China-U.S. Drug Deal Is a Palliative, Not a Cure

(Bloomberg Opinion) -- If you were hoping for the U.S. and China to seal a wide-ranging pact in the next few months to avert a further round of tariff wars, their speed in agreeing a crackdown on the modern opium trade in Buenos Aires looks like good news, right?

Wrong. The White House’s triumphant declaration that President Xi Jinping “in a wonderful humanitarian gesture, has agreed to designate Fentanyl as a Controlled Substance” misses the fact that multiple varieties of the drug have been controlled substances in China for more than three years.

More than half of U.S. deaths from fentanyl and other synthetic opioids over the past two decades happened since Beijing banned exports of the drug and 115 other pharmaceuticals as part of a 2015 crackdown. As of 2017, 25 different fentanyl-related drugs were included on China’s controlled-substances list, comprising more than one in seven of the items on the register. The problem is, as soon as a new formula is designated, Chinese chemists come up with another variant to skirt the regulations.

China-U.S. Drug Deal Is a Palliative, Not a Cure

This hydra-headed problem will be familiar to anyone who’s tried to enforce their intellectual-property rights in China. For all that Beijing may promise to crack down on an issue – and, who knows, may actually want to do so – change comes much more slowly at the ground level.

As a result, while a final deal between the U.S. and China is possible, it’s unlikely to be sufficient to sweep away the frictions in that relationship.

Consider the issues around intellectual property, which arguably represent the most substantive complaint from the U.S. side. Washington would like to see an end to the theft of trade secrets and forced technology transfers, but it’s far from clear that China can offer much assistance on that front.

Take technology transfers. There’s no line in China’s legal codes mandating “forced technology transfers” that can be repealed by government fiat. Instead, the term is a way for foreign companies to characterize the complex of circumstances that make them feel they’re not operating on a level playing field.

It’s hard to say at what point those circumstances would change enough for both sides to agree that such transfers don’t exist any more. One major shift that’s already happening is that the list of industries in which foreign companies must operate via minority stakes in joint ventures is growing smaller and smaller. That’s significant because most forced technology transfer happens when a foreign company licenses its intellectual property to a Chinese-controlled JV.

Then there are issues on which progress has been slower, but remains possible. China requires foreigners to show their intellectual property to government agencies in order to obtain technology licenses, a major problem given fears that the bureaucracy is being used as a conduit to pass information to local competitors. It also requires that licensors indemnify licensees against third-party infringement, a seemingly abstruse subject that nonetheless remains one of the biggest irritants. 

Finally, you have areas where Beijing can’t reasonably offer any comfort. While China can promise tougher penalties for outright theft of intellectual property, it can’t promise such acts won’t happen, any more than the U.S. government could promise that Alphabet Inc.’s Waymo won’t take Uber Technologies Inc. to court over similar activities. The entanglement of the Chinese state in the corporate sector makes such cases more alarming there – but asking China to end its support of state-owned champions is likely to get about as far as asking the U.S. to abolish its bankruptcy code, or break up its largest companies.

The problem here is ultimately the same as the one with control of addictive drugs. At the high level, China has been doing all the things that are needed to solve the problem. At the provincial and city level where enforcement happens, though, people are so innovative at flouting the regulations and penalties can be so light that Beijing’s best intentions quickly go awry.

The question is why this disconnect occurs. One view is that a government capable of spying on its 1.4 billion people and imprisoning hundreds of thousands of Uighurs allows this activity to go on because, for all its promises, it doesn’t really care about fueling an opioid epidemic in the U.S. Midwest. The other is that – in line with that hoary ancient proverb about how “the mountains are high and the emperor is far away” – enforcement of laws in China is difficult for long-standing structural reasons.

In truth, though, it doesn’t matter which view is correct. Unless that disconnect changes and Beijing starts to intervene much more aggressively in commercial life at the ground level, it’s hard to see how any future U.S.-China deal can resolve the tensions in this relationship. Strange though it seems, the policy Washington wants is one in which China’s government becomes even more interventionist than it already is.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

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