Why the US-China trade deal targets corporate secrets

U.S. authorities have long accused Chinese companies and individuals of hacking and other outright theft of corporate secrets. And some in the Trump administration worry that Chinese companies are simply buying it through corporate deals.

U.S. companies say Chinese companies also use more subtle tactics to get access to valuable technology.

Sometimes China requires foreign companies to form joint ventures with local firms in order to do business there, as in the case of the auto industry. It also sometimes requires that a certain percentage of a product’s value be manufactured locally, as it once did with wind turbines and solar panels.

The technology companies Apple and Amazon set up ventures with local partners to handle data in China to comply with internal security laws.

Companies are loath to accuse Chinese partners of theft for fear of being punished. Business groups that represent them say Chinese companies use those corporate ties to pressure foreign partners into giving up secrets. They also say Chinese officials have pressured foreign companies to give them access to sensitive technology as part of a review process to make sure those products are safe for Chinese consumers.

Do the methods work?

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

Gamesa of Spain was the wind turbine market leader in China when Beijing mandated in 2005 that 70% of each wind turbine installed in China had to be manufactured inside the country. The company trained more than 500 suppliers in China to manufacture practically every part in its turbines. It set up a plant to assemble them in the city of Tianjin. Other multinational wind turbine manufacturers did the same.

The Obama administration questioned the policy as a violation of World Trade Organization rules and China withdrew it, but by then it was too late. Chinese state-controlled enterprises had begun to assemble turbines using the same suppliers. China is now the world’s biggest market for wind turbines, and they are mostly made by Chinese companies.

A somewhat similar industrial evolution occurred soon after in solar energy. China required that its first big municipal solar project only use solar panels that were at least 80% made in China. Companies rushed to produce in China and share technology.

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

What industries could be next?

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

Shortly after opening China to foreign auto companies, Chinese officials held a competition among global automakers for who 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 to be formed with a Chinese state-owned partner.

General Motors beat out Ford Motor and Toyota by agreeing to build a state-of-the-art assembly plant in Shanghai with four dozen robots to make the latest Buicks. Executives at Volkswagen, the German automaker that had entered China even earlier, were furious, because competitive pressures forced them to upgrade their technology as well.

China is now the world’s largest car market. But except for a few luxury models, practically all of the cars sold in China are made there. Steep Chinese tariffs on imported cars and car parts have also played a role, as has the desire of foreign companies to avoid the costs and risks of transporting cars from distant production sites.

How will the pact fix the problem?

In the trade truce, Chinese officials agreed not to force companies to transfer technology as a condition of doing business, and they undertook to punish firms that infringe on 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 drop the joint venture requirement in areas like cars.

The question is whether China will stick to its pledges. Chinese officials already issued rules last month putting in place much of what they promised in Wednesday’s agreement. Foreign lawyers say the new rules have large loopholes. The rules give Chinese regulators broad discretion to act as they see fit in cases that involve “special circumstances,” “national state interests” and other fuzzy exceptions.

The trade pact calls for consultations within 90 days if the United States thinks Beijing is not living up to its commitments, but it is unclear whether the Trump administration could then force compliance. More broadly, the pact does not address China’s subsidies for new industries, a key factor in what happened in sectors like solar panels. China has largely rebuffed calls to rein in subsidies for homegrown competitors in industries like semiconductors, commercial aircraft, electric cars and other technologies of tomorrow.

The Trump administration is counting on tariffs to counterbalance that. The partial trade pact will leave in place broad tariffs on many of those industries to prevent Chinese competitors from flooding the U.S. market. Leaving broad tariffs in place also gives Western companies a strong financial incentive to reconsider supply chains that are heavily reliant on China.