Forced technology transfer and Made in China 2025: An introduction

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Lately there have been lots of discussions on forced technology transfer and the Made in China 2025 policy. Experts have been battling over whether China is using any arm-twisting techniques China to protect and promote its domestic businesses, with little or no respect to the WTO and similar international trade guidelines. International technology transfer, it seems, is at the center.

It is no secret that the USA and China are engaged in a trade policy war of sorts recently.

China’s alleged forced technology transfer policy, the US claims, is against prevailing trade laws and aims to further the Made in China 2025 policy.

The US has repeatedly accused China of discriminatory practices.  It says the policy forces companies to unconditionally transfer technology and compromise their own intellectual property rights in exchange of access to the world’s largest market. It alleges some of the actions by the Chinese authorities are in direct violation of the WTO.

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China rejects these allegations as baseless and says the US has set off a trade war. It says it is both prepared and confident of fighting off any such allegations. Further it said it remains committed to its Made in China 2025 policy and that China is open to a dialogue to remove any misunderstanding with the USA regarding trade with China. However, Chinese officials said, ‘The US lacks the sincerity for negotiations’.

What is forced technology transfer?

Forced technology transfer is the policy pursued by a domestic government that requires non-domestic organizations to license technologies and know-how to domestic partners at terms that are substantially below market terms, sometimes when the technology transfer was otherwise not unavoidable.

This practice gives domestic companies instant access to advanced technologies which, otherwise, they may not have been able to develop at the same cost. On the other hand, the licensing multinational corporations lose fully or partially their technology leadership without a fair compensation.

This policy is presented by the domestic government as a standard requirement for all international organizations seeking to access the market. Non-acceptance of this requirement prevents the licensing organization to do business in that particular market.

Such policies that dictate the contractual agreement between domestic and non-domestic organizations are considered exploitative and against the principles of fair trade as laid down by international bodies like the WTO.

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Why is forced technology transfer a cause of concern?

When a licensing organization shares its know-how at sub-market terms, it lets go of a substantial portion of licensing revenues, something considered rightfully theirs under various IP laws.

In extreme cases, licensing organizations may see copyright infringement when the partnership liquidates and the domestic partner continues using the technology. Even worse, the domestic partner may then expand its business and begin exporting products and services the core of which was the once-licensed knowhow.

All this makes China technology transfer and related concerns very genuine.

What is the Made in China 2025?

The Made in China 2025 is a vision statement of China that aims to improve production quality and efficiency through policy-backed initiatives and systemic changes, thereby enabling Chinese businesses to better compete globally and substantially change the perception about Chinese products. It was drafted by China’s Ministry of Industry and Information Technology (MIIT)  and adopted in 2013.

Experts note that while this initiative may have been inspired by Germany’s Industry 4.0 idea of intelligent manufacturing (something that may have also partially influenced India’s Make in India program), the Made in China 2025 has a far wider base and more complex challenges to overcome.

While Germany’s Industry 4.0 is centered around Internet of Things (IoT) that seeks to connect organizations of varying sizes to global productions, Made in China 2025 has far-reaching principles that include green development and nurturing of human talent.

Given the degree of social and industrial disparities that exist within China and its business, it is considered an extremely ambitious goal, to say the least.

The vision focuses entirely on manufacturing and categorically mentions ten priority sectors that range from automated machine tools, aerospace, information technology, agriculture equipment and biopharma.

The preparations are not in thin air. Being the largest energy consumer, China’s commitment to renewable energy reflects in the fact that it installed the equivalent of one and a half soccer fields of solar panels every hour.

How are Made in China 2025 and the US China trade war related?

How the Made in China 2025 impacts MNCs is something that has multiple facets. The good news is it expects Chinese firms to drastically improve their quality standards so that they can deliver international quality products at competitive rates. In practice, it means the Chinese companies may not be able to work in absence of MNCs from whom they expect important contributions in terms of technology and even technology management.

That way, the MNCs will see more avenues to invest in China, with a more welcoming Chinese administration. Also, a technologically and economically more sophisticated China means good news to the global economy.

On the flip side, China has often been accused of being less than fair in handling intellectual property rights.  In 2007, for instance, the US had taken China to the WTO over an IP dispute. After two years, China had to yield, tighten its IP laws and stipulate stricter punitive steps against erring companies. The new economic adviser to US President Donald Trump, Larry Kudlow put it rather bluntly when he said “The whole world knows China has been violating trade laws for many years, and President Trump is the guy calling them on it.”

A long-lasting trade understanding between the USA and China is in the interest of global economy, but how soon it happens remains to be seen.

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References

  1. US State at March 27, 2018 DSB meeting
  2. Wall Street Journal
  3. Wikipedia

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