China’s Ambition to Dominate Trade Worldwide
Posted by Author on March 17, 2011
Breaking into the Chinese market is riddled with challenges like in no other market. U.S. businesses are flocking to China in pursuit of rising earnings, only thinking that it is one of the largest markets worldwide.
“However, time after time, local entrepreneurs, either with or without the tacit support of the Chinese government, have found ways to fleece American companies bare,” according to an article on the VentureBeat website.
Apple was fleeced when a factory manager in China stole the blueprint to its latest iPhone model a few years ago, produced it, though not quite in the format as the Apple iPhone, and put it on the market before Apple introduced its latest model.
General Motors (GM) ran afoul of Chinese ingenuity. Chery Automobile Co., Ltd. cloned GM’s Chevrolet Spark, with the body, design, and components being almost identical.
“Deputy Commerce Minister Zhang Zhigang claimed that General Motor[s] has not provided enough evidence. … The main point of the whole argument was that General Motors did not register that particular model in China,” said Isola Oluwabusuyi in a paper published in February by the Journal of Economics and International Finance.
The Cap Times, a Wisconsin newspaper, tells of Manitowoc Co., Inc., a business formed in 1902 in Wisconsin. This company has done business with China, bought Chinese plants, and maintained a workforce in the U.S. and China.
“Yet the company has also had its designs and ideas spirited away by Chinese competitors, with little available recourse,” according to a 2011 Cap Times article.
China’s Indigenous Innovation Policy
China is very innovative when it comes to outdoing competitors and keeping its goal to achieve leadership in global competition.
For example, a government policy demands the sharing of technological secrets under the guise of indigenous innovation policy (promoting local over foreign produced goods). This directive, in hidden form, gives the Chinese the incentive to steal trade secrets and bring a similar but cheaper product to the market, according to expert discussion.
Also, international trade policy has established common product standards, which are followed by most export-oriented countries. However, China has established its own product standards, which is a slight modification of the common product standards, but enough to keep foreign competitors at bay.
“The Chinese standards setting system tends to be nontransparent and to exclude meaningful opportunities for foreign companies to provide input and comment,” testified Karen Laney, acting director of operations at the U.S. International Trade Commission, before the U.S. House of Representatives Subcommittee on Terrorism, Nonproliferation, and Trade this month.
By setting its internal standards and disregarding internationally accepted standards, China runs afoul of anti-monopoly laws. This scheme has become another roadblock for foreign businesses doing business in China.
There are several reasons. First, unless the U.S. exporter produces its products as prescribed by Chinese standards, it can’t be sold in the Chinese market or to China’s government. Secondly, international standards will make for higher royalty payments for intellectual property rights (IPR) by the Chinese manufacturer. If the product is produced according to Chinese standards, it requires modification, so the Chinese manufacturer pays far lower IPR royalties.
Ed Royce, chairman of the Subcommittee on Terrorism, Nonproliferation and Trade, quoted an influential government official in his published testimony during a March subcommittee hearing, “China’s indigenous innovation policies threaten global intellectual property protections, fair government procurement policies, market competition, and innovators’ freedom to decide how and when they transfer technology.”
China Saying One Thing and Doing Another
“China has a history of promises made, promises broken,” said Royce during his testimony.
Just a few months ago, Hu Jintao, China’s president, met with U.S. President Barack Obama, promising in a signed document that product acquisitions by the Chinese government would not be subject to the indigenous innovation policy.
China experts have said that this promise isn’t worth the paper it is written on, said Royce, because China has never been one for keeping promises.
“One can hardly say that China has lived up to its commitment. … The whole scenario is fast becoming pathetic. … The pattern that seems to be emerging is that the Chinese leadership waits for others to complain about what they are supposed to do and then try to do a little bit of it after serious complaints,” said Oluwabusuyi in her paper.
Just remember all the promises China made when it joined the World Trade Organization (WTO) on December 11, 2001, which after 10 years have yet to materialize.
Promises broken include, not decreasing tariffs, not trimming subsidies, not improving market access, not protecting intellectual property rights, and not manipulating the exchange rate for competitive reasons. Also, China has not joined the WTO Agreement on Government Procurement, which is creating much ill will.
“While the Chinese side has made several claims to the contrary, observers are of the opinion that China has failed woefully in meeting its WTO obligations. … Despite all the promises made by China to stamp out piracy, the problem seems to be growing in leaps and bounds,” according to Oluwabusuyi.
China continues to publish new rules and regulations that on the surface comply with its WTO agreements and give lip service to demands by WTO members. But China experts claim that the laws are mere window dressing to keep critics at bay.
China has been a participant in 98 WTO cases in different capacities from its accession until November 2010, including 20 times as the defendant.
China has put into force counterfeit laws and has announced its intentions to go after counterfeiters for a number of years. But statistics present a different picture.
“Out of the total global counterfeit auto parts market, China is responsible for 83 percent of the counterfeit auto parts,” according to the Havocscope black markets website.
Oluwabusuyi brings forward a number of reasons for China not facing up to its commitments. One of them is that “the Chinese communist party is no longer committed to morality. … The Chinese communist party has destroyed the conscience of China.”
Arguing the Unexpected
“There are limits to how costly” China’s indigenous innovation policies could be for U.S. trade, argued Dr. Philip I. Levy of the American Enterprise Institute at the March Subcommittee on Terrorism, Nonproliferation, and Trade hearings.
Levy argues that it is not of great importance if China steals and copies foreign products. By the time the Chinese firm becomes a competitor, the foreign firm has already developed a new and more advanced product and as well made quite a bit of a profit since bringing the product to the market.
Admittedly, China’s indigenous innovation is a step in the wrong direction, ill-defined, and costs China much in terms of recognition and good will on the world stage. But the policy doesn’t endanger America’s dominance in the technology field, although it will add significant costs for a U.S. firm doing business in China.
China has still far to go and has started too early to flex its muscle, achieving ill will and hostility by foreign governments, business leaders, and the world’s population.
“China is approaching the issue of technological leadership from a position of weakness, not strength,” Levy testified.
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