How China Systematically Pries Technology from U.S. Companies
wsj.com
wsj.com
The US pried the textile and locomotives industries from the UK, check the history of Samuel Slater[1]. Same happened for Japan under Meiji restoration. India and Brazil do the same for pharmaceutical patents, because they're too poor to afford paying them.
Stealing IP will happen, no matter what treaties and governments try to do. For poor countries it is a path they just don't have the luxury of giving up.
[1] https://en.wikipedia.org/wiki/Samuel_Slater
Edit: over-patriotic Americans seem to think this is just about them and call my argument whataboutism. It isn't both. I am stressing the fact that protectionism and stealing IP is a path almost every industrialized nation took. Even the UK did protectionism against India textiles to help their beginning textile industry.
The industrialized countries are trying to close the gates they used to get into their rich garden. My point is that right or wrong, moral or not, it simply won't work.
This is the sort of argument that an eight-year-old makes to his mother, and the mother responds, "If Jimmy jumped off a bridge, would you?"
I don't know if you're an American or not, but there's an very common expression: Two wrongs don't make a right.
Like you said, two wrongs don't make a right. Just by pointing out this has happened elsewhere doesn't make the conversation about China doing it any less important or relevant. Why shut down this conversation?
In the US patent law doesn’t cover everything, there are alternate forms of IP like copyright which has let open source software and fashion thrive.
Then there’s the open hardware system in China called GongKai: https://www.techdirt.com/articles/20141230/09362929550/how-g...
[See my other comment for how to interpret "expect", though...]
On another level, though, any country that has more to gain by stealing than to lose by being stolen from is going to be tempted to steal. Given what human nature is, you'd better expect it to happen.
It's like how in domestic society, on one level we expect people to obey the law. But on another level we expect at least some people not to, which is why we have police.
China has a lot of wealth on display but overall isn't so well developed if you remember the fact that so many people live there. If China were as developed as the US, we would expect it to be something like 3x the economic activity as the US.
GDP per capita:
USA: 57k
Canada: 42k
UK: 39k
...
Kazakhstan: 8k
China: 8k
Libya: 7k
In addition by some metrics, it could be exploiting even harder to achieve further industrialization. For instance, China is way behind the US in CO2 emissions per capita even today, and if you count total CO2 emissions, the US is still #1. If China had equal CO2 emissions as the US per capita (which might indicate a similar level of industrialization), that would be disastrous.
https://www.ucsusa.org/global-warming/science-and-impacts/sc...
Of course?
This is one of the stupidest question in the world; I don't understand how parents worldwide are still repeating it.
Randall Munroe explains it best: https://xkcd.com/1170/.
Now there's an hypocrisy to complain about a rule when you broke it prior.
You can place a bit more blame on the US companies that let it happen. The people running them are short-sighted and unpatriotic.
The real problem is that the law allows companies to be in a race to the bottom that is ultimately self-destructive. Allowing non-citizens to get access to the IP should be illegal. If it were, then bringing that IP to a location controlled by China's contradictory law would be a violation.
You can't fully stop spies, but you sure can make it illegal to simply hand things over without a fight.
Samuel Slater is a fine example. He was a spy. He broke the law. The USA would have gotten the technology years earlier if the UK had simply handed it over. Picture that: the USA demands that textile factories be built in the USA, as joint partnerships with technology transfer. The UK wasn't that stupid.
This is one aspect of Chinese culture that I’ll never understand. For example, if you get cheated, it’s your fault for being lax/trusting/stupid enough to get cheated. The immorality is on the victim, which makes for some extremely paranoid business relationships when working in China.
How is that beneficial in the long term? Why doesn’t such a system just implode on itself? I guess this is where guanxi comes into play to counteract that, because I don’t see how it could work otherwise.
Does Chinese culture actually shift moral blame onto the victim? If not, then this sounds a bit like the "victim blaming" obsession of modern American culture, which misses the crucial point - there are two types of blame to be passed around here. The offender was evil - they cheated. The victim was stupid - they were aware of the danger and ignored it.
It isn't really victim blaming, more like your business partner comes back to you and says "Why did you let me cheat you? This is all your fault."
There are other ways to convince people, like appealing to their interests or punishing with retribution.
