China's Deal Breaker: Property Rights
By persuading President Trump that the sanctions-busting telecom outfit ZTE should continue to enjoy access to U.S. technology, China has achieved one of its top priorities in trade negotiations with the U.S. In return, Trump should demand better treatment for the U.S. companies that make such technology.
Imagine trying to cut a business deal with someone who would readily agree to spend huge sums buying some of your products while simultaneously refusing to agree not to steal others. This is the bizarre negotiating position that China maintains throughout its discussions with U.S. officials. Maybe it’s not surprising that a communist regime would insist that property rights and the rule of law remain off the table. But it’s important for American negotiators to understand why Chinese leaders are willing to buy more American commodities but unwilling to respect U.S. intellectual property: Beijing’s strategic goal is to move global technology leadership from Silicon Valley to China.
Dictator-for-life Xi Jinping aims to achieve superiority by 2030. “They believe they are the dominant power of the 21st century and they self-confidently believe they are winning the competition with the U.S.,” says a former senior U.S. official who received classified briefings on Chinese intentions. “They are successfully using the very latest U.S. technology (some legally acquired, some not) for societal control in a police state with capabilities that would surprise even George Orwell were he alive. And they are using yuan diplomacy to acquire basing rights and mineral rights throughout Africa and Asia.”
The House Intelligence Committee is investigating whether China is a growing national security threat, as Chairman Devin Nunes discussed with me on “Sunday Morning Futures” on Fox News Channel recently. "We're looking at the military footprint that China's trying to put around the globe. The Chinese just opened up a military base in Djbouti at the entrance to the Red Sea in the heart of the Middle East and the Indian Ocean -- a long way away from China. We believe that they are looking at investing in ports and infrastructure around the globe, not just for military capabilities but also to control those governments." On IP theft, the chairman was direct: "I believe that they are stealing Silicon Valley blind."
House Armed Services Chairman Mac Thornberry told me, "If there is one theme that has come through in our committee’s hearings and briefings – classified and unclassified – over the course of this year, it is that China doesn’t just take an all-of-government approach, it takes an all-of-nation approach. Any company, any individual, will be a tool of the Chinese government to steal, to buy, to borrow, whatever it takes, intellectual property that can be used in their military against us.”
Considering the various potential threats to the U.S., former Vice President Dick Cheney told me that "the Chinese long-term are the most serious, they have the most capability. And [they] have made phenomenal gains economically, which they are now converting to better military capability.”
There’s also a lot of good news in China’s rising prosperity and technical expertise. But it’s not easy to tell where entrepreneurship ends and Beijing’s strategic and military objectives begin. Chinese economic growth is expected to come in at close to 7 percent this year. Once a technological backwater, the country’s tech start-ups now attract nearly 32 percent of the world’s venture capital funding. This is second only to the roughly 45 percent share captured by U.S. companies, but China is closing fast. In the early 1990s, the U.S. share was close to 100 percent.
Innovations by Chinese firms can carry benefits far beyond their shores — as long as they are truly innovating. Unfortunately, business executives from outside China have found too often that they are required to share their own innovations via joint ventures with local companies in order to play in the Chinese market — or are simply victimized by theft. The cost of stolen intellectual property to U.S. businesses has been estimated at $300 billion per year. I'm told Chinese leadership will not acknowledge that they are stealing U.S. intellectual property. How do you fix something that they won't admit to?
For some American executives, operating in China amounts to bureaucratic death by a thousand cuts of license requirements and audits. Some foreign firms must face "expert review panels" that include local competitors who judge the suitability of a new rival to operate against them. From banking to auto manufacturing, if a foreigner wants to sell to the Chinese people, a best-case scenario has long been a 49 percent stake in a joint venture, controlled by a Chinese partner. Innovation and know-how are transferred to the locals, enabling a Chinese product to duplicate and then compete with its American counterpart. Some industries are simply deemed off-limits to foreigners.
Some tech executives tell me that the Trump effort to demand respect for property rights may be too late -- that China has already improperly acquired enough technology to potentially become the global leader in artificial intelligence, robotics, and blockchain technology, among other fields.
This is cause for concern, not panic. History shows that the central planners in Beijing are unlikely to accurately predict the most important technologies of the future. Their experiment in combining political repression with economic liberalization won’t last forever. And due to the regime’s limits on child-bearing, China has a rapidly aging population, which will put increasing strain on its economy and society.
For now the White House has to create incentives for China to move toward a more open market where property rights are enforced -- without disrupting trade that is often beneficial.
The U.S. and China appear to be a long way from an agreement, but the Chinese have shown some willingness to compromise in areas outside technology. Beijing says it will allow foreigners to own 100 percent of companies in some industries, such as autos, within five years.
Perhaps the Chinese realize that they too would have much to lose from a less open U.S. market and, just like Americans, are not exactly sure what President Trump will do next. In April of 2017, the president told me about his first meeting with the leader of China’s ruling communist party at Mar-a-Lago: “We had finished dinner. We're now having dessert. And we had the most beautiful piece of chocolate cake that you've ever seen and President Xi was enjoying it.
“I was given the message from the generals that the ships are locked and loaded, and we made a determination to do it, so the missiles were on the way. And I said, ‘Mr. President, let me explain something to you. We've just fired 59 missiles toward Syria. I wanted you to know this.’ And he was eating his cake. So he paused for 10 seconds and then he asked the interpreter to please say it again."
The president’s approach appeared to have gotten Xi to listen.
Instead of seeking a commitment for arbitrary levels of total imports and exports that will largely be determined by consumers, President Trump should let Xi Jinping know that U.S. companies should not have to take on foreign partners or share their technology, regardless of the industry.
More Chinese imports of U.S. agricultural and energy commodities are always welcome. But China sometimes seems to understand better than the U.S. does that innovation is the crown jewel of the American economy.