- + The much anticipated phase one of the US-China deal renewed commitments on Intellectual Property (‘IP’).
- + A ruthless eradication of IP theft not only would benefit the US economy, but would also skyrocket foreign direct investment (‘FDI’) into China.
- + The protection of trade secrets of foreign businesses operating in China is a landmark advancement for international IP rights.
Why is Liu He’s heat level hot?
Answer: China’s top trade negotiator cleverly uses IP enforcement to boost FDI into China.
Xi Jinping is the recurrent name we hear when talking about Chinese policymaking. As such, we fail to recognize that Liu He is actually the one pulling the strings of the world’s second largest economy. Who is he and why are his recent moves so hot? Liu He is a Chinese economist and politician who back in 2013 started advising the notorious Xi Jinping on the new architecture of Chinese economic policy. He slowly but surely climbed the political ladder and in 2017, at the 19th Party Congress, Liu was promoted to the Politburo of the Communist Party of China. His next step was in March 2018 when he became Vice Premier of the People’s Republic of China, a role he exploited with such remarkable success that he has been appointed top trade negotiator for the China-U.S. trade war. Since October 2019, Liu He has negotiated with his counterparts on a preliminary trade deal, culminating in January 2020’s Phase One. In times of Corona, the term de-escalation can be fairly used to describe the first phase of what we hope will be the end of a protracted trade war between China and the U.S. A war that has extended for more than 18 months and that has involved tariff rivalry, the introduction of foreign technology restrictions and WTO dispute resolution.
Why is IP relevant in the trade war? According to the FBI, “Chinese theft of technology is the biggest law enforcement threat to the U.S.” In fact, stealing US trade secrets cost between ‘$300bn and $600bn a year.’ So how is this connected to He? As explained in further detail below, cracking down hard on IP will not only alleviate the FBI, but that it will also boost FDI into China by giving an image to the outside world of a transparent, law enforcing country.
What is driving Liu He’s decision?
Answer: A Win-Win Approach for both the U.S. and China.
As aforementioned, theft of trade secrets has been a long-lasting problem for U.S. businesses as well as businesses worldwide. Since Liu He, Donald Trump and Mike Pence signed the trade agreement in the East Room of the White House, the Chinese Vice Premier has had to submit the so-called ‘Action Plan’ in order to fortify IP protection. This scheme forces China to implement ‘its obligations’ and ‘the date by which each measure will go into effect.’ While Xi Jinping did not sign the agreement, he should be given credit for picking the best possible person to sign the phase one deal in his place.
Liu He embodies eloquent diplomacy and pragmatism par rapport economic development of the two superpowers. It will be his win-win approach that will mark the point of truce in this pungent trade war. His coherence when navigating foreign affairs was portrayed when he recently rejected Trump’s anxiousness to begin a phase two trade deal. In contrast to his counterpart in these negotiations, Liu He appears patient and poignant yet unafraid of clearly expressing his opinions. For instance, he told the Chinese media in Washington how they “might get nothing if we rush to a second job before the first one is properly done. I don’t think it is a wise choice to impatiently launch new stages of talks.” Liu He is a manifest defender of ironing out the differences between China and the U.S. by means of dialogue.
Liu He’s attitude to negotiations, whether political or economic, is characterized by an emphasis on “tête-à-tête” exchange of views and consensus. For instance, back in 2019, He expressed with relation to his meeting with the U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin, how “Both sides discussed resolving core issues of common concern, reached consensus on how to resolve related problems (and) agreed to stay in contact over remaining issues.” This statement is very representative of He’s negotiating style: prioritizing respect and equality to both sides’ argumentation, becoming the protagonist of the deal. It is precisely his perennial bargaining and win-win approach to IP and technological enforcement which has led to very hot, and ultimately successful moves towards the end of the US-China trade war.