In turn, we ought to acknowledge both the possibility that fighting back might hurt more than it helps and the possibility that we've been shooting ourselves in the foot by turning the other cheek.
I feel like this misses the point. I don't expect people to complain much about IP being stolen by competitors - that feels like an security/internal problem.
The issue with China seems to be that they force partnerships with Chinese companies, resulting in western companies having to share their IP, and when that IP is used outside of the constraints of whatever contract was created and the western company complains, the Chinese government colludes with the Chinese company to stymie or exploit the western company as much as can be done without breaking the relationship.
I'm also not going to say whether this is right or wrong - just that the feeling I get from the whole thing (as someone who doesn't follow this stuff that closely) is that the government efforts go beyond what others have done in the past (which I understand to be more subsidizing industries to boot them up).
If China can afford to not respect the IP laws then there is nothing what a company can do, eventually the secrets would be reversed engineered.
The real issue here is China's double-talk on trade. They talk about open free trade but in reality they practice intense nationalistic and protectionist trade tactics. They do everything possible to prevent foreign companies from selling anything in China, while at the same time doing everything they can to attract foreign labor outsourcing, capital, and of course IP.
I can't blame them too much. These kinds of trade policies are how nations build strong domestic economies. The US did the same thing during its industrialization phase. Nevertheless it's horrible for American workers and the American middle class.
It's literally the only thing I agree with Trump about -- that China needs to be taken to task for its extremely aggressive trade policies.
Also, as time goes on the skills of the entire world population is being equalized. That is to say, the skilled labor market is becoming global. When that happens American workers and middle class simply can't keep enjoying the high wages that are currently prevalent.
Unless of course, you want to start a new era of imperialism and force developing economies to confine themselves to the lower end of the value chain.
Its a siren song that is enabled by increased quarterly profits, even knowing full well the risks, it will be another CEO and board before they come home to roost.
So it’s worth noting that, as a western company, you cannot trust these agreements, whether or not the actions of the Chinese are justified. You should assume that any restrictions you negotiated are worthless, and if you want access to the Chinese market the price implicitly includes any IP the local partner can take.
That’s what I see as the takeaway.
But over the years they started developing in-house knowledge, and their own innovations.
Now Toyota is known for making reliable cars that are affordable. Is the world better off with Toyota making cars? I think so. But is Chrysler worse off? I also think so. So it’s a tough one. But at the same time I like the philosophy of software startups regarding ideas: sure, take these ideas for free, it’s all in the execution.
There is an obvious upside of operating in Asia, both cheap labor (though now decreasing) and strong work ethic coupled with access to a huge market.
It seems to me that execs understand and take a calculated risk when they choose to do business in various parts of the world. If they cannot make this calculation, they should not be running a company.
More than anything else, the attitude displayed in this article appears to me as an attempt to defer (or pass to the public) the consequences of the above calculated choices. If not directly, through a trade war that will hurt all Americans. All the while, these companies keep their financial gain private, in the pockets of execs and shareholders.
There is something to be said for protecting IP in the interest of a country's defense, but the technology that qualifies for this type of protection should be the subject of public debate, not a president's whim. Furthermore, unless the companies that own this IP are taken over by the state, company execs will always be free to make the decision re. operating in Asia and between the associated IP risks and capital gain.
What I mean to say is that just because I'm taking a calculated risk does not remove the other party of moral and legal liability for their theft of some kind.
In fact, the only argument I remember hearing (I think it was Marc Andreessen?) against the shaming of the scammer in the prince analogy is that they sometimes have no other option to feed their family. I doubt that justification applies to Chinese IP theft.
I do not necessarily agree with this argument, but it actually translates to China's situation pretty directly - you could argue that their attitude to IP is a necessary component of their attempt to quickly lift the whole country out of poverty.
Another question would be whether the Chinese acquiring this IP would trickle down to help those in poverty, or whether the wealth would stay consolidated at the top.
A good question. If hardware market is any good of an indicator, I'd be hopeful - https://www.bunniestudios.com/blog/?p=4297.
I think your entire premise is dubious. The first mover advantage cannot be great because the Chinese government will never allow a foreign company to have a dominant position in an important domestic Chinese market. Without significant change since in government those first entrant companies are simply very foolishly assuming the regulatory environment will be anything like it is in the United States or Europe.
