Does technology transfer from the US to China harm American firms, workers, and consumers? A historical and analytic investigation

Abstract

Decades of spectacular economic growth have made China into an important geopolitical player. As Chinese companies improve their capabilities across several areas of advanced technology, including artificial intelligence, some US policymakers and pundits lament the country’s ‘unfair trade practices’ and serial ‘theft of American intellectual property’, particularly through so-called forced technology transfer. China hawks claim these practices hurt US companies, workers, and consumers. Do Chinese technology practices harm economic efficiency? What are their distributional consequences? To address these questions, we explore the different modalities of international technology transfer and flesh out their economic consequences. We also investigate the recent history of technology transfer, providing examples from the industrialisation experiences of European countries and the Asian Tigers. We surmise that current Chinese processes are neither novel nor alarming from the standpoint of either economic efficiency or distribution: US firms are collecting record royalty payments for their intellectual property from China and generating gangbuster profits due to their access to Chinese labour, suppliers, and the country’s growing consumer market. American consumers benefit from US–China economic interdependence and so do some workers. The consequences for the US economy as a whole are positive. While we are agnostic about whether these practices threaten America’s national security, we offer ideas for how to prevent China from acquiring its most sensitive military technology.

Keywords:

• Technology transfer
• intellectual property rights
• China–US economic relations
• innovation
• artificial intelligence

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Breakneck growth rates have sometimes approached 10% annually, allowing Chinese real living standards to double twice between 1979 and 2006. Between 1990 and 2008, China’s workforce increased by 145 million people as peasants migrated from the countryside to work in megacities such as Beijing and Shanghai; labour productivity improved by more than 9% per year during that period, as did total factor productivity.

2 There are certainly historical parallels to the fears voiced by US policymakers regarding China’s economic and technological rise. The British were worried about the rise of the Netherlands in the 17th century on the back of financial innovations such as liquid securities markets, which birthed the Dutch East India Company and the growth of a global trading empire that encroached upon the British sphere of geopolitical influence, including in North America. This fuelled the Crown to engage in mercantilist policies such as the so-called Navigation Acts, which were aimed at bolstering British traders at the expense of their Dutch counterparts. It also triggered several Anglo-Dutch wars. Britain was also worried about the rise of the US in the late 19th century. However, in this case, the passing of the torch from the former to the latter was peaceful and gradual. While the US had eclipsed Britain in economic terms by the early 20th Century, due in large part to the Second Industrial Revolution (electricity, the internal combustion engine, chemicals, aeronautics, and radio), the former surpassed the latter in geopolitical and military terms only after World War II. Similarly, the US was worried about the rise of Japan in the 1980s. But these worries faded after Tokyo’s 1990 stock market crash, its subsequent economic collapse, and the failure to return to its former economic glory after 30 years of stagnation.

3 While this paper is relegated to evaluating the impact of US–China economic integration and the role of technology transferred from the US to China, other Western countries have also benefitted greatly from more trade, investment, and technology exchange with China. Consider Sweden: Ericsson, which makes equipment for wireless networks, collects 13% of its revenues from China. Other Swedish companies with big stakes in the Chinese market, either because of trade or FDI, include engineering firms, carmakers, pharmaceutical companies, and machine makers. Indeed, China is Sweden’s sixth largest export market and a host to over 500 subsidiaries of Swedish firms (see Economist 2021).

4 This is not only relegated to China: US citizens and businesses remain the most prolific patent applicants abroad. American-based applicants filed over 230,000 patents overseas in 2019 (WIPO 2019).

5 The authors argue that Chinese MNCs, like those from other countries, face unique challenges besides hostility voiced by critics in Western countries. These include relatively weak institutional contexts at home, possible interference from their governments, entering foreign markets at a relatively early stage in their maturation process, a dearth of managerial and technological capacity, and strong ties to their home country.

6 For example, see O’Connor (2019).

7 However, they do lag considerably behind American firms in terms of the efficacy of the algorithms they use to identify patterns and personalise and target information to users (see Economist 2019).

