Trump-Xi Deal May Founder on a Patent Lack of Trust

As we’ve argued in the past, intellectual property is one area where the interests of the U.S. and China are surprisingly well aligned. Lax enforcement formed the core of U.S. Trade Representative Robert Lighthizer’s criticism of China under Washington’s Section 301 regulations, so a breakthrough at the G-20 summit in Osaka would represent a symbolic victory for the U.S. For his part, President Xi Jinping has made IP reform a signature issue, not least because Chinese businesses are growing more sophisticated and assembling their own portfolios of patents and trademarks they want to see protected.

China, moreover, has been quietly reforming in many of the ways that the U.S. wants to see. It has progressively trimmed its negative list of industries where foreign investors are required to operate in joint ventures with local companies. These are one of the prime potential conduits for IP leakage, since the intangible assets must generally be vested in the local venture as a requirement for getting an operating license. By this point, though, most industries are open to wholly foreign-owned units.

China’s ranking in the U.S. Chamber of Commerce’s IP Index stood still in 2019 after years of steady improvement, but it remains well ahead of the likes of Turkey, Chile, Brazil, Thailand and Vietnam. The new foreign investment law passed earlier this year contains a prohibition on forced technology transfer, although the proof of such measures will be how they’re enforced. The IP legal regime in China is improving, with courts becoming more consistent in handling technical issues, especially for local firms, according to analysts at Gavekal Dragonomics.

There are many reasons why individual Chinese companies may want to steal technology from U.S. counterparts, but Beijing has an even bigger reason to clamp down. Chinese leaders know that if they’re to become technologically independent, they will have to take the training wheels off and learn to walk on their own.

Take electric vehicles. One reason that so few foreign-branded electric cars are made in China, the world’s biggest market for such vehicles, is that the playing field is tilted against them. As a result, Chinese-made EVs remain technologically inferior to many models produced overseas. This month, the government scrapped a four-year-old policy of publishing an approved list of battery makers, which had effectively shut out industry leaders such as South Korea’s Samsung SDI Co. and LG Chem Ltd.

Korean firms lead Chinese peers by six months to a year and a half in evolving battery chemistry and technology, according to JPMorgan Chase & Co. analysts. Allowing equal participation earlier could have helped battery technology migrate faster. Instead, lagging technology has hurt demand for electric cars in China, with local manufacturers hit hardest.

While it would be hard to tie IP enforcement – a long, slow and technically difficult process – to the immediately measurable matters of trade and tariffs, some sort of announcement would provide great optics for both sides.

There are ways that China and U.S. could come to a stopgap agreement that would at least slow the darkening tide of protectionism – but that would depend on a level of trust between the two sides that seems to have all but vanished. There’s a slim hope that peace can still break out in this trade war. But the drumbeat from both sides has kept getting louder.