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%.
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.
Michał Wąsik ll We all love you but not your hated.
David, in case you weren’t following the BRI since 2013, China specificlly excluded the United States. So you should be directing this comment to both countries and I by the way agree with you and I think Xi and Donald may also be inclined. There’s a decent chance they will find a respectful, mutually beneficial relationship. But to portray China as the innocent here is absurd on its face.
George Koo because it is a requirement of the trade agreement. It didn’t have to be a requirement. They could have done it without the requirement. But people have used the dollar as the common currency for trading just because they trust it. China is forcing the use of the Yuan (or gold). At the same time as part of their strategy they applied for and were accepted in the basket of currencies recognized for world trading. There is nothing wrong with China doing what is best for China. They have been resolute and strategically smart. What is wrong is for you to act like it isn’t a plan.
Michał Wąsik I agree that the US needs a protective tariff … but this should be a negotiated agreement with the Chinese… not a Trade War… both sides can benefit by phasing out extreme dependence on each other and find areas of mutual benefit, such as direct foreign investment
Art Laramee Hey Art, do you understand the basics of a swap agreement? It allows both parties of the trade to deal in their respective currency at agreed exchange rate. For example, for trade between China and South Korea, they can settle either in yuan or the won. Both parties save by not having to convert their own curency into dollars and also save by not having to risk the exposure of holding onto a declining dollar. China is not forcing any of their trading partners to hold on to the renminbi. Both parties have to agree to do without using the dollar. And if they agree, it’s because it makes economic sense and because holding on to too many dollars is too risky. Please explain. What’s so disingenous about this?
George Koo George you are being disingeuous. China has made as part of its trade agreements a clause where the trade sttlements specifically exclude the dollar for the stated purpose of getrting more countries invested in the Yuan. This isn’t even a secret. China is not trying to devalue the dollar directly. They wish to establish a parallel financial world system where China is dominant, not the United States but in order to pull that off, there must be a robust trading regime not using the dollar to settle but using the Yuan. It’s working by the way… United States using sanctions as punishment is driving many countries there to get beyond the reach of the United States. So, it’s true that we contribute to China’s strategy, but that doesn’t change China’s purpose.
Friends,
Stealing technology is a common everyday phenomenon you will find everywhere. I saw it in Taipei, I have seen it in Silicon Valley, and was victim to stolen human technology when I was in business before I retired. Software programmers are hired away to competitors everyday in the business world with financial incentives.
Secrecy clauses in employment agreements are of little value to stop trade secrets from going to the competition. Software is very easy to modify, just slightly, to deny theft of software IP.
Americans do not know that we “borrowed” British technology in our younger days before we had colleges and universities to develop our own technology. We “borrowed” without remuneration, the technology of the Cotton Gin from England to begin our textile factories.
As suggested in recent articles, China is now, and will in the future, need IP protection from pilfering by the rest of the world.
Roger S. Dong
Guy M Wong CPA Well, I do not deny what you’re saying, but I can’t stand the fact that China wants to overthrow the American economy and the whole America. The Chinese know that changing the currency from the dollar to the yuan in the settlement will kill our economy and that is their ultimate goal. I have no doubt about it.
It’s true that China is promoting currency swaps as a way of avoid using the dollar in trade settlements between China and the trading partner country. (Many other countries are making swap agreements and not just with China.) This is not quite the same as undermining the dollar as the world’s reserve currency. As a holder of trillions of dollars, undermining the dollar is not in China’s interest. Howver being the world’s reserve currency is not an American entitlement but dependent on all the other countries willing to continue to hold on the dollar as a non eroding asset. In other words, China cannot undermine the "full faith of the government of the United States," only Washington DC can. Some might say they are doing a pretty good job of it.
