A Nuanced Approach to China Part 3

Moving on from strategic foreign policy discussed in Part 1 and trade relations in Part 2 this article will seek to focus on investments and business relations with China. In particular, it will be touching on two highly complicated subjects, intellectual property theft and financial investing. As laid out in Part 1 and Part 2, China is an existential threat to liberty and seeks to displace the United States as a global leader. However, it has not done anything to warrant brash retaliation and often operates in the grey zone of what is permissible. It also understands that its economic contributions to the world are unavoidable and it would be foolish not to engage with them. However, much as they believe they can leverage economic influence to their advantage, there are a number of ways the US can do the same. Think of China like a coworker who wants your management position but hasn’t done anything that can be seen as worthy of true retaliation. You know they’re up to no good but at the same time they contribute to the company and they haven’t done anything that can truly justify harsh vengeance. In order to defend your position in management, you must also play smart and utilize nuance. Much like there is a way to live with the competitive coworker in a manner that not only protects yourself but maximizes the well-being of the company, there is a way to intelligently navigate our tense relationship with China. 

Finance and Investing

Political risk is something all investors should be aware of when investing in China as with all authoritarian regimes. One day the business you bought stock in could be growing rapidly and then all of a sudden the CEO says something critical of the Chinese Communist Party and they disappear. Then the stock of the company plummets and the Shanghai Stock Exchange cancels the IPO of a related company, costing investors billions. This is the case of Alibaba and Jack Ma, and it is emblematic of the political risk of investing in China in general. To make things worse, the US government moves to blacklist a number of Chinese firms in retaliation over trade disputes, leading to the creation of a potential blacklist of American firms by the Chinese. Then on top of that, the US House of Representatives unanimously approves a bill to delist all Chinese companies from US stock exchanges if China doesn’t comply with auditing standards.

And this was only the last two months of 2020.

When it comes to investing in China, private investors should first and foremost understand that their investments are subject to serious political disruption by the actions of the Chinese Communist Party, which has unprecedented control over the economy. There are also risks when it comes to the aforementioned auditing standards, and US investors encountering fraud in China is a serious recurring theme. However, the US government should attempt to make it easier to safely do business with China, not more difficult. The Motley Fool writes,

“If you’re looking for growth, you can’t avoid China. In fact, according to Matthews Asia, China accounted for 41% of global growth in 2019, and is forecast to account for as much as the U.S. and Europe combined over the next several years. This growing pie might offer companies room for revenue expansion, especially as China moves away from a focus on “quantity” of growth and toward “quality” of growth.”

China has many promising stocks and companies to invest in that can not only make US financial investors money but make the world a better place. Companies like Alibaba have brought the wonders of e-commerce to Asia and electric car companies like Nio and BYD show promise to make transportation cleaner. Allowing access to such investment opportunities will not only allow US investors to profit but it will also make the world a more prosperous place. This is of course after recognizing the political and strategic risks that come from engaging with such companies. However, if such companies are not a true threat to national security, consumers should otherwise be left to make voluntary decisions on whether to patronize such enterprises. 

What is not productive are unilateral and harsh policies such as suddenly delisting companies from stock exchanges and further exacerbating trade disputes by blacklisting Chinese companies. Not only has this been counterproductive from a strategic standpoint, only prompting retaliation, but it also harms US consumers. Of course, that isn’t to say that any and all bad behavior should be tolerated. To address such issues, it would be best to lay out a clear and accommodating framework of penalties that creates expectations for the Chinese and predictability for investors. 

A lighter hand that creates uniformity for investors and lays out mutually beneficial incentives for the Chinese to improve their business integrity standards would be a more sustainable option. It would be in the Chinese government’s best interest to have a relatively safe environment that attracts foreign investment. Further engagement, not isolation would likely lead to such outcomes. 

Intellectual Property

Intellectual property theft is a practice the Chinese have been engaging in for many years, stealing industrial secrets and even more problematic: military secrets. The National Law Review writes,

“China’s typical modus operandi is to steal American IP, replicate it, replace the U.S. company originating that IP in the Chinese domestic market, then displace the United States in the global market.”

Chinese theft of US military secrets has gone directly into creating advanced weaponry, many of which is directly tailored to combatting the US military. These are all incredibly serious topics. However, as the theme of this article suggests, brute retaliation (economic or militarily) does not seem to be a promising remedy. 

Furthermore, much like many things associated with China, the damage is likely over exaggerated to garner political support. According to the Mercatus Center, it was alleged by the Trump administration in 2018 that Chinese IP theft is somewhere in the trillions of dollars worth of damage. However,

“The US International Trade Commission (USITC), in a more cautious assessment in 2011, estimates that US firms suffered $48 billion in lost revenue in 2009 from IP theft in China… The report determined that three-quarters of the $48 billion in losses were caused by lost sales and one-quarter were caused by lost royalty and license payments and other unspecified losses. While the loss is nontrivial in absolute value, it amounts to less than 1 percent of the total sales of US IP-intensive firms doing business in China.”

Although it is certainly an issue that such practices are occurring, this does not justify a retaliation such as the Trump administration’s trade war which in itself cost Americans billions without any significant benefit. 

If one wishes to retaliate against China for IP theft, it should be proportional to its actual record, which is likely far better than it is made out to be. According to a policy analysis by the Cato Institute, China’s compliance with IP law is actually quite decent and any complaints should simply be taken through the World Trade Organization rather than the use of unilateral trade sanctions. 

Furthermore, Don Boudreaux notes that private companies can do more to protect their intellectual property by not only reinforcing themselves but also working with the Chinese government to stamp out theft. It would be in the best interest of the Chinese to create a lucrative business environment that is friendly to American investment. This of course would only likely be widely successful when it comes to petty IP theft such as fake brand stores, and not state-sponsored industrial espionage which should be brought to the attention of the WTO. 

When it comes to IP theft it is also important to note that the mere existence of the term can yield a contentious debate. According to Jeffrey Tucker,

“Keep in mind that, unlike real private property, IP is necessarily created, defined, and enforced by legislation — by statute. For that reason, it is necessarily territorially restricted based on state jurisdiction.”

Although it would be nice if the Chinese stopped trying to conduct industrial espionage, it is difficult to measure the true damage such practices have done given that the idea of IP is a nebulous concept. What’s the difference between Chinese companies attempting to copy American companies and other American companies trying to copy each other? What is worth being patented and what is simply an idea that should be public, like the idea of touch screen technology, but is simply restricted because of slick legal advocacy? Furthermore, this is also assuming that the Chinese companies will do just as good as a job with the IP as the actual company that came up with the idea. Even if the Chinese company can produce a successful product, oftentimes such competition either domestic or foreign simply leads to productive benefits for society as a whole. This is of course drawing a distinction between the Chinese taking IP that is generally not worthy of protection and only protected because of arbitrary laws and stealing ideas that are truly worthy of being patented. This debate not only applies to China but to companies operating within the US as well.

Key Takeaways 

When it comes to China, we have a lot to gain and much to lose. When it comes to investing and doing business this dynamic is especially important to understand. For one it is important to know how beneficial not only to ourselves but to the world a productive business relationship with China is. There are political risks when it comes to investing in China but it is crucial that in our quest to mitigate those risks we don’t further aggravate the situation with rash unilateral sanctions. When it comes to protecting our intellectual property and ensuring good business practices, it is important that we are guided by reality and not a fantasized version drummed up by politicians for political gain. Harsh retaliation is neither productive or justifiable but standing idle is not a solution either. Our response to China must be measured, nuanced, and intelligent, as such an approach is the only way we will ever succeed.

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