“Lighthizer faces an anxious president who lacks the patience or commitment to secure substantive changes for protection of U.S. IP.”
While a preliminary trade deal seems to have been struck between China and the United States over tariffs, the two sides have yet to seriously address the toughest and perhaps most economically crucial issues on the table: China clinging to a tech policy based on systematic theft of U.S. intellectual property (IP), forced technology transfer, and cybertheft.
President Trump has paid lip service to the need for any deal to include IP protections, and China responded on March 14 by rushing a law that would, according to CNBC, “prohibit the forced transfer of technology from foreign-invested businesses in China, step up protection of intellectual property and claim to give the companies equal footing with domestic players.” Nevertheless, China watchers are skeptical that these commitments remain cosmetic, while it remains clear that Trump has focused his negotiators chiefly on those things nearest and dearest to his heart: physical goods and tariffs. As talks move forward, the question remains—how will U.S. Trade Representative (USTR) Robert Lighthizer resolve these challenges for the benefit of IP holders?
More Focus on Tech, Less on Tariffs
Technology is a vital export for the United States, and intellectual property issues—intangible as they are—are particularly challenging. Many U.S. companies have long complained about pressure in China for technology transfer in exchange for market access, as well as outright corporate espionage.
However, because complaining about China has usually meant getting locked out of the market, until now, most U.S. companies have been unwilling to go high profile on the issue. The Trump Administration’s get-tough attitude has helped to catalyze many pent-up years of grievance, leading many in the U.S. business community to now egg on tough U.S. action against China on this front.
As a result, the USTR’s ensuing “Section 301” trade investigation on IP protection and forced tech transfer, which gave pretext for ratcheting up tariffs on China, garnered praise from many otherwise skeptical of the administration’s trade policy. But now that that leverage has been gained, how will the United States cash it out?
Devil in the Details
These types of trade issue are hugely complex and difficult to address through traditional trade rules. Indeed, precisely because traditional trade rules often do a poor job of capturing IP issues, the United States used a legal tool (Section 301) that is not based on violations of formal World Trade Organization obligations but rather vague “unfair” and “discriminatory” standards.
U.S. trade negotiators have a long history of frustration on this front with China, all the way back to when Ambassador Barshefsky negotiated some of the first IPR agreements with China in 1999. Those and subsequent agreements were successful in pushing legal reform, but ultimately disappointed because they relied on the Chinese government and stakeholders to enforce them—and enforcement was not forthcoming.
Chinese industrial policy—and the whole political economy, where growth underpins the legitimacy of the Communist Party—is wedded to ruthless and underhanded tactics to secure foreign IP. Resolution requires new thinking and a meeting of the minds between the United States and China.
While longer term, China needs to envision other paths to development and growth, in the near term, the United States needs to get substantive commitments on structural things like limits on joint ventures, strictures for local and national officials, and problems with the enforceability of IP for foreigners. And if these commitments are going to mean anything, they need to go hand in hand with a meaningful system of verification and accountability.
This is really hard. The Chinese continue to deny that they do anything to coerce transfer of IP, and strenuously object on principle to intrusive oversight powers by foreign states or rights to unilateral retaliation by the United States. USTR Lighthizer has his work cut out for him to compel a deal with teeth.
Trump and Short-Termism
However, Lighthizer also faces another front in the trade way: the domestic front. He faces an anxious president who lacks the patience or commitment to secure substantive changes for protection of U.S. IP.
Structural solutions are long-term, and don’t satisfy the near-term political needs of the administration. Facing a potentially shaky economy and a roller coaster stock market as a major election looms in 2020, the President is transparently eager for a deal to end the whole business.
China has clearly perceived this, and, instead of working through the tough details of structural reform to address tech and IP issues, repeatedly seems to be dangling massive purchases of U.S. goods. Now, with Trump’s enthusiasm for a deal, it seems he may be dangerously close to taking it.
Not only would this throw away a historic amount of leverage, it would sell out U.S. holders of IP at risk in China, leaving the market increasingly hostile for American technology.
The Two-Fold Challenge
The challenge for USTR Lighthizer in the near term is thus twofold: to negotiate a meaningful set of commitments as well as a system of verification and/or arbitration of disputes—which the Chinese will hate—as well as to stave off domestic pressures for a quick win that shrinks away from doing the hard work necessary to make any real progress on IP protection issues—not easy with the present mood of the President.
It’s impossible to tell where the discussion will go having struck an initial agreement to finish an agreement, and it’s hard to know whether any substantive change will occur. While President Trump seems poised to cut a quick transaction in his next meeting with President Xi, it is still possible—like Lucy from Charlie Brown and the football—that Trump could pull away at the last minute to build pressure for something bigger that really does address serious IP problems. Either way, one thing is clear: we will continue to lose on tech unless the Administration treats it with the seriousness it deserves.
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