Go to any department store in China and the first two floors (i.e. the prime spots) all feature foreign brands.
There's an externality here, it's not just that one company, but all of its competitors that are losing out on these IP "appropriations". Then, let's say you're one of the companies that are able to "sell out", if you want to profit at all, you need to be the first to sell out. You can't rely on nobody selling out, therefore selling out isn't even bad management.
Answering such questions is very, very difficult, but rarely do I even see anyone asking such questions. "Free trade is shown to increase GDP of all participating countries", which is a fact as far as I can tell, seems to be the limit of how deeply we want to think about these things, and suggestions that the world just might be a bit more complex than that usually elicits passionate, seemingly non-negotiable disagreement.
Say what you will, but "privatize profits and socialize losses"[1] is winning formula, even in a country that on its face rejects socialism.
What's interesting in light of your observation is that companies didn't stay away from China due to onerous demands - in that parallel universe, the executives would be lobbying for China to open its markets. What happened in our world goes to show what they value more: keeping their IP or access to the markets/manufacturing. Now they want to have their cake and eat it.
1. corrected (had repeated 'profits') - thanks @greenleafjacob
I don't think the gain is as one-sided as you suggest here. The American consumer has had decades of inexpensive goods available. That is a real economic benefit.
I don't think this naked materialism really improves quality of life for the average schmuck, it just adds a gilding.
Apple for instance can be copied easily yet iPhone knockoffs don't command comparable prices due to lack of established trust and quality. Rivals compete openly with their own R&D.
Microsoft the behemoth failed to break in the phone market even with heavy supportive measures and willingness to take a loss like they did with xbox.
Otherwise it's a double whammy, your foreign competitors compete unbound while your domestic market competition is restricted.
It would also align the game theory to prevent companies from "selling out" to such jurisdictions.
Company executives may have short term incentives, and little interest in the long term health of their organizations.
Company executives have to compete with executives willing to compromise their company's long term health in the short term.
The well-run insurers are always competing against the most poorly run, excessively risky insurers.
Some of these poorly run companies offer irrationally low premiums and gain lots of customers because of it -- but then go bankrupt. OTOH, well run insurers that used sound underwriting principles and charged rational premiums end up with fewer customers.
But China's labor is so cheap. Exploitation is a sweet sweet drug for the west. So, it's complicated.
At the time (1826), America's per capita GDP was $2,460, which is 68% of the UK's per capita GDP of $3,600. Today, China's per capita GDP is $16,000, or 29% of of the US's per capita GDP of $55,000.
Japan is about $39,000, Germany is $41,000, France is like $37,000.
But Poland which is part of the EU is $12,000 as well. Russia is like $9000 per capita.
For all I know the numbers are totally made up, but they rate Russia at 17.29, China at 19.08, Poland at 26.56, Japan at 34.58, Germany at 36.54, France at 36.74 and the US at 37.98. Obviously the relationship to GDP per capita isn't monotonic, but some correlation appears to be there.
[0]: https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)...
China is already suffering from it. The golden age of them not giving a fuck about IP in hardware space are coming to an end, to detriment of the society at large.
Also, China has grown an upper class whose interests most strongly align with strong IP laws.
Law propagation is done cynically via who benefits - either via influence and threats or mutual benefit. China would need to suffer from a lack of protection of their own to agree to the status quo which the west has become accustomed to. It is not a natrual state of being by any means.
Anyone who has suffered bullying and received a blind eye from society in return would know that despite the lofty claimed principles they never operate on equality, justice or other but power and what they can get away with.
Not even the UK is exempt- Robert Fortune stole tea production IP (and samples) from China(!) in a covert mission[1] for Britain[2]. Now tea is quintessentially british
1. https://www.smithsonianmag.com/history/the-great-british-tea...
2. I know Britain and the UK are not the same thing. Bear with me, NI.
For example I think most people in the UK would say if the taxpayer has directly or indirectly underwritten something then it’s not unreasonable for a portion of the profit on that thing to be taxed and spend on the NHS, roads, education, whatever the inventor leveraged and benefitted from along the way. That’s not to say that the inventor can’t or shouldn’t get rich themselves, but it is only fair that they give something back.
