The US-China Trade War and Myths about Intellectual Property and Innovation in China
China’s intellectual property (IPR) regime has been increasingly criticised for poorly protecting IPR, “forcing” transfer of technology (FTT) and enabling outright IPR “theft” (Navarro and Autry 2011; CTAIP 2013, 2017; USTR 2018a,b; OTMP 2018). These complaints have contributed to one of the largest trade wars in modern history—the US-China trade war starting in 2018—consisting of a barrage of tariffs, export restrictions and other punitive measures by the US government against Chinese entities (for example, Prud’homme and Cohen 2019). More generally, the complaints have directly and indirectly contributed to current initiatives to decouple US economic activity from that in China, upending global value chains (GVC) in the process (Schell and Shirk 2019; Lovely and Liang 2018). How did we get here? I offer a somewhat counter-intuitive explanation in this chapter. Specifically, I argue that a notable portion, albeit certainly not all, of the US-China trade war is attributable to two major conflicting myths about China’s IPR regime borne in scholarly, government and business circles.
The word “myth” is derived from Ancient Greek but its modern definition evolved in the seventeenth and eighteenth centuries to mean a story that creates misconceptions (Segal 2015). Myths embed themselves in the fabric of human discourse in multiple ways. One way is for them to be strategically planted. Another is misunderstanding due to information asymmetries and faulty analysis. As mentioned in passing later in this chapter, both of these mechanisms help explain the origins of the current myths about China’s IPR regime.
In terms of methods for this chapter, I identified myths about China’s IPR regime by juxtaposing my understanding of the realities of China’s IPR regime with perspectives presented by others. Although an important risk receiving increased attention recently, I consider cyber-intrusions/hacking a separate issue not primarily governed by China’s IPR regime. To identify myths about China’s IPR regime, a large body of literature was reviewed, including scholarly works, government reports and practitioner and press articles in English and Chinese. My understanding of China’s IPR regime is built on in-depth phenomenological study in the country, including by working on IPR issues as an employee in several private-sector institutions and at an IPR office; conducting numerous interviews with IPR professionals, academics and government officials in China; conducting legal research on IPR regimes in China and elsewhere in the world; and reviewing a range of literature in English and Chinese. This analysis resulted in the identification and debunking of two major myths and seven subsidiary ones about China’s IPR regime. To be sure, while the analysis in this chapter builds on other recent work of mine pointing out three myths about China’s IPR regime (see Prud’homme 2019c), this chapter offers a much more detailed explanation about those myths and other falsities circulating about China’s IPR regime and how they collectively contributed to the ongoing US-China trade war.
The myths discussed in this chapter all involve the ability of China’s IPR regime to protect IPR owned by private businesses (especially, but not only foreign ones), rather than the social optimality of the regime (its contribution to societal welfare). With this in mind, when evaluating the “strength” or “quality” of China’s IPR regime in this chapter, I rely on the framework developed in Prud’homme (2019a) of the “business friendliness” of an IPR regime. That framework considers, from the perspective of a generic IPR-intensive business, an IPR regime that has fewer (in number and magnitude) suboptimal constraints on appropriability and on entrepreneurial opportunities, as well as fewer (in number and magnitude) excessive transaction costs to be more business-friendly.
I make two main contributions within this chapter. First, I identify and debunk two major conflicting myths about China’s IPR regime that appear to have contributed to the current trade war. This is a somewhat counter-intuitive explanation, vis-à-vis conventional wisdom, for the tense state of global affairs. The first major myth—which originates from Chinese stakeholders and is supported by two subsidiary myths—indicates that China’s IPR regime is more business friendly than it is in actuality. This falsity created significant frustration among foreign stakeholders, leading to the trade war. The second major myth—which originates from foreign stakeholders and is supported by five subsidiary myths—indicates that China’s IPR regime is less business-friendly than it is in actuality. This falsity created misunderstandings and overzealousness among foreign stakeholders, also leading to the trade war. Second, I offer general suggestions about how the scholarly, policy and practitioner communities can make use of this much needed “reality check”.
Major Myths about China’s IPR Regime
Myths Originating from Chinese Stakeholders
Chinese scholars and the Chinese state appear responsible for knowingly spreading the myth that China’s IPR regime is more business friendly than it is in actuality. Much of this falsity has taken the form of denial about a range of concerns, many legitimate, involving risks that China’s IPR regime poses to foreign multinational corporations (MNCs). Alternatively, sometimes Chinese authorities have promised reform but strategically do not deliver on it until much later in order to provide local firms the chance to engage in uninhibited technological learning and acquire market share (Prud’homme et al. 2018; Prud’homme and von Zedtwitz 2018, 2019). In addition, a range of Chinese stakeholders, including local scholars, firms and government officials have contributed to this myth by not proactively addressing IPR infringement targeted against foreign MNCs on the ground in China.
