China Economy

China respects others' trade secrets — unless it wants something, experts say

Key Points
  • China stands accused of rampant theft of foreign intellectual property by the United States and others and legal experts say the country wields its legal system to get what it wants.
  • China denies the allegations and points to statistics to show it is not only a major innovative power but one that respects and defends intellectual property rights.
  • China's IP protection framework has, in fact, shown improvement, but state control means foreign companies face difficulties when their interests collide with China's.
Chinese President Xi Jinping.
Thomas Peter | Reuters

The lack of intellectual property protections is one of U.S. President Donald Trump's major complaints about China.

With the world's two biggest economies fighting each other in a trade war, Beijing points to statistics showing it respects the rights of international firms. But experts say the country still wields its state-controlled legal system to take whatever trade secrets it wants for its own companies.

That's an opinion shared by the United States and the European Union, which contend that China's system can force companies to give up their technological or trade secrets if they want to do any business in the country. And that's not even accounting for the allegations of outright intellectual property theft, which detractors say is rampant in China.

In a March report, the Office of the United States Trade Representative pointed to longstanding and "numerous IP protection problems" in China, including forced technology transfers and the theft of trade secrets. Meanwhile, the EU, in a February report, cited issues including requirements for "the disclosure of business information when trying to enter the Chinese market" such as in joint ventures.

For its part, China's Foreign Ministry said in July that the accusations of theft are "groundless" and cited statistics, including the country's top global ranking for invention patent applications received and its payment in 2017 of $28.6 billion in royalties, to show it is not only a major innovative power but one that respects and defends intellectual property rights.

But experts said that doesn't tell the complete story.

"If it's something that's really meaningful to you and valuable to China, I think it's going to be very hard to get a fair shake," Mark Cohen, director of the China Initiative at the Berkeley Center for Law and Technology at the University of California, Berkeley, told CNBC last month.

Cohen, who served as an IP attache at the U.S. Embassy in Beijing for four years, cited a list of high profile court cases, including defeats by Idaho-based Micron Technology and Schneider Electric of France — the latter was the largest ever ruling against a foreign company in China.

'State-oriented and state-controlled'

Experts are also quick to stress, however, that the legal environment surrounding IP in China is by no means one-sided and has made important strides in the 40 years since the country initiated its economic transformation.

In the process, it has introduced numerous western legal concepts in relation to the economy and business, including in intellectual property. Joining the World Trade Organization in 2001 spurred improvement, as did the rising quality of judges and the introduction in recent years of special IP courts.

"It's no longer the wild, wild west," Cedric Lam, head of Greater China Intellectual Property at law firm Eversheds Sutherland in Hong Kong, told CNBC last month, referring to the evolution in the more than two decades he has spent negotiating the country's IP landscape.

"The legal framework is there, but how you go implement and execute those legal provisions, that has been the issue," Lam said, citing a lack of enforcement as a perceived minus. On top of that, he said, the quality of judges may have improved, but it's important to remember their salaries are paid by local governments.

Still, Cohen said foreigners have had success litigating IP issues in China for years. He cited a more than 80 percent win rate in patent cases involving foreigners even though they account for less than 2 percent of the civil docket for IP.

And while many would hail that and numerous other indicators — such as having the largest trademark office in the world — as proof China has arrived in terms of IP protection, Cohen said the situation becomes murky when "core" intellectual property is involved.

"The major issue we face in China IP is not unlike what we're facing in other areas of our trade engagement," he said. "It's that China has a different system that is very much state-oriented and state-controlled."

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