ITIF Commends Trump Administration for Investigation of Chinese Innovation Mercantilism
Testimony Before US International Trade Commission Outlines China’s Trade Abuses
The Information Technology and Innovation Foundation (ITIF), a science and tech policy think tank, has applauded the Trump administration for pushing back against China’s systematic pattern of “innovation mercantilism” in strategically important industries.
ITIF Vice President for Global Innovation Policy Stephen Ezell provided testimony to the US International Trade Commission as part of its Special 301 investigation into China’s policies and practices related to technology transfer, intellectual property.
“China has systematically flouted the spirit, and often the letter, of its WTO commitments,” said Ezell. “More than 15 years after it joined the WTO, China remains the world’s leading purveyor of innovation mercantilism.”
China’s mercantilist policies, according to Ezell, include the forced transfer of technology and intellectual property to IP theft, export subsidies, and currency and standards manipulation. These practices prevail in sectors ranging from information and communications technology to solar panels, steel, and automobiles.
“We need to be quite clear that China’s objective is to become competitive across virtually all advanced-technology industries,” said Ezell, “and that the techniques it is using to become so pose a direct, even existential threat to America’s high-tech industries along with foreign counterparts.”
The Made in China 2025 Strategy is a $300 billion plan for China to become a global leader in 10 strategic industries, including semiconductors, biotechnology, aircraft, and robots, Ezell noted. China’s National Integrated Circuit Strategy calls for investing $150 billion over the next decade to create a completely closed-loop semiconductor manufacturing ecosystem in China.
“The strategy unabashedly calls for China to reduce imports of US semiconductors by half in 10 years and to eliminate them entirely within 20 years,” said Ezell. “In advanced-technology industries like this, China fundamentally rejects the notion of comparative advantage and instead seeks absolute advantage, wanting to limit imports and replace them with domestic production while still enjoying unfettered access to global markets. Assimilating foreign technology is a key component of China’s efforts to become a global innovation leader.”
China’s Technology Import and Export Regulations (TIER) compel exchange on unbalanced licensing terms by mandating Chinese ownership of any technology improvements for imported technology, and imposing other non-market terms in licensing and technology contracts.
“Effectively, this means that foreign licensors, including US firms, cannot negotiate to own any improvements or share them with Chinese licensees,” said Ezell. “Another discriminatory aspect of TIER is that it obligates a foreign licensor into China to offer an indemnity against third-party infringement to the Chinese licensee. This obligation only attaches to a foreigner licensing technologies into China. The Chinese licensor has no such obligation.”
The US economy in terms of counterfeit goods, pirated software, and theft of trade secrets may have grown as high as $600 billion, according to Ezell.
A growing concern are measures which may induce or force the localization of design or manufacturing processes of ICT products such as semiconductors or servers. Some of these measures require the disclosure of sensitive information or that the IP rights be Chinese-owned. “Chinese draft technical measures require American innovators of microprocessor technology enterprise servers and operating systems to disclose design secrets,” said Ezell.
Chinese foreign direct investment is increasingly state-directed and predicated on the acquisition of technology, Ezell noted. “Over the past 16 years, 99 percent of Chinese US-bound FDI in electronics and 95 percent in ICT sectors were for acquisitions,” he added. “In the semiconductor industry alone, through early 2016, there were more than 27 attempted, completed, and/or pending international M&A deals, totaling $37 billion, initiated by Chinese-headquartered firms, with more than half these deals financed or backed by Chinese government.”