It’s one of the most contentious fronts in the U.S.-China trade war: so-called forced technology transfers. The term refers to a spectrum of practices through which foreign companies that want to operate in China are induced to part with their know-how. That may be simply through a requirement to form a joint venture with a local firm, or more insidious bureaucratic methods like overly intrusive inspections. The Chinese government dismisses allegations of strong-arming as “utterly unfounded,” describing any cooperation as “voluntary” and “based on market principles.” A 2018 report by the U.S. Trade Representative quoted one ex-White House official as saying the transfer requirements are voluntary in the same way a business proposition from Vito Corleone in “The Godfather” was.
1. What’s the charge?
Before China joined the World Trade Organization in 2001, technology transfers were often an explicit requirement 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 seen to breach WTO rules come verbally and behind closed doors. China’s opaque foreign investment approval system required outside companies to form joint ventures with local partners in return for market access. As part of the deal, the foreign company had to share its secrets — how to make a certain pigment, say, or vehicle parts. As the joint venture requirement has given way in some industries to allow for majority or 100% foreign ownership, these days the most egregious cases of technology transfer flow from environmental-impact assessments or other steps in the licensing process.
2. How does that work?
Take chemical companies, 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 problem is the dominance of state-owned enterprises in some industries. That creates a de facto cartel that China uses to extract concessions from foreign companies, who have no one else to make a deal with. The European Union Chamber of Commerce in China found 20% of companies surveyed this year had 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.
3. Why not go to court, or the WTO?
In a submission to the US Trade Representative in 2018, the Information Technology and Innovation Foundation, a Washington-based research and advocacy group, wrote that China’s informal pressure tactics make it “impossible to prosecute.” Lobby 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.
4. Has anyone tried?
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.
5. What does China say?
“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 points to 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 next year will ban administrative agencies from forcing technology transfers. It also includes the possibility of criminal penalties for officials who disclose or leak trade secrets gleaned from regulatory approvals. The law was approved in March after just a matter of months, a process that usually takes years. A revision to the Administrative Licensing Law approved in April also prohibits officials from disclosing trade secrets and confidential information.
6. That’s not good enough?
U.S. officials say China has committed to changes before but not followed through. The European Union Chamber of Commerce in China reported in May that the new foreign investment law “contains broad terms and vague language throughout” that create “uncertainty that damages business confidence.”
7. Does technology transfer happen in legitimate ways?
Absolutely, and in fact China is among the world’s biggest spenders on patents and licenses, according to the International Monetary Fund. Last year, its outlay on foreign intellectual property rights rose 24% to $35.8 billion, according to China’s State Administration of Foreign Exchange. (It received about $5.6 billion for its intellectual property.) The payments were mainly in industries including computing, telecommunications, auto manufacturing, shipbuilding and aviation. “Sharing” was key to a deal for four vessels signed in November 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 into the future, 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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