In late 2018, a wave of orders were issued from the White House in response to the rise of the Middle Kingdom. Trump had accused China of stealing the United States’ technology with the heated rhetoric solidified in Section 301 followed by the imposition of billions of dollars in tariffs. While the upcoming November elections continue to dominate headlines, what has flown largely under the radar are the continual efforts made by the same administration to clamp down on “the world’s principal IP infringer.”
According to Trump, the Asian superpower’s growth was achieved at the expense of the US, a nation desperate to hold onto its technological and military prowess and dominance.
In a White House press statement back in May of this year, under the subheading “PRESERVING AMERICAN SUPERIORITY: President Trump is ensuring that our Nation remains militarily and technologically dominant,” the White House wrote that China would attempt to overtake the US’ supremacy “by any means necessary, including by co-option and coercion.”
These sentiments are echoed throughout the private sector in the US. In a survey conducted earlier this year among 54 of some of the largest companies in The CNBC Global CFO Council, one in five of the companies claimed that they were victims of intellectual property (IP) theft. Furthermore, large firms including Apple Inc., Boeing Co., Dow Chemical Co., Ford Motor Co., Motorola Inc. and General Motors Co., have pursued successful criminal actions against Chinese agents.
However, despite the US’ continual concern with Chinese IP infringement – concerns that, in fact, date back to the Clinton administration – some claim that the US is merely attempting to preserve its position atop the world’s pecking order and that the US, in fact, stole to the top too.
A similar rise to power
Throughout the 19th century the rise of the US was imminent, but it was hindered because its textile industry lagged behind that of the United Kingdom. For the UK, this same industry accounted for half of the nation’s export revenue. By modern comparisons, Britain’s textile industry then was about three times larger than the US automobile industry is today.
Up to then, imitation was what largely contributed to the US’ ascent in the supply chain and the British were just as protective of their know-how as the US is now about its software and hardware. Strict laws were enacted throughout Britain, including prohibiting the emigration of high-skilled textile workers.
The US, desperate to achieve economic parity with its rival, sought any means necessary to climb the ranks. According to Ron Chernow’s biography of American Founding Father Alexander Hamilton, the US government raided British industrial secrets and wooed knowledgeable British textile managers. Tench Coxe, Alexander Hamilton’s deputy at the Treasury Department, was also arrested for creating bounties in exchange for trade secrets as well as sending an agent to steal machine drawings.
However, this race to the top came to a near-end when a young British boy by the name of Samuel Slater, unusually skilled at mechanized spinning and concerned about the future of England, hopped onto a boat under an assumed name and emigrated to the US. Slater arrived and, with the help of his American partners, kick-started a thread-making empire that would soon dominate the nation.
Former US president Andrew Jackson called Slater “The Father of the American Industrial Revolution.” The British, on the other hand, called him “Slater the Traitor.”
Two decades later, however, while the American textile industry had progressed, it still lagged behind Britain. This was until a Boston native and Harvard graduate, Francis Cabot Lowell, set sail from Great Britain in possession of the competitor’s most guarded commercial secret. Lowell had committed to memory the pirated plans for Edmund Cartwright’s power loom – the technology that had once made the UK the world’s leading industrial power.
Arriving on US shores, Lowell capitalized on the British technology and with the help of Paul Moody – an American textile machine inventor – they opened the manufacturing mill that converted cotton into cloth in Waltham, Massachusetts. It was the first of its kind.
Modern day parallels – when the student becomes the teacher
China opened up its economy for international trade in 1949 and within a few decades it was the fastest growing economy in the world with the domestic government reporting an average annual growth rate of 10% from 1978 to 2005. Between 1990 and 2005, China had accounted for more than three-quarters of global poverty reduction.
The Asian nation’s growth initially revolved around agriculture and, subsequently, shifted to industrialization. China’s 1.4 billion citizens soon began cementing their reputation as the “copycat” nation by becoming the international community’s production ally, replicating the products of well-known brands. Companies within developed countries took advantage of Chinese labor to decrease their own production costs, sending technological know-how into the country.
