China’s ‘Innovation’ Policies Come at Expense of U.S. Manufacturers

By January 18, 2011Innovation, Trade

As the two largest economies in the world, the relationship between the United States and China is of great importance to global growth and prosperity. This week’s visit of Chinese President Hu affords the opportunity for direct high-level attention to the imbalances in that relationship and lays the basis for a new direction. 

It is critical that the relationship be characterized by both mutual respect and benefit through adherence to international trade rules.  It is also vital that the relationship be a balanced one in terms of trade and commercial opportunity.  When the final trade data for 2010 come in, the U.S. deficit in manufactured goods with China is likely to have set a new record of about $290 billion, exceeding the 2008 record of $277 billion.

The National Association of Manufacturers (NAM) has long pressed for efforts that would result in a more open and balanced economic relationship.  A key aspect is a bilateral and multilateral effort to address China’s greatly undervalued currency.  We strongly support the Administration’s engagement with Chinese leadership on this issue.  But we also call for much greater attention to China’s distortion of commercial opportunities for U.S. firms – particularly China’s set of policies designed to encourage “indigenous innovation.” 

China’s leadership has set itself a broad strategic objective of making the Chinese domestic economy more innovation-oriented and decreasing China’s reliance on foreign technology.  The leadership considers these policy imperatives as critical to China’s long-term economic development, national security and global competitiveness.  

There is nothing wrong with seeking to spur innovation and technology.  Just about every major country, including the United States, pursues that objective.  But the United States and other countries follow the global rules they have adopted and seek to promote development within those rules.  China’s policies, however, bend and break the rules.  Its policies come at the specific expense of foreign companies and competitors, essentially forcing the transfer of foreign technology to China. 

These policies raise great concerns among U.S. companies: government procurement preferences for “indigenous innovation” products; setting indigenous national standards regardless of international standards that already exist; pressure on foreign companies to transfer technology to Chinese firms; increasing moves to promote China’s own “national champions” particularly in innovation- and technology-driven sectors; non-commercial licensing requirements for technologies that support certain key technical standards; financial support for patent filings abroad in ways that clearly benefit Chinese domestic innovation only; amending the domestic patent protection system to benefit Chinese companies at the expense of their foreign competitors and counterparts; and failing to live up to its commitment to open its huge government procurement market. 

Each of these policies, alone and in combination, hurts American businesses — both exporters to China as well as those who have invested in China over the years — and threatens America’s long-term global competitiveness and American jobs, exports and investments. 

America’s manufacturers look forward to President Obama making it clear that China’s distorting policies are unacceptable, and are not a basis for China’s role in a rules-based global system. This week should mark the beginning of a new, and sustainable relationship — and a departure from the current relationship, which is clearly not sustainable.

Frank Vargo is the NAM’s vice president for international economic affairs.

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