Within this major myth, the first subsidiary myth propagated by Chinese stakeholders is that China has not aggressively exerted pressure on foreign-Sino technology transfer arrangements in the recent past. I have heard this myth repeated multiple times by Chinese state media, knowledgeable Chinese IPR scholars and Chinese government officials over the years. A typical example is the following quote in Chinese state media:
China promises not to use technology transfer as a prerequisite for foreign market access … [there is] no reliable evidence that China has violated this commitment …. China’s requirements for joint ventures…are in line with China’s commitment to join the WTO. This is the approach adopted by most countries and has nothing to do with compulsory technology transfer (Xinhua 2018).
I have even heard otherwise highly informed Chinese scholars go as far as to deny the existence of controversial technology transfer provisions in Chinese law (for example, those in China’s Technology Import-Export Regulations as well as China’s Rules for New Energy Auto Manufacturing Companies and Products), down to the article number and exact text. (See Chapter 4 of Prud’homme and Zhang  for a detailed account of these provisions.) In a more cautious, yet nonetheless clear denial of the aggressiveness of China’s foreign–Sino technology transfer policies, Zhang Xiangchen, China’s Ambassador to the WTO, as recently as 2018, stated that “the fact is, nothing in these regulatory measures [regarding technology transfer in China that US firms have complained about] requires technology transfer from foreign companies …[these complaints are] pure speculation” (Miles 2018).
I suspect that these narratives have circulated partially due to strategic denial by the Chinese authorities, partially as a knee-jerk reaction to the perceived-to-be accusatory tone in which discussions on related issues often take place, and partially due to genuine ignorance. Whatever the reasons, the idea that China has not instituted aggressive technology transfer policies—including preconditioning market access on technology transfer in a likely WTO-inconsistent way and sometimes coercing technology transfer via other WTO-incompliant means—is false. Table 3.1 outlines some of the most aggressive technology transfer policies in place in China as of 2018. When I use the term “policy” I mean both written documents and systematic, de facto practices. The policies falling into the “no choice” category in the table can arguably be legitimately labelled as “forced” technology transfer (FTT) policies. Further, although the policies falling outside the “no choice” category do not actually “force” technology transfer, they are nonetheless highly aggressive, not commonly found in developed nations and in some instances are arguably even WTO inconsistent.
Table 3.1: Typology of Aggressive Technology Transfer Policies in China
Mechanism behind technology transfer
Lose the market
Foreign firms should transfer technology in line with the policy or lose market access
• Perhaps the best-known requirements imposed on foreign firms to transfer their technology to a foreign-Sino joint venture (JV) as a precondition for market access (for example, a business license) and/or access to state support (for example, public procurement and other financial resources) in China were in the traditional auto industry and high-speed trains industry. Similar requirements were reported in other industries such as the big-power-generation turbines industry, aircraft industry, and, most recently, the new energy vehicles (NEV) industry.
• Other state policies were reported to, directly or indirectly, require transfer of technology as a precondition for market access, such as (the now revised) local content requirements for operating and winning government procurement contracts in the wind turbine industry, among other foreign investment restrictions.
Foreign firms do not have a reasonable choice about whether or not to transfer technology because the state interprets the letter of the law governing such transfer in a highly dubious way/one that is clearly unreasonable vis-à-vis what is written.
• Requirements to excessively disclose trade secrets directly to the state or to experts on state-organised panels as a precondition for receiving regulatory approvals (for example, in the pharmaceuticals, chemicals and other industries). Such disclosure should not be necessary to grant regulatory approvals; worse, the confidential business information disclosed is sometimes leaked to competitors.
• Unfair court rulings involving intell-ectual property that favour local firms.
Violate the law
Foreign firms should choose to transfer technology in line with the written policy/law (which itself may be ambiguous or burdensome but nonetheless can at least generally be planned around) in order to be cautious and avoid potentially being subject to administrative or judicial actions enforcing that policy/law.
• Several provisions of China’s Technology Import-Export Regulations (for example, a provision requiring that subsequent improvements in technology developed in contractual relationships are owned by the party making the improvements and a provision mandating that foreign technology licensors bear liability for any accusation of infringement that may be brought against a technology importer in relation to the use of licensed technology).
• Several provisions in recent measures governing IPR and anti-trust, and several governing IPR and technical standards (for example, burdensome standard-essential-patent disclosure requirements and dubious licensing terms).
• Provisions in the foreign-Sino Equity Joint Venture Regulation “generally” restricting technology contracts in foreign-Sino equity JVs to a duration of ten years and requiring that the technology-importing party in the JV should be granted the right to use such technology “continuously” after the contract expires.
Sources: Prud’homme (2012), Prud’homme et al. (2018), Prud’homme and Zhang (2019), Prud’homme and von Zedtwitz (2019), USTR (2018a).
