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The US finds itself in a spot with China on tech transfer

It is unlikely US firms seeking a role in second largest economy will toe Washington’s line

Image Credit: AFP
A worker walks outside a construction site in Beijing.
Gulf News

As the Trump administration moves to take on China over intellectual property, Washington will find it has limited firepower.

Beijing has a strong grip on US technology companies, and global trade rules could favour China.

Technology is proving a major battleground for China and the US, as both sides vie to protect their economic and national security interests. Beijing has forced a long list of US companies to enter joint ventures or share research with Chinese players, part of a broader push to create its own technology giants. From makers of smartphones to chips to electric cars, US businesses have reluctantly agreed, fearful of losing access to China, which has the second-largest economy in the world.

China’s ambitions have set off alarms in Washington, with concerns on both sides of the aisle. Robert E. Lighthizer, the US trade representative, is now preparing a trade case accusing China of extensive violations of intellectual property, according to people with detailed knowledge of the case.

But China can play a strong defence. The country has broad latitude, under special rules it negotiated with the World Trade Organisation, to maintain restrictions within its market.

“The problem is that US trade negotiators agreed to provisions allowing China to limit market access for US companies unless they engaged in joint ventures,” said Michael R. Wessel, a member of the US-China Economic and Security Review Commission, which Congress created to monitor the relationship between the two countries.

“Potential Chinese partners demand the family jewels,” he said. “Companies can say no, but too many give in to Chinese pressure to make a quick buck.”

The current trade frictions trace back to the Clinton administration. When China was entering the WTO in 1999 and 2000, US negotiators gave Beijing some leeway, a position later supported by the administration of George W. Bush. As a developing country, China was allowed extra protections, such as requirements that companies in critical industries work with Chinese partners.

China, in return, promised to shed the extra rules gradually as its economy matured. But Beijing did not open up, even as China evolved into an economic powerhouse.

Quite the opposite has happened under President Xi Jinping, who has pursued a more nationalistic agenda than his reform-minded predecessors. China now sees the technology sector as a critical piece of its industrial policy — a policy that Beijing is aggressively enlisting US tech giants to support and that the leadership will most likely go all out to protect.

Beijing’s demands have been partly driven by security concerns, particularly after disclosures by Edward J. Snowden, the former National Security Agency contractor, of electronic spying by the US on China’s rapid military build-up. China has also been explicit about its economic motives, seeking to dominate fast-growing global industries that could create millions of well-paid jobs for a generation of increasingly well-educated young Chinese.

In several cases, China’s strategy to control technology approaches the kind of oversight most countries reserve for industries serving the military or government. New Chinese rules often force foreign tech companies into partnerships with local companies — in part to gain expertise, in part to assert control. Other guidance from the government has indicated that companies must invest more in China to continue to have access to the market.

Apple has opened research and development centers in the country as part of a new charm campaign. In the chip sector, a major initiative intended to lift Chinese capabilities has drafted America’s biggest makers of the electronic brains that run everything from smartphones to driverless cars. Over the past four years, America’s largest chip companies have entered into a dizzying network of partnerships unlike anything they have anywhere else.

Qualcomm works with a company in southwest China to develop server chips. In 2014, Intel signed agreements with two Chinese chip makers, Spreadtrum and Rockchip, to give it a leg up in the market for China’s smartphones and tablets.

Last year, Intel agreed to a partnership with the influential Tsinghua University in China as part of a bid to make server chips that match local specifications. IBM and Advanced Micro Devices have both licensed chip technology to Chinese partners with ties to China’s military. GlobalFoundries, a California-based company, joined forces with a local government in central China to build a $10 billion chip manufacturing plant there.

US technology companies can find themselves at a serious disadvantage in China unless they agree to cooperate with government-linked Chinese businesses. Take cloud computing, the fast-growing business of leasing computer power to companies. Chinese laws require foreign companies to join with local partners and allow them only a minority stake.

International businesses are also blocked from branding such services under their own names. Both Microsoft and Amazon, dominant forces in cloud computing in the US, have local partnerships in China. By contrast, China’s e-commerce giant Alibaba operates two data centers in the US without any partner.

Another rule calls for data about Chinese consumers or business operations to be stored in China. Apple and Amazon recently set up data centers in China, again with local partners, to store more customer information in the country.

Against that backdrop, the call for trade action is attracting bipartisan support. Sen. Ron Wyden of Oregon, the ranking Democrat on the Senate Finance Committee, which handles trade issues, met with Lighthizer and gave him a letter supporting a challenge to Chinese policies.

“China’s forced technology transfer policies are among the key challenges facing US innovators operating in China or otherwise competing with Chinese firms,” Wyden wrote.

China can make its own play under global trade rules. Beijing can quickly demand binding arbitration — and could have a good chance of winning. China was allowed into the WTO with very few limits on its ability to regulate services or foreign investment, two categories in which China was fairly weak when it entered the organisation in 2001.

If China did win a WTO case, it would then have the right to restrict US exports to the same extent that the US restricts Chinese imports. China consistently exports four times as much to the US as it imports.

Even so, China could penalise US companies like Apple and Starbucks that have very large operations that produce and sell in China with minimal imports from the US.

“US negotiators, I think, basically dropped the ball,” said Nicholas R. Lardy, a longtime trade expert at the Peterson Institute for International Economics, referring to the rules on services that were negotiated when China entered the WTO. “They didn’t think China was very important.”