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U.S.-China trade talks making little progress on make-or-break IP issues

January 21, 2019

Ever since negotiators from the U.S. and China sat down in Beijing after a Christmas meltdown in global markets, President Donald Trump has sought to calm investors and claim his trade talks are making great strides. But that glosses over a more uncomfortable reality.

According to people close to the discussions, the two sides have so far made little progress on the issue any deal Trump strikes with China may ultimately be judged on: ending what the U.S. has dubbed as decades of state-coordinated Chinese theft of American intellectual property.

That stands in contrast to movement on other fronts that has lifted stocks in recent sessions, including a Bloomberg report on Friday that China offered a path to reducing its trade surplus to zero by 2024. European stocks and U.S. equity futures dipped Monday, while Asian markets posted modest gains. The next round of talks is scheduled for Jan. 30-31, when Chinese leader Xi Jinping’s top economic emissary Liu He will visit Washington, D.C.

China’s alleged IP theft and its related practice of forcing foreign companies to hand over technology to gain access to its market formed a large part of the agenda for the three days of early-January talks. Yet the discussions amounted more to an airing of grievances than constructive negotiations, according to participants and others briefed on the talks.

Deputy U.S. Trade Representative Jeffrey Gerrish spent much of the time citing a U.S. report used to justify the tariffs imposed on some $250 billion in Chinese goods, one person present at the talks said. Chinese officials responded by repeating longstanding denials of any wrongdoing and asked the U.S. for proof.

The lack of progress in discussions on structural issues such as IP was confirmed by Robert Lighthizer, the U.S. trade representative, in a meeting with lawmakers last week, according to congressional aides. His office declined to comment.

China’s Ministry of Commerce and the National Intellectual Property Administration didn’t respond to faxes seeking comment.

Tariff leverage

While it’s unclear if the U.S. made any new demands on IP during the latest round of talks, last year it called on China to eliminate specific policies and practices linked to technology transfer, cease government-sponsored cyber theft, strengthen IP enforcement and end government support for industries targeted in the Made in China 2025 plan.

China has publicly denied the U.S.’s claims regarding IP theft and the forced transfer of technology. It insists that it has lived up to the commitments it made when it joined the World Trade Organization in 2001, including by establishing special IP courts.

The IP stalemate gets to the heart of Trump’s trade wars and questions over his ability to turn the leverage he’s created with tariffs into meaningful Chinese policy changes. It also points to the potential political fallout.

“Any trade deal worth making will clearly address China’s rampant IP theft and forced technology transfers, both for the good of the American economy and American workers, as well our national security,’’ said Senator Marco Rubio, a leading Republican proponent of taking a tough line on China.

Likewise, Senator Ron Wyden, the ranking Democrat on the Finance Committee, said any deal would have to “directly address the basis for the tariffs, which includes China’s practices on IP theft and technology transfer.” “Anything less,”’ Wyden said, “would leave American workers and employers vulnerable to China’s predatory practices.”

Trump and his aides have themselves portrayed the protection of U.S. IP as an existential one for the American economy. His administration has also begun a federal investigation into Huawei Technologies Co. for allegedly stealing technology secrets from U.S. companies, which comes shortly after it announced a “China Initiative” designed to prioritize trade-theft cases and litigate them as quickly as possible.

In a speech last November, Peter Navarro, a White House trade adviser, called out Beijing’s march “to acquire the technologies and intellectual property of the world by any means necessary’’ and control artificial intelligence, robotics and other emerging industries. Or, as he put it, “the kinds of industries going forward where our sons and daughters and their children will find the good jobs at good wages.’’

The tussle over China’s treatment of IP gets at one of the central complaints levied by foreign companies either doing business in China or competing with increasingly aggressive Chinese rivals: that China’s rapid rise has as much to do with a state-coordinated campaign to sprint up the value chain as it does with reforms over the past 40 years.

That is part of the reason business groups who have otherwise opposed Trump’s tariffs have been more willing to back his approach to China and are now insisting that any deal must tackle IP issues to be meaningful.

‘Serious Issues’

“We have not been particularly enamored of the tariff route that the administration has gone with. But there is no question that these are serious issues,’’ said Charles Freeman, a top Asia executive for the U.S. Chamber of Commerce. “We agree with the diagnosis. Just not the prescription.’’

A big priority for many industries may be a short-term deal to de-escalate tensions between the world’s two largest economies, said Jimmy Goodrich, of the Semiconductor Industry Association. But “it would be a shame to see the leverage created only be used to get minimal outcomes."

Beijing has also in recent months unveiled measures to appease the Trump administration.

Days after Xi and Trump agreed to a tariff truce on Dec. 1, Chinese officials issued a proposed new IP law that would ban companies caught stealing technology from issuing bonds or accessing other financing.

Earlier this month, the government said it would accelerate the passage of a new foreign-investment law that includes administrative measures to protect the IP of foreign companies and ease pressure on them to transfer technology to local partners.

China has also emphasized an increase in trademark enforcement cases, with 31,000 investigations conducted in 2018 and big foreign brands such as Lego, Alfred Dunhill and New Balance among the beneficiaries.

Still, international business groups remain skeptical.

While the draft foreign-investment law would nominally give international companies the same national treatment as domestic rivals in IP matters, “the very name ‘Foreign Investment Law’ maintains the distinction between Chinese and foreign companies," said Mats Harborn, of the European Union Chamber of Commerce in China.

Erin Ennis, a senior vice president at the U.S.-China Business Council, said that while the proposed IP law is an improvement, it still falls short by not including criminal penalties such as jail time. It also doesn’t address the myriad regulations and other ways in which regional governments and Chinese companies force foreign companies to hand over IP.

“Some of this is in the weeds,” Ennis said. “But that’s where the problems are happening.’’

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