One may wonder why, if these technology transfer policies were really as aggressive as foreign firms said they were, they remained in China for any prolonged period of time. The answer reflects a number of important phenomena. Previously, some foreign MNCs did not support WTO complaints because they feared that they could be targeted for reprisals. Some FTT policies were targeted at specific industries in which there was oligopolistic competition, and therefore there would be little secret about who was behind the complaints about such policies (Prud’homme and von Zedtwitz 2019). And some foreign firms viewed their home government diplomats as heavy-handed in their tactics and not always presenting as united a front as industry associations (Prud’homme and von Zedtwitz 2019). However, as foreign MNCs became further embedded in the Chinese market due to increasing investment there alongside the globalisation of value chains, and as Chinese rivals became more capable, the transaction costs, appropriability risks and broader threats to competitiveness that a number of Chinese technology transfer policies posed to MNCs became more acute (Prud’homme and von Zedtwitz 2018, 2019). This is a major reason, alongside political changes in the US and Europe, why it was not until 2018 that WTO cases against a range of Chinese technology transfer policies were brought. In other words, although many of these policies have been around for years, it has not been until recently that many foreign MNCs have felt it worth the risk to support a WTO case against them (Prud’homme et al. 2018; Prud’homme and von Zedtwitz 2019). In my opinion, there is legal merit to at least portions of the WTO cases brought by the US and Europe in 2018 against a range of Chinese technology transfer policies (see WTO 2018a, b for details of the cases).
Moreover, arguably as a tacit admission of guilt, in 2018 and 2019 the Chinese government rapidly instituted an incredible number of reforms to the majority of the policies listed in Table 3.1 (which include most of the same policies mentioned in the US’ and Europe’s 2018 WTO complaints, as well as broader concerns about China’s technology transfer regime). I critique these changes in depth in Prud’homme and Zhang (2019) and provide a short summary of them in Prud’homme (2019b).
The second subsidiary myth propagated by Chinese stakeholders is that various other aspects of China’s IPR regime (beyond FTT policies) present at the start of the trade war are not against free-trade norms. Some of the most prominent examples of this myth, taken from high-level meetings between foreign rights holders and the Chinese authorities that I participated in while working in China, include denial by certain Chinese authorities of the dubiousness of certain court rulings regarding co-existence of local trademarks and foreign trademarks, an unwillingness to recognise the export of infringing goods produced by Chinese original equipment manufacturers (OEMs) as trademark infringement (just because the final products were not sold domestically) and questionable approaches to adjudicating likelihood of confusion and bad faith matters involving trademarks (Prud’homme and Zhang 2019). Other examples of this phenomena could be given, although further discussion about this relatively straightforward myth would be superfluous.
Myths Originating from Non-Chinese (Foreign) Stakeholders
In contrast to Chinese stakeholders, I believe that a number of foreign stakeholders, some knowingly and others more unknowingly, have contributed to the myth that China’s IPR regime is less business friendly than it is in actuality. The most strategic propagators of this myth may range from foreign defence hawks looking to build an anti-China narrative to support a harder military stance against the country to certain foreign MNCs facing incredible competition from newly innovative Chinese firms. In other cases, these myths likely start out as hyperbole rather than concerted lies, or result from sampling bias (for example, only speaking with parties that feel most aggrieved by China’s IPR regime due to their bad experiences, which may indeed have been deplorable but nonetheless do not represent the current norm, about the inadequacy of China’s IPR regime to protect IPR). They then morph from there.
In many cases, however, myths about China’s IPR regime have been derived from the conflation of legitimate grievances about very real IPR infringement with gripes about the quality of China’s IPR institutions (that is, state mechanisms for protecting IPRs, which I interchangeably call the “IPR regime”). No mistake should be made: IPR infringement is certainly a major problem in China. In fact, China experiences the highest rates of counterfeiting and piracy in the world (European Community 2017). Further, Chinese courts are home to the greatest numbers of patent litigation cases in the world (Global IPR Project 2014) and even more copyright and trademark infringement cases (Supreme People’s Court 2017).
At the same time, while significant rates of IPR infringement can be an indicator of insufficient IPR institutions in a country, there is often what I call a “temporal gap” between institutional change and its effectiveness, that is, the inevitable lag between the time IPR and other complementing institutions (including but not limited to formal educational and public awareness systems) are reformed and when their full deterrent effects on IPR infringement can be realised. And this gap may be more pronounced in larger economies, such as China’s, with significant heterogeneity in terms of subnational institutional development – what the insightful IPR law scholar Peter Yu calls “crossing over points” (Yu 2009, 2013). Yet other factors may also help explain this temporal gap in China (Prud’homme 2019a) and the inter-related but more complex phenomena of “institutional disconnects” (Prud’homme, Tong and Han 2021). If we roughly estimate the temporal gap in China to be around 5–10 years, we can understand how it is paradoxically possible for there to be significant IPR infringement in the country even though the country’s IPR institutions are of a reasonable level of quality. Lack of understanding of this paradox has helped fuel the myth that China’s IPR regime is worse than it is in actuality.