Philosophically, could one not make the same argument that there are strong similarities between these two items? Indeed, it isn't currently strongly codified in law, but you don't seem to be arguing from that perspective.
Of course now people are going to normalize it and say it’s no big deal after years of saying it was an exaggeration.
But that’s what you get when you get blinded by the lure of 1-billion potential consumers... along with an unfavorable trade agreement wich allowed for assymetrical tariffs, etc.
Assymmetrical tariffs are more favorable than symmetrical tariffs, something practically every economist agrees on. Also, why insist on exporting more valuable goods to China, when China remains perfectly content with green pieces of paper instead?
Does there ever come a point where they should be normalized? From most of what I've read in mainstream news coverage, this topic seems to be considered not valid for discussion, as if the answer is self-evident (despite very few of the reporters, or readers, having any serious depth in the subject).
The ideal situation is no tariffs on either side, which is normalized.
> for certain situations?
For any given economic scenario there's a practical intervention that would result in a better result than what the theory suggests is the best expected result. There's also an infinite number interventions that result in a worse outcome. The problem is, how do you know what the right intervention is? You don't.
> From most of what I've read in mainstream news coverage, this topic seems to be considered not valid for discussion, as if the answer is self-evident
It's not self-evident, the question just has remained settled for over a century. Economists disagree over all kinds of things, this isn't one of them.
Fine, but that's not the case now, correct?
> The problem is, how do you know what the right intervention is? You don't.
Do you or practically every economist know?
> It's not self-evident, the question just has remained settled for over a century.
I'm not sure what question you're referring to.
China became a member of the World Trade Organization on December 11, 2001, and was given developing nation status which comes with a variety of benefits. Should that status ever change?
To most its not a good deal. To US companies, that are driven by quarterly targets then it is very much a case of sacrificing the future for the present. And if they stay out of China then the odds are that hackers will either steal the info anyway or another western competitor will play ball.
There's just no way to stop this happening as I see it. The best non-US companies can do is negotiate an equity stake in their local partners and hope the government doesn't pass laws to take it away.
The lions share of course go to the likes of Google/Facebook but its not totally correct to say the country gets nothing.
This comment comes off as trite and naive. Multi-billion dollar companies like DuPont and AMD Inc do not only think a few quarters ahead. They think years or decades ahead.
Go to any one of a number of other countries that don't expect you to partner with a communist dictatorship and give up IP in order to have goods produced there? Vietnam, Thailand, Malaysia, Mexico, India?
It seems like a pretty obvious "AVOID" signal for me, but I'm not running a multinational that's cut corners to keep profit margins high while exporting all of the manufacturing work.
A source of cheap labour, raw materials and a huge market, is something that people from ex-colonies are all too familiar with. One should also acknowledge the high tech cartels that exists.
In a way it is a free market, because people can not claim to not know what they were getting themselves into.
Trade secrets are bullshit as a doctrine. Why is the rest of society obligated to protect not advancing at their own expense for the sake of private greed? The proper response to breech of trade secrets in a court of law should be "You never registered it for any sort of protection in exchange for disclosure and chose to keep it secret. Go to hell."
At the other end of the spectrum is protecting the "invention" of buying something with a single mouse click.
There should be a healthy middle somewhere.
Sure they would. It's called public research, most of which is promptly handed to private companies to profit from. Pharmaceutical research is hugely taxpayer subsidized.[1]
Let me be clear: I think the funding is a good thing, but the privatization (read: theft) of subsequent profits is bad.
[1] https://other98.com/taxpayers-fund-pharma-research-developme...
Of course these companies use information obtained through public research, they're supposed to, because there's a long process from research to an approved product, which is what the research institutions do not do. Public and private research goes hand in hand, just like in other industries. The study quotes a hundred billion in public funding over six years, compare that to private R&D budgets of well over 50 billion per year:
https://en.wikipedia.org/wiki/Pharmaceutical_industry#The_co...
It's not "a scam", as that article wants you to believe. You should stop reading that website, it's making you more uneducated.
Obviously both can "[figure] out the right arrangement of atoms that cures some disease." How does that not answer your question? Furthermore, how would 'obviousness' negate a counterexample? You're just moving the goalposts here.
