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Yesterday’s blog reviewed the challenges facing US negotiators with regard to China’s large-scale intellectual property (IP) theft. Continuing to focus on key issues in the US-China trade talks, today’s post will examine China’s investment policy/forced technology transfer and state-directed subsidies to domestic technology sectors.
Foreign investment regime and forced technology transfer
China’s evolving foreign investment regime is both separate and directly linked with issues of forced technology transfer. On investment, Beijing has reduced the number of sectors in which foreign investment is either prohibited or restricted to minority ownership. Particularly, it has moved to open financial sectors such as life insurance, securities firms, and large-scale institutional investors. Still, many technology-related sectors remain off limits or with many restrictions — especially those included in China’s famous Made in China 2025, the plan to become dominant and independent of foreign sources over the next half-decade.
Beijing touts a new foreign investment law (effective in 2020) as evidence of its more open investment climate. The law contains several provisions dealing with technology transfer, including provisions that forbid administrative agencies from demanding such transfers as a condition of investment, and enjoins officials from disclosing trade secrets gleaned during the regulatory process. US and European business leaders, however, complain that the legislation is very broadly worded, with imprecise, vague language that still leaves great uncertainty. And European firms have complained that in recent months tech transfer pressure for cutting-edge technology has even increased despite china’s denials.
Government subsidies
On government subsidies, particularly in high-tech sectors prioritized in the Made in China 2025 plan, Beijing has been adamant that such support is essential to the country’s development model. When the ambitious program was first announced in 2015, the Chinese government stated that it would commit some $350 billion in government funds to the included technologies over a ten-year period. Still, Beijing has piously claimed that it will practice “competitive neutrality” for these sectors, a claim accurately labeled a “fake idea” by AEI’s Derek Scissors.
Not surprisingly, it was widely reported that this issue was central to the break off of US-China trade talks in May. Indeed, as a result of possible US denial of access to vital computer chips and other technology components, top Chinese officials have vowed to double down and increase government support of strategic technologies. (This not to say that this increase would not have occurred anyway.)
Recently, Wang Zhijun, head of the Ministry of Industry and Information Technology, announced plans to speed up technology advances in the information and communications technology sectors, and within that a crash program to advance the semiconductor industry.
This government support takes various forms, including direct subsidies from the central government and regional entities, myriad tax breaks, and regulatory favoritism. Given the perceived harm to Huawei and ZTE from a US ban on sale of strategic chips to those companies, the semiconductor industry is being deluged with funds and a drive to recruit tech talent (particularly software engineers from around the world). Estimates of the size of Beijing’s crash semiconductors program are in the range of $80 billion over the next few years from the central government, supplemented by regional and municipal governments. Many outside experts doubt the success of this state-led crash program, but the bottom line here is that Beijing is not likely to give an inch on its determination to foster — and protect — high-tech sectors for the foreseeable future.
Conclusions
There are three takeaways from the above analysis. First, China has made some efforts to carry through “reforms,” partly in response to its own evolving technological development and partly as a result of outside pressure. Second, even where some advances have been made, China’s reform efforts remain very much a work in progress — and must be balanced against regression on IP theft and the steadfast refusal to move away from state-directed subsidies and support for key industries. Finally, given the “work in progress” state of Beijing’s promised reforms, the US should insist that as a part of any deal, the US will retain the right to monitor promised reforms and take action should these promises prove illusory and “fake ideas.”
To read Part I, which discusses intellectual property protection and reforms, click here.
Given the “work in progress” state of Beijing’s promised reforms, the US should insist that as a part of any deal, the US will retain the right to monitor promised reforms and take action should these promises prove illusory and “fake ideas.”
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