The first subsidiary myth propagated by foreign stakeholders is that China’s longstanding Confucian culture prevents the country from seriously protecting IPR. This myth is rooted in a number of scholarly works, perhaps the most seminal of which is Harvard law professor William Alford’s treatise, which argued that China’s Confucian values have embedded deep in Chinese culture an imitation-approach to learning, and in fact a respect for emulation of elders and certain others, and this will perpetuate a culture of IPR infringement in the country (Alford 1995). Alford’s argument was largely based on a phrase he attributed to Confucian thought “窃书不算偷” (originally translated as “to steal a book is an elegant offence”, but in my opinion is better translated as “theft of a book doesn’t count as stealing”) (Alford 1995). International business scholars, among others, have repeated this line of argumentation in recent years (for example, Zimmerman and Chaudry 2009; Zimmerman 2013).
However, in reality, violations of IPRs in modern China are rarely explained by Confucian-value narratives (Shi 2008; Yu 2015). There are several reasons for this. While elements of Confucian values are still present in some form in modern China, the value-system no longer exists at anywhere near the level it did prior to the 1900s. The “新文化运动” (“new culture movement”), which started around the collapse of the Qing dynasty and continued till the 1920s was instrumental in rooting out a significant portion of Confucian values from Chinese society and replacing them with modern scientific inquiry (Furth 1983). Mao Zedong’s Anti-Confucian Campaign from 1973–75, at the tail end of the Cultural Revolution, also further diluted Confucian values in mainland China (Gregor and Chang 1979). Further, the phrase “to steal a book is an elegant offence [theft of a book doesn’t count as stealing]” has in fact long been misattributed: Confucius never uttered the phrase, rather it much later emerged in the popular fiction book, Kong Yiji (孔乙己), published by well-known novelist Lu Xun in 1919, which attempted to parody traditional values through the life of a character with the same surname as Confucius (Shi 2008: 458).
Looking outside mainland China further helps illustrate that violations of IPRs in modern China are rarely explained by Confucian-value narratives. Japan and South Korea have retained more Confucian values than mainland China, yet they highly respect IPRs (Shi 2008). Also, regions such as Taiwan (Chinese Taipei) (Dimitrov 2009), Hong Kong SAR and Singapore, with significant proportions of culturally-Chinese inhabitants, highly respect IPR (Peng et al. 2017a, b).
None of this is to say that there are not Chinese cultural attributes that influence the design of China’s IPR regime and the willingness of Chinese citizens to respect IPRs. Nor is it to say that there is not a strong culture based on tradition and collectivism in China—there surely is one. However, the influence of domestic culture on China’s IPR institutions is arguably much more closely linked to so-called “Chinese pragmatism”: a cultural characteristic embedded in Chinese society that values pragmatic actions and is reinforced by the country’s political system (Pan 2011; Pye 1995).
The second subsidiary myth propagated by foreign stakeholders is that because China is not a Western-style liberal democracy, its governing institutions will never reasonably respect firms’ IPR. Some prominent international business scholars have recently suggested that China’s non-democratic, non-liberal, political system significantly undermines the rule of law which in turn facilitates large-scale IPR infringement and a generally “weak” IPR regime in the country (for example, Brander et al. 2017: 908, 912; Li and Alon 2020). The definition of a “weak” IPR regime here obviously means one that offers unreasonable/insufficient protection of IPR, especially for foreign firms, although beyond this the exact parameters are left undefined (for example, Brander et al. 2017; Li and Alon 2020). This proposition that “only Western-style liberal democracies can provide reasonable protection of IPRs” has also previously been put forth in different forms by other prominent scholars from different disciplines. For example, William Alford offers a more tempered view, but nonetheless an antecedent, by arguing that “political culture [in China] … is unlikely to be able to protect their [Chinese citizens’] property rights, which in turn means that it will be even less likely to protect the highly sophisticated property interests [including IPRs] of foreigners” (Alford 1995: 120).
Before I proceed to debunk this myth, an important caveat is warranted. A discussion about how China’s political culture vis-à-vis that in Western liberal democracies protects all rights in all situations is far beyond the scope of this chapter. In fact, it is worth mentioning up front to avoid misinterpretation that I, like many others, strongly believe that liberal democracies are better suited to provide robust protections, defined in any number of ways, for individual socio-cultural rights. Further, I fully recognise that debate is warranted into how China’s communist and socialist political ideologies and legal origins shape the letter and practice of law in the country. These factors obviously limit real property rights. And such a political economy perspective may indeed be useful for partially understanding why state objectives reflected in certain IPR and technology-related policies, IPR administration and IPR enforcement, still sometimes supersede fair treatment of foreigners and certain Chinese firms vis-à-vis Chinese firms with closer government relationships (for example, Palmer 2001; Prud’homme 2012, 2019c; Prud’homme and von Zedtwitz 2018). Scholars of Chinese law have provided one broad frame to start thinking about these issues, debating the differences between the concepts of “法制” and “法治” (and therein “rule by law”/“legal institutions” vs. “rule of law”) and the interrelated issue of the influence of Communist Party choices on those made by Chinese courts (for example, Li 2003; Wang 2010).
