Is China stealing intellectual property from the USA?

He accuses China of widening America’s foreign trade deficit, violating the rules of the World Trade Organization, and using dishonest methods to obtain Western technology. Most economists are amazed at Trump’s ignorance of the nature of foreign trade balances, but many generally agree with his allegations regarding intellectual property. However, according to Yu Syndicate, professor at the Chinese Academy of Social Sciences, in his article on Project Syndicate, the evidence on which these allegations are based is also, to put it mildly, weak.

Following a trade investigation launched by the Trump administration last year in accordance with Section 301 of the Trade Act, China was accused of acquiring foreign technology through discriminatory licensing restrictions, unfair technology transfer agreements, targeted investment abroad, and illegal computer intrusions network of American companies, as well as cyber theft of intellectual property.

“The weight of this evidence,” the report concludes, shows that China is applying restrictions on its foreign presence in the economy to force US companies to transfer their technology to Chinese organizations.

How important are the US and China for each other?

However, these arguments are not at all as convincing as presented in the report. To begin with, Chinese companies do not suffer from a lack of capital (due to a chronic surplus of savings in the country), so for them, the main motive for trying to attract direct investment from abroad is access to foreign technology. According to WTO rules, these companies have the right to demand technology transfer from their foreign partners on a commercial and voluntary basis.

Fortunately for China, foreign companies are very eager to enter its market, and not least because the country has preferences for direct investment. Moreover, for decades, foreign and local companies have readily accepted the Chinese “market access to technology” strategy, which requires foreign investors to “import” advanced technology in exchange for entering the Chinese market.

Whatever flaws they see in this approach, the fact remains: foreign enterprises, including companies wholly owned by foreigners, or foreign partners of Chinese firms, have benefited enormously from their investment in China. According to a report published by the World Bank in 2006, foreign multinational companies had an average return on investment in China of 22%. And according to a report prepared by the Conference Board of World Enterprises, in 2008 the average rate of return on capital in China for US multinational companies was 33%.

However, since 2009, profit before interest and taxes from foreign enterprises in China has been declining, although in 2017 the situation improved. This is a problem that the Chinese government must take seriously. One way or another, no one can say that foreign companies are forced to work in the Chinese market. Statements that US firms are pushing technology transfer to China are therefore irrelevant.

Moreover, these statements are not based at all on any convincing evidence. The US Trade Representation Office (abbreviated USTR), which prepared the “Section 301 Report,” claims to have conducted many surveys, however, all participants in these surveys answered anonymously, and their statements are nothing more than speculation: there is nothing in them that could be accepted for consideration by the court. And even if these statements were true, they cannot conclusively testify that forcing foreign companies to transfer technology is the dominant practice in China.

Equally unconvincing are the allegations in the “Section 301 report” regarding investments abroad, namely China’s use of “state capital and extremely opaque investment networks to facilitate the acquisition of high technology abroad.” According to USTR, the Chinese government has not only clearly defined its investment strategy, but also has an army of firms obedient to it, which are willing to implement this strategy.

Meanwhile, according to a report by the American Enterprise Institute (AEI), from 2005 to 2016. Chinese companies made only 202 investments in the United States, including mergers and acquisitions, and only 16 of them (totaling $ 21 billion) were directed to the technology sector. Between 2013 and 2016 Chinese investors spent much more – $ 94 billion – on American real estate.

The industry distribution of foreign investments by Chinese companies shows that there are no signs of the effective operation of even market mechanisms that would force Chinese companies to invest rationally. On the contrary, companies make independent – and often irrational – investment decisions that sometimes result in large losses.

The final issue raised in the “Section 301 Report” relates to cyber theft of intellectual property and confidential commercial information, which the US claims to be implemented by the Chinese government. The report acknowledges that the number of detected cases of Chinese cyber espionage declined after 2015, when China and the United States agreed that neither party would “engage in or knowingly support cyber theft of intellectual property, including trade secrets and other confidential business information, in order to obtain commercial benefits. ” Nonetheless, some U.S. officials insist that such a decline is most likely a result of a shift to more centralized, honed and sophisticated attacks by fewer participants.

In reality, China is gradually progressing in the protection of property rights. As noted by Nicolas Lardi of the Institute of International Economics. Peterson, “China’s royalties and royalties on using foreign technology have risen sharply in recent years, reaching almost $ 30 billion last year, an almost four-fold increase over a decade.” Moreover, Lardi continues, “China probably ranks second in the world in terms of the scale of royalties paid for technologies that are used within the country’s national borders.”

It is clear that the “Section 301 report” is based on rumors, imagination, and half-truths. And the obvious question arises: how can the Trump administration make political decisions with such serious consequences, namely, introduce trade duties that can provoke a catastrophic “trade war” if it is based on such weak arguments. The answer is obvious: this report is intended to justify this decision, and not to provide the information necessary for making decisions.

All this does not mean that the problems raised in the “Section 301 report” are pure fiction or that China impeccably fulfills its obligations to the WTO. On the contrary, China still has much to do to improve compliance with WTO rules, especially with regard to opening the financial services sector and strengthening the protection of intellectual property rights.

However, trade problems must be resolved within the WTO: the United States should use the organization’s dispute resolution mechanism to satisfy its claims. Given that the Trump administration does not demonstrate such approaches, China should consider initiating a new round of WTO negotiations in cooperation with Australia, Canada, the European Union, Japan, Mexico and New Zealand. The system of multilateral relations must be maintained – and it does not matter, with or without the United States.

The “trade war” launched by Trump will not be able to force China to abandon its desire to catch up with developed countries. China is ready to wage war of attrition. Unfortunately, both parties, as well as the rest of the world, will suffer serious losses during this process.

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