8 Huawei is the world leader in the information technology behind the 5G wireless network, and earned over US$107 billion in revenues in 2018.

9 Government procurement is centred on computers, telecommunications infrastructure, office equipment, software, renewable energy, and energy efficiency.

10 As Lind and Press (2018) argue, China’s energy mercantilism makes sense from a national security perspective in light of imperfect contracting, supplier collusion, geographic concentration, and a high risk of conflict.

11 The State Council of China famously introduced a ten-year US$300 billion plan in 2015 labelled ‘Made in China 2025’ that declared the country’s intentions to become a world leader in semiconductors, AI, and electric vehicles, among other high-tech industries.

12 Outside of technology, American politicians have also complained about Chinese tariffs on American imports, China’s supposed currency manipulation, its subsidies for state-owned enterprises, and its flooding of the international market with cheap industrial goods such as steel.

13 On all of these points see Navarro (2018). According to the FBI and US Joint Chiefs of Staff, the Chinese government is behind the theft of billions of dollars of US companies’ trade secrets across a wide swath of sectors, including aviation, pharmaceuticals, and extractive industries.

14 In early 2018, documents were leaked by an unknown source that showed the White House was considering a wholesale nationalisation of the nascent 5G wireless network. Members of Congress objected, forcing National Economic Council Director Larry Kudlow to aver that in the US, 5G would be built with ‘free market, free enterprise principles’ (Swan et al. 2018).

15 This follows on the heels of the Federal Communications Commission labelling both China’s ZTE Corporation and Huawei national security threats, banning ZTE and Huawei from providing equipment to America’s wireless communications network, and ending federal subsidies directed to these firms and meant to increase internet coverage. Washington has also pushed other countries, such as Germany and the UK, to preclude Huawei from helping build their 5G networks. The UK did just that in July of 2020. Policymakers around the world claim, without much evidence, that the Chinese government will be able to exploit its cosy relationship with these firms to weaponise 5G: using backdoors built into Huawei equipment such as routers to spy on foreign governments and citizens and sabotage critical infrastructure such as power grids. Besides telecom gear, Huawei also makes handsets and microchips and provides cloud computing services.

16 Usually, governments, industrious individuals, or firms were motivated to develop higher value-added manufacturing as sources of higher profits, wages, or taxes (Landes 1969; Reinert 1995).

17 The US government has also restricted investment from China in American firms that produce sensitive technology, including Chinese venture capital meant to fund startups (Winkler 2019).

18 This section draws on Menaldo (2021).

19 Other researchers claim that patents retard innovation and economic development in developing countries. They may foster technology transfer from developed to developing countries only in some industries (e.g. Mansfield and Lee 1996), or under specific conditions (see Braga and Fink 1998). A few researchers argue that patents needlessly increase the costs for developing countries to acquire state-of-the-art technology from countries at the innovation frontier (Grossman and Helpman 1993). Weak IPRs supposedly allow late industrialisers to draw freely on the best ideas and imitate the most innovative practices, including via reverse engineering (see Kelly 2009).

20 On these points see Arora (1995).

21 China has joined the World Intellectual Property Organisation (WIPO), the Berne Convention for the Protection of Literary and Artistic Works (copyright), the Universal Copyright Convention, the Paris Convention for the Protection of Industrial Property (patent and trademark), the Patent Cooperation Treaty, the Agreement on Trade-related Aspects of Intellectual Property Rights, and the Madrid Agreement for the International Registration of Trademarks (Greguras 2007).

22 This section draws closely on Morinville (2018).

23 For comparison, the total number of patent, trademark and copyright cases filed in US District Courts during 2006 was 11,406 – the highest number between 2002 and 2007.

24 A 2020 report by the Boston Consulting Group, commissioned by the US Semiconductor Industry Association, concludes that the Trump administration’s policies will undermine the competitive position of American chip companies, reducing market share, revenues, and employment (Varas and Varadarajan 2020).

25 US consumers benefit doubly as they get access to a wider variety of cheaper goods that otherwise might not exist at all, both from Apple and other firms that outsource production to Taiwanese firms operating on the Chinese mainland and other Chinese firms.

