We are all aware how Beijing permits Chinese firms to appropriate (2) and use foreign know-how, but that’s old hat. Such measures have gotten them no closer to their goal of being an innovation powerhouse and business leader.
China needs to move up the value chain but is struggling to do so. It still incenses the party that each year the US gobbles up almost 40% of world license fees (3), a testament to its technology leadership, for example.
Beijing is not giving up; China’s new boss, Xi Jinping, has thrown down the gauntlet. His attacks on foreign business are moderately more liberal than Mao’s, and that’s the good news. The bad news is that the communist party is stealing American secrets (4) and passing them to local firms.
The Chinese government has basically “tapped” and realized they cannot out-innovate America. Consequently, they have turned to economic espionage (5). Its goal is to achieve what Chinese firms cannot do on their own, to beat us. Is Beijing tipping its hand that an economic war is underway?
Communist Illegitimacy to Blame?
Chinese leaders are hand-picked by a highly secretive cabal. No rhyme or reason is given for why Xi Jin Ping was chosen. But chosen he was, and there you have it. Irrespective of what the Chinese feel, Xi and his ilk will continue to rule and bestow power upon hand-picked successors. This will occur no matter what 1,399,999,950 Chinese people say. After all, they do not have the right to vote.
The problem with such autocracies/quasi dictatorships is that they have no legitimacy. Xi was given his position and is accountable to none other than the handful of cadres who put him in power. This is not lost on the one billion plus Chinese. Although they do not push for democracy, they would like some reward for not storming Tienanmen and forcing change.
Of course this matter was addressed with muzzle flashes back in 1989. After a Deng Xiao Ping led military rained “50 caliber servitude” onto 500,000 students, a settlement was reached. The Chinese would not push for democracy and Beijing would not shoot them. To sweeten the pot, the communists also promised to improve their livelihoods. And so it has been for the past quarter century.
The communists need to create wealth and hold up their end of the bargain. But this also serves their goal of knocking the US off its economic pedestal as well. By attacking foreign firms, the communists prove to the good people of China that they are there to help them. “No need to storm the gates, folks. We have everything under control.”
Business too, plays a role in this unhealthy game. Companies are backed by the full force of the ruling party. In exchange for not calling into question Beijing diktats, Chinese firms are provided support in staving off competition. This comes in many varieties (6) and ranges from closing off markets to foreigners, forcing tech transfer and, now, government sponsored theft.
Once again, all of these moves have one thing in common – help Chinese firms fend off foreign competition. And even more importantly they serve to torpedo America’s competitive edge.
China’s Push for Economic Independence
In order to understand the optics of this, one needs a little background. The communist party in Beijing cannot conceive of a bipolar world including two great powers, us and them. Being students of history, they saw how America hastened the demise of the USSR through economic means. Since it worked on the Russians, it should work against America too, they reasoned. Since then, it’s been “game on.” Beijing has resolved to wage economic warfare.
Since opening up, China began an aggressive push for fiscal independence. It ruffled their feathers that they had fallen woefully behind Western counterparts and Beijing pushed to advance. In order to topple the American economy, they had to build their own. Constructing a manufacturing base was the first step.
Once secure that they could build things, they moved to create them too. A decade ago they dominated in innovation, and chose patents granted as the yardstick to measure success. So far they’ve been fighting a losing battle.
Of course they pen scads of patents but this means little. In keeping with the old communist adage of quantity over quality, they “game the system” by creating useless patents. Many of these are written with no other intent than to secure a grant and economic reward that goes with it. Their “great idea” will never leave the drawing board.
The futility of this is well documented and “junk patents” (7) in China abound. Local officials write them for spurious inventions and then force the city to license these and grow rich in the process. And speaking of rich, affluent Chinese convicts can write patents and then be granted a reprieve (8) from their prison sentence (9).
Yes, China is the only country I know of which pardons hardened criminals for “inventing” something (10). All of this merely reinforces how damaged their plan is. Innovation has not yet felt at home in the “center kingdom.”
Even though over 20% of all global Research and Development (R&D) centers are in China, innovation is not. Regardless of what strategies Beijing puts in place, not much has changed. China still exhibits a heavy dependence on advanced Western tech.
As I said in the opening, gauging by license fees, China’s plan to invent has gone up in smoke. Take, for instance, the fact that in 2012 the US spent $400 billion to China’s $200 billion on R&D (11) but made more then ten times as much by selling that know-how.
