How China steals technology

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Via the WSJ:

DuPont Co. suspected its onetime partner in China was getting hold of its prized chemical technology, and spent more than a year fighting in arbitration trying to make it stop.

Then, 20 investigators from China’s antitrust authority showed up.

For four days this past December, they fanned out through DuPont’s Shanghai offices, demanding passwords to the company’s world-wide research network, say people briefed on the raid. Investigators printed documents, seized computers and intimidated employees, accompanying some to the bathroom.

Beijing leans on an array of levers to pry technology from American companies—sometimes coercively so, say businesses and the U.S. government.

Interviews with dozens of corporate and government officials on both sides of the Pacific, and a review of regulatory and other documents, reveal how systemic and methodical Beijing’s extraction of technology has become—and how unfair Chinese officials consider the complaints.

China’s tactics, these interviews and documents show, include pressuring U.S. partners in joint ventures to relinquish technology, using local courts to invalidate American firms’ patents and licensing arrangements, dispatching antitrust and other investigators, and filling regulatory panels with experts who may pass trade secrets to Chinese competitors.

U.S. companies have long complained that Beijing pressures them to hand over intellectual property. More recently, their concerns have escalated as China turns into an advanced rival in industries ranging from chemicals to computer chips to electric vehicles.

Coerced technology transfer is now a central part of the spiraling U.S.-China trade fight, a standoff that appears to be only more entrenched. The White House estimates China inflicts $50 billion yearly in damages on U.S. companies. That transfer, U.S. executives regularly complain, weakens American businesses’ competitiveness and undermines the incentive to innovate.

These kinds of activities are called “behind the border” trade protections. All countries have them. We are one of the worst in agriculture with all sorts of dubious claims about diseases etc. But some nations are more aggressive than others with China clearly one of the worst:

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Chines piracy is not new. Indeed it seems to be something of a national specialty with famous episodes such as the counterfeiting of Japanese corporation NEC, via the NYT:

At first it seemed to be nothing more than a routine case of counterfeiting in a country where faking it has become an industry.

In mid-2004, managers at the Tokyo headquarters of the Japanese electronics giant NEC started receiving reports that pirated keyboards and blank CD and DVD discs bearing the company’s brand were on sale in retail outlets in Beijing and Hong Kong. So like many other manufacturers combating intellectual property thieves in China, the company hired an investigator to track down the pirates.

After two years and thousands of hours of investigation in conjunction with law enforcement agencies in China, Taiwan and Japan, the company said it had uncovered something far more ambitious than clandestine workshops turning out inferior copies of NEC products.

The pirates were faking the entire company.

Evidence seized in raids on 18 factories and warehouses in China and Taiwan over the past year showed that the counterfeiters had set up what amounted to a parallel NEC brand with links to a network of more than 50 electronics factories in mainland China, Hong Kong and Taiwan.

Using the company name, the pirates copied NEC products, and went as far as developing their own range of consumer electronic products — everything from home entertainment centers to MP3 players. They also coordinated manufacturing and distribution, collecting all the proceeds. The actual NEC even received complaints about products — which were of generally good quality — that they did not make or provide with warranties.

What is new is this, via the ABC:

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Announced in October 2015, the Made in China 2025 plan is a roadmap for the future of the country’s manufacturing sector.

It intends to turn China into a manufacturing super power, and Beijing is keen to pour somewhere in the order of $US300 billion into that lofty goal.

The plan looks to target emerging industries like robotics, the manufacturing of autonomous and electric cars, artificial intelligence, biotech and aviation.

Those industries will be subsidised, handed low-interest loans, rent-free land and tax breaks in order to beat global competitors in the field.

Neale O’Connor, an expert on Chinese technology and manufacturing innovation at Monash University’s Malaysia Campus, said China hoped to turn itself into a high-end manufacturer with global trade links.

“There are bold plans not just to dominate the domestic market in China, but actually to be dominant in the world,” he said.

“The focus is to help China move from being dependent on international companies and providing low-cost labour to actually becoming an independent and technology-driven economy.”

…the policy features self-sufficiency quotas in certain hi-tech components, which would make it unnecessary for China to trade with other nations to gain access to that technology.

According to the Council on Foreign Relations (CFR), this would be a nightmare for countries like South Korea and Germany, since hi-tech exports are so central to their economies.

There’s also the question of how China plans to gain the know-how required to make those hi-tech components.

China has been repeatedly accused of stealing the trade secrets it desires, using cyberespionage to strike “US commercial networks in line with Chinese industrial policy goals,” according to the Office of the United States Trade Representative.

It has also been accused of using its strict market access rules in order to obtain intellectual property from foreign competitors.

This is now the core of the trade war. Either China changes course on it or the war gets worse.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.