However, as China grew richer and acquired knowledge, its technology also quickly improved. Interactions between the nation and the rest of the global community were increasingly made on a level-playing field. Instead of being the production house for consumers in developed nations to access cheaper goods, China established itself as a global player in the league.
Any nation eager to achieve economic parity with its rivals learns by copying, interacting and learning from those rivals. Once enough knowledge is accumulated, that nation then establishes a foundation strong enough to support invention and entrepreneurship, allowing for the-then student to capitalize on the former teacher’s materials.
However, what remains in the center of the debate is how the materials were obtained. The reality is that the interaction between China and the US was, in every form, what contributed to China’s rise. China learned through trade, joint ventures, foreign investment, research collaboration, free-flow of labor resources as well as theft.
The theft, if successful, propels growth. If successful enough, this theft will then end the race between rival powers, as it did between the US and UK.
According to reports, China’s IP theft has cost the US between US$225 billion to US$600 billion per year. IP has been taken through espionage, theft and forced technology transfers due to mandatory joint ventures.
Countless IP infringement claims have been made against the Chinese. In 2009, Japan’s Kawasaki Heavy Industries were sent to China to undertake a large project and build a high-speed railroad system. Local Chinese governments pushed the Japanese to teach their core technologies to their Chinese engineers and, soon after, those technologies were implemented by the Chinese themselves to land railway projects elsewhere across the world.
Early last year, Apple accused two Chinese employees, Jizhong Chen and Xiaolang Zhang, of exploiting their access to company labs where R&D in self-driving cars were in the works and selling it to the China-based company XMotors. The Federal Bureau of Investigation (FBI) arrested Chen last year after he bought a plane ticket to China.
A Chinese businessman, Mo Hailong, was caught and sentenced to three years imprisonment in 2016 for stealing trade secrets from US seed corn companies. Other suspects in the case reportedly fled the nation before they could be arrested.
The frequency of IP infringement may have likely been even higher in the 19th century if the flow of human labor and communication was as seamless and quick as it is now. In addition, China has a population four times the size of the US. On top of that, the sheer size and quantity of state owned enterprises (SOE) is unique to China and something that the US didn’t have at that scale back in the 19th century. Fundamentally, however, just as Lowell capitalized on his trade theft when arriving in the US, China has capitalized on its know-how and now leads the 5G race.
A legitimate concern?
While some believe that the US’ concerns are legitimate, others believe it represents an attempt to preserve status. For Ralph Weber, Associate Professor for European Global Studies and researcher of Chinese politics, Confucianism and political philosophy, it’s a hybrid.
Speaking to TMS, Weber stated that “The US reaction is [a] hybrid, at the same time addressing these legitimate concerns, but also pursuing national interests defending its own tech supremacy as well as more parochial concerns by the Trump administration. The latter threaten to undermine the credibility and effectiveness of raising the legitimate concerns.” When asked about the comparison between the US and UK rivalry in the 19th century and the current power struggle, Weber stated that an important difference to also note was that the rise of international law and multilateralism – which attempt to define rules around the world – wasn’t as prevalent during the earlier rivalry.
For Ray Dalio, founder and chairman of Bridgewater Associates, the situation between the US and China is analogous to a larger historical concept known as the Thucydides trap, whereby an upcoming power threatens the position of an existing one. In the last 500 years there have been 16 times where a power has come to challenge an existing power.
“The war,” he writes, “occurs because the rising power naturally wants to have increasing power, which the declining power naturally doesn’t want to give up, and there is plenty to argue about so there is typically a testing of each other’s powers. That testing typically starts with small confrontations, which escalate into big ones.”
Dalio believes that we’re now witnessing the tensions and power struggles between the two countries in the form of the current trade war.
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