China as a responsible stakeholder: optimism laced with frustration (part 1)
24 Mar 2018|

Dealing with China since its accession to the World Trade Organization in 2001 has been a case of dewy-eyed optimism laced with frustration. The US reaction to this is starting to be clear under President Donald Trump, but what about the rest of us?

The key idea driving trade diplomacy with Beijing from 2001 to now has been former US Secretary of State Bob Zoellick’s responsible stakeholder concept. The two big ideas under this concept are:

  • China benefits so much from the global trading and finance system that it’s not in its interests to damage it.
  • Over time, Chinese authorities will continue to liberalise their economy, strengthen the independence of the rule of law and, as a result, become a more transparent, open economy.

The first big idea still seems to have value in explaining modern China’s behaviour—it does indeed understand very clearly the huge benefits the Chinese people obtain by interdependent trade and doesn’t want to lose those benefits.

Unfortunately, it has taken EU, US and Australian officials, politicians and corporate leaders a long time to begin to realise that Bob Zoellick’s two big ideas didn’t both have to be true.

While continuing to benefit from global trade and regulatory systems, China under President Xi Jinping has been moving in the opposite direction to the gradual liberalism we all expected—or at least hoped for. This isn’t some underhanded, covert set of acts. China has been doing this in plain sight. We’ve just failed to notice or understand it.

A specific but critical example with very immediate implications for Australia is the emergence of Chinese tech firms globally—names like Alibaba, TwoCent, Huawei, WeiChat and ZTE.

Chinese tech firms haven’t grown through unique business savvy and simple entrepreneurship. They’ve been enabled and protected by the Chinese state over the years. A big factor in their rise has been the intellectual property regime in China.

Foreign companies like Cisco, Apple, Microsoft and Ericsson that want to operate in China can do so—if they can navigate the web of obstacles and constraints in place at central, provincial and local levels in China. Much more importantly, next generation information technology is China’s highest priority ‘Strategic Emerging Industry’. So, tech and telecom companies operating there need to hand over their source code and intellectual property to a Chinese partner—who, unsurprisingly, can over time turn into a direct competitor.

The EU has a clear-eyed and very polite assessment of Chinese intellectual property policies and practices. Since China joined the WTO in 2001, the EU has been engaged with China to encourage it to meet its commitments to reform and liberalise parts of its economy. Progress is slow.

A March 2018 report of the European Commission’s Directorate-General for Trade identifies China as the sole Priority 1 country for action on intellectual property. In publishing the report, the European Commission made clear that ‘China remains [the] chief concern in the latest EU report on the protection and enforcement of intellectual property rights.’

While China has made progress, some problems remain:

  • A lack of transparency
  • Industrial policies and non-tariff measures that discriminate against foreign companies
  • Strong government intervention in the economy, resulting in a dominant position of state-owned firms, unequal access to subsidies and cheap financing
  • Poor protection and enforcement of intellectual property rights.

The conclusion the EU and others have continued to draw from these kinds of reports since 2010 is that further efforts need to be made with China to promote ‘reciprocity, a level playing field and fair competition across all areas of cooperation’.

Perhaps it’s time for us to realise that this ‘failure to liberalise’ isn’t a failure but a demonstration of strategic policy, deliberate intent and ruthless implementation.

China is working towards the goal of being technologically dominant globally in telecommunications, in business-to-business trading systems, in artificial intelligence and its applications, and in machine learning. These technology areas are in a strategic sector for China, which means they’re the most advantaged and the most protected by Chinese policy, regulation and administration.

As noted earlier, President Xi’s agenda is hidden in plain sight, in documents like the Communist Party’s 13th Five-Year Plan of 2015. (The ‘we’ in the quotes below is not just the Chinese Communist Party, but Chinese state-owned enterprises and other companies, Chinese academia and the Chinese military—so all of ‘Team China’). To quote the Party’s plan:

We will drive forward research in key technologies for 5G mobile networks and ultra-wideband applications, and develop commercial applications of 5G technology. We will adopt a forward-thinking approach in planning for the next generation internet and move to upgrade to IPv6 across the board. We will formulate plans for future cyber frameworks, cyber technology system, and cybersecurity systems. We will focus on making breakthroughs in key big data and cloud computing technologies, independently controllable operating systems, high-end industrial software and large management software, and artificial intelligence technologies for emerging areas.

So, there is clarity of intent, and there are large bodies of empirical evidence that show these plans are being implemented by Chinese government institutions and high tech national champion firms like ZTE, Alibaba and Huwaei.

EU, US, Australian and other policymakers and regulators have been engaging with China as if we have a shared vision of further economic liberalisation and common interests around intellectual property protection. We don’t.

President Xi’s China Dream is one of Chinese technological and economic dominance, used to exert Chinese power in the world. He’ll use whatever levers and opportunities are available to achieve that.

Understanding this would allow us to move from false optimism in trade, market access, foreign investment and intellectual property protection towards a new framework that has as its starting point the stated and demonstrated intent of Chinese policy and action.

The new concept might be China—the ruthless stakeholder.

In part 2 of this post, I’ll look at how Western policymakers should respond to China’s technological expansion, focusing particularly on telecommunications and 5G networks.