The most important dimension of US-China relations is technology, which is vital to economic, military, and even ideological competition.
In economic competition, the main American challenge is not, as is sometimes implied, insufficient innovation. The US is the richest country in the world by trillions of dollars of advantage. The number of US patents granted to Americans set a record in 2019 and almost equaled it in 2020. That is, more than triple the number of patents granted to Japanese, the second place in this market.
The main challenge is not even Chinese innovation. Beijing’s preference for big business and state funding over genuine competition ensures it will struggle in key areas from aircraft development to shale.
The main challenge is China’s acquisition of intellectual property (IP) and the use of legal and financial subsidies to develop intellectual property (IP) products and drive the US out of global markets.
Legislation under review may, if passed, increase these risks. The US Innovation and Competition Act (USICA) passed the Senate, while the National Science Foundation for the Future Act passed the House.
Each spends at least $100 billion over five years on US research and development, but the Senate has included far more provisions that try to limit Chinese access than the House has done so far.
Without stronger safeguards than even the Senate has currently put in place, China will be able to capture technology developed by US research, subsidize its deployment and actually do harm to American businesses and workers rather than the benefit Congress envisions.
That China will continue to pursue the acquisition of American research is not seriously debatable. The US Department of Justice reports that 80% of its economic espionage cases involve China.
There are several documented cases of Chinese trade secret theft in nearly every year of this century, from Datang’s receipt of information stolen from the now-defunct Lucent in 2001, to China State Nuclear Technology’s receipt of information stolen from Westinghouse in 2010, to X-Motors’ receipt of stolen information from Apple in 2019.
In the area of personal data capture, Chinese hackers attacked the US Office of People Management from the end of 2013 and Equifax in 2017, among other incidents.
Theft of military secrets is nominally a separate topic, but it is related to commercial theft and appears to be extensive. Dual-use technology, military and commercial, must be transferred, upon request, from Chinese companies to the People’s Liberation Army, as a result of China’s controversial “civil-military merger”, policy and term created by the Chinese government. It must also be transferred upon request to any other entities the Chinese government deems appropriate. When confronted by the government, there is no remedy for a Chinese company that owns US intellectual property.
Despite this one-off and multifaceted threat, hardly any Chinese beneficiary of illegal IP acquisition has faced even the mildest consequences (which are publicly known). And the US is reluctant to create policy tools for recipients of stolen IP.
For example, the Trump administration’s investigation of this huge problem, conducted under Section 301 of the US Code, has degenerated into its bad and generalized tariff policy, punishing everyone regardless of behavior.
What happens after the theft is vital and often overlooked. Having spent less on innovation, Chinese companies have more resources available for production. If the sector in question is considered valuable by the central or local government, companies will receive heavy subsidies. As a result, they can lower the price relative to foreign competitors, taking them out of China first and then out of foreign markets. Legal and illegal acquisition of technology followed by massive state support helps explain the speed and extent of the rise of Chinese telecom equipment manufacturers, for example.
That could allow China to copy the mRNA technology and then try to bankrupt US vaccine makers.
The loss of technology is therefore only the first risk. Advocates of a globally open innovation system, where American research is easily shared with foreign counterparts, recognize Chinese thefts but consider research protections even worse.
They argue that the US must maximize innovation and accept some leaks. But they underestimate the danger. China’s record is clear: new technology is not primarily a means of improving people’s lives; it is primarily a means of increasing party supremacy.
The commercial dimension of this is the CCP’s use of anti-competitive practices to create global industries dominated by China, undermining the benefits of developing new products and services.
Current legislative projects are insufficient
This double whammy justifies strenuous efforts to protect American intellectual property. As it stands, USICA is inadequate for this purpose, while in the Chamber the process is still embryonic.
There are sections of USICA that prohibit the transfer of IP to Chinese entities, but they do not entail punishment for American offenders, let alone foreign recipients, and are unlikely to delay Chinese acquisition.
