This week Commerce Secretary Wilbur Ross stated that he thinks that China has, “agreed to the concept of a trade deficit reduction.” If true this would greatly diminish the risk of a full blown trade war with America’s largest trading partner. However, even if China ultimately agrees to buy more goods from U.S. companies to offset some of the trade deficit, the much larger problem is Chinese theft of American intellectual property (IP), an issue so large that it is estimated to be close to America’s annual federal budget deficit.

There are many horror stories of U.S. firms working in China only to find that they are blocked discretely or blatantly through regulation or government policy.  In other cases, the government heavily subsidizes domestic firms and industries to give them an unfair advantage when competing abroad until such time that the industry can completely dominate the world’s production at effective scale. China also steals IP through espionage and cyber theft. Finally, China requires U.S. firms to partner with local Chinese companies and to share technology in order to gain permission to operate and sell in China.

There are countless examples of these various abuses adversely impacting some of the largest companies in the world. At times they are obvious and blatant, such as when Google had a large search business in China until one day when they woke up to find that their service was entirely blocked. Google was eventually forced to pull out of China entirely.

Most of the time, these abuses are more subtle and take place over time and behind closed doors and can be more difficult to measure. The solar industry provides a great example of China’s capacity to offer subsidies to unfairly compete to the point of unabated dominance. The photovoltaic industry was invented in the U.S. where many of the world’s patents still exist. In 2005, China had almost no photovoltaic (solar panel) industry and the U.S. had a worldwide market share near 50%. Yet over the next five years, China’s push resulted in worldwide prices dropping by 80% and Chinese market share of photovoltaic cells climbed to nearly 60% of the world’s production. The U.S. share dropped to nearly zero. The tens of billions in subsidies offered by the Chinese government allowed them to build massive manufacturing capabilities. The U.S. Department of Energy (DOE) determined that the Chinese government may have contributed nearly $50 billion to help build China into a solar panel manufacturing mecca. That’s an astounding level of subsidy for any industry and allowed China to become the acknowledged price leader. China built so much capacity that prices cratered throughout the world, which left most other manufacturers facing bankruptcy. U.S. producers, which had previously been the worldwide leaders in photovoltaic manufacturing, largely disappeared.

Unfortunately, the value of the $50 billion subsidy for the photovoltaic industry is a drop in the bucket when compared to the annual cost of the theft of U.S. IP. This theft comes from many directions, including the counterfeiting of luxury goods and pharmaceuticals to the cyber theft of technology.  Direct theft on the Chinese mainland from U.S. companies operating locally has also contributed to massive losses of U.S. technology. China has also operated with complete disregard for U.S. copyright laws. The U.S. Trade Representation has repeatedly warned China about these various thefts over the past five years, but the pattern of theft has continued and grown.

A 2017 report by the United States Trade Representative estimated that Chinese theft of American IP costs between $225 and $600 billion annually.  These are staggering estimates, and are roughly equal to the amount of the U.S. federal budget deficit in 2016.  So while it is important to reduce the trade imbalances between the two nations, it is even more important to protect domestic IP.

When the thefts take place on foreign soil, it is much more difficult to enforce.  U.S. firms today are forced to partner with local Chinese companies and must provide and transfer a lot of technology in order to sell and build their wares within China. The U.S. has no such requirement of Chinese firms to operate in the US. (China is also not a technology leader.)  Policies should change to make the competitive environment more prone to fair competition and less to outright theft. The U.S. can start by requiring changes in Chinese policy allowing U.S. firms to be able to openly compete in Chinese markets without partnering with Chinese firms and without being required to turn over their technologies.

As a country, we focus on the annual costs of inefficient healthcare spending, tax rates, and entitlement spending. But the theft of U.S. IP is remarkably among the largest opportunities for domestic fiscal improvement through policy change, dialogue, and enforcement. Both the Democrats and Republicans should agree to measures to secure these benefits. The impact on investments, employment, and domestic economic growth could be significant, and for these reasons it bears watching as it plays out.

https://ustr.gov/sites/default/files/301/2017%20Special%20301%20Report%20FINAL.PDF

https://www.scientificamerican.com/article/why-china-is-dominating-the-solar-industry/

About the Author

David Lieberman

David Lieberman

Mr. Lieberman is a Partner, Managing Director, and Portfolio Manager with Advisors Capital Management, LLC (ACM), and serves on the Investment Committee. Mr. Lieberman was previously a Portfolio Manager of the Growth Strategy at ACM. Prior to joining ACM, Mr....
About the Author

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