All this being said, I believe that degree matters: I do not believe that China’s lack of adopting a liberal democratic political system, per se, will relegate the country’s IPR regime to being generally “weak”. I have three reasons for this belief. First, some countries that are not liberal democracies respect the rule of economic law needed to protect IPR just as well, if not better than liberal democracies. For example, Singapore, which is not a “liberal” democracy (Allison 2015), has one of the best reputations globally for respecting IPR, foreign IPR included (Ramcharan 2006; US Chamber 2018: 35–6). Further, if extending our discussion to a central behaviour that IPR regimes are supposed to incentivise—innovation—we find that Singapore is widely recognised as one of the most innovative countries in the world (Global Innovation Index 2019).
Second, having a liberal democratic political system does not actually ensure state compliance with the rule of international economic law, despite its clearer ability to safeguard sociocultural rights. In fact, some iconic liberal democracies frequently violate international legal norms by discriminating against foreign businesses. For example, there appears to be a persistent anti-foreign bias in IPR litigation in Canada (Mai and Stoyanov 2019). There is also potential discrimination against foreigners during the patent examination processes at the European Patent Office, Japanese Patent Office (Webster et al. 2014), and patent offices in other liberal democracies (Yang 2019; deRassenfosse et al. 2019). More generally, if adjudicated violations of WTO law are used as a crude benchmark of adherence to rule of international economic law, one finds that the most iconic Western liberal democracies perform poorly. The US and EU, not China, are by far the world’s leading defendants/respondents in WTO cases  and, according to some estimates, the US and EU have the worst records out of any WTO members in terms of timely and fully complying with all the WTO judgments against them (Reich 2017:18–21).
Third, there are counterexamples to the proposition that Chinese institutions, in particular, categorically do not protect IPRs as well as those in liberal Western democracies. After conducting extensive research about the workings of the many components of China’s current IPR regime experienced by both domestic and foreign entities and comparing them to regimes elsewhere in the world, I believe that it is inaccurate to call China’s IPR regime categorically “weak”, even though there are still areas where the regime deserves improvement (for example, Prud’homme and Zhang 2017; Prud’homme 2019a; Prud’homme and Zhang 2019; Prud’homme, Tong and Han 2021). Moreover, as explained in more detail in the context of the fourth myth propagated by foreign stakeholders, in some ways China’s IPR regime actually offers both domestic and foreign rights holders more appropriability at less cost than the IPR regimes of Western liberal democracies such as the US and those in Europe. Meanwhile, the Chinese government, led by the Communist Party, has integrated a number of important national mechanisms in China’s legal system that act as checks and balances in IPR law-making and enforcement similar to those one would expect in Western liberal democracies. Yet none has required that China becomes a Western-style liberal democracy.
The third subsidiary myth propagated by foreign stakeholders is that “forced” technology transfer (FTT) is ubiquitous in China. This perception about FTT in China is evident in a variety of government, think-tank and scholarly research that has emerged in recent years (for example, Navarro and Autry 2011; CTAIP 2013, 2017; USTR 2018a, b). These works clearly state, with few if any caveats (although some works are more cautiously worded than others), that the Chinese government is “forcing” technology transfer through a wide range of means across the country, implying that it is nothing short of ubiquitous.
However, while interviewing and surveying multinational executives in China, I have found that the most egregious Chinese policies coercing technology transfer do not appear to have been commonly faced by foreign firms in recent years (Prud’homme et al. 2018; Prud’homme and von Zedtwitz 2019). Moreover, the most commonly cited examples of less egregious policies, which more transparently mandate technology transfer for market access, have usually been confined to a handful of industries (Prud’homme et al. 2018; Prud’homme and von Zedtwitz 2019). Further, the rest of China’s controversial technology transfer policies, while problematic in terms of transaction costs, typically do not result in unmanageable losses of value incurred by foreign firms (Prud’homme and von Zedtwitz 2019; Prud’homme and Zhang 2019). In other words, although there certainly were technology transfer policies in China at the start of the trade war that violated free-trade norms, they were not as widespread or always as consequential as many assume (Prud’homme 2019c). All this helps explain why only 8 per cent of respondents to a foreign industry association survey in the lead up to the trade war reported that expectations of technology transfer in China were a top IPR challenge for them (AmCham 2018). “Theft” of IPR by employees and cyber-hacking, behaviour which is distinguishable from FTT policies, may also be more sporadic than many assume: 13 per cent and 8 per cent, respectively, of respondents on a recent foreign industry association survey reported that they faced these issues in China (AmCham 2019).
Moreover, in 2018 and 2019—clearly in response to the trade war —the Chinese government rapidly instituted a number of significant reforms to the majority of its most controversial technology transfer policies (Prud’homme 2019b). Recent reforms have also been made to China’s IPR court infrastructure that should help mitigate the effects of discriminatory treatment of foreign IPR in local courts, a type of FTT policy (Cohen 2019).
