Since I went after Peter Navarro’s anti-China screed last week, I thought it fair to start off this week with a fisking of something written from the opposite perspective. It was easy to find a China Daily Op/Ed on trade policy that so ignores reality that it should win some sort of Baghdad Bob journalism award. It just goes to show that there are folks on both sides of the US-China trade debate that are almost entirely full of shit, at least on occasion.

So today’s post focuses on a piece written by Xu Li, who is apparently the “director of Policy Review Division of WTO Affairs Center in Beijing.” This is important because this guy is no tyro, not someone who could hide behind the “well, I’m no legal expert” sort of excuse. No, this guy is an expert, so I will assume that everything he says is on purpose with full knowledge of the law and the customs and practices of relevant market sectors.

Xu’s article is entitled “Anti-china Allegations Reveal Old Mindset.” I should have used that for my post last week about Navarro’s Businessweek article. In this case, Xu is referring to complaints from the US Chamber of Commerce about China’s indigenous innovation policy. Here’s how he gets the ball rolling:

Even before the tide of criticism against China’s currency rate could recede, Washington has questioned Beijing’s technology innovation policy. In the US Chamber of Commerce report on China’s industrial policies, American trade officials have censured China’s indigenous innovation policy. The US chamber says China’s technology innovation policy is either forced technology transfer or technology theft.

By defining indigenous innovation as enhancing original innovation through co-innovation and/or re-innovation based on the assimilation of imported technologies, China negates autarky and adopts an open stance toward building its technological capacity on existing technologies, domestic and foreign both. Yet the US views this as China’s intention to dominate the world and wrest the global leadership from other countries (mainly the US).

Part of this is true and part is blather. Yes, the US is worried about China’s tech policy, but it has little to do with world domination. There are plenty of military concern trolls out there who are on that issue. The folks who are dealing with tech policy care about things like IP rights, royalty payments, and competition. This is a business issue, not a matter of global leadership.

Amidst all the gobbledygook about co-innovation and such, Xu uses the term “autarky,” which in the context of tech policy always suggests (to me) that China is trying to avoid paying royalty fees to foreign enterprises. One of the goals of innovation policy is to create more patented tech at home so that China no longer has to send money abroad to pay for tech it needs to: 1) further develop its economy; and 2) manufacture stuff for the export market. We’re talking about some serious money here.

WTO expert that he is, Xu goes there next:

WTO rules help us address US concerns. When China was admitted to the WTO, it vowed never to use technology transfer as a condition for investment in the country. China’s laws have honored that commitment. Though China is not yet a signatory to the Government Procurement Agreement, when it comes to government procurement, it promises to offer the most-favored-nation status to other countries.

I almost admire that paragraph, in the same way that you would admire a shyster lawyer who gets his client off on a technicality. In the end, though, these assurances are based on sleight of hand. Allow me to address both instances.

First, Xu says that China’s laws have honored the commitment against conditional investment. He’s absolutely right. However, this argument is a complete straw man, for the critics, including the US Chamber of Commerce and the US government, are not complaining about China law, but rather informal agency practice. Nice try, Mr. Xu!

Example: I want to set up a foreign invested enterprise somewhere in Anhui. I go to the local approval authorities and say “Hey guys, I want to set up a widget factory. Is that OK?” The officials in Anhui tell me that sure, it’s OK, the law does not prohibit widget factories that are owned by foreigners. However, they tell me orally through the agent I’m using, that before they will approve the factory, I must take on a Chinese partner (i.e. set up a JV) and transfer my widget patents to the JV.

Is this a problem with Chinese law? Nope, the law is fine. It is a problem with the approval officials (sometimes acting at the direction of Beijing, sometimes not) making conditional deals with foreign investors. Xu never addresses this sort of practice in his article of course.

Second, when discussing government procurement, Xu says that China “promises to offer the most-favored-nation status to other countries.” This is perhaps his most egregious bit of deception. Let me back up one moment. The WTO, and the agreement that started it all back in the 1940s, the General Agreement on Tariffs and Trade (GATT), is based on two principles: national treatment and most-favored nation treatment (MFN). The latter means that any trade concessions offered to one member nation will be afforded to all member nations, while the former says that foreign products/services/IP should be treated the same as their domestic counterparts once they enter the market.

So Xu is saying that we shouldn’t worry about government procurement because China upholds MFN and treats all foreigners alike. Again, this is a nice try. Sounds like a solid legal argument, but in reality he is trying to fool his readers. The problem with government procurement is not that foreign firms are being treated differently, it’s that they are being discriminated against in favor of Chinese domestic enterprises. You see? It’s not an MFN issue at all, it’s national treatment. Chinese companies can sell to the government, but in certain cases, foreign companies cannot; this is the crux of the problem.

Xu spends considerable effort in obfuscation and rhetorical sleight of hand to dismiss critics, but he then inexplicably lays all his cards on the table towards the end of his Op/Ed:

We have to step back from the dispute to see the bigger picture of an old order or balance in the technology trade, in which China has paid a huge amount of royalties for technology import and that the US is still suffocating China by restricting on hi-tech exports to the country. China’s indigenous innovation will no doubt affect the old order and tip the old balance as technology exporting countries, more or less, lose their leverage in the market. And if they cannot rebalance the situation by adjusting their domestic policies, they will only end up complaining against and criticizing others.

I think that says it all. This is the push back to that “autarky” stuff I mentioned above. China wants to stop paying so much on foreign royalties, and the stated policy to do so is called “indigenous innovation.” I have no problem with this policy in general, when rules are applied fairly. However, and as I acknowledged in last week’s Peter Navarro post, tech extortion does indeed happen occasionally, in addition to government procurement barriers, IP enforcement problems, etc.

Xu Li’s argument cannot be won by pretending that some of China’s trade policies are not protectionist. Although I cannot reasonably expect a government official to pen an Op/Ed admitting to such practices, I can at least call him out on his rhetorical excesses when I see them.