Jim McGregor, longtime China guru, wrote an excellent column in Tuesday’s Washington Post that calls for the U.S. to revamp its China strategy as a reaction to the PRC’s industrial policy. I second the motion.
This Monday, I wrote a post about China’s clean energy market, in which I was rather dismissive of critics who complained about China’s protectionist measures in that sector:
The current government in China has had an industrial policy since 1949, which is periodically updated. I am slightly confused, therefore, when foreigners scratch their head in puzzlement when foreign investment and international trade bumps up against China’s economic plans. This is inevitable and unsurprising.
My advice to individual companies: just deal with it. McGregor is more helpful, suggesting in a constructive manner that the U.S. must respond in fashion to China’s strategies and start talking about these issues at the national level:
The time has come for a White House-led, public-private, comprehensive examination of American competitiveness against a clear-eyed view of China’s very smart and comprehensive industrial development policies and plans.
What technology do we protect? What do we share? What are our commercial strategic imperatives as a nation? How do we overcome the fundamental disconnect between our system of scattered bureaucratic responsibilities and almost no national economic planning vs. China’s top-down, disciplined and aggressive national economic development planning machine?
I don’t think anyone would disagree with that. From the Red Scare crowd to the Friedmanites, a lot of folks back in the U.S. see China as a looming challenge and have been scrambling around trying to mount a response.1
Unfortunately McGregor’s suggestions, however logical and reasonable they are, will be difficult, if not impossible, for Washington to implement. It’s the tragedy of our age, right? When was the last time folks in the White House or up on Capitol Hill were “clear-eyed” about anything, much less a hot potato political issue like China?
More’s the pity, for the challenges ahead are tricky indeed. As the United States has experienced in Asia before, opening up new markets and insisting that your new partners follow trade rules is often merely the initial phase of a bilateral relationship.
As time goes on, other trade barriers pop up, including what the WTO refers to as non-tariff barriers to trade.2 McGregor’s description gives you a sense of the maturity of the bilateral relationship and the pitfalls ahead:
Chinese policymakers are masters of creative initiatives that slide through the loopholes of WTO and other international trade rules.
The problem on everyone’s mind these days is technology policy, an issue that is front and center with Chinese policymakers, in addition to U.S. officials like Commerce Secretary Gary Locke who is currently on a China trip.
The specific issue du jour (actually of the year) is government procurement, and China’s rules about indigenous innovation.3 My favorite writing on the subject has been by Professor Stanley Lubman, who wrote two great posts (Post I and Post II) on his Wall Street Journal blog.
McGregor expands on the government procurement restrictions, which he labels as the “poster child” of China’s technology strategy, and describes other barriers facing foreign technology companies:
Chinese government mandate to replace core foreign technology in critical infrastructure — such as chips, software and communications hardware — with Chinese technology within a decade. The tools to accomplish this include a foreign-focused anti-monopoly law, mandatory technology transfers, compulsory technology licensing, rigged Chinese standards and testing rules, local content requirements, mandates to reveal encryption codes, excessive disclosure for scientific permits and technology patents, discriminatory government procurement policies, and the continued failure to adequately protect intellectual property rights.
All of these “tools” are out there and might be used by the Chinese government in the future. If McGregor is suggesting that this is definitely how Beijing intends to achieve its goals, I would probably part company with him on that assertion.
For some of those tools, including the Anti-monopoly Law, compulsory licensing, and protection of intellectual property, I think the jury is still out. We’re all still waiting to see how the AML will be implemented, including whether compulsory licensing might come into action (i.e., the infamous Article 55 of the AML).
With respect to IP protection, a proper response would be voluminous. Suffice it to say that over the past year or so, I have seen instances of both solid patent enforcement as well as questionable administrative decisions where industrial policy, as an issue, was lurking on the sidelines. It’s a big concern, but I’m not going to guess at this point what will happen.
Jim McGregor’s advice is spot on, and U.S. officials would be smart to listen to him. Do I expect that to happen with the bipolar Cold War atmosphere that is present-day party politics in Washington? Sadly, no.
- By “Red Scare crowd,” I refer to those who see China as a potential military, as well as economic, threat. They are generally stuck in a Cold War, anti-Communist mindset and focus on defense issues. By “Friedmanites,” I refer to New York Times columnist Thomas Friedman, who writes frequently about how the U.S. needs to upgrade its education and technology policy to respond to China’s economic rise, particularly in the high technology area.[↩]
- This is in contrast to traditional barriers to trade, such as tariffs and quotas. NTBs include safety and hygiene requirements, product testing, special licensing, product standards, and rules of origin.[↩]
- China has passed rules that would shut out foreign companies from selling products to the government unless they have created IP in China. Since announcing the rules, China has softened its stance somewhat.[↩]