Michał Wąsik China is now as advance if not more advance than us in terms of technological knowhow in many areas. George Koo talked about quantum encryption in his article. China is the only country that has achieved that. Besides that, China’s Five-hundred-meter Aperture Spherical radio Telescope (FAST) is the largest in the world. The largest supercomputer today is found in China. So is the longest bridge in the world, the Danyang–Kunshan Grand Bridge. China’s high speed rail system is the best in the world, we don’t even have a single HSR train running. Dr. Koo also pointed out we are now using Chinese technology in our train cars. I can go on and on. The fact is China is spending lots of money on R&D, probably at least on par with us today.
Steve Jobs was right when he told Obama those jobs are not coming back to the U.S. Besides, our unemployment rate is at an all time low. We need to be smart and concentrate on what and how we can do better and stop whining about China.
In the 19th century, Britain saw the US as a major violator of IP rights. When Dickens visited the US, he was surprised to find many unauthorized editions of his books. This is what developing countries do. And when they are developed enough to produce their own IP, they switch roles. As the US did. As China is beginning to do.
I personally am in favour of higher duties on foreign goods, tied to things like worker safety, wage bargaining, etc. But we definitely need more pieces explaining to people what the benefits of the US-China trade relationship are. And we need less primitive xenophobiia and more rational diiscourse.
Guy M Wong CPA The Chinese wanted to buy American companies because they planned to steal know-how. That’s the truth. Besides you block our goods, you see it on the US trade deficit.
I’m not going to argue here, but this article is propaganda. That’s all I wanted to say.
Michał Wąsik The Chinese tried but they were blocked by the U.S. government, from China’s CNOOC proposal to buy Unocal to the recent Canyon Bridge Capital Partners proposed purchase of Lattice Semiconductor Corp. Huawei and ZTE’s attempts to invest in the US have also been blocked. The latest is Zhongwang Group’s bid to acquire US aluminum maker Aleris. We still don’t know if that will go through. And when the Chinese was allowed to buy the Wardorf Astoria in NYC, the U.S. government stopped using it. The U.S. also openly urged its allies to boycott China’s AIIB. It’s about time the U.S. recognize China as an equal partner rather than treating it as an adversary. The Chinese did not "steal" jobs from us. We ourselves are to blame with our high costs, including, but not limited to, inflexible regulations, lack of workers willing to perform mundane jobs, and high absenteeism and turnover rate.
So, for the IS to take part in BRI, how do you get around the requirement that trade exclude the dollar? There is no denying the published fact that China is trying to replace the dollar with the Yuan as the world’s reserve currency and is using the very ambitious and very successful BRI to accomplish that. Having said that, I would love it if we could all just get along and have friendly competition.
George, great column. Couple of points: 1, as far as IP transfer is concerned, all Asian countries did the same way as a way to left itself up in development. I actually went to Taiwan trying to hegotiate a tech transfer agreement for GE. You probably had same experience and perhaps mention it would have stremthen your case even more. 2, Buick was traditional a prestige brand in China prior to 1949 and GM exploited this fact. 3, The best way for U.S. to obtain quantum encryption technology is to send U.S. students there. My points may be too long for inclusion in your column.
Your speculation about Xi at Mar-a Largo is right on. Give credit to Xi for know how to handle difficult situation smoothly.
KS Chin The United States should introduce a 50% duty on Chinese goods. Due to the expansion of your country we have lost thousands of jobs. Our government has committed this sin for 50 years, moving from America to China. Now we demand more Chinese investment in the USA.
Promise favourable terms to Donald Trump’s project of building a dozen towers and golf courses , then Trump will be singing praises of China!
Michał Wąsik And what do you base that on? Perhaps because US has invaded China toegther with the Western powers? And instigated a rebellion in Tibet? And again thought about invading China after marching into North Korea? And what did China do to US again? Maybe you are right, if China is vengeful, they would want to destroy America. Would that be plausible?
stop pretending. You, Chinese just want to destroy America, you do not have to prove anything!
George,
Well said. It is about time for the US media to write more about the advantages of US-China cooperation than confronting each other. As with Pres. Trump, we want to make American GREAT; but the route to that gratness may require certain "humility" to accept cooperation for mutual gains rather than one-sided Greatness.
David Chai, Union city, CA