US President Donald Trump and his Chinese counterpart Xi Jinping.  Photo: Reuters / Saul Loeb
US President Donald Trump and his Chinese counterpart Xi Jinping. Photo: Reuters / Saul Loeb

It has been widely reported that the White House has been busy preparing a comprehensive strategy for President Trump’s trip to China in November. In fact, two different strategies have been worked on based on two contrasting approaches: confrontation and cooperation.

Advocates in favor of confrontation come from the Steve Bannon school of international thinking, wherein Gordon “The Coming Collapse of China” Chang salutes Mr Bannon as the Paul Revere warning America of the coming economic war with China.

A whole generation of China watchers has been waiting for Chang’s prophecy to find some shred of reality but can only conclude that he is a blindfolded seer muttering gibberish in the wilderness. Still, Bannon’s Breitbart has seen fit to elevate Chang to the position of “renowned expert on Asia.” Such admiration speaks volumes of the callow superficiality of these novitiates in international relations.

Any student of Econ 101 knows that the notion of an economic war between the US and China is preposterous. Much of Bannon’s arguments, like those of Commerce Secretary Wilbur Ross, rest on the charge that China has gained unfair possession of corporate America’s intellectual property.

We owe it to aiding the success of Trump’s China trip by examining this question of China’s alleged hijacking American IP in some detail.

It’s true that, in the 1980s and 1990s, China’s economy was tiny compared to the US and its quality of technology far behind. Therefore, as a matter of national policy, China insisted that, in certain critical industries, foreign companies wishing to invest in China must form joint ventures, with foreign ownership not exceeding 50%. 

For GM and others, getting into the China market in exchange for sharing their technology was a deliberate business decision, no coercion involved

However, it would be inaccurate to accuse China of coercing foreign companies into handing over their know-how and trade secrets. To paraphrase Bill Gates when he entered China, “You want to play in the China market, you go by their rules. If you can’t abide by their rules, don’t enter.” (Google elected to withdraw from China but Baidu came up with its version of search technology anyway.)

GM was one of the first car companies to invest in China and had to form a 50/50 JV with Shanghai Auto Industries Corp. No doubt SAIC learned a lot from its JV partner, but look at what GM got.

GM introduced its Buick into China just as the Chinese market for passenger cars was taking off – and Buick duly became the established “luxury” car of choice for the Chinese consumer. At one point, GM’s share of profits from all the Buicks sold in China, exceeded – even at 50% – the total of its paper-thin profits from all its sales in the US. GM’s profit from China delayed the inevitable bankruptcy of the parent for some years.

For GM and others, getting into the China market in exchange for sharing their technology was a deliberate business decision, no coercion involved. Few companies who made the decision to get into China regretted doing so; but still, politicians back home like to cry foul.

Autodesk, in the San Francisco Bay Area, faced a different problem. They had a computer-aided design program for the PC that was extremely popular in China. Except, practically every copy in China at the time was a bootleg copy – very few if any were paid for. For years, software piracy was a popular bone of contention between American embassy staff and Chinese officials.

The country manager of Autodesk saw the problem differently. He saw all the pirated copies as his installed base, already trained and familiar with the basic program. He then introduced a high-rise building design application to run on top of the CAD program, which he then sold like hot cakes. At the time, China was undergoing a building boom and users were far more interested in paying for the package and getting trained to use the new application than trying to find a bootleg version.

Today, China’s economy has narrowed the gap with the US and has been developing its own IP that might benefit the US. In other words a reversal of roles is underway.

Take the example of China Railway Rolling Stock Corp (CRRC). This company has won contracts to supply subway cars for new lines and replace old cars in Boston, Chicago and Los Angeles. The contract for each city was worth well north of US$500 million and each car delivered will qualify as “Buy America,” which means with local content exceeding 60%.

Massachusetts Transportation Secretary Stephanie Pollack unveils a CRRC-built metro car in Boston on April 3, 2017. Photo: CRRC MA

CRRC will accomplish that local content requirement by shipping the outer shells from Changchun, in Jilin province, to the US, and make all the other components of the car there. The final assembly will also be done in the US. CRRC’s proprietary design has reduced the weight of the car, thus reducing costs while enhancing rider safety. The company will use its manufacturing methodology in America and supervise local (American) labor to make a superior product.

The CRRC bid was at least 20% lower than competing bids from Canada and South Korea. There were no US bidders. In other words, the use of Chinese know-how will provide American cities with state-of-the-art rail cars, at affordable prices, made with American labor, and resulting in the infrastructure improvements to “make America great again.”

The point about IP is that it’s a dynamic, ever-changing asset and not static like a piece of gold that should be locked up in a vault. The owner of IP can profit by sharing it via joint venture or license. IP can also leak away, as employees leave the company, for example. Competitors can copy and reverse engineer to achieve the same ends. Even carefully written patents are not foolproof but serve as the beginning of disputes, giving litigation attorneys countless billable hours.

The issue of intellectual property ownership is simply too complicated for America’s Bannons, or Bannon-lites, to use effectively for the purpose of stoking friction between China and the US.

Judging from the rapport China’s Xi established with Trump in his visit to Mar-a-Largo earlier this year, we might surmise that Xi has figured out how to make the US president feel good about himself

There are many other companies from China that would like to invest in America and share their expertise in low-cost production, to the benefit of local employment and economic growth. GM, for example, invited Fu Yao to invest in a plant in Ohio to make windshields for the auto industry. The governor of Ohio was ecstatic. So long as xenophobia does not intrude, good things happen.

Judging from the rapport China’s Xi established with Trump in his visit to Mar-a-Largo earlier this year, we might surmise that Xi has figured out how to make the US president feel good about himself. Xi can use this goodwill to point out to Trump that the flow of technology is now bi-directional and sharing can only help both countries achieve greatness.

In a private conversation, Xi might want to explain to Trump that the North Koreans won’t feel they have reached mutual threat parity with the US until their intercontinental missiles can reach Trump’s properties on the East Coast and hurt him in the pocketbook. The only way to calm down the situation is to talk.

Xi can’t tell Pyongyang what to do, but he can certainly try to broker a session at the conference table. Step-by-step, confidence-building conversations can, hopefully, lead to serious negotiations. Since Trump does not have the patience for this painstaking process, Xi might hint that someone else should take the lead.

Trump, in turn, can shower praise on Xi’s vision in creating the Belt and Road Initiative and make the observation that trains already run from China straight to London, an economic lifeline increasingly vital to the UK as Brexit moves forward. Given that governor Jerry Brown has already declared California to be part of the initiative, Trump may also want to ask Xi how the US can participate in the BRI.

A surprising offer would be for Xi to propose sharing China’s quantum encryption technology with America! The idea would be to initially develop hack-proof communication between Beijing and Washington and gradually expand it to all cyber communications between two countries, put networks out of the reach of criminal elements. 

The key to making Trump’s China visit an unqualified success, in addition to having positive cooperative developments to talk about, is to keep the two leaders’ exposure and engagement with the western media to a minimum. Minimize opportunities for Trump to strut or tweet and for western media to create news, real or fake. Let the discussions and frank exchanges proceed behind closed doors.

George Koo

George Koo retired from a global advisory services firm where he advised clients on their China strategies and business operations. Educated at MIT, Stevens Institute and Santa Clara University, he is the founder and former managing director of International Strategic Alliances. He is currently a board member of Freschfield's, a novel green building platform.

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