The Return of the Pig
By William Reinsch
Last week I wrote about the CED talks with the China and the implications of their apparent failure. I ended up rather blithely recommending that we needed a strategy rather than a succession of one-off transactional negotiations that might win individual battles but would lose the war. It occurred to me afterwards that “recommending a strategy” is not a very useful addition to the debate unless one goes further and describes an actual strategy. So, this week, I thought I would attempt that.
For a complex economic relationship like we have with China there is no one-size-fits-all solution. In some cases, agriculture being the best example, straightforward negotiations on market access are best, backed up by threats to take illegal barriers to the WTO, and the challenge will be figuring out what we are prepared to give in order to get what we want. There are no free lunches as far as the Chinese are concerned.
More important in the long term will be maintaining our lead in critical technologies. Intellectual property is the key to our innovation and ultimately to our competitiveness and leadership, so protecting it should be our top priority. And there is no question it is under attack from China. The Information Technology and Innovation Foundation summarizes it well:
“As articulated…in China’s ‘Made in China 2025 Strategy’ and the “13th Five-Year Plan for Science and Technology”― China seeks leadership in over 400 advanced technologies, from semiconductors, high-performance computers, and cloud computing to aerospace and biotechnology….China pursues innovation-mercantilist policies ― such as the acquisition of foreign technology enterprises leveraged by nonmarket, government-backed funds; forced transfer of technology or intellectual property (IP); IP theft; abuse of antitrust/antimonopoly policy; denial or restrictions of foreign firms’ access to Chinese markets; development of China-only standards; massive subsidies for Chinese firms; refusing to allow access to key resources (e.g., rare earth elements) unless companies locate in China; or any number of other unfair trade practices….”
Those tactics affect American companies trying to operate in the Chinese market, companies that compete against China in the U.S., and those that go head-to-head with them in foreign markets. While, again, there is no one-size-fits-all solution, I think the best strategy for high tech companies whose “crown jewels” is their intellectual property, is to forget about the first and concentrate on the last two.
Doing business in China during the Xi Jinping administration means doing it on the Chinese government’s terms, not those set by the market. Those terms more often than not include transferring key parts of the firm’s technology to the required Chinese joint venture partner (or having it stolen), and they often include an implicit limitation on the share of the market foreign companies can obtain. Of course, this is still tempting because even a single-digit share of the very large Chinese market is significant. Companies have willingly, or sometimes unknowingly, sold their souls for it and are making good money in the short run but risking their competitive survival in the long run.
Unfortunately, that is not going to change anytime soon, although it is not immutable. It is the policy Xi Jinping is pursuing. It is not what Jiang Zemin and Zhu Rongzhi had in mind when China joined the WTO, and it could well change when new leaders eventually take over.
A more productive long-term strategy would be for these companies to forget about the China market, unless they can access it on their terms and preserve ownership of their IP, and instead focus on dominating the rest of the world. That means coming to the U.S. government with two requests:
1. Keep their Chinese competitors out of the U.S. by using some of the same tactics the Chinese have used on them; and
2. Help them compete head-to-head against the Chinese in third markets, where the battle is really being fought.
That means adroit use of CFIUS authorities to control inward investment, review of regulatory and testing requirements, development of U.S.-friendly standards in third countries via trade agreements — precisely why TPP and TTIP were so important — and aggressive use of the Eximbank and other economic tools to support our companies in foreign markets.
Those are heretical thoughts from someone who supports trade and has tried hard over the years not to froth at the mouth when talking about China, despite serving 15 years on the U.S.-China Economic and Security Review Commission. But China’s strategy is clear — it’s not a secret — and they have pursued it very effectively. Conventional tactics have not worked, and they are not going to work. It is past time for us to start thinking outside the box about how to counter their strategy because ultimately our global leadership and our economic competitiveness depend on it.
William Reinsch is a Distinguished Fellow with the Stimson Center, where he works principally with the Center’s Trade21 initiative.