More generally, what have often been characterised by businesses, government officials and scholars as “forced” technology transfer policies, in fact do not always appear to technically “force” technology transfer—if the common definition of “force” is used, that is, being compelled by threats (physical or otherwise), violence or an utter lack of alternatives (Prud’homme and Zhang 2019; Prud’homme and von Zedtwitz 2019). Instead, with the important exception of “no choice” policies (mentioned in Table 3.1 in the context of the first subsidiary myth propagated by Chinese stakeholders), foreign firms are allowed some flexibility to decide whether or not they want to comply with China’s so-called “FTT” policies. In this sense, “forced” may not be the most accurate word to describe many controversial technology transfer policies in China. This being said, as also mentioned in the context of the first subsidiary myth propagated by Chinese stakeholders, the choice not to comply with the policies most often considered to “force” transfer of technology in/to China is always met with consequences, some significant, and many of these policies appear to be WTO inconsistent.
The fourth subsidiary myth propagated by foreign stakeholders is that China’s IPR regime is categorically weaker, and therefore less business-friendly, than the IPR regimes of developed nations. This myth has been explicitly or implicitly stated by numerous sources, scholarly and practitioner-oriented. For example, even recent scholarly international business literature—working within the overly-reductionist conceptualisation of countries as having either “weak” or “strong” IPR regimes—considers China’s IPR regime to be “weak” (for example, Berry 2017; Brander et al. 2017).
Reforms are unquestionably still needed to China’s IPR regime in order to make it more conducive to innovation; however, with some important exceptions, the quality of China’s regime is generally comparable in many aspects (IPR laws and regulations, IPR administration and IPR enforcement) to those in developed nations (Prud’homme and Zhang 2019). Moreover, and perhaps surprising to many, in some ways China’s IPR regime is actually more friendly (that is, poses less risks and costs) for IPR-intensive businesses—including, and sometimes especially, foreign businesses—than the IPR regimes in prominent developed nations. Table 3.2 provides some examples of these aspects of China’s IPR regime.
Table 3.2: Aspects of China’s IPR Regime Currently Making it Friendlier than the IPR Regimes in Prominent Rich Nations to IPR-intensive Businesses
Component of IPR regime
IPR laws and regulations
• Business method patents (BMPs) are more accessible in China than the US and Europe
• Certain biotechnology and software are protectable in China but not in the US
• Non-Compete Agreements allowed in China but not in some US states (for example, California)
• Faster invention patent pendency (time to grant patents) in China than at the European Patent Office and US Patent & Trademark Office
• Certain subject matter is protectable in China but not in the US (see above)
• Invention patent examination is of higher quality in China than at some offices in Europe
• Lower attorney and court costs for IPR litigation than the US and some other jurisdictions†
• Faster IPR trials in China than other key markets
• “Local administrative enforcement” route offers more enforcement options than available in developed nations
• Foreigners win most of their IPR cases in China†
• Chinese courts more strictly enforce non-competes than courts in some US states
• Specialised IPR courts and a specialised IPR appeals court in the Supreme Court are available in China yet not always present in the same form elsewhere
• Arguably less risk of patent trolls in China than in the US
Other IPR policies/measures
• Special campaigns to limit infringement of foreign IPR in particular*
• Blacklist for repeat IPR infringers and those engaging in other “dishonest” behaviour related to IPRs
• Aspects of several other programmes and policies (for example, state-established licensing platforms)
Notes: † Indicates that instrument/phenomenon may not always be intentionally designed/orchestrated by the state, but nonetheless makes China’s IPR regime more business-friendly (often for foreign businesses in particular) than the regimes in many developed nations. *Reflects clear efforts to protect foreign IPR, although may be unnecessary if there were less IPR infringement in China.
Sources: Prud’homme (2019a, c), Prud’homme and Zhang (2019).
The fifth subsidiary myth propagated by foreign stakeholders is that China’s formal and informal institutions create Chinese firms that are merely copycats rather than innovators. This myth, rooted in Abrami et al. (2014) and other literature, combines elements of the previously mentioned myths. But it deserves to be debunked on its own since it discusses not only institutions protecting IPR, but also the connection between such institutions
There are several ways to debunk this myth. At the most macro level, one could note that there does not appear to be a causal link between democratic institutions and greater amounts of, or the quality of, innovations (Taylor 2016; Gao et al. 2017). But continuing along this line of argumentation would obviously require scrutinising the relationships between more specific Chinese institutions and innovation, which is outside the scope of this chapter. Meanwhile, however, a more straightforward way to debunk the myth is to assess the extent to which Chinese firms are actually innovating, whether because of or despite Chinese institutions. Chinese firms are already seriously innovating in China in a range of industries and will become even more competitive in the future (for example, Prud’homme and von Zedtwitz 2018; Greeven et al. 2019). For example, Tencent and Baidu are innovating in Internet business models, Haier is highly competitive in innovative consumer goods/white goods, DJI is engineering high-quality drones, Huawei and Xiaomi are producing high-quality and affordable telecommunications equipment, Huawei is a leader in 5G standards setting, Alibaba is offering popular and inexpensive cloud data services, BYD is making competitive NEVs, BGI is advancing in genome sequencing and Cloudwalk is developing advanced artificial intelligence facial recognition technology (Prud’homme and Cohen 2019). Even in industries built upon decades of Western talent and research, where Western firms have sizeable experience curves and lead-time advantages, Chinese firms are making headway. For example, HiSilicon, owned by Huawei, is making competitive smartphone semiconductor chips, and Cambricon and Horizon Robotics are making competitive artificial intelligence (AI) chips.
