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Economy

Unfounded Accusations Against China

Jul 24 , 2018
  • Li Yong

    Deputy Chair, China Association of International Trade

Hangzhou_West_Lake_Apple_Store_Opening.jpg

Crowds queuing up outside an Apple Store in Hangzhou

 

“Economic aggression” is the worst term that any of the U.S. administrations have ever used to define China-US trade relations and it has been used by the Trump Administration to justify its devastating tariffs on Chinese imports. In addition, it has become an excuse for the U.S. to attack China’s technological advancements.

The trade imbalance between the two countries seems to be the starting point of all the ensuing accusations that culminated in the White House report "How China's Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World", which reflected the opinions of US Trade Advisor Peter Navarro, an advocate of economic nationalism and monger of trade war and tariffs.

The report allegedly focuses on two categories of China’s economic aggression, namely, a) acquiring key technologies and intellectual property from other countries, including the United States and b) capturing the emerging high-technology industries that will drive future economic growth and advancements in the defense industry.

These accusations however exploit the vulnerabilities of Americans with stories of trade deficits undermining U.S. industries and causing job losses, and spread Sinophobia.

The report accused China of IP theft and forced technology transfers. No evidence other than distortion and perversion of facts was documented in the report. The stories told therein are more of a distraction from the issues in the U.S. than a serious rundown of facts.

In a recent CNBC interview, Larry Summers, the former Clinton Treasury Secretary, and an ex-economic advisor to Barack Obama, said Chinese companies’ leadership in some technologies are not the result of theft from the U.S. “You ask me where China's technological progress is coming from. It's coming from terrific entrepreneurs who are getting the benefit of huge government investments in basic science. It's coming from an educational system that's privileging excellence, concentrating on science and technology,” said Summers. “That's where their leadership is coming from, not from taking a stake in some U.S. company.”

The report, however, chose to ignore China’s effort to restructure the economy from low to value-added production by its massive spending on research and development activities. China’s total spending on R&D is estimated to have reached ¥1.76 trillion (about $279 billion) last year. China’s spending on R&D in 2017 accounts for 2.12% of its total GDP. Reuters quoted 2015 World Bank data to compare that with around 2.8% in the United States, 2.9% in Germany, and 3.3% in Japan. The US-based National Science Foundation “Science and Engineering Indicators” report this year said China would become a global innovator very soon if present trends in R&D funding continue. The World Intellectual Property Organization (WIPO) has a similar conclusion in its annual report, saying that China will “overtake the US within three years as the largest source of (patent) applications filed under WIPO's Patent Cooperation Treaty”.

Nicholas Lardy of the Peterson Institute for International Economics notes that China ranks fourth in the world in payments of licensing fees and royalties for the use of foreign technology, behind Ireland, the Netherlands, and the United States, but ahead of economies including Japan, France, UK, Canada, Germany, Singapore, South Korea, and India. The recent statement by China’s Ministry of Commerce shows that China’s payments for the use of foreign IPRs reached $28.6 billion in 2017, a 15-fold increase from 2001, when China joined the WTO.

China is also an exporter of IPRs. According to the latest data released by the State Administration of Foreign Exchange (SAFE), foreign payments for Chinese IPR licensing fees and royalties reached a record high of $4.77 billion in 2017, an increase of 311.5% since 2016. Manufacturing technologies contributed nearly 80% of China’s revenue from IPR licensing and royalties, totaling $3.79 billion.

China does not need to steal technology from the U.S. or anywhere else.

On the allegations of China’s “forced technology transfer”, former Morgan Stanley Asia chairman Stephen Roach wrote in the South China Morning Post that US firms were willingly transferring technologies to the joint ventures because it improved production efficiency and profitability.

Foreign investments in China can take three forms: equity joint venture, contractual joint venture, and wholly-owned foreign enterprise (WOFE). Motorola set up its wholly foreign-owned enterprise in Tianjin in 1992. Foreign investors also have the choice of leaving China, if they wish. They can make their own independent decisions to come and go. Peugeot came to China in 1985, and for some reasons other than technology transfer, Peugeot sold its assets and left China in 1996. The brand came back in in 2002, partnering with another local auto maker in Wuhan.

As it stands today, China’s policy regarding the forms of foreign investments are virtually restriction-free.

There used to be equity requirements, for example, in the auto industry. But foreign investors always have the choice of not doing business with China if they feel they are forced to surrender technologies that they don’t want to give up or feel their technologies are underpriced.

The fact is, technology transfer is part of the investment strategy of foreign investors, including American ones. In the joint venture contract, there are sophisticated and complex terms regarding the transfers and the protection thereof. American companies are in China to make money, not to be forced to transfer their technologies.

Hua Chunying, the spokesperson of China’s Ministry of Foreign Affairs, said in a press conference that “many American companies have made a bundle from the Chinese market, thanks to China's rapid economic growth and large consumer base”. For example, China is the largest market for Apple and General Motors, Hua said. In 2017, when General Motors Company lost ¥10.98 billion worldwide, its two joint-ventures in China still pocketed ¥13.33 billion worth of profit. Qualcomm's sales in China accounted for 58% of its total revenue. The retail price for Apple's iPhone 7 starts at $649, but manufacturers in China only get less than 1% of the value. When China exports a $450 business suit to the US, China gets 5% of the profit while the US gets 84%.

China has not used technology transfer as a precondition of market access and there has been no such requirement in China’s regulations regarding foreign investments.

According to the Principles of International Law Concerning Friendly Relations and Co-operation Among States in Accordance with the Charter of the United Nations, “No State may use or encourage the use of economic, political or any other type of measures to coerce another State in order to obtain from it the subordination of the exercise of its sovereign rights or to secure from it advantages of any kind”. The U.S. accusations of IP theft and forced technology transfer are attacks and insults against China. They themselves, combined with the aggressive tariff impositions, constitute acts of “economic aggression”. What the U.S. is doing now aims at reducing China’s economic prospects through economic coercion. The unilateral protectionist policies and practices go against the desire of people for a better world order, and the desire of the global business community for free trade and investment.

 

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