The recent tariffs imposed by the US on China were accompanied by the introduction of new limits on Chinese investment in US high-tech industries. This is part of a broad campaign to crack down on Chinese acquisition of US technology. For a long time, Western businesses have complained that China steals intellectual property, but the nature of this theft and the veracity of the complaint have changed over time.
Previously, Chinese theft of intellectual property focused on relatively low-tech industries such as retail and included the pirating of films, music and computer games or the counterfeiting of fashion designs and labels. Similar intellectual property theft has been rampant in South East Asia. For the most part, it is unlikely to have majorly affected the bottom line of these, as the counterfeits target a different market.
But as China has developed economically and moves away from reliance on manufacturing, it is now competing directly with Western companies in the creation aspect of intellectual property. Accusations of intellectual property theft have evolved to centre on trade secrets and commercial-in-confidence material from the defence industry, national laboratories, universities, governments, and businesses such as BHP Billiton, Rio Tinto, Fortescue Metals, Yahoo and Google.
China’s approach to intellectual property theft has three prongs. In the first prong, it quite simply steals intellectual property, usually through hackers such as 3PLA (also known as Unit 61398) from China’s People’s Liberation Army (PLA) cyber-espionage unit.
In the second prong, it purchases stakes in technology companies to gain access to the technology. This is part of what the Trump administration is seeking to avoid through its new limits on Chinese investment. Although it is denied by the investing company, the role of state-owned enterprises in China and the often-cosy relationship between businessmen and the Chinese Communist Party make such accusations difficult to disprove.
In the final prong, China often unofficially requires foreign businesses seeking to enter the Chinese market to transfer the technology to a partnering Chinese enterprise. If the company refuses, it is denied entry into China’s market.
Despite China’s history of intellectual property theft, the situation has been changing, a fact that has generally gone unnoticed. China is now an intellectual property producer in its own right and is, therefore, seeking to protect its intangible assets. China now has the biggest intellectual property office, the State Intellectual Property Office, charged with reviewing patents and designs, in the world.
In 2017, China became the second largest source of patent applications filed by the World Intellectual Property Office behind the US. It is now indisputable that China is a world leader in innovation. For instance, police recently seized millions of dollars-worth of counterfeit products in Guangdong, such as Penfolds Wine. And whilst there are still problems regarding copyright and counterfeiting, China is cleaning up its own market. This will be made easier by blockchain technologies that can verify provenance. Companies that invest in China will find that the authorities are making greater efforts to stop intellectual property theft.
So, are sanctions the right approach to China’s intellectual property theft? As China continues to develop as an exporter of intellectual property, it will naturally continue to seek to safeguard its own developments. However, in strategic industries, there is still a concern that China will seek to steal and replicate inventions, particularly in the defence sphere. It is critical therefore that rather than introduce sanctions and limitations on Chinese investment, which hamper domestic businesses in Western countries, that change is brought further into the international trading system. For instance, the the European Union, the US and Japan are working together to reform the WTO to define what counts as an arm of the government and lower the burden of proof for complaints (which is too high given the opacity between the Chinese government, businesses and state-owned entities). Countries should also continue to carefully vet Chinese investments to ensure that they do not compromise national security.
Jeremy Rees is the International Trade and Economy Fellow for Young Australians in International Affairs