Implications for Scholars, Policymakers and Practitioners
The debunking of the two main myths and seven subsidiary myths discussed in this chapter provides a much-needed reality check for scholars, policymakers and practitioners. There are two overarching implications that can be drawn from this reality check. First, it should help foreign and Chinese stakeholders understand the value of more constructively and truthfully engaging with one another in the future. The Chinese side should recognise how foot-dragging and denial about certain problems in China’s IPR regime, alongside coordination and capacity problems, contributed to the bubbling up of foreign stakeholders’ frustrations about Chinese institutions. This ultimately erupted in the form of a trade war. It would behoove the Chinese side to avoid this outcome again in the future if possible. Meanwhile, on the non-Chinese/foreign side, those stakeholders should realise that constructive engagement with the Chinese authorities about IPR reform based upon established facts is ultimately in their long-term interest.
Moving forward, this mutual understanding should allow both groups of stakeholders to better focus time and resources on addressing genuine problems with China’s IPR regime. In terms of enforcement, it could benefit, for example, from more systematically awarding higher damages in practice, improving procedures for collecting evidence and enforcing court orders, and further reducing local protectionist judgments (see Chapters 7 and 9 of Prud’homme and Zhang 2019). In terms of laws and regulations, China could benefit from a number of revisions to those governing plant varieties, unfair competition/trade secrets, trademarks, copyrights, patents and integrated circuits (see Chapters 2 and 9 of Prud’homme and Zhang 2019). In terms of IPR administration and other IPR measures, China could benefit from several reforms (see Chapters 3, 4, 6 and 9 of Prud’homme and Zhang 2019; Prud’homme and Song 2016). As this chapter was being finalised, judicial interpretations and other measures were in the works to help address some of these issues.
Second, the reality check provided in this chapter should help foreign stakeholders understand that neither China’s IPR system nor the trade war will seriously restrain Chinese innovation or Chinese entities’ usage of IPR in the long run. As mentioned, innovation in China has taken off in recent years. Further, despite the trade war, there will be considerable temptation for some Western firms to engage in co-opetition or otherwise collaborate with increasingly capable Chinese firms and research organisations to advance next-generation technologies that no one dominates at present, ranging from various applications of AI to new energy vehicles. In addition, the trade war has already emboldened a heighted sense of nationalism in the form of a feverish quest for technological “自力更生” (“self-reliance”) in China contributing to faster mobilisation of state and private resources that might enable Chinese firms to catch up to foreign counterparts in a range of industries, both emerging and more mature (Prud’homme and Cohen 2019). Additionally, even if the trade war further fragments global markets, it will not prevent innovative Chinese firms from being both domestically and internationally competitive nor prevent them from filing more and more of their own IPRs (Prud’homme and von Zedtwitz 2018; Prud’homme and Cohen 2019). Chinese firms will inevitably leverage their growing presence, not just in China but in other emerging markets, which have accounted for almost two-thirds of world economic growth and more than half of new consumption over the last fifteen years (MGI 2018). And China’s Belt and Road Initiative (One Belt, One Road) might help secure these important sources of future demand (Scheve and Zhang 2016) and even serve as a canvass on which Chinese IPR and other norms may be rolled out (Prud’homme 2019a).
In response, foreign firms and governments will need to improve their own innovation and IPR management capabilities in order to compete with Chinese rivals in global markets. Hiding behind the walls of protectionism erected by the current trade war will not ensure their survival in the long term.
In this chapter, I have attempted to explain why the United States and China have become embroiled in one of the greatest trade wars in modern history. A notable portion, albeit certainly not all, of the US-China trade war is attributable to two major myths about China’s IPR regime borne in scholarly, government and business circles. This is a somewhat counter-intuitive explanation, vis-à-vis conventional wisdom, for this tense state of global affairs.
The first major myth, which originates from Chinese stakeholders, indicates that China’s IPR regime is more business-friendly than it is in actuality. This falsity is supported by two subsidiary myths, namely that (1) aggressive forced technology transfer policies have not existed in recent years in China; and (2) various other aspects of China’s IPR regime in place at the start of the trade war have not violated free-trade norms. These myths created significant frustration among foreign stakeholders, leading to the trade war. The second major myth, which originates from foreign stakeholders and contrasts sharply with the one arising from Chinese stakeholders, indicates that China’s IPR regime is less business-friendly than it is in actuality. This falsity is supported by five subsidiary myths, namely that (1) China’s longstanding Confucian culture prevents it from seriously protecting IPR; (2) because China is not a Western-style liberal democracy its governing institutions will never reasonably protect IPR; (3) “forced” technology transfer is ubiquitous in China; (4) China’s IPR regime is categorically weaker than the IPR regimes of developed nations; and (5) China’s formal and informal institutions create Chinese firms that are merely copycats rather than innovators. These myths created misunderstandings and overzealousness among foreign stakeholders, also leading to the trade war.
