Theft as a Matter of Industrial Policy
"I am not mad at China," Jones began, "I'm mad at our own government for making bad trade agreements." The essence of Jones's complaint is that when the U.S. government works to pry open markets around the world, as it did by advocating that China be granted membership in the World Trade Organization (it became a member in late 2001), intellectual property is one of the areas where negotiations tend to bog down. He's not wrong. The often elaborate apparatuses built into the agreements have proved cumbersome and weak in practice.
Jones offered a disturbing story about how China's national industrial policy facilitates forced technology transfer to Chinese industries. One new mechanism is the so-called CCC safety certification. Every electronic component or piece of equipment to be sold in China must be submitted to the Chinese government body overseeing the CCC certification. The process requires the foreign manufacturer to give Chinese officials full access to engineering drawings and schematics and to provide a complete finished product for evaluation. In addition, the applicant companies must pay for Chinese officials to visit and inspect their factories outside of China.
Not long ago, Jones learned that China's banks would be shopping for 10,000 currency machines. The Cummins machine that met the Chinese specs sells for about $1,000, and Jones felt obliged to explore. When he learned the details of CCC certification, he walked away. He felt certain that the Chinese government itself would have been involved in the reverse engineering of Cummins-Allison's technology for the benefit of Chinese companies.
Jones says one reason he can hold the line is that Cummins-Allison is privately held and has the luxury to think long-term. He believes that the leaders of public companies, who are compensated based on their results within short windows of time, are willing to trade technology to China if they can achieve a short-term gain from it. One of the most confident speculations in my book was that the largest automakers in China, which were already engaged in partnerships with leading global car companies, would soon offer their own lines of world-class cars that borrowed liberally from their more advanced partners. It was not hard to anticipate, and in April 2006 Shanghai Automotive Industry Corp., or SAIC, which is a majority partner in joint ventures with both General Motors and Volkswagen, announced that it would soon build cars under its own nameplate. There is no word yet on how seriously the new SAIC venture takes its responsibilities as a technology licensee, but I've yet to talk to a person in either Chinese or American industry who doesn't assume that the government-run Chinese company had its eyes on a comprehensive transfer of technology from the beginning. Its partners knew as much, and like many top world companies they saw little alternative but to go along, because participation in the Chinese market often demands such technology transfer as a condition to access.
I wanted to test with Jones an argument I had been making about the value of pirated technology on the shop floor. I'd been saying that in some industries IP theft seemed to be a crucial part of China's comprehensive low-cost advantage, more significant even than cheap labor. I've heard American manufacturers marvel, bitterly, that Chinese manufacturers sometimes deliver finished products for less than American companies pay just for parts. "This, too, is a function of China's no-cost technology environment," Jones said. "At every stage of the supply chain you have companies that do not have the technology costs American firms have. Chinese companies run counterfeit software, reverse-engineered machines, and other proprietary processes they need not pay for. So by the time a Chinese company assembles a product from Chinese parts, there is a big savings that has accrued all along the way. We have to pay for parts that are made in places that pay a lot for their technology, so naturally we pay more."
When the harm stemming from China's intellectual property regime is calculated, the number is tallied in two ways. One, like the $500 billion figure cited above, is from the estimated gross sales of counterfeit and pirated goods. Another approach is to add up the sales that legitimate sellers would have racked up had they sold a like amount of goods at the prices they normally command. Allowing that copied goods undercut their legitimate competition by between 20 and 99 percent, the number gets huge very fast. Yet even that method doesn't begin to measure the cost to companies that dare not introduce their products to China. That price is harder to add on, since it is impossible to tally the value of plans not made. It is not hard, however, to understand that when American companies must pay full dollar for technology that Chinese companies can get for little or nothing, that dynamic can contribute to the weakening, or near disappearance, of whole American industries.
I was asked in Beverly Hills what would improve if the amount of IP theft in China began to diminish. I pointed to three benefits. First, IP protection would chip away at China's low-cost manufacturing advantage. Second, it would create a large market for America's high-value technology and entertainment products. Third, it could also work to convince the Chinese to revise their currency policies, which today economists widely believe keep the Chinese yuan below its presumptive market value against the dollar. If China were to find that it had to pay to import technology it now simply takes, it might also have incentive to increase the value of its money and make the world's capital goods more affordable to Chinese buyers.
