One Hand Tied Behind Our Backs: Why America Must Do Much More to Curb China’s Dangerous Innovation Mercantilism

Ahead of Chinese President Xi Jinping’s visit to the United States this week, ITIF arranged an expert panel to discuss the ramifications and potential U.S. responses to China’s aggressive, mercantilist strategy of shutting American technology companies out of Chinese markets. Panelists referred to a number of the key points in ITIF’s latest report—“False Promises: The Yawning Gap Between China’s WTO Commitments and Practices”—which was released to coincide with the event.

Congressman Randy Forbes (R-VA), founder and chairman of the Congressional China Caucus, provided opening remarks explaining how China’s mercantilist strategy unfairly tilts the playing field against U.S. technology companies to such a degree that it threatens to undermine the U.S culture of innovation. The systemic nature of China’s mercantilist approach to stealing cutting-edge technology and intellectual property—through forced technology transfers and other means—has only grown more pervasive over the last decade. It is now critical that the U.S. government and others conduct a clear-eyed assessment and create accountability for China’s actions. Thus far, in the absence of real opposition, China has been using “controlled friction” to push as far as it can.

Robert Atkinson, president and founder of ITIF, summarized the changes in China’s economic development model. In the first phase, starting in 1978, Chinese leader Deng Xiaoping implemented a range of policies to increase the role of market mechanisms in the economy and open up China to foreign direct investment. In the second phase, from 2001-2006, China joined the World Trade Organization (WTO), but subsequently failed to live up to a range of agreements made as part of its accession. In phase three, from 2006-2013, “indigenous innovation” became China’s guiding economic strategy. The seminal document—“The Guidelines for the Implementation of the National Medium-and Long-term Program for Science and Technology Development (2006-2020)”—outlined a mercantilist approach to making China a leader in a range of technology intensive sectors. The latest phase, starting in 2013, has China becoming even more aggressive in its efforts to support independent “indigenous innovation.” Since becoming premier in 2013, Xi Jinping has overseen an even more aggressive approach toward an indigenous innovation path that prioritizes Chinese companies and actively excludes or seeks to exploit—both legally and illegally—foreign companies and their advanced technology and intellectual property. In response to this approach, Atkinson argued, the United States needs to move beyond the strategy of patience and passive engagement to a “constructive confrontation” strategy to hold China accountable by raising the costs of its actions.

However, panelist Derek Scissors, resident scholar at the American Enterprise Institute, didn’t think that heightened trade enforcement through the WTO, as supported by other panelists, was the right response due to the potential for such action to be hijacked by protectionist objectives. Scissors argued that China’s innovation mercantilist policies would only end up damaging China’s own economy. To that point, Atkinson noted that while China’s innovation mercantilism certainly does not represent the optimum long-term economic growth path for China, the strategy can do significant damage to America’s innovation industries and broader economy in the meantime.

Panelist James Mulvenon, vice president of the intelligence division at Defense Group, Inc., agreed that the situation is getting worse and that a growing number of long-term U.S. and foreign expatriates are leaving China as the much hoped for transformation of China into a rule-of-law and open-market-based economy is not happening. China is increasingly using cyber espionage to supplement its ability to both subtly and coercively acquire technology and intellectual property from foreign companies wanting to operate in China. The close relationship between the management of key Chinese technology companies and the Chinese military and security services means that there are many opportunities for the type of cooperation needed to capitalize on commercially focused cyber-espionage operations. Mulvenon highlighted the need to invest more resources in the English-language translation of Chinese strategy documents, pointing out that it was four years before the United States even became aware of China’s “National Medium- and Long-Term Program for Science and Technology Development” plan.

Similarly, panelist Bill Whyman, senior managing director and head of technology strategy research at Evercore ISI, outlined that China’s intensive approach to controlling key sectors of its economy has created “synthetic markets” and a dense and interrelated set of policies that are aimed to reinforce the government’s overall objectives to promote these key sectors. The semiconductor sector is the clearest example of this approach. There, as detailed in ITIF’s new report, China’s plans unabashedly call for a closed-loop semiconductor ecosystem that would reduce Chinese imports of U.S. semiconductors by half in 10 years and eliminate them entirely within 20.

Panelists agreed that China’s overarching approach and strategy toward innovation is faulty at its core, because it fails to recognize that productivity and organic innovation is at the center of economic performance over the long term. Furthermore, panelists thought that the U.S. government should avoid blaming U.S. technology companies for going along with these actions. U.S. companies have been raising their concerns with the U.S. government agencies in recent years and would likely support a more comprehensive and stronger approach. However, U.S. companies are mindful of the real threat of repercussions that they face in China if they are singled out as supporting U.S. government action against China.

Watch the event video here.