US President Donald Trump and Chinese President Xi Jinping.(Source: PTI)

Why Trump and Xi Should Strike a Deal on Technology

(Bloomberg Opinion) -- If China is such a powerhouse of intellectual-property theft, why doesn’t Beijing do it any better?

Take the auto industry. This would seem a sector ripe for forced technology transfer, industrial espionage and all the other sharp practices causing such tension in China’s trade relationship with the U.S.

China is the world’s biggest producer and consumer of vehicles, and foreign companies wanting to manufacture there for decades have been forced to invest in joint ventures with state-owned local partners.

Carmakers are in a constant arms race to innovate: Five of the world’s top research and development bills worldwide belong to Volkswagen AG, Daimler AG, Toyota Motor Corp., BMW AG, and Honda Motor Co. Dominating the emerging electric-vehicle industry is a key objective of the Made in China 2025 industrial policy that has drawn so much ire from Washington.

And yet the country is almost a footnote in international auto trade. Export earnings in 2017 came to just $7.18 billion – smaller than Belgium, Slovakia, Spain and Hungary.

Why Trump and Xi Should Strike a Deal on Technology

It’s not such a mystery really. Foreign carmakers have a well-thumbed playbook when operating in China, whereby the technologies they do transfer to local ventures are several steps behind the state of the art. That makes it all but impossible for partners to use this route to keep up with the pace of innovation. 

Why Trump and Xi Should Strike a Deal on Technology

That’s reason to suspect the lax enforcement of intellectual property, one of the toughest sticking points in the hoped-for talks between Beijing and Washington, isn’t such an impossible nut to crack: China simply isn’t benefiting enough from the status quo. Premier Li Keqiang has repeatedly promised to abolish forced technology transfers – and while the term doesn’t describe a single policy, some of the most egregious laws it's built upon could yet be wound back.

In regulatory terms, China already has been moving in the direction the U.S. wants. As we’ve noted before, the U.S. Chamber of Commerce has for several years given the country what’s essentially a “most improved” grade on IP protection. The list of industries that require joint ventures – the main path for technology transfers – has been pruned repeatedly, and removed altogether in many areas.

For all the perception of bias against outsiders, China’s patent courts also give foreign litigants similar treatment to domestic plaintiffs. Foreigners are as likely to bring such cases and are marginally more likely to prevail relative to local peers, according to a paper last year by Renjun Bian of the University of California, Berkeley. The damages they receive are about three times higher, too, although still extremely low by global standards at an average of around $33,000. Perhaps the “punitive compensation” promised by President Xi Jinping in a speech Monday will help to redress that.

One of the biggest challenges to foreign investors might be just how active the country’s courts have become. As many as 152,072 civil intellectual property cases were filed in 2016 – more than in any other country – in a market that’s rapidly switching from a free-for-all to a system of settled IP law. Companies sluggish to defend their patents and trademarks in this environment will lose out.

Why Trump and Xi Should Strike a Deal on Technology

Progress in many areas still remains slow. Lego A/S has won recognition of its trademarks and had court rulings stop the Bela brand from selling knock-offs of its building blocks. Still, many suspiciously familiar products are still on sale. A case is still pending against Lepin, whose Star Wnrs (sic) X-wing fighters can be bought on Alibaba.

There are also still the cases of what looks like outright industrial espionage, such as the alleged theft of semiconductor designs and pressuring companies via antitrust authorities. China must end legal thuggery of that sort if it wants to prove to outsiders it’s serious about updating the rules. 

Still, there’s enough common ground between foreign companies protective of their own IP, and Chinese ones hoping to develop it, to think that a more level playing field could benefit both sides.

The best reason for optimism isn’t that China’s leadership is fair-minded but that the rules themselves are counterproductive. As the car industry demonstrates, Beijing often ends up harming its domestic industry by demanding too much from foreign players. If it wants to develop an innovative economy fit for the 21st century, it must first bring its laws up to date with the 20th.

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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