Theft by other means: China’s assault on foreign companies

Wednesday, January 1, 2014

Theft by other means: China’s assault on foreign companies

Derek Scissors | December 19, 2013, 8:16 am

If Senator Max Baucus becomes the next US Ambassador to China, he will start day one with a very big problem. China’s economic reform program is barely a month old and already appears fraudulent in critical respects. In particular, attacks on foreign companies, which began earlier this year, are growing far more threatening. The health of the American technology industry, especially, is at risk, and the credibility of US policy is being challenged.A new Chinese government was installed in March, and a revival of economic reform seemed possible. Almost immediately afterward, though, state-run media began attacking foreign companies. Government regulators became involved, claiming foreign companies charged illegally high prices. The prices were said to be too high by reference to China’s anti-monopoly law, though little or no attempt was made to show the companies were monopolies.

What was actually happening was intimidation by the National Development and Reform Commission (NDRC), the economic planning body and a long-time opponent of open markets. The NDRC did not want a legal dispute even within China, where it is the most powerful regulatory agency and courts are entirely controlled by the Communist Party. So it attempted to bully foreign firms into forgoing legal or public relations defense and just accepting price controls.

At its much-touted plenary meetings, the Party vowed, among other things, to remove some price controls. But hopes of a course change in this matter are being incinerated. The efforts at browbeating groups of foreign companies are morphing into efforts at browbeating individual foreign companies. The attempts at imposing price controls are expanding into attempts to steal technology.

The principal target, for the moment, is American telecommunications technology. The Party is using the anti-monopoly law to assail small and large American telecom firms. A small company is charged with being an abusive monopoly, despite never making a penny in China, and told it better not defend itself. A large company faces a prolonged intimidation campaign along the same lines.

What is actually happening is plain here, too: China is currently rolling out fourth-generation telecom networks. American companies and their patent rights are in the way. A year ago, China promised yet again to forgo coercive technology transfer. Two months ago, a high court judge in a telecom case in the birthplace of Chinese economic reform called the country’s anti-monopoly law a great way to break the barriers created by foreign technology ownership.

The assault on foreign telecom is bad enough, but there is no reason to consider this an isolated incident. China’s record on competition and protection of intellectual property has been abysmal. And another target is in sight: semiconductors. State-owned enterprises have bought two large, private Chinese chip-makers in the past six months. With the Chinese private sector out of the way, the NDRC can move to coerce foreign firms into turning over patents on highly discounted terms.

Nothing less than the credibility of American policy is at stake. The 24th annual meetings of the Sino-American Joint Commission on Commerce and Trade are occurring December 19th and 20th. In past meetings, China repeatedly promised not to pressure foreign companies. What point is there in talking further on these topics when Chinese behavior has gone from mediocre in 2012 to bad in the middle of 2013 to outright dangerous now?

The issue extends further. China has undermined the expansion of the Information Technology Agreement. July saw a purported breakthrough in China-US talks on a bilateral investment treaty (BIT). But the NDRC’s current actions are utterly incompatible with good-faith BIT negotiations, or for that matter the Trade In Services talks.

The American government – not just the usual agencies involved in trade but also the Department of Justice and the Federal Trade Commission – need to recognize the threat and respond in unified fashion. This will require far more coordination among agencies and leadership from the White House.

One necessary element of the response is strong, international restrictions on state-owned enterprises. There are multiple ways to pursue this goal, but the main one at present is through the Trans-Pacific Partnership (TPP). Congress, including Senator Baucus, has already indicated the importance it places on constraining state firms. China’s behavior makes a strong TPP position on competition even more important.