How the U.S. Can Protect Corporate America’s Tech Secrets From China


But this is easier said than done as Chinese manufacturers are skilled at making copycat products—and their efforts to catch up in automobiles, aviation, computer chips and other sectors have the full support of Beijing as it seeks technological parity with the U.S.

“You’ve got strong desire to develop technology, you’ve got a very poor domestic innovation system and you have a large, attractive domestic market,” said Scott Kennedy, senior adviser for China at the Center for Strategic and International Studies. “You’ve got to break one of those three things to fundamentally change the landscape.”

While there are no foolproof remedies, Mr. Kennedy and others following the U.S.-China trade fight say there are specific measures that U.S. negotiators can pursue to slam the brakes on China’s intellectual-property theft and what they view as the forced transfer of technology.

These include opening up more Chinese sectors to foreign investment, punishing companies that pirate foreign technology and lowering import tariffs on high-tech goods.

At present, many Western companies must strike joint-venture arrangements with Chinese partners before they can start doing business. These rules, which China has begun to phase out in the financial services and automotive sectors, often serve to help loot trade secrets.

As representatives from the U.S. and China try to hammer out an agreement on trade, the White House is seeking to stop what it calls “forced technology transfer.” WSJ’s Shelby Holliday explains.

“Eliminating joint ventures or equity caps is the most obvious thing that can be done,” said Erin Ennis, senior vice president at the U.S.-China Business Council, which represents American firms that do business in China.

Still, the biggest prize in negotiations with China would be for Beijing to overhaul its system to protect foreign investment—and expose and punish those that pry technology away from global companies, said Robert Holleyman, who served as a deputy U.S. trade representative in the Obama administration.

”It has to be a declaration that’s serious and that has binding effect,” said Mr. Holleyman, who is now a partner at law firm Crowell & Moring LLP. “The reason why this is so challenging in China is that the administrative and licensing requirements are so complex, so unclear and so susceptible to interpretation by local and provincial and central government officials.

The Trump administration initiated the trade fight with China after an investigation by the U.S. trade representative’s office last year alleged a series of trade violations, including systemic forced technology transfers.

Beijing has denied engaging in a campaign to steal American technology but has expressed willingness to consider changes to address concerns from the U.S.

The U.S. trade delegation, led by Deputy Trade Representative Jeffrey Gerrish, center, left Beijing late Wednesday afternoon.

The U.S. trade delegation, led by Deputy Trade Representative Jeffrey Gerrish, center, left Beijing late Wednesday afternoon.


Photo:

Agence France-Presse/Getty Images

After months of threats and tit-for-tat tariffs, midlevel U.S. and Chinese negotiators concluded three days of talks in Beijing on Wednesday, setting the stage for higher-level discussions.

China experts like the U.S.-China Business Council’s Ms. Ennis are already seeing changes in the legal environment. And a push from Beijing could go a long way to help companies eager to exploit growth opportunities in China.

“Protecting your intellectual property in China is generally a challenge, but the system is getting better,” she said. “The judicial system is getting much more sophisticated on these issues.”

Beijing recently released draft legislation that aims to deal with complaints from foreign companies operating in China about policies and practices that favor domestic firms.

For example, new vehicles currently need to get government approval before being mass-produced and undergo a mandatory technology audit that usually lasts several days, foreign firms say.

An audit last year convinced an employee at one foreign auto maker that there was “clear evidence of collusion” between the audit team and Chinese companies, The Wall Street Journal has reported. When the audit began, the person said, inspectors asked for the blueprints of the electric-vehicle components that the foreign company was trying to protect from its Chinese JV partner.

Mr. Holleyman said American negotiators must push China beyond promises. “You have to have a mechanism by which there is monitoring and reporting to ensure that any rules that are inconsistent with that are removed from the books,” he said.

Some companies don’t produce their most cutting-edge products in China out of concern for technology theft, trade experts say, preferring to export those goods to consumers in China.

The stakes are especially high in high-tech sectors and products with military applications, such as aviation. American officials are worried about the legal purchase of strategic technology as well as illicit efforts to gain capabilities used in civilian and military aircraft.

Pentagon and defense companies have long alleged that intellectual property theft has allowed China to develop systems that closely resemble U.S. weapons including jet fighters, helicopters and armed drones.

Lockheed Martin
Corp.

Chief Executive Marillyn Hewson has said protecting intellectual property is “a critical area for the aerospace and defense industry.”

Boeing
Co.

relies on China for a quarter of its airliner sales and recently opened a facility near Shanghai to paint and complete U.S.-built 737 passenger jets. The company said it has been careful to protect its intellectual property. “Boeing teams have worked to insulate our IP and trade secrets with rigorous processes,” the company said in a regulatory filing last year.

Write to William Mauldin at william.mauldin@wsj.com and Doug Cameron at doug.cameron@wsj.com



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