On Friday, communist China’s president Xi Jinping will make a state visit to Washington. Presidential candidates, government agencies and special interest groups are clamoring to have their pet issues added to the discussion agenda. Which ones should President Obama choose?
The 2013 report of the prestigious bipartisan Commission on the Theft of American Intellectual Property certainly indicates that Chinese cyber-theft should top the list. It states, “The scale of international theft of American intellectual property (IP) is unprecedented — hundreds of billions of dollars per year, on the order of the size of U.S. exports to Asia,” and concludes, “China is the world’s largest source of IP theft.” The FBI agrees.
At FBI headquarters in July, the head of FBI counterintelligence, Randall Coleman, said there has been a 53 percent increase in the theft of American trade secrets, thefts that have cost hundreds of billions of dollars in the past year. In an FBI survey of 165 private companies, half of them said they were victims of economic espionage or theft of trade secrets — 95 percent of those cases involved individuals associated with the Chinese government.
Take the case of Vringo. A NASDAQ-listed communications technology company, Vringo found that ZTE, a Chinese telecommunications giant, has been using Vringo patented technology for years without paying licensing fees. When Vringo asked for compensation, Chinese regulators launched what the U.S. firm sees as a retaliatory investigation. Vringo’s complaint, now in a New York court, claims that China’s companies, government, and courts are colluding in the abuse of patent rights of foreign companies in favor of Chinese competitors.
Randal Phillips, vice chairman of the American Chamber of Commerce in China and managing partner for Asia for the Mintz Group, said the Vringo case show that, “ZTE is clearly being favored,” and that Beijing was doing “whatever it can do” to support ZTE. He added, “It’s a combination of the new assertiveness that you see across the bureaucracy and certainly on the IT front since 2013,” the year Xi became president of China.
Intellectual property theft, deeply concerning in its own right, is not a stand-alone issue. It is intrinsically linked to rampant corruption in the ranks of China’s government officials and has far-reaching effects on U.S. companies in China.
Corrupt government officials have always been the norm in China, from the days of dynasties and emperors down to these days of communist party rule. Today, China has a government bureaucracy of 11 million people, and those bureaucrats have always been attracted to low-paying civil service jobs by the potential of “gray income” earned by doling out favors, a system long assumed to be a cost of doing business in China. The problem with the system is that it is expensive. Very expensive.
A study by the U.S.-based Carnegie Endowment for International Peace estimated corruption to cost about 3 percent of China’s gross domestic product. In 2003, that was $86 billion. Applied to China’s GDP this September, it is an eye-popping $311 billion! Little wonder that President Xi Jinping has instituted a strict anti-corruption campaign. Regrettably, the campaign has focused on “tigers” — senior government officials — at the expense of eliminating the rampant corruption by the “flies” — officials at the provincial and local level. In any event, putting a dollar value on direct corruption does not address the totality of the costs. Business confidence and foreign direct investment in China are already falling because of the absence of the rule of law.
Even China’s tigers, local officials, and sometimes regulators, are arrested outside the rule of law. Many are detained for months or even years without formal charges being brought against them. According to the New York Times, “interrogators seek to extract confessions, sometimes through torture. … shuanggui is a secretive, extralegal process that leaves detainees cut off from lawyers, associates and relatives.”
Although some detainees are Chinese communist party officials who have run afoul of their former colleagues, others are simply employees of businesses that have become economic targets of Chinese interests. Last year’s confrontation between Shanghai regulators and American food processor, OSI Group, is a prime example. In a staged takedown, six OSI factory employees were arrested and the OSI factory closed. Over a year later, those detainees are still being held incommunicado, with no official charges against them. Unsurprisingly, Shanghai, China’s commercial and financial nerve center, is known for its particular brand of corruption.
Unfortunately for foreign companies doing business in China, there are many more flies than tigers, and regulator flies often ignore the rule of law. A business confidence survey of 541 members conducted by the European Union Chamber of Commerce in China this year found that 39 percent will cut back investments, up from 24 percent last year. Besides noting market fluctuations, the members cited the need for “a better implementation of the rule of law.”
Sentiment among American companies is the same. China’s disregard of the rule of law should be the underlying driver for all discussions of commercial topics during the coming visit of China’s president. Lack of the rule of law is the most difficult challenge American enterprises face in China, and it should not be difficult for President Obama to raise it with President Xi Jinping.
Chet Nagle is Vice President of M-CAM, global intellectual property and intangible assets experts based in Charlottesville, Virginia