By Jeff Ferry, CPA Research Director
The White House published on Tuesday a document detailing the wide range of tools and strategies used by the Chinese government to steal, extort, and otherwise gain access to American intellectual property (IP) to support their drive to become a leading global economy with dominant positions in many of the world’s most important industries.
The document is a powerful and frightening inventory of the broad-based Chinese campaign of economic aggression, ranging from well-known ploys like espionage to lesser-known bureaucratic tricks like regulatory rules within China that force US companies to give up their trade secrets as the price for entry into the Chinese market.
The document, entitled How China’s Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World, and available here, backs up the current Trump administration plan to levy tariffs on Chinese imports under Section 301 of the Trade Act of 1974. The administration announced tariffs on $50 billion of Chinese imports. After China announced its own tariffs in retaliation, the administration suggested early this week it is considering 10% tariffs on an additional $200 billion worth of Chinese imports. That would leave the Chinese in a quandary for reprisals, because we only export about $105 billion worth of goods to China a year. Nevertheless, there is little sign the Chinese government is close to yielding to US demands to treat intellectual property and foreign companies with respect. This will be a long battle.
The largest section of the White House’s “Economic Aggression” document is devoted to the coercive practices used inside China to force foreign companies to share their technology with Chinese “partner” companies. For example, it’s well known that American companies can only sell in China if they agree to partner with a Chinese company and work together to manufacture (inside China of course) the American company’s products. The report describes how in these joint ventures, the Chinese partner often owns other separate companies that compete with the joint venture. It often assigns employees of competitive companies to work inside the joint venture—making it easy for those competitive companies to learn the techniques and product details of the American company and begin to produce a very similar product at the 100% Chinese-owned company.
Another practice is to use product testing for Chinese approval to sell in China as a means to force the foreign company to share its secrets. This is often disguised as testing for “safety” or “standards” but the reality is otherwise. Says the report: “China’s extensive, burdensome, opaque, and discriminatory approvals process functions as a significant non-tariff barrier to entry and a coercive tool to force the transfer of technologies and IP.”
Another trick the Chinese government uses is the threat of fines under its antimonopoly law as a means to force foreign companies to share their trade secrets and to under-charge Chinese customers for their products. The report cites the example of chipmaker Qualcomm: “China’s ability to extort concessions lies in its authority to impose fines of between one and ten percent of a foreign company’s revenues for the previous year for alleged anti-competitive practices. As an example, San Diego-based Qualcomm agreed to a fine of $975 million; it also was forced to accept below-market royalty rates on patents used by Chinese smartphone manufacturers.”
At CPA, we’ve written about China’s widespread use of espionageto steal US industrial secrets. The White House report focuses on China’s use of what it calls “nontraditional information collectors,” especially Chinese college students and graduate students at American universities. Today, about 25 percent of foreign grad students specializing in STEM subjects (science, technology, engineering, math) at US universities are Chinese. In Congressional testimony earlier this year, FBI Director Christopher Wray highlighted the “counterintelligence risk to US national security” from the Chinese students who are persuaded by their government (sometimes against their will) to spy for the Chinese military. Said FBI Director Wray: “The use of nontraditional collectors, especially in the academic setting, whether it’s professors, scientists, students….it is not just in major cities, it’s in small ones as well…I think the level of naivete on the part of the academic sector about this creates its own issues.” China has set up more than 300 entrepreneurial parks specifically for students returned from overseas, who are often lavished with high salaries, research budgets, and support for their entrepreneurial ideas, because the government knows they are often bringing back the latest and greatest American technology breakthroughs.
While the US intelligence community has been saying for at least 20 years that China leads the world in industrial espionage, many American business leaders are unconvinced. They either don’t believe that Chinese companies will take their product and process crown jewels and push them out of world markets in 10 or 20 years…or they just don’t care. One American businessman does care. Michael Moritz, founder and partner of Sequoia Ventures, one of Silicon Valley’s most respected venture capital firms, pointed out recently that of the world’s top 50 privately owned technology companies, 26 are now Chinese and just 16 are American. Said Moritz: “Chinese internet companies also stand out because they are purchasing stakes in many of the more interesting, younger private technology companies…They are using their investments to help fulfill the ancient Chinese definition of the Middle Kingdom—as the center around which all else revolves.”
The US-China war for world economic leadership is all around us—in virtually every smartphone we buy and article of clothing we put on. The US surely has the capability to win this war. The question is: do we have the will?