The debunking of these myths should help the scholarly, policy and practitioner communities in China and abroad to better understand the value of more constructively and truthfully engaging with one another in the future. It should also help foreign stakeholders to better understand that neither China’s IPR system, nor the trade war will seriously restrain Chinese innovation or Chinese entities’ usage of IPR in the long term.
 I reflect on my experiences gained by working full-time in China as a consultant at an international law firm’s office in Beijing, a division manager at a boutique consulting firm in Beijing, as manager of the IPR and R&D working groups at the European Union Chamber of Commerce in China based in Shanghai, and as a policy advisor/ technical expert at the European Union Intellectual Property Office (EUIPO)’s Beijing-based EU-China “IP Key” division. In those roles, I worked closely with a wide range of multinational corporations on IPR and innovation management issues and managed relations with central and subcentral Chinese government officials, as well as European and US government officials engaged with China.
 The policy in the new energy vehicles (NEVs) industry started in 2009 and was tightened in 2017. The 2009 policy required “mastering” of one of three core NEV technologies within a foreign-Sino JV in order to receive an NEV production licence and access to government procurement and subsidies. The 2017 policy required mastering of all (not just one of three) core NEV technologies. As of early 2019, the measure still appeared to be in effect; however its effects on foreign MNCs appear largely nullified due to changes in 2018 to China’s investment requirements in the NEV industry.
 For example, some foreign MNCs have been required to set up an R&D centre in China as a precondition for entering a JV in industries in which a JV was the requisite mode of entry. By way of another example, foreign firms have complained about provisions in Chinese law requiring data servers to be localised in China as a precondition for receiving and maintaining certain business licenses.
 For further details see: Prud’homme 2012: 101.
 This being said, when considering patent litigation cases per capita, the US and Germany experience the most patent litigation in the world. (Source: calculations based on data from Darts-IPR (Global IPR Project 2014) and population figures from the World Bank).
 More generally, one might also note that the idea of legitimately being able to use a copyrighted work without paying for it (in some capacity without committing infringement) is reflected, to varying degrees, in exceptions to copyright exclusivity found in many countries.
 A related overarching value worth mentioning that permeates China’s political economy is the notion that “实践是检验真理的唯一标准” (“Practice is the sole criterion for testing truth”).
 Among other passages explaining this reasoning, see, for example: “We criticize the argument that China will endogenously improve IPR protection due to internal pressures from its domestic IPR sector as the United States and some other countries did in the past. China’s governance institutions are very different from those of the liberal Western democracies, past and present, as China has a weak internal rule of law, a fragmented governance system and cultural traditions that favor collective over individual rights” (Brander et al. 2017: 908); and “It [IPR protection] … is a particular problem in China due to the lack of checks and balances that exist in Western liberal democracies” (Brander et al. 2017: 912).
 Figures based on Reich (2017) and WTO statistics collected by the author. These figures are both in terms of absolute numbers of cases and when the numbers of cases are adjusted according to the number of years which each party has been a member of the WTO. This being said, as mentioned previously, there has historically been reluctance to bring WTO cases against China for fear of reprisals against foreign firms operating in the country. And, as discussed elsewhere in this article, WTO complaints specifically about IPR have been brought against China.
 For example, the process of drafting commercial laws and regulations, and sometimes even economic policies, in China—including those governing IPR—is relatively open for public comments. I can attest to the relative openness of this process as on many occasions I worked with foreign stakeholders to provide comments on draft IPR measures directly to the Chinese government. Based on my discussions with the authorities, I believe that they took all the comments they received seriously, especially those from powerful organisations (both foreign and domestic). (Although, as in the West, there is certainly a fair bit of sausage-making behind the scenes when it comes to finalising and approving the drafts.) In the area of enforcement, the Supreme People’s Court has instituted “guiding cases” which while not formally setting precedent, as China is a civil law, not a common law, country, can serve as an example of best practice for encouraging judges to adopt less-protectionist judgements (Long and Wang 2015). Numerous other institutional mechanisms, some of which are discussed in this chapter, have been adopted in China to further reduce local protectionist tendencies in IPR judgements or otherwise act as checks or balances in the country’s IPR regime.
 One might also point to what seems to be a higher rate of granting injunctions in IPR cases in China (see the figures in RPX ) relative to the US (for example, see the figures in Hines and Preston ). But further research, based on more up-todate statistics and analysis of the reasons for granting/not granting the injunctions, is warranted before firm conclusions can be drawn.
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