Before China joined the World Trade Organization in 2001 -- and agreed to abide by its rules-- technology transfers were often explicitly required for entry into China. Usually nothing very sophisticated was involved, old-line sewing machines about to be phased out, for example. The U.S.-China Business Council and other lobby groups say the practice has continued, though demands that now could be breaching WTO rules come verbally and behind closed doors. The European Union Chamber of Commerce in China found that 20% of companies surveyed in 2019 felt compelled to hand over know-how to maintain market access, up from 10% in 2017. High-value, high-tech industries such as chemicals and petroleum, medical devices, pharmaceuticals and cars were particularly targeted, it said.
2. How does it supposedly work?
Historically, China required outside companies to form joint ventures with local partners in return for market access. As part of the deal, the foreign company would have to share its secrets -- how to make a certain pigment, say, or vehicle parts. China now allows some industries to have majority or 100% foreign ownership. With those companies, the most egregious cases are alleged to flow from environmental-impact assessments or other steps required for an operating license. Take chemicals, for example. In the U.S., inspections for new chemical plants may require reporting a range of temperatures at which a manufacturing process operates, whereas in China the specific temperature must be disclosed, according to Jacob Parker, vice president for operations at the U.S.-China Business Council in Beijing. “Every new detail that’s required allows for the replication of the process by potential domestic competitors,” he says. Another issue is the dominance of state-owned enterprises in some industries. That creates a de facto cartel that can be used to extract concessions from foreign companies.
The informality of China’s pressure tactics make it “impossible to prosecute,” the Information Technology and Innovation Foundation, a Washington-based research and advocacy group, wrote in a 2018 submission to the U.S. Trade Representative. Lobbying groups for foreign companies say their clients usually try to deal with the issue in private. The fear is if they go public, they could lose access to the world’s most-populous country and second-biggest economy.
There have been some high-profile cases.
• Kawasaki Heavy Industries Ltd., maker of Japan’s Shinkansen bullet train, set up a joint venture with local manufacturers in 2004. In 2011, after reports that China would file for international patents on high-speed trains, the company issued a warning letter to China to ensure it didn’t use the technology transferred outside the nation, according to a company spokesman. “The company continued monitoring since then, but there’s no truth that China has ever used the technology transferred outside the purpose,” he said. Still, Yoshiyuki Kasai, honorary chairman of the Central Japan Railway Company, told the Sankei Shimbun newspaper in 2018 that “the technology transfer to China was a huge mistake.” China’s railways minister told the state-run Xinhua News Agency that the Chinese trains were different and “far better.”
• DuPont Co. spent more than a year in arbitration with its onetime local partner, which it suspected of copying valuable chemical technology, according to a report by the Wall Street Journal. Then investigators from China’s antitrust authority raided DuPont’s Shanghai office in December, seizing documents and computers -- and also telling company officials to drop the case against the local partner. The antitrust authority said its investigation into DuPont was ongoing and declined to comment further, the paper said. The company didn’t reply to an emailed request for comment.
• After chemical maker Huntsman Corp. submitted products for review by an expert panel, people close to the company say it found competitors using the same kind of technology in their own products, the same Wall Street Journal article says. It filed a lawsuit in Shanghai in 2007 against a Chinese company it alleged infringed a patent on a black dye used in textiles that is less polluting, the report said. It then faced a court-appointed review panel stacked against it, Huntsman said in a 2011 complaint to the U.S. Commerce report, the report says. Huntsman didn’t respond to an emailed request for comment.
“A lie repeated a thousand times still is a lie,” the People’s Daily, the flagship Communist Party newspaper, wrote in May. It said the U.S. “fabricated” accusations and that the Trump administration hasn’t provided examples despite repeated requests. Aside from such denials, China made a rapid-fire series of legal changes that appeared designed to help it reach a deal with the U.S. A new foreign investment law scheduled to take effect in 2020 will ban administrative agencies from forcing technology transfers. It also exposes officials who disclose or leak trade secrets gleaned from regulatory approvals to potential criminal penalties. The law was approved in March 2019 after just a matter of months, a process that usually takes years. A revision to the Administrative Licensing Law approved shortly thereafter prohibits officials from revealing trade secrets and confidential information. And the government said in November it would raise penalties for violations of intellectual property rights and look into lowering the threshold for criminal punishment.
6. That’s not good enough?
U.S. officials say China has committed to changes before but not followed through. Groups representing U.S. and European firms operating in China said in October that the new foreign investment law addresses some of their members’ core concerns, including around IP protection, but questions remained about how it will be implemented. U.S.-China Business Council Vice President Jake Parker said it also “falls short of specifying the types of disclosures of trade secrets that will be prohibited and clarifying the types of administrative organs to which the provisions on technology transfer apply.”
7. Does technology transfer also happen legally?
Absolutely, and in fact China is among the world’s biggest payers of fees to patent and license holders, according to the International Monetary Fund. In 2018, its outlay on foreign intellectual property rights rose 24% from the previous year to $35.8 billion, according to China’s State Administration of Foreign Exchange. The payments were mainly in such industries as computing, telecommunications, auto manufacturing, shipbuilding and aviation. (It received about $5.6 billion for its intellectual property.) “Sharing” was key to a deal for four vessels signed in 2018 by the world’s largest cruise ship operator, Florida-based Carnival Corp., its longtime Italian shipbuilding partner Fincantieri SpA and China State Shipbuilding Corp. To aid Carnival’s quest to break into China, Fincantieri will license its technology to the Chinese state-owned shipyard, providing expertise in building cruise ships -- a key focus in the Chinese government’s “Made in China 2025” program. Carnival spokesman Roger Frizzell said demand for cruise ships globally far exceeds supply and that will continue, with China expected to be world’s largest market “by a large degree.”
8. Is there a solution to the impasse?
U.S. President Donald Trump said he’s in no hurry to make a deal, while the People’s Daily complained that “the more the U.S. government is offered, the more it wants.” Over time, China’s shift into higher-technology industries should lead it to tighten laws and regulations over trade secrets and intellectual property -- if only to protect domestic companies.
9. Has this happened before?
Yes. When China first opened to the world in the late 1970s, it wasn’t seen as a huge problem because the technological gap was so wide. That changed as China developed. U.S. chemical manufacturers say their Chinese competitors have gone from 30 years behind to three to five years behind over the course of one decade, according to Parker at the U.S.-China Business Council. “That kind of incredible innovation doesn’t happen,” he says. More broadly, the problem has been around for centuries. Hundreds of years ago even America’s Founding Fathers seemed unopposed to a little intellectual property theft. In a 1791 “Report on Manufacturing,” Treasury Secretary Alexander Hamilton advocated rewarding those bringing “improvements and secrets of extraordinary value” into the U.S.
--With assistance from Miao Han, Grant Clark, James Mayger and Masumi Suga.
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