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Why China Won’t Abandon Its Controversial Trade Policies

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China Power

Why China Won’t Abandon Its Controversial Trade Policies

Protectionist policies play a key role in China’s national strategy.

Why China Won’t Abandon Its Controversial Trade Policies
Credit: DOD photo by U.S. Navy Petty Officer 1st Class Dominique A. Pineiro

Over the weekend, the United States and China declared a ceasefire in their escalating trade conflict. Both sides agreed to put tariffs on hold while negotiations continue. Although China made vague promises to reduce its trade surplus with the United States in the interim, the Trump administration’s demands that China end its flagship industrial policy, Made in China 2025, and improve its intellectual property system have gone unaddressed.

It seems as though many believe that foreign pressure will cause China to abandon its protectionist practices. What this misses is the importance that China’s industrial policies and IP protections play in its own conception of national economic development and its core interests. While it is in China’s long-term economic interest to improve its intellectual property rights (IPR) regime as its economy develops, it is also in its interest to promote domestic industry in the high-tech sector even at the expense of foreign competition. These two policy goals go hand in hand.

The Future of China’s Growth

Since the Reform and Opening began in 1978, China has had one of the most dynamic economies in the world. The Chinese economy rose to these heights by relying on a constant flow of new workers from the countryside into the urban labor force and massive investments in housing, infrastructure, and industrial capacity. However, in recent years, this model has become unsustainable as the availability of cheap labor has waned and investment gluts have emerged. What is more, the global financial crisis showed Chinese policymakers the risks of an economy too reliant on exports to fuel growth.

Reflecting China’s continued proclivity for central planning, China’s leadership has identified promoting innovation as key to boosting productivity and competing in the global economy in the 21st century. In the 13th Five-Year Plan, China set a target to have 60 percent of its economic growth come from innovation by 2020. Made in China 2025, an essential policy for boosting China’s innovative capacities, seeks to transform the country into a global technology powerhouse and achieve technological self-sufficiency by 2025.

Originally approved by China’s State Council in 2015, Made in China 2025 specifically targets 10 high-tech industries for China to not simply surpass but replace other high-tech economies like the United States, Germany, South Korea, and Japan. The Chinese government is investing heavily in the program through subsidies, loans, and other policy incentives to support companies focusing on high-tech research, innovation, and acquisition of overseas technologies. With central government funding of over $1.5 billion and local governments matching that amount between 2016 and 2020, Made in China 2025 is set to pose a serious challenge to international technology companies. A report published by the Mercator Institute for China Studies concludes that the plan “seeks to gradually replace foreign with Chinese technology at home – and to prepare the ground for Chinese technology companies entering international markets.”

As a central tenant of China’s economic development strategy, the plan has been a major sticking point with China’s international trading partners. However, despite the previous threats of tariffs and trade war, it is almost impossible to conceive of a scenario where Beijing gives up its core industrial development policy. This is especially true as China depends less on the U.S. market for exports and increasingly relies on domestic consumption to fuel growth.

China’s IPR Regime

At the same time as Made in China 2025 fosters domestic technological innovation and economic development, China has also recognized that supporting stronger IP protections are essential for cementing its high-tech leadership. Indeed, contrary to popular characterization, China has already made remarkable progress in strengthening its IPR regime.

While Western enterprises and governments have long pushed for stronger IP protections in China, it has been the central government’s own nationalistic initiatives and the demand of its increasingly innovative domestic firms that drive progress. The government recognizes that a strong IPR regime is essential to developing an innovative economy. At the same time, domestic firms continue to rely on innovation to fuel their growth and expand market power. It is in this symbiotic relationship between state support and domestic innovation that has led to a stronger IPR regime in China — not international pressures.

As China began to open to the world under the leadership of Deng Xiaoping, officials recognized that legal reforms were necessary to implement economic transition and attract foreign investment. Policymakers saw IP reform as an important tool for achieving their ambitious economic targets. Although not initially effective due to poor enforcement, China’s first modern IP laws based on Western legislation were introduced in the 1980s covering trademarks (1982), patents (1984), and eventually copyrights (1990). A decade later, China overhauled its IPR regime in order to boost its international economic integration and accede to the WTO. China continued its global push by joining a number of international treaties on IP protection such as the Berne Convention, the Paris Convention, and the Patent Cooperation Treaty.

Although these reforms provide a solid legal foundation for IP protections in China today on par with most developed economies, these reforms were possible only insofar as they conformed with China’s view that a strong IPR regime is a tool for promoting national economic goals. Xi Jinping made this national interest abundantly clear when he proclaimed at the Boao Forum for Asia, “Stronger IPR protection is the requirement of foreign enterprises, and even more so of Chinese enterprises.” This conception of IP runs from early reformers in the 1980s to current policymakers in the Xi era.

Domestic Demand for Stronger IP Protections

China’s IPR regime has become all the more important as domestic firms have become leaders in technology and innovation. Accompanying the government’s push to use IP protection to achieve its national economic goals, local stakeholders have demanded reform because of their desire to take advantage of the benefits of stronger IP protections. China continues to strengthen IP enforcement to prepare for when its companies become global leaders in their fields and need strong institutions to defend their innovations from appropriation.

Indeed, this can already be seen in a number of high-tech sectors in China. In the race to develop 5G mobile networks, China is leading the way with domestic firms owning approximately 10 percent of global “5G-essential” IPRs. Chinese tech giants Huawei and ZTE, the top two international patent filers in the world respectively, have been major leaders in 5G technologies. Similarly, Alibaba and Tencent continue to drive innovation in the in the realms of mobile payments and financial technology. Mobile payments in China have passed $9 trillion a year — far ahead of the United States — and China now accounts for half of the world’s digital payments and three-quarters of the global online lending market. What is more, Baidu, Alibaba, and Tencent are all investing heavily in artificial intelligence and autonomous vehicles, two technologies that continue to define the global technological frontier.

Given the incredible technological advances and market success of Chinese firms, it is no surprise that many firms believe a strong IPR regime is essential for protecting their innovations. Li Jian, a vice president of Beijing East IP, a Chinese law firm, told the New York Times, “Many Chinese companies have realized that through patent protection they can gain an advantage in the market. They have more faith now in the Chinese government to protect their intellectual property.”

There is a common trend in the West to deride China’s weak IP protections and unfair industrial policies. Nevertheless, it is important to recognize the essentiality of these policies to China’s national economic development objectives and reform efforts. As Evan Feigenbaum, vice chairman of the Paulson Institute at the University of Chicago, wrote in MacroPolo, “Reform is, quite simply, about Beijing’s priorities, not ours. And that means that while reform might eventually mean more openness through competition reforms, we should certainly not assume that will be the case and would be rather naïve to do so.”

China’s mercantilist bent is nothing new. It is not even unique to China. From the United States in the 19th century to the East Asian Tigers in the latter half of the 20th century, governments have long relied on tariffs, subsidies, and barriers to market entry to foster infant industries and absorb technologies from abroad. To the extent that China reforms its industrial policies and IPR regime, it does not do so to align with liberal economic norms or foreign pressures, but rather to support its core national economic interests. As trade talks continue, it is important that policymakers do not forget this.

William Weightman is a 2017-18 Fulbright Fellow based in Chengdu, China, where he researches intellectual property law, IP enforcement, and technology innovation policy.