>It's not "a scam", as that article wants you to believe. You should stop reading that website, it's making you more uneducated.
My apologies, your friendly suggestion is misguided. My "source" was the notoriously uneducated Noam Chomsky, but I knew you'd pooh-pooh that (can't stop you tho! :D) as appeal to authority. I confess I lazily Googled the citation.
Direct link to the timecode of Chomsky's comments: https://www.youtube.com/watch?v=szIGZVrSAyc&t=11m18s (~4m long)
I didn't ask a question.
> Furthermore, how would 'obviousness' negate a counterexample? You're just moving the goalposts here.
You are playing a semantic game. The obvious, honest interpretation of my words is that I'm talking about preserving private investment. I'm of course aware that governments can and do fund research. I didn't expect to be discussing with a person that has such poor debating skills as to resort to such nitpicking, otherwise I wouldn't have replied at all.
> My apologies, your friendly suggestion is misguided. My "source" was the notoriously uneducated Noam Chomsky, but I knew you'd pooh-pooh that (can't stop you tho! :D) as appeal to authority.
No I wouldn't, because Mr. Chomsky isn't considered an authority on that particular subject (or most any of the many subjects he has opinions on).
Again, I'm not denying the contributions of publicly funded universities. You're (apparently) denying the contribution of privately funded R&D. It's true that companies rely on public research, why shouldn't they? What else is supposed to happen?
Allow me to rephrase: that disproves your statement, "nobody would invest millions into figuring out the right arrangement of atoms that cures some disease, if there wasn't a way to profit from that."
Everything else is noise.
You really want to play that dumb semantic game? Fine, I'll play: I didn't specify financial profit. When publicly funded research leads to the cure for a disease, then the public profits.
> Everything else is noise.
No it isn't, "everything else" is the whole damn point that you fail to address.
>Fine, I'll play: I didn't specify financial profit. When publicly funded research leads to the cure for a disease, then the public profits.
Your attempt to walk back isn't credible. Your immediately previous sentence that this backs up was "IP laws also support innovation." Tautologically, if your goal is public benefit then it belongs in the public domain, with no need for IP protection.
_Unless_ your purported goal of "public benefit" is just private enrichment in disguise: corporate R&D subsidies, wherein publicly-developed tech is handed over to private companies for "commercialization" (typically by licensing it 'for a song' compared to the taxpayer's risky R&D expenditure, with private companies cherry-picking 'winner' technologies to license while the public picks up the tab for the many inevitable losers that come from anything risky). This is very common, of course.
If your true goal is public profit then no IP is needed. Only if your goal is private profit (handing over an exclusive license to one's buddies) does IP come into play.
I'm not walking back on anything, you claim you "disproved" my statement as false, I "proved" it to not be false, even if one wanted to play a stupid semantic game. I'd prefer we didn't play that game in the first place.
> Your immediately previous sentence that this sentence back up was "IP laws also support innovation." Tautologically, if your goal is public benefit then it belongs in the public domain, with no need for IP protection.
Of course my goal isn't "public benefit". Like I originally said, the point behind the statement is maintaining private investment. But my statement, as written, isn't wrong as you tried to show. My intention is entirely orthogonal to the statement being false, you're raising a false dichotomy. You failed at your nitpicking, that's all. Did I even think about all that when writing the sentence? Of course not, I didn't expect to end up debating someone who would resort to such primitive tactics.
You've weaseled away from the issue since the beginning, namely that private investments far exceed public investments and that without a way to protect that investment (i.e. through intellectual property), that money would disappear. If you want to argue that everything would be surely better if the government researched, developed and marketed novel drugs, then do that. Make a good case for it. Don't go about nitpicking casually written sentences, it's intellectually embarrassing. It just shows you're a waste of time to talk to.
Nope, sorry. Public investment just fell below 50%... for the first time since WWII. https://www.sciencemag.org/news/2017/03/data-check-us-govern...
>It just shows you're a waste of time to talk to.
haha, you're a peach.
