China’s State-Owned Enterprises Encourage Intellectual Theft

Dan Eberhart | CEO, Canary, LLC

All eyes turn back toward China this week as U.S. Commerce Secretary Wilbur Ross returns to East Asia for another round of trade talks with his Chinese counterparts.

The American business community is watching closely — markets have been roiled in recent weeks as tensions have risen, and new investigations have been launched into the automobile and telecom sectors, while American companies that depend on imported steel and aluminum have been taking it in the teeth. Trade wars hurt all participants — except for companies in countries that aren’t involved in the dispute and can swoop in and take market share from affected businesses.

Still, America has been complacent about the bad behavior of China for too long. As a U.S. businessman who relies on Chinese manufacturers, I oppose tariffs. But as an American, I agree with President Trump that China has taken advantage of the situation for far too long and that a change in the relationship is overdue.

American companies, especially the multinational behemoths who influence so much of policy in Washington, have been content to watch their profits rise while Beijing stole their intellectual property and bullied them into admitting to crimes they may have never committed. Qualcomm paid a fine of nearly $1 billion for supposed anti-trust violations in 2015, and Volkswagen and Chrysler paid tens of millions in fines for similar offenses the year before.

A now familiar pattern began to develop among companies that wanted to do business in China. First, the company would make a very public mea culpa, and then pay Beijing for the privilege of continuing to do business in China.

Other American giants aren’t immune. Even as its market share continues to slide in China, Apple has bowed to demands from the country’s Communist Party. Last year, it agreed to partner with a Chinese data-services company to store iCloud data in the country, raising concerns about privacy and the security of trade secrets that directly contradicted Tim Cook’s stated vision for the U.S. tech giant.

Despite all this, the policy response in Washington has been relatively muted. The Obama administration dragged its feet on negotiation of a bilateral investment treaty with China that would have established rules governing foreign investments in China in line with the World Trade Organization and other U.S. trade and investment agreements. It would have pushed China closer to actually joining the rules-based global trading system that has led to 60-plus years of unprecedented global growth.

But taking firm action would have threatened the short-term profits of those multinational corporations already operating in China, even as small and medium-sized businesses without the same political clout suffered.

At the root of the problem are the protections and benefits that Chinese state-owned enterprises (SOEs) receive from their government. By forcing U.S. companies to enter into joint ventures with their Chinese counterparts, Beijing is facilitating intellectual property and trade-secrets theft that costs American companies billions of dollars in lost profits and market share.

To give just one example, American auto companies can only own 49 percent of their joint ventures in China. As they siphon expertise from their American counterparts, Chinese automakers have built out their own operations, with the intent of squeezing foreign competition out of the entire supply chain.

Specialization is good. It allows countries to focus on those areas within a supply chain they can add the most value to while integrating the expertise of other nations’ and diversifying from the risk of becoming over-reliant on a single industry. Focusing too heavily on a “Made in China” policy will hurt both trading partners in the long run.

By narrowly targeting these SOEs and pressuring them to stop their forced technology transfers, rather than subjecting the entire Chinese economy to tariffs, the Trump administration can help American businesses and address the core issue at the same time.

The president can do this through direct negotiations with the Chinese government, but he should also let the new WTO case on forced technology transfer run its course. Doing so will build international consensus and, with the appropriate amount of diplomatic pressure, force China to end some of its more egregious practices without making the entire U.S. economy pay a price.

The Trump administration has a once-in-a-generation opportunity to help American competitiveness abroad, without hurting the businesses it says it wants to help. We trust Secretary Ross will do the right thing. But at the end of the second quarter, we’ll still want to verify the results.

Dan K. Eberhart is CEO of Canary, LLC. He has been doing business with manufacturers in China for the past decade. He is currently traveling on business in China and southeast Asia.

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