It has been widely reported that the Whitehouse staff has
been busy preparing a comprehensive approach to China for Trump’s widely
anticipated trip to China in November. In fact, two different approaches have
been formulated based on the idea of confrontation or cooperation.
Most prominent advocate in favor of confrontation has come
from the Steve Bannon school of international thinking, wherein Gordon (the
Collapse of China) Chang salutes Bannon as the Paul Revere warning America of
the coming economic war with China.
A whole generation of China watchers has been waiting for
Chang’s prophecy to find some shred of reality but can only conclude that he is
a blindfolded seer muttering gibberish in the wilderness. Yet, Bannon’s
Breitbart has seen fit to elevate Chang to the position as “renowned expert on
Asia.” This mutual admiration speaks volumes on the callow superficiality of
these novitiates in international relations.
Any student of Econ 101 knows that the notion of an economic
war between the U.S. and China is preposterous. Much of Bannon’s argument, as
is those from Commerce Secretary Ross, rests on the charge that China has
gained unfair possession of corporate America’s intellectual property.
We owe it to helping ensure the success of Trump’s China trip
by examining this question of China’s alleged hijacking American IP in some detail.
It’s true in the 1980’s and 1990’s, China’s economy was tiny compared
to the U.S. and its quality of technology far behind. Therefore as a matter of
national policy, China insisted that for certain critical industries, foreign
companies wishing to invest in China must form joint ventures with foreign
ownership not to exceed 50%. Passenger cars belong to one of these critical or
so-called pillar industries.
However, it would be inaccurate to accuse China of coercing
the foreign company into handing over its know how and trade secrets. To
paraphrase Bill Gates when he entered China, “You want to play in the China
market, you go by their rules. If you can’t abide by their rules, don’t enter.”
(Google elected to withdraw from China but Baidu came up with their version of
search technology anyway.)
GM was one of the first car companies to invest in China and
had to form a 50/50 JV with Shanghai Auto Industries Corp. No doubt SAIC
learned a lot from their JV partner, but look at what GM got.
GM introduced their Buick into China just as China’s market
for passenger cars was taking off and Buick became the established “luxury” car
for the Chinese consumer. At one point, GM’s take of profits from all the
Buicks sold in China, even at 50%, exceeded the total of the paper-thin profits
GM earned from all the sales in the US. GM’s profit from China delayed the
inevitable bankruptcy of the parent for some years.
Getting into the China market in exchange for sharing their
technology was a deliberate business decision, no coercion involved. Few
companies that made the decision to get into China regretted doing so, only the
politicians back home like to cry foul.
Autodesk in the San Francisco Bay Area faced a different
problem. They had a computer aided design program for the PC that was extremely
popular in China. Except, practically every copy in China at the time was a
bootleg copy; very few if any were paid for. For years, software piracy was a
popular bone of contention between the American embassy staff and the Chinese
officials.
The country manager of Autodesk saw the problem differently.
He saw all the pirated copies as his installed base, already trained and
familiar with the basic program. He then introduced a high-rise building design
application to run on top of the CAD program, which he then sold like hot
cakes. At the time China was undergoing a building boom and the users were far
more interested in paying for the package and getting trained to use the
building design program than spend the time trying to find a bootleg version.
Today, China’s economy has narrowed the gap with the US and
has been developing its own IP that might benefit the US; in other words a
reversal of roles is underway.
Take the example of China Railway Rolling Stock Corp (CRRC)
in the US. This company has won contracts to supply subway cars for new lines
and replace old cars in Boston, Chicago and Los Angeles. The contract for each
city was worth well north of $500 million and each car delivered will qualify
as “Buy America,” which means with a local content exceeding 60%.
CRRC will accomplish the local content requirement by
shipping the outer shells from Changchun to the US and make all the other
components of the car in the US. The final assembly would also be done in the
US. CRRC’s proprietary design has reduced the weight of the car, thus reducing
cost while enhancing rider safety. They will use their manufacturing
methodology in America and supervise local (American) labor to make a superior product.
The CRRC bid was at least 20% lower than competing bids from
Canada and South Korea. There were no US bidders. In other words, the use of
Chinese know how will provide American cities with state of the art rail cars,
at affordable prices, made with American labor, and resulting in the infrastructure
improvements to make America great again.
The point about IP is that it’s a dynamic, ever changing
asset and not static like a piece of gold that could be locked up in the vault.
The owner can profit by sharing its know how via joint venture or license. The
IP can also leak away, as employees leave the company, for example. Competitors
can copy and reverse engineer to achieve the same end. Even carefully written
patents are not foolproof but serves as the beginning of disputes giving
litigation attorneys countless billable hours.
The issue of intellectual property ownership is simply too
complicated for the Bannons or Bannon-lites to use effectively for the purpose
of stoking friction between China and the U.S.
There are other companies from China that would like to
invest in America, share their expertise in low cost production for the benefit
of local employment and economy. GM for example invited Fu Yao to invest in a
plant in Ohio to make windshields for the auto industry. The governor of Ohio
was ecstatic. So long as xenophobia does not intrude, good things happen.
Judging from the rapport China’s Xi established with Trump in
his visit to Mar-a-Lago earlier this year, we could surmise that Xi has figured
out how to make Donald Trump feel good about himself. Xi can use the goodwill
to point out to Trump that the flow of technology is now bi-directional and
sharing can only help both countries achieve greatness.
In a private conversation, Xi might want to explain to Trump
that North Korea won’t feel that they have reached mutual threat parity with
the US until their intercontinental missiles can reach Trump’s properties on
the East Coast and hurt him in the pocketbook. The only way to calm down the
situation is to talk.
Xi can’t tell Pyongyang what to do, but certainly can try to
broker a session at the conference table. The operative words are step-by-step,
confidence building conversation that hopefully can lead to serious
negotiations. Since Trump does not have the patience for this painstaking
process, Xi could hint that someone else should take the lead.
Trump in turn can shower praise on Xi’s vision in creating
the Belt and Road Initiative and make the observation that trains already run
from China straight to London, an economic lifeline increasingly vital to U.K.
as Brexit moves forward. Given that governor Jerry Brown has already declared
California to be part of the initiative, Trump may also want to ask Xi how the
US can participate in the BRI.
A surprising offer would be for Xi to propose sharing China’s
quantum encryption technology with America! The idea would be to initially develop
hack proof communication between the governments in Beijing and Washington and
gradually expand to cyber communications between two countries and put the
network out of the reach of the criminal elements. The implications would be
huge and Trump can look exceptionally statesman-like as he emerges from his
visit to China.
The key to making
Trump’s China visit an unqualified success, in addition to having positive
cooperative developments to talk about, is to keep the two leaders’ exposure
and engagement with the western medial to a minimum. Minimize the opportunity for Trump to strut
or tweet and for the western media to create real or fake news. Let the
discussions and frank exchanges proceed behind closed doors.