This win-win approach is based on his acute understanding of geopolitics. In fact, during the Phase One negotiations, he even historically contextualized the deal by recalling the disputes between the European powers during the preceding century and declaring how dangerous it was when “a country’s [educated elite] and general public have a tendency of taking a hardline approach to other countries.” His attempt at maximizing the successful outcomes for both China and the U.S. is grounded on his discernment of the importance of the relationship between these two superpowers. For the Vice Premier, not only is it unrealistic, but also immature for people without economic and political factual knowledge to prattle about the decoupling between China and the U.S. In fact, Liu He expressed how the global value added of this relationship is founded on a “part of me in you and part of you in me.” IP enforcement, as important as it might be, is just one of the many compromises He is willing to make to save what he believes to be an everlasting relationship.
What is changing Liu He’s temperature?
Answer: Investment drought in China.
At first glance, the US-China trade deal seems everything but attractive from a Chinese point of view. The aforementioned ‘Action Plan’ commits Beijing to purchase at least US$200 billion of American goods and services during a period of two years. These additional goods will constitute around “US$77 billion worth of manufactured products, US$52 billion in energy, US$32 billion in agricultural goods and US$38 billion in services.”
These commitments seem overarching for China who will benefit very much from this deal due to the fact that reconciliation between it and the US will boost investment in China. This may seem quite evident at first if you have the preconceived idea that China’s economic growth is unstoppable. However, the truth is that He is very much aware that China’s capability of attracting FDI very much depends on the reform of its economic system. A system He believes should be increasingly driven by free-market principles where legal and natural persons pay for what they want and receive what they pay for.
While it may not appear so, recognition, protection and enforcement of IP rights is inextricably linked to investment in China. Whilst technology has been portrayed as the number one source of astonishing US economic growth and productivity, the strengthening of the IP system has been the utmost underlying factor. A robust and transparent IP framework is what ultimately triggers investors to put their resources at risk, and therefore, IP is the pillar for venture capital investment. Liu He is more than aware of such strengthening taking place in the rest of modern economies, and is patiently determined to help China not fall behind in this sense. As such, Liu He is using Phase One of the Deal to exhibit to the world that China understands how IP is a “powerful tool for competition, stability and mitigation of risks on capital investments.”
What does this mean for you?
Answer: Business, Business and more Business.
This trade agreement provision enforcing IP rights will positively change the course of doing business in China. From a broad point of view, infringing pharmaceutical patents or selling and exploiting counterfeited goods will from now onwards imply facing judicial proceedings. For the first time in history, the agreement covers both procedural and substantive matters, civil and criminal enforcement, and both online and physical markets. This will hopefully put to an end decades of plagiarism and trade secrets stealing.
From a narrower perspective, this IP arrangement has many bits and pieces to it. Listed below are the main IP-related clauses in the agreement.
- In terms of Trade Secret Provisions
- The Scope of Actors and Prohibited Acts has been expanded
- The burden of proof will be shifted by China in case of trade secret civil disputes
- China’s government agencies shall not disclose trade secrets without permission as provided in the ‘Confidentiality obligation of Government Agencies’
- The threshold of Criminal Liabilities of Trade Secret Misappropriation is lowered.
- In term of Intellectual Property Enforcement within E-commerce Platforms
- Combating online infringement has been a key focus for both Trump and Liu He. The Agreement requires China to establish a “notice and take-down” mechanism
- Pharmaceutical Patent Application
- The Agreement requires that pharmaceutical patent applicants shall be permitted to supplement data after the patent application date to satisfy patentability requirements
- Patent Term Adjustment System
- The Agreement forces China to implement this system whereby the term of a patent shall be adjusted based on undue delay of the patent office or the patent applicant
Whilst these clauses will undoubtedly ease the course of business for foreign companies operating in China, opening up the financial sector and reforming the IP system are much needed changes for the domestic Chinese economy. Once the adjustments are in place, China just needs to stand ready to reap the benefits from its compromise in the US-China Trade War. Liu He’s maintenance of his heat level will simply depend on his ability to keep up this win-win approach throughout the rest of the phases.