The Foreign Service Journal, July-August 2019

THE FOREIGN SERVICE JOURNAL | JULY-AUGUST 2019 33 WILL ITMAKE ANY DIFFERENCE? The Cost of Doing Business with China On March 22, 2018, USTR released its report, “Findings of the Investigation into China’s Acts, Policies and Practices Related to Technology Transfer, Intellectual Property and Innovation under Section 301 of the Trade Act of 1974.” The report focused on four practices: I. Unfair Technology Transfer Regime for U.S. Companies in China. The Chinese government uses formal and informal joint venture requirements to prohibit U.S. companies from operating in certain industries without a Chinese partner, often requiring the Chinese partner to be the majority shareholder. The government uses licensing processes to force U.S. companies to transfer technologies to their Chinese joint venture partner. Provisions in licensing and review processes are vaguely worded, giving Chinese authorities wide discretion on which rules to apply. Foreign companies either comply or risk being shut out of the Chinese market. II. Discriminatory Licensing Restrictions. China’s technol- ogy regulatory regime forces U.S. companies to conduct technol- ogy transfer on non–market–based terms, and prohibits them from negotiating their own terms with Chinese partners. China applies different rules for technology transfer between domestic firms than between a Chinese and a foreign firm. Regulations for the latter are burdensome and discriminatory, mandating that licensees can use the technology in perpetuity even after licens- ing contracts expire. III. Outbound Investment and Subsidies. The Chinese gov- ernment encourages outbound foreign direct investment, par- ticularly in the tech sector, to advance its military and economic strategic goals. Chinese companies have established presences in Silicon Valley with the objective of acquiring technologies. Invest- ments are often driven by state-owned enterprises or financed by government-backed banks, which gives Chinese companies an unfair competitive advantage when investing in technology, because they are not constrained by risks. In addition, Chinese government subsidies artificially inflate acquisition costs, which allows Chinese companies to expand global market share at the expense of U.S. companies. IV. Unauthorized Intrusions into U.S. Commercial Com- puter Networks and Cyber-EnabledTheft of Intellectual Prop- erty and Sensitive Commercial Information. China has used cyber intrusions into U.S. commercial networks to gain access to “trade secrets, technical data, negotiating positions and sensitive, proprietary, internal communications.” Cyber intrusions target a wide range of industries, but are most pervasive in high-tech sectors. The report identified several other issues including “Chinese measures purportedly related to national security or cyberse- curity; inadequate intellectual property protection in China, including widespread trade secret theft, counterfeiting and bad faith trademarking; China’s anti-monopoly law; China’s standard- ization law; and China’s talent acquisition strategy.” Experts estimate that the United States incurred annual dam- ages of $50 billion due to unfair Chinese practices and policies. On Nov. 20, 2018, USTR released an update to the report, stating that Chinese unfair technology policies persist. While some elements of Chinese policy are similar to those Japan employed in the 1980s, there are some important differ- ences. Ironically, one is that China is more open to imports than Japan was. At $32.67 billion, China had a global trade surplus (its exports are 15 percent greater than its imports) in March 2019; by comparison, Japan had 26 percent more exports than ISTOCKPHOTO.COM/RAWF8