Does China Systematically Force US Companies to Reveal Their Secrets?

© 2018, Farok J. Contractor, Rutgers Business School

Among the commercial issues in contention between the US government and China today, the transfer of technology is increasingly an agenda item brought up by the American side. According to a report in the Wall Street Journal on September 27, 2018, a Beijing policymaker summarized the Chinese viewpoint thus:

“China’s offer to the world has been straightforward…Foreign companies are allowed to access China’s markets, but they would need to contribute something in return: their technology.”[1]

From the perspective of a controlled socialist country, the Chinese “offer” seems innocuous—or, to them, even generous. From their chauvinistic or nationalist viewpoint, the Chinese government is reluctantly allowing foreign companies into their large, growing domestic market—something that could displace competing Chinese firms that are less competitive or that lack Western technology. In return for being allowed in and making profits inside China, the Chinese feel that the US and European companies should contribute something in return: namely, their technology secrets.

Below I make five comments on current “forced” approach to technology sharing between the US and China and then end with my suggestion for what should be the best response from the US to this issue.

Five comments on technology “sharing”

From a long historical perspective, the Chinese are more or less following the Japanese government policy example during the period 1960–1980. At that time, the Japanese also limited the equity share of foreign investors and required joint ventures (JVs) with local Japanese companies. But today is different:

1. While at that time there was concern about Japanese imports (with trade surpluses in favor of Japan), there was not as much fear about technological competition from Japanese companies.

2. Today, intellectual property (IP)—patents, brands, and logos registered in each nation, and trade secrets—proprietary technology deliberately not registered with a government and kept secret inside a company, have become even more important as the most valuable company assets, compared with decades past.

3. IP enforcement, in addition to awareness of a company’s legal rights, is much more developed today. China itself introduced special intellectual property courts in 2014 to hear IP cases.[2] Presumably, the Chinese government did so to address the complaints from Western multinationals that they had no redress against Chinese copycats and IP violators, and also because Chinese companies themselves were facing the threat of unauthorized copying of their technology by other Chinese rival firms.

4. The Japanese paid handsome royalties and fees and respected IP rights. By contrast, the Chinese openly or implicitly demand US firms’ technology, allowing entry into China as their quid pro quo.

5. During the period 1960–1980 in the US business press, competition from Japanese companies was made out to be a serious concern. However, there was then nothing akin to the huge support given today by the Chinese government to their own companies to develop Chinese indigenous capabilities and technology acumen.

For all the fears in the US press, the 1970s and ’80s threat of a “Japanese invasion” abated and disappeared. The Japanese economy lapsed into stasis, from which it has not yet quite recovered. I am not saying that this will happen in China. However, the business press and companies sometimes exaggerate and amplify fears and anxieties.

What is the best US response?

Of course, the Chinese should be asked to follow international norms. But the best response would be for US companies (perhaps occasionally and judiciously aided by the US government grants or tax incentives) to ramp up their own R&D, and remain many steps—generations of technology—ahead of Chinese competition. That way, even if the Chinese copy and learn, US industry would remain ahead of the Chinese—or anybody else.

Innovation and creativity are the strength of the American economy and culture. I hope the US can build on those strengths rather than retreat into excessive paranoia and tit-for-tat, or “lose-lose,” retaliatory policies.[3]

References

[1] Wei, L. and Davis, B. (2018). How China systematically pries technology from US companies. Wall Street Journal (September 26). https://www.wsj.com/articles/how-china-systematically-pries-technology-from-u-s-companies-1537972066?emailToken=7d3031ac46cfd9c913c7dd76e6acddc3WqXZNq3mzL5LE9Z7j/4+eUSufFH76h3ECEfWe1atBsZ9gsSOzy/3OvF3GO++Zyyn3N/QZeJFxwHje+T9ObO8lnpyYddOaTRHzH6YeDglEFv5U9xQ8XhfpKLSPqB9e7CA&reflink=article_email_share

[2] Li, N. and Zhang, L. (2017). Specialized IP courts in China—judicial governance of intellectual property rights. International Review of Intellectual Property and Competition Law, 48(8), 900–924 (December). https://link.springer.com/article/10.1007/s40319-017-0642-6

[3] Kang, C. (2018). Trump’s China fight puts U.S. tech in the cross hairs. New York Times (September 23). https://www.nytimes.com/2018/09/23/business/trump-china-tariffs-tech.html Also: Tejada, C. (2018). Beg, borrow or steal: How Trump says China takes technology. New York Times (March 22). https://www.nytimes.com/2018/03/22/business/china-trump-trade-intellectual-property.html