Slow and Steady: US Intellectual Property and the China Challenge

Over the past weeks the nature of U.S. complaints over Chinese violations of intellectual property have become clearer. In particular, one of the violations the Section 301 filing alleges involves the forced transfer of technology from U.S. firms to Chinese firms. This has long been a concern in the United States, both to industry groups and policymakers, although more to the latter than the former. Effectively, U.S. firms need to pay a bribe to Chinese partners in the form of technology transfer in order to operate in China.

Pay-to-play is a problem, but generally speaking a manageable one; if U.S. firms do not want to transfer technology, then they can simply say no to joint ventures, even if this means that they cannot operate in China. Pay-to-play arrangements violate certain aspects of U.S. and international IP law, but the decision on whether to pay can be essentially economic, given the existence of a robust system of intellectual property protection. The problem emerges when U.S. firms have no faith in the interest or ability of the Chinese government to protect their technology. Technology transferred to a particular firm on the basis of a joint agreement may not stay with that firm; instead, it may spread to numerous competitors.

A third concern, however, involves the threat of unwanted theft of U.S. IP under the aegis of China’s new cybersecurity law, which places limits on the storage and transfer of data. Many experts believe that this law gives Chinese authorities and potential IP thieves unwarranted access to trade secret associated data, whether during the storage or transfer process. U.S. companies remain wary of China’s IP regulatory system, especially on trade secret related issues; the incentive for bad faith dealing on the part of Chinese authorities is extremely high.

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