Another provision creates a list of Chinese State beneficiaries of IP violations, but implies no action. Finally, there are sections that use existing authority more fully to punish violators, but these options present almost useless sanctions on individuals when the threat of Chinese subsidies indicates that the target should be global sales by beneficiaries of property theft intellectual.
The key, as always with PI, is the application. Oversight of Chinese entities is difficult and will require the attention of the US government not just now, but throughout the life of any USICA-type spending program.
At the moment, even existing application possibilities are being ignored. China has access to a very large market to sell products developed from IP, without anyone asking.
In the case of its citizens or US citizens with family in China, Beijing can also coerce the transfer of IP. Any Chinese participation in American technology ventures is therefore a risk. If it is undesirable to block all Chinese participation in federally funded research, enforcement of transfer ban rules must be aggressive.
To stand any chance of matching Chinese incentives, a final version of the bill must prescribe criminal penalties for the offense, as well as hefty fines. As is always the case with industrial policy, those who oppose these laws can choose not to participate.
Another important aspect of the application is export control. In principle, exports can take place without involving technology transfer. However, the US does not have a properly functioning export control regime.
The US Congress, with an eye on China, voted overwhelmingly to tighten export controls in August 2018. However, the US Department of Commerce failed to take any action on “key” technologies – time-honored technologies that shouldn’t be freely shared, such as high-performance semiconductors. And, after originally identifying 45 “emerging” technologies whose export might need to be restricted, the Commerce Department now states that no specific action is required.
To protect the results of the research program from Chinese takeover and the resulting predatory competition, a total ban on exports to China and to countries that do not have adequate controls over resales that end up in Chinese hands is needed.
The term of the ban would be limited and would depend on the evolution of the specific technology, but no discretion should be granted for exemptions.
Otherwise, developers will take the taxpayer’s funds and then do lobby with the Department of Commerce or other implementing agency to further their business interests in China at the expense of US economic and strategic interests.
As with breaking the rules on participation in research and development, export violations by Americans should be subject to severe punishment.
US law enforcement is the easy part. With regard to Chinese beneficiaries of illegal IP acquisition, the starting point must be to treat their behavior as criminal and to recognize that the US is under no obligation to allow new business of any kind with accused criminals.
Penalties must include a ban on all new transactions with US counterparties anywhere in the world, including transactions through third parties.
This should extend to restricting the receipt of US capital, directly or indirectly, and prohibiting all sales in the US market. The idea is to erase the commercial advantages of using illegally acquired technology. Repeat offenders must face indefinite deletions from global transactions and locks on their assets, just like any other criminal entity.
American participants in new federally funded research programs should be required to provide information about the status of their research and any contacts with China.
This will make it harder for Chinese entities to pretend that, surprisingly, they had an independent research program in the same field at roughly the same stage. Thereafter, US companies claiming losses to Chinese competitors using illegally acquired technology will have an evidence base available. This evidence base will justify an initial suspension of transactions.
American companies have difficulty proving Chinese criminal behavior based on a high standard of evidence, due to lack of law enforcement in China. But when technologies developed in a new federal program appear in China, it is assumed, for a number of years (varying by sector), that China must have acquired them illegally.
Over time, the evidence base may expand to include the records of the Chinese entities and industries involved – are they clean or dirty? If more incriminating evidence does not come to light, the ban must be removed. If so, the assets must be seized or the ban on transactions must be global.
Even if the legislative process produces ideal IP rules and penalties, actual implementation will still be a challenge. O lobby executive branch regulatory agencies could undermine Congress’ intent.
Agencies must be adequately funded, staffed and monitored. And the nature of commercial research means this will be a long-term effort — Congress must ensure that the rules are followed and that penalties are applied years later.
Research funding is a legitimate government function. If intellectual property is left unprotected, however, the results will be the opposite of what Congress wants.
It is certain that China will try to acquire IP generated through new American research and then subsidize goods produced with it.
The US must be much better at fighting China in both the acquisition and sales phases, or the success of US research will lead again to China’s economic and strategic success.
Derek Scissors he is a senior member of the American Enterprise Institute.