Business How China gets US trade secrets

How China gets US trade secrets

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BEIJING – The new trade agreement between Washington and Beijing is partly intended to address one of the toughest problems among them: China's tactics for acquiring technology from companies based in the West.

It is a thorny issue, and it is unlikely to be completely resolved with a commercial pact.

The Trump administration blames China for stealing Western trade secrets, and used those accusations as the legal basis for starting the trade war almost two years ago. Trade talks between the two sides quickly became broader issues, but the initial trade pact signed on Wednesday includes promises from China to stop some of the practices that Western companies have criticized for a long time. Depending on the details, that could make the agreement more acceptable to American companies.

The basis of these concerns is that China has repeatedly demonstrated that it can acquire technology and, through strong government subsidies, build competitive rivals for US companies. Companies fear that they can do the same in other industries, such as software and chips.

China has long denied that it forces foreign companies to give up technology. They do so voluntarily, says Beijing, to have access to the vast and growing market in China. Still, Chinese officials say they are taking steps to address the concerns.

Companies are reluctant to accuse Chinese partners of theft for fear of being punished. The business groups that represent them say that Chinese companies use those corporate ties to pressure foreign partners to reveal secrets. They also say that Chinese officials have pressured foreign companies to give them Access to sensitive technology as part of a review process to ensure that these products are safe for Chinese consumers.

Foreign business groups point to renewable energy as an area where China used some of these tactics to build local industries.

Gamesa of Spain was the market leader in wind turbines in China when Beijing ordered in 2005 that 70 percent of each wind turbine installed in China had to be manufactured within the country. The company trained more than 500 suppliers in China to manufacture virtually every part of its turbines. He established a plant to assemble them in Tianjin City. Other multinational wind turbine manufacturers did the same.

The Obama administration questioned the policy as a violation of the rules of the World Trade Organization and China withdrew it, but by then it was too late. Companies controlled by the Chinese state had begun assembling turbines using the same suppliers. China is now the world's largest market for wind turbines, and they are mostly manufactured by Chinese companies.

A somewhat similar industrial evolution occurred shortly thereafter in solar energy. China demanded that its first major municipal solar project only use solar panels that were manufactured at least 80 percent in China. Companies rushed to produce in China and share technology.

The Chinese government also heavily subsidized the manufacture of solar panels, mainly for export. Chinese companies ended up producing most of the world's solar panels.

Some in the Trump administration fear that the same thing is happening in cars.

Shortly after opening China to foreign automotive companies, Chinese officials held a competition among global car manufacturers for which they would be allowed to enter the market. The competition included a detailed review of each company's offer to transfer technology to a joint venture that will be formed with a Chinese state partner.

General engines he beat Ford Motor and Toyota by agreeing to build a cutting-edge assembly plant in Shanghai with four dozen robots to manufacture the latest Buicks. The executives of Volkswagen, the German automaker that had entered China even earlier, were furious because competitive pressures also forced them to update their technology.

China is now the largest car market in the world. But with the exception of some luxury models, virtually all cars sold in China are manufactured there. High Chinese tariffs on imported cars and spare parts have also played a role, as have the desire of foreign companies to avoid the costs and risks of transporting cars from distant production sites.

In the commercial truce, Chinese officials agreed not to force companies to transfer technology as a condition for doing business, and pledged to punish companies that infringe or steal trade secrets. China also agreed not to use Chinese companies to obtain sensitive technology through acquisitions.

Even before that, Chinese officials pledged to eliminate the requirement of the joint venture in areas such as cars.

The question is whether China will keep its promises. The Chinese authorities already issued rules last month putting into practice much of what they promised in Wednesday's agreement. Foreign lawyers say the new rules have large gaps. The rules give Chinese regulators broad discretion to act as they see fit in cases involving "special circumstances", "national state interests" and other diffuse exceptions.

The trade agreement requires consultations within 90 days if the United States believes that Beijing is not fulfilling its commitments, but it is not clear if the Trump administration could force compliance. More generally, the pact does not address China's subsidies for new industries, a key factor in what happened in sectors such as solar panels. China has largely rejected calls to control subsidies for local competitors in industries such as semiconductors, commercial aircraft, electric cars and other technologies of tomorrow.

The Trump administration has tariffs to counter that. The partial trade agreement will leave broad tariffs in force in many of these industries to prevent Chinese competitors from flooding the US market. The establishment of broad tariffs also gives Western companies a strong financial incentive to reconsider supply chains that rely heavily on China.

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