If You Can’t Build It, Steal It

If You Can’t Build It, Steal It
  • Forced technology transfer is really theft by another name
  • How are those tariffs working out? Not too well for China
  • Don’t believe the happy talk on US trade negotiations with China

We’re down to the pointy end now.

In between Trump’s tweets and official Chinese commentary from Davos, here’s what’s playing out in the US capital this week.

Overnight, the US-China trade negotiations began.

Both countries agreed to a 90-day truce on 1 December last year.

That means, come 1 March the two parties need to have reached an agreement, or the tariff and tax lobbing begins once more.

Already the effect on global trade is showing:

Source: Capital Economics; The Daily Shot

The amount of goods (volume) being shipped are falling, however new orders (exports) have seriously dived in the past 12 months.

Don’t get me wrong, global growth and trade volumes were already slowing before the trade war began. However, the two duelling economic super powers have only sped up the process of falling growth.

Falling growth is an issue for markets.

But as Jim points out today, things could be about to get a whole lot worse. And markets aren’t prepared for it.

If you can’t build it, steal it

For the US, the tariffs aren’t the issue. The real tension is China’s theft of American intellectual property.

China hasn’t ‘stolen’ intellectual property so to speak, although there are some links to cyber theft.

No, China has a complex legal web that coerces companies to provide full technology patent details when manufacturing products in China. Plus they compel businesses to switch to state-owned technology and supported Chinese products.

This probably doesn’t surprise anyone who has been manufacturing in China for the past few decades.

Furthermore, it has given China technological edge, without being innovation leaders themselves.

This process allows Chinese firms to piggyback off others creativity and innovations, and create cheaper products for consumers.

Essentially, China has been able to flood the market with cheap knocks off because of their disregard for intellectual property rights.

Something US Trade Representative Robert Lighthizer estimated cost US companies US$50 billion.

And it’s that number that kicked off the tariff war at the start 2018.

It’s this very subject that will be at the centre of talks this week.

Already China has tried to rush through draft legalisation to try and close their government approved theft of information. Or ‘forced technology transfers’ as The Washington Post called it.

China’s new rules are a ‘step backward’ says legal expert Scott Kennedy, director of the Chinese business project at Centre for Strategic and International Studies, saying:

The draft is so full of vague statements and holes that passing the law would make absolutely no difference to the experience of foreign companies in China and actually could leave them worse off than they are today.

The point? The tariffs are a smoke screen.

They were about getting China to the table. Trump’s side will put a large focus on the end of forced technology transfers.

And according to Jim, markets aren’t prepared for an adverse outcome.

Read on for more.

Best Wishes,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia