The EU yesterday escalated its complaint to the World Trade Organization that China "forces" Western companies to surrender valuable intellectual property (IP) as part of doing business there.
Five years ago, the US estimated that the value of IP stolen by the Middle Kingdom exceeded the value of US exports to Asia. As China moves from an assembler to a high value technology leader, these secrets are even more valuable.
The sum of losses ranges from $225bn to $600bn a year, and the issue was cited by US President Donald Trump when he imposed tariffs on Chinese goods in February. The US formally opened up the issue at the WTO in February (with Japan joining) and the European Commission started its own proceedings in June.
In 2010, management consultants McKinsey recommended that investors in Chinese joint ventures take several steps to minimise exposure to the loss of IP, such as "leaving the blueprints at home" and "bringing only older technology to China", none of which proved practical and which few heeded.
In its original June complaint, the commission explained (PDF):
China imposes mandatory contract terms for contracts concerning the import of technology into China that discriminate against and are less favourable for foreign intellectual property rights holders. In addition to being discriminatory, these mandatory contract terms also appear to restrict intellectual property right holders who import technology into China in their ability of protecting their intellectual property rights in China.
A bewildering variety of tools are used to hamper IP protection, the commission said, but it takes primary aim at the piece of Chinese legislation that governs JVs with non-Chinese companies, the Regulations for the Implementation of the Law of the People's Republic of China on Chinese-Foreign Equity Joint Ventures . Point 4 looks particularly vulnerable: the right of the importing (Chinese) party to carry on using the IP even after the JV's technology transfer period (usually 10 years) has ended.
Yesterday the commission broadened its complaint and cited specific sectors, such as electric vehicles. The move obliges China to come up with an accessible remedy within 60 days. But fixing the problem may be trickier than it looks.
IP obligations and rules are governed by the WTO's agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Article 66 of TRIPS encourages developed countries to transfer IP to "least-developed" countries.
Members shall provide incentives to enterprises and institutions in their territories for the purpose of promoting and encouraging technology transfer to least-developed country Members in order to enable them to create a sound and viable technological base.
With skyscrapers dominating the skylines of the Middle Kingdom's supercities, it's debatable whether China qualifies as underdeveloped. Or whether it did in 2001, when China joined the WTO.
Ironically, an emerging China valued intellectual property while many in the West were seemingly trying to abolish it, or hoped it would simply vanish. Not such a smart move at the time – and possibly an error of historic proportions. ®
You can find the current list of WTO disputes – who's kvetching about whom – here.