The US was paid over $100 billion in license fees while China’s take was a pittance. They ranked so low on the global scale that China did not make the top twenty. In other words, the US spent twice as much as China but made nearly ten times more from their inventions. This helps us understand Beijing’s declaration of war.
Ever heard of titanium dioxide? It’s the stuff that makes white things white. The formula belongs to DuPont, who earns tens of billions dollars per year touting it across the globe.
China makes a lot of big appliances and was paying DuPont a hefty sum for this chemical. Beijing said enough was enough and commanded a state owned company to steal it. And that’s just what they did (12). This was a few years back but it set the tone for what has since followed.
Who Is Really in Charge?
Bear in mind that the Chinese government is calling the shots. They are the ones who ordered the raid on DuPont and they are still doing it today. A month ago, they attacked Apple IOS and just this week Microsoft Outlook – who knows what they took.
One thing is clear, however, the communist party is condoning economic espionage which hurts the national interests of the US. Their actions against US interests are essentially an act of commercial warfare.
Consider the DuPont case for example. What they did would be like Obama calling on the US military to hack into the offices of Toyota, steal their electrical vehicle technology and then say, “Hey Ford, look what I have for you!”
Consequent to this, Obama would prohibit Toyota from selling its EV’s in America while simultaneously subsidizing Ford EV’s. He would then encourage Ford to compete against Toyota with their very own technology but sold at a discount.
The same logic holds true for state-sponsored hack attacks on other American firm as well. The communist party controls the pipes over which data flows. They decide what can pass and what gets blocked and even sneak a peak when need be.
If they can prevent me from tweeting “China should be a democracy”, and scan my emails, then they must be capable of finding out who launched massive attacks on Apple (13) and Microsoft (14).
What’s IP theft have to do with economic warfare? Think of it like this, the American economy and business growth depends innovation. The fact is that 70% of the value of all US corporations is rooted in their IP. It is what has allowed the U.S. to be an economic powerhouse for so long. China’s attack on US know-how thus threatens the essence of American commercial vitality. By conducting aggressive campaigns as outlined, Beijing will torpedo American leadership via death by 1,000 ‘cuts, copies and pastes’.
The logic is that by stealing US tech China saves on R&D costs and can sell goods at a discount. This allows them an unfair competitive advantage which marginalizes the competition.
The net result is that the money these firms ‘save’ through IP theft acts as a subsidy. The Chinese costs are lowered and they are then able to charge less. Foreigners do not receive the same benefit and are knocked out of the industry.
This leads to a perversion of free market forces and pricing. One of the most dramatic examples of this is how 1 kg of steel produced in China is now less expensive than 1 kg of cabbage (15).
War Has Already Begun
Recall that Beijing would like nothing more than to knock the U.S. off its perch, but it must also provide jobs. In their minds, the best way to do this is by promoting local firms and excluding the rest. Through an orchestrated anti-foreign campaign, Beijing can achieve this two-part goal.
Over a year ago, China’s leader hailed fighting America in the Korean war as honorable. A little while after that the major communist party newspaper headlined an article proudly announcing how PLA nukes could destroy a good chunk of America and now Beijing is actively attacking American firms. The war is on and our response is almost non-existent.
Put it this way, would Washington stand for a country like Iraq, Iran or North Korea to steal American property and then use it to compete against us economically? Of course not. But this is precisely what China is doing. Each day Chinese firms steal almost one billion dollars from American companies. This allows them to beat us on price and destroys entire industries. If you don’t believe me then ask anyone who works with solar panels or steel.
Simply put, China is on the offensive and it’s only getting worse. Their new head is mercenary in his belief that foreign firms must go. State sanctioned theft is their current “go to” and things are looking grim. Their goal is pretty simple, “win by any means necessary” and absent a concerted effort on our part, they may do just that.
The supreme art of war is to subdue the enemy without fighting.” – Sun Tzu
References & Image Credits:
(2) TSW: Fake Store Part of Bigger Picture in China’s State Sponsored Attack of US Economy
(3) 30 Most Innovative Countries
(4) TSW: Protecting American Space Exploration from Chinese Nationals
(5) TSW: China Will Continue to Hack the USA
(7) Tech Dirt
(9) New York Times
(11) Bloomberg: Innovative Countries
(13) China iCloud Hack
(15) Market Watch