Attack the messenger to your heart's content. Game, set, match.
https://www.eff.org/issues/patents
Reform is desperately needed. Further, most startups or software we see on HN didn't happen because someone was reading patent databases all day. They usually just make stuff out of a need or want, try to grow it with iterations and marketing, and make money off that. Most use patents defensively or just to increase money in acquisition/IPO's since buyers think patents are important. Why buy them if innovation already happened? To stop others via patent suits from innovating and stealing their market share. Patents hurt innovation.
I don't disagree, but it's not like there aren't any arguments for both sides. You can point to negative outcomes for any piece of regulation, it doesn't put the whole concept into question.
I wonder if China only remade pharmaceutical IP while India remade technological, the reports would be different?
Or is it because China is a rival?
However, tech companies seem to be more than happy to give 50%+ of their business in China away, as well as 100% of the tech IP that will be stolen once the partnership happens. And then they whine about how restrictive the GDPR or a similar law in the US would be.
And, in theory, in exchange for that access, outside companies gained new access to the Chinese market - to investing in factories there and selling products and services there. That was supposed to be part of the WTO deal.
But, the requirement in China that state owned companies had to be partners, that IP had to be transferred to these state partners as an additional condition of doing business -- that's what is unusual, that's where the word "forced" enters the conversation.
Someone correct me if I'm wrong, but I don't think WTO rules reallly allow for that sort of required government involvement.
I think a recent EU complaint to the WTO about IP transfer rules in China does a better job of explaining the issue than I have. Bloomberg wrote about it in June:
In its complaint, the EU is targeting rules in China on the import and export of technologies and on Chinese-foreign equity joint ventures. Certain provisions “discriminate against non-Chinese companies and treat them worse than domestic ones,” violating WTO requirements that foreign businesses be put on an equal footing and that IP such as patents be protected ...
From
https://www.bloomberg.com/news/articles/2018-06-01/europe-ta...
or
https://www.bloombergquint.com/global-economics/2018/06/01/e...
Based on what you're saying, it sounds like the EU and other countries could impose a wide range of conditions or restrictions onto Chinese investments or purchases without running afoul of WTO rules. Interesting stuff.
Looks like I stand both corrected and downvoted. Gotta luv HN!
On the other hand, as a thought experiment, what would have happened if China had been more open or fair to foreign investments? Then even more businesses would have invested in China and thus subject themselves to the influence of the Chinese government. For an example (not to imply any moral equivalence) see the tremendous power the US government wields over transactions conducted entirely between foreign entities.
https://www.npr.org/2018/09/26/651689220/u-s-army-reservist-...
Listen to what the Qualcomm CEO said when a CNBC reporter asked whether China was stealing its technology:
A) give up some of your property to an entirely unrelated person
B) not do that
Choose wisely!
edit: If someone is using whataboutism (as the person I'm responding to is) there is no real argument to respond to.
Any modern day atrocity can be justified by saying that it was done in the past by a different nation. Saying that the US had done something in the past to justify a different countries' present day actions is intellectually lazy and dishonest and is meant to shut down discussion. I was just not trying to waste my time typing this entire statement out but apparently some of you don't understand why `whatabout x` isn't a real argument.
Using the argument that some country did the same thing 100 or 200 years before is a child's argument and holds no weight. The Chinese government by taking advantage of the international order developed by the US has sown the seeds for the trade retaliation that is taking place today (to the detriment of everyone).
Stealing IP without contributing to creation costs is bad behavior on several levels.
There is a difference between "I can do this bad thing, because you have already done it" and "this thing is not bad, otherwise you wouldn't have done it". Tu quoque addresses the former situation, not the latter.
And no, tu quoque definitively intends to discredit the opponent's argument by asserting the opponent's failure to act consistently in accordance with its conclusion.
This applies to whataboutism, and exactly what we're talking about in this thread of deflecting back to the U.S.'s inconsistent behavior in the past.
Nothing that happens on land is piracy, so I'm not sure why it comes up so often in these discussions.
People are literally living in a modern version of 1984, complete with re-education camps and stolen Western surveillance technology. No American can in good conscience send their technology to be stolen by a country that wants to imprison and torture entire states of its citizens.
If the PRC government merely didn't follow IP law, that would be a calculated risk. When the PRC steals our technology to power a global game of persecution, corruption, and espionage, it's morally wrong.