Spillover of China’s Trade Violations Feared

Constant discussion of the West’s simultaneous distrust of and interdependence with China has not changed China’s economic behavior. There is a slew of unaddressed grievances, including China’s indigenous innovation policies, copyright infringements, violations of its World Trade Organization (WTO) agreement, and exchange rate manipulation that go against every standard for international trade.

Now a new concern has sprung up, which might top all other grievances. The latest apprehension focuses on the spillover effect caused by China’s violations of WTO agreements, its refusal to play by international rules, and its bullying of trade partners while downplaying its mercantilist behavior. Many countries, be they industrial or developing nations, might conclude that if China gets away with mercantilism and other activities, why can’t we?

“While [China’s] policies may have understandable intentions, the means to achieve the ends and the consequences for companies from the United States and other countries do not bode well for our immediate commercial concerns or for the perpetuation of a troubling model that others might replicate,” testified John Neuffer, vice president at the Information Technology Industry Council (ITI), during a June U.S.-China Economic and Security Review Commission hearing.

The concern arose from China’s decision to invite foreign companies into its government procurement program if the product was developed and originally registered in China. No other nation has adopted, implemented, or proposed such a stipulation for their government procurement programs. Also, this puts American companies at risk of being locked out of government procurements, because most products have components that were produced in different countries worldwide.

“This was an unprecedented use of domestic intellectual property (IP) as a condition of market access that no other country in the world requires, and one which made it nearly impossible for American companies to qualify. IP is developed all over the world, not just in one country,” Neuffer testified.

However, Neuffer stated that China has put this decision on hold and agreed during recent meetings at the U.S.-China Strategic and Economic Dialogue to get rid of procurement catalogs that are based on the Chinese indigenous policy.

The problem is that China’s discriminatory procurement policies, violations of agreements, and offenses are so manifold that getting rid of a catalog does not solve the problem of freezing out foreign companies from the procurement process.

“We will need to be vigilant to ensure that this [doing away with certain procurement catalogs] happens. But the [Chinese] indigenous innovation policy drive extends well beyond the catalogs,” Neuffer testified.

Neuffer suggested that China’s disregard of acceptable trade behavior, violations of trade agreements, demands for turning over intellectual property rights (IPR), and outright theft of IPR plays a great role in the indigenous debate. Delinking just one violation and agreeing to stop a certain practice is only a minute part in the discussion and doesn’t make a dent in trade relations between China and the rest of the world.

In short, Neuffer worries that China’s indigenous policies, mercantilist behavior, and trade violations keep foreign players at bay and “puts at risk all past and future investments that our [U.S.] companies have made in that [Chinese] market.”

Putting America’s Future at Risk

“I think we will see increased purchases [by Chinese firms] of Western companies as a path to acquire technology. This has already been taking place, not only in the U.S., but across Europe,” testified Willy C. Shih, professor at Harvard Business School.

A German manufacturing owner shared his concern with Shih, as Chinese firms are aggressively acquiring German and other European firms that own advanced tool technologies coveted by the Chinese firms.

One such sale was the Volvo sale by Ford Motor Co. to China’s Zhejiang Geely Holding Group Co. Ltd., an automaker, for $1.8 billion. The Chinese company understood how to bargain and got a sweet deal, considering that Ford paid $6.4 billion for Volvo in 1999.

The Volvo deal presented the Chinese firm with key Western auto making capabilities. This sale provides the Chinese auto manufacturers with a jump into highly advanced technology and allows them to outcompete Western manufacturers in the near future.

Actually, buying foreign companies is not new, with European and Japanese firms having blazed the trail. Also, U.S. companies bought out quite a number of companies to achieve global leadership. For example, the Swiss firm Hoffman-La Roche Ltd. acquired Genentech Inc., a California-based pharmaceutical firm, in 2009 for $46.8 billion, giving it a strong foothold in America’s pharmaceutical industry.

“The seeds are already sown. … Our trade deficit and the inevitable impact on the dollar have put America on sale,” Shih said.

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