As the story goes, in 206 B.C., when Liu Bang, who later founded the Han Dynasty that lasted over 400 years, was vying with another warrior Xiang Yu to become the ruler of China, his general Han Xin thought of a strategy to defeat Xiang. He first sent thousands of troops to build a 250-kilometer wooden path that would enable his infantry and cavalry to march to the frontline against his enemy. The ostentatious war preparations soon caught the attention of Xiang Yu, who immediately dispatched his major forces to guard the passes and forts. Liu then had his elite forces advance surreptitiously through narrow mountain trails, and launch a surprise attack that roused his enemy’s armies. The moral of this episode in Chinese history — there is more than what meets the eye — may shed some light on the more recent U.S. accusations of China’s “forced transfer of technology.”
For over a year, the accusation has been at the core of the U.S. trade dispute with China, and it has generated considerable amount of confusion. It is critically important to make a clear distinction between commercial deals between foreign companies and their Chinese business partners on the one hand, and acts of the Chinese government on the other. While commercial contracts are based on mutual agreement, “forced transfer of technology” is related to the latter. So, it is not appropriate to regard complaints against Chinese companies as “forced technology transfers.”
In joint ventures in China, foreign businesses are free to negotiate the terms of the contract with their Chinese business partners. They can simply walk away if they are not happy with the terms proposed by their negotiating counterpart. They enter into contracts at their own will, based on their calculations of the cost and benefit of their participation in the business. As part of the contractual relationship, technology transfer is all about meeting one’s obligations under the contract. It is not about being “forced.”
Summing up his experience working for many years with a joint venture between his company and the China Construction Bank, Stephen Roach, a faculty member at Yale University and former Chairman of Morgan Stanley Asia, said, “Forced technology transfer overlooks the simple fact that joint ventures are commercially and legally binding agreements between two partners working together willingly to build a new business that undoubtedly requires a sharing of personnel, systems, and processes.” He added, “I was never forced to turn over anything.”
In a typical joint venture, foreign companies and their Chinese partners pool and share their resources to capitalize on their comparative advantages. Often technological edge is what local companies seek from foreign firms so as to secure a strong competitive position. Just the other day, a friend of mine who is an executive of a leading fiber glass manufacturer in China told me, “We have everything we need for expansion: capital, sales network, clients, supplier and trained workers. New technology is the only thing we look for in a potential partner.” His comment reflects the position of many Chinese companies wanting to set up joint ventures with foreign companies.
With a savings rate of over 40%, there is no shortage of capital in China and financing is often readily available for creditworthy local companies. On the other hand, advanced technology is highly valued. Investing with their technology makes excellent business sense for overseas companies — it will help them to secure a foothold in China’s market and grow their business. Those that have chosen to do so have generally been rewarded handsomely. By investing its technology and processes in China, General Motors, for example, is able to make more cars in China than anywhere in the world. And it makes more profits than it does in its home market. According to the American Chamber of Commerce in China, 90% of U.S. companies’ China operations were profitable or broke even in 2018.
If there is a “forcer” of technology transfer, it would be the invisible hand, the market and the compelling forces of competition. As local companies are fast developing their capacities to innovate and Chinese consumers become increasingly choosy, more often than not there is a compelling need for foreign investors to bring in their technology. Failure to put their best foot forward would run the risk of not only losing the world’s biggest market, but also losing out to competitors in China and beyond. Therefore, it is market and market competition that make it an imperative for foreign companies to transfer technology.
Toward the end of the 1990s, I served as the deputy director-general in the local government’s department of foreign investment in Shenzhen, a pioneering city in China’s drive to open up its market to the outside world. I knew of no national law then requiring foreign investors to divulge sensitive trade secrets to their Chinese business partners. Never did I hear of any national policy that stipulated that the approval of a foreign invested enterprise should be conditional on the foreign business handing over its technology to Chinese entities. In its Section 301 report released last year, the United States was unable to provide any evidence to substantiate its claim that there is a Chinese law that requires foreign companies to transfer technology in order to set up their business in China. Furthermore, the U.S. failed to furnish a single real case to prove that the Chinese Government had, in practice, forced or pressured foreign investors to give up their technology. This failure on the part of the U.S. has called into serious question the validity of its claim.
The fact is that there is neither a legal requirement nor an official policy in China that stipulates technology transfer is a prerequisite for foreign investors to access China’s market. There are reported complaints from foreign businesses with regard to technology transfer, but these grievances apparently belong in the commercial realm. It would be unfair to blame it on the government.
To allay the real and imaginary concerns of some foreign businesses, China has gone as far as to revise its law governing foreign investments. The new law that has gone into effect recently specifically states that forcing transfer of technology by administrative means is prohibited. Should instances of such unwanted interventions by certain overly-enthusiastic government officials arise, foreign businesses can file administrative appeals or lawsuits. And yet, Washington does not seem to have been impressed at all by the initiative of the Chinese government.
Washington attributes “forced transfer of technology” to China’s legal requirement that foreign business’s Chinese operations in some sectors take the form of a joint venture with a local company, with a cap on foreign equity. In an attempt to link “forced transfer of technology” with market access, it claims that China’s imposition of the requirement “lays the foundation for Chinese government to require or pressure technology transfer.”
However, market access is another issue entirely. China’s joint venture requirement and foreign equity limitations are the negotiated results between China and the other WTO members over a period of more than a decade. Their imposition is consistent with WTO rules, and in line with China’s commitment to the multilateral trade body. To share the benefit of its economic development, China has done more than meet its obligations under the WTO. The restrictions on foreign investment in place have been reduced dramatically, with those in 2018 down to one third of the 2011 level.
China is not alone in maintaining restrictions on foreign ownership. Such a practice is common in most, if not all, countries in the world. The United States, for example, limits foreign investment on not just national security grounds, but also in “critical technologies.” The Committee on Foreign Investment in the United States routinely investigates and rejects potential deals with foreign companies. Largely due to the implementation of a stricter foreign investment review regime in the United States in 2018, investment from China in the country was decimated, down by 90% in 2018 compared to the previous year. In Germany, the government scrutinizes — and sometimes blocks — purchases of 10% or more stakes by non-European firms in German companies in sectors such as energy, water, food supply, telecommunications, defense, finance, and transportation.
Admittedly, the Chinese market is not as open as some foreign investors and their governments would like it to be. The good news is that the process of opening up in the country is accelerating. New measures are being taken to allow for easier access to the market for foreign companies, including the abolition of the joint venture requirement in sectors such as exploration and exploitation of oil and gas, and the removal of caps on foreign equity in insurance, shipping agency, and call centers. Furthermore, China is expected to embrace foreign investors even more enthusiastically.
Apparently, Washington’s accusation is nothing short of a myth. But what is the real U.S. motive? As the story at the beginning of this article demonstrates, sometimes what you see is not what it is, and the real motive is concealed. One wonders if “forced transfer of technology” is a smokescreen, like Han Xin’s. In all probability, Washington’s accusation is designed to force open the China market by extracting more concessions than it would otherwise be able to.