent protection can help overcome this stagnation by granting monopoly rights to innovators.

But such actions can also go too far, with critics complaining that patents in pharmaceuticals, for example, have blocked entry of newcomers and raised costs excessively.

From China’s point of view, technology acquisition has driven its impressive growth from low- to upper middle-income status. Realising the importance of technological upgrading and its own limited capabilities in important sectors, China has designed relatively lax IP laws to encourage knowledge inflows from abroad.

While China has been much maligned for counterfeiting, the key to its success has not been copying per se but rather how it has learned from ideas from overseas. Chinese companies such as e-commerce giant Alibaba [which owns the Post] and messaging app developer Tencent have demonstrated that adapting foreign products for local use can be a springboard to true innovation. In fact, in certain sectors, US companies are now returning the favour by imitating their Chinese counterparts.

The major reason the US and China cannot agree on the appropriate strength of IPR protection is that they differ in their domestic innovative capabilities, which are closely tied to their respective development levels. Because emerging economies rely on the innovations of advanced economies to grow, multilateral agencies, such as the UN Conference on Trade and Development and the World Trade Organisation, have underscored the importance of cross-border technology transfer to developing countries.

China has performed spectacularly in this regard, using foreign knowledge – both legally and questionably – en route to lifting over 500 million people out of poverty since opening its economy. Although Washington insists that China is no longer a developing country, it ranks 64th in gross domestic product per capita and its innovative skills fall short of Organisation for Economic Cooperation and Development comparators.

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Differing political systems present yet another roadblock to mutual understanding. US companies look out for their own interests, and patents are primarily used to exclude others and safeguard personal returns. This creates winners and losers: producers gain monopoly rights, driving up prices for consumers and forcing out competitors. Democracies must be responsive to these distributional effects and seek to balance the interests of various constituents.

In contrast, China’s authoritarian system permits much greater latitude to pursue longer-term national interests without domestic political constraints. China views IP as part of society’s collective push towards innovation leadership; for instance, it sets explicit targets for the total number of patents.

Alarm has been raised in Washington over China’s techno-nationalist measures, headlined by the ambitious “Made in China 2025 Initiative” – a set of aggressive industrial policies aimed at increasing indigenous capability in emerging strategic technologies such as 5G, artificial intelligence and quantum computing.

Bolstered by nationalistic support, China is well equipped to weather resistance from the international community. Despite being seen as flaunting international norms, China’s technology acquisition strategy is not unprecedented. Others such as Japan, South Korea and Taiwan similarly disrespected IPR in prior decades, but as their innovative capacities matured, such practices were eventually abandoned.

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Nonetheless, in the case of China, many US foreign policy experts no longer see technology transfer as simply a matter of economic trade-offs. Washington’s brand of techno-nationalism is exemplified by placing Huawei and other Chinese tech companies on its Entity List and by strengthening foreign investment security reviews.

National security concerns add a whole new dimension that impose costs on both sides: China misses out on knowledge transfers needed for growth and American tech companies lose profits needed to expand.

In light of such complexities, the White House negotiation strategy misses the mark for two reasons. First, it began with a misguided view that it could use punitive tariffs to quickly force China to reform and has since pivoted to a phased approach. A broad consequence of China’s rapid development is that its institutions lag behind its economic weight, fostering the sense that China is not a responsible stakeholder.

The reality is that priorities in IP policymaking depend on an ever-evolving set of economic circumstances, and China has shown willingness to reform of its own accord. America’s own historical path from IP thief to IPR protector suggests that China’s perspective will continue to shift as it approaches the technology frontier.

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Second, because of differing developmental levels – compounded by the dominant role of the Chinese state – the US and China have seemingly irreconcilable perspectives on the role of IPR and China’s ambitions to become a technology power. But the challenges of IP policymaking are common to all countries, and security issues affect Europe and others beyond the US-China great power rivalry.

Rather than pursuing a bilateral solution, a wider forum is needed to discuss technology transfer in an era of rising global techno-nationalism. Reaching a more robust political consensus may require something like the G20 format, where a broader spectrum of interests is represented. If China is to realise its tech ambitions, it will be in its own interests to push for such an initiative.

Yukon Huang is a senior fellow at Carnegie Endowment for International Peace. He is author of Cracking the China Conundrum: Why Conventional Economic Wisdom is Wrong. Jeremy Smith is a junior fellow at Carnegie