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US should tread carefully on China IP abuse concerns

News last week that the administration of Donald Trump is engaged in “serious discussions” over Chinese intellectual property rights abuses and policies is to be broadly welcomed.

News last week that the administration of Donald Trump is engaged in “serious discussions” over Chinese intellectual property rights abuses and policies is to be broadly welcomed.

The discussions centre on whether to start an investigation under Section 301, a punitive bilateral weapon in the United States trade arsenal.

The probe would focus on Chinese rules that require foreign companies to transfer technology to local partners. Such a focus is sorely needed.

Not only has intellectual property become a key battleground between China and the West as Chinese companies vault up the technology ladder, the regime that Beijing has created to coerce transfers from foreign companies is also often unfair and sometimes cynical.

In industries from power generation to high-speed rail and computer chips to electric cars, China has forced US, European and other foreign companies to form joint ventures or share research with local counterparts.

Access to China’s booming marketplace is often linked explicitly or implicitly to the foreign company’s progress in transferring technology.

Naively, perhaps, the US and European Union hoped at the time of China’s accession to the World Trade Organisation (WTO) in 2001 that, as the Chinese economy developed, Beijing would relax its insistence on technology transfer and regard those multinationals that have invested heavily in China as local operators. But the opposite has happened.

The government of President Xi Jinping has unveiled an industry blueprint called Made in China 2025, which sets out large-scale import substitution targets in several key industries and foresees the elevation of national champions at the expense of multinationals.

China should realise that such clearly protectionist policies, if implemented, may place an unbearable strain on global free trade.

A series of recommendations by both the American Chamber of Commerce in China and the European Union Chamber of Commerce in China point to a more sustainable way forward.

The US Chamber called on Beijing not to use “technology requirements” for economic protectionism or industrial policy.

The EU Chamber, meanwhile, criticised Made in China 2025 as “highly problematic”.

While opposition to China’s technology transfer regime is clear, the question of how to persuade Beijing to embrace a more reciprocal trade and investment system is fraught with complications. Most of these flow from the highly interdependent nature of the US-China commercial relationship.

Some US$650 billion (S$885 billion) in bilateral trade last year and almost US$300 billion in cumulative two-way direct investment since 1990 has fostered an ecosystem of supply chains and corporate partnerships that span the globe.

The use of a tool such as Section 301 — the trade diplomacy equivalent of a wooden club — to batter China into submission may be counterproductive. Under the 301 statute, which has not been widely used since the 1995 creation of the WTO, the US would in effect act as judge, jury and executioner on any grievance that it identifies.

The use of such an uncompromising weapon would probably be seen by the Chinese as an extreme provocation, thus risking a full-blown trade war.

The US and Europe would indeed be well-advised to collect information on China’s intellectual property rights abuses and the unfairness of its technology transfer regime.

However, Mr Trump’s administration would be better advised to drop the 301 cudgel in favour of a coordinated approach with EU partners to put pressure on China through determined, but diplomatic, negotiations. FINANCIAL TIMES

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