26 China is the biggest buyer of semiconductors produced by American companies, typically purchasing about 25% of their microprocessors (amounting to US$300 billion in sales).

27 Some have less obvious, but just as salient, applications: achieving supremacy over quantum computing may allow China to obtain satellite communications that cannot be hacked and radar capable of piercing through stealth antidetection capabilities (see Economist 2019).

28 Analysts speculate that over 70% of the technology that the US military relies on is off-the-shelf and commercial, which means that international supply chains expose it to a major vulnerability: potential hacking and sabotage by America’s enemies (Economist 2019).

29 This section draws closely on Barnett (2011).

30 This is not to rule out potential negative externalities. Consider what Obstfeld and Rogoff (2009) have argued about the 2008 Global Financial Crisis: a global savings glut exacerbated by China’s trade surplus and concomitant build-up of foreign reserves qua US Treasuries depressed real long run interest rates. This allegedly helped spur the creation of new asset classes that could generate higher yields, but that were riskier than first realised by investors. They included mortgage back securities and other collateralised debt obligations. The latter’s prices deteriorated sharply after American homeowners defaulted on a wide swath of mortgage loans with variable interest rates after they had ballooned, devastating banks’ balance sheets, and precipitating a bank run and credit crunch that led to the Great Recession. We can of course dispute whether this was indeed a causal, linear process running from the US–Chinese economic integration to the crash.

31 To be sure, the scholars who model these dynamic effects in the US focus on skilled (educated) labour to explain why the returns to college degrees have mushroomed, despite the fact that the pool of college educated workers has grown steadily over time (e.g. Goldin and Katz 2009). Conceivably, however, the same process may apply to unskilled labour too, at least during several post-World War II periods, including more recent ones (Gordon 2009).

32 Of course, it is not irrational for voters who have suffered employment losses directly due to the offshoring of their jobs to seek redress. This may include the desire to place tariffs on competing imports, which are in turn passed on to consumers as higher prices for domestically manufactured products. Nevertheless, if targeted correctly, tariffs ensure that these products become (artificially) cheaper than foreign made ones. While this may constitute a rational response for the labourers who produce these goods, this may not be the most optimal response. First, their jobs may be automated away anyway, no matter the level of trade protectionism: domestic workers will remain relatively expensive and the costs of automation keep dropping like a stone. Second, it might be more advantageous for workers exposed to trade to favour policies that reform education, create vocational training, and promote lifelong on-the-job training. Also, investment in green energy systems may be more effective in creating lasting economic opportunities than futile attempts to force the reshoring of inefficient steel manufacturing. Therefore, while supports for protectionist policies that may or may not save domestic industrial jobs in the short term are rational, they are also myopic, and therefore possibly explained by high discount rates (see Magistro 2020).

33 Survey evidence suggests that in both the 2016 and 2020 elections, hardcore Trump supporters favoured him because of his (1) opposition to immigration, (2) opposition to liberal cultural values, (3) disdain for political correctness, and (4) mockery of experts and the media (Tucker et al. 2019; Sherman 2018; Major, Blodorn, and Blascovich 2018). These studies also provide strong evidence that nativism and even outright racism fuelled Trump’s rise and continued political success (Noland 2020), with opposition to trade ranking near the bottom of the list. Moreover, the reasons given by Trump supporters for backing him do not vary geographically; his voters in the rustbelt voiced similar concerns as those located elsewhere.

34 Bouët and Laborde (2018) provide evidence suggesting that increasing import restrictions on China will lead to a welfare loss for the US. The modelled impact of a 35% increase in bilateral tariffs between the US and China may benefit workers in some isolated sectors like textiles, but would hurt workers in significantly more sectors such as chemicals, plastics, agriculture, and motor vehicles. All scenarios modelled by Bouët and Laborde would reduce average wages across both skilled and unskilled workers. Bekkers (2019) suggests that short of much more dramatic changes in policy, extending Washington’s trade restrictions on Chinese imports will not affect US manufacturing employment tangibly; moreover, it will continue to hurt American consumers and workers.