How China gets what it wants from American companies

China says it will respond to any new trade tariffs by the United States with measures of the same scale and intensity.

China is vital for many top international brands, but doing business there often comes with a high entry fee.

Some major US companies including GM and Qualcomm sell more of their products in China than anywhere else in the world.

“Our economic interests with China are significant and growing,” said Jacob Parker, vice president of the US-China Business Council, a trade group that represents US companies’ interests in China. “China is a $600 billion market for the American economy.”

But the Chinese government is now coming under increased pressure over the demands it makes of foreign firms seeking to gain access to that vast market. The Trump administration is pointing to unfair practices by Beijing as the reason for US plans to slap tariffs on around $50 billion of Chinese goods, a move that has intensified fears of a trade war between the two countries.

International companies have long complained that China has strong-armed them into handing over trade secrets in exchange for market access. In some sectors, Beijing will only let foreign firms operate through joint ventures in which Chinese partners have the majority stake.

‘Training their future competitors’

That’s the case in the auto industry, where many top brands like GM, Volkswagen and Toyota have teamed up with local players rather than face steep tariffs on imported vehicles.

The partnerships have often delivered blockbuster sales, but they have also raised concerns that they lead to Chinese companies getting their hands on their foreign partners’ technologies.

International automakers are “training their future competitors and receiving only a fraction of what their intellectual property would earn” if they were allowed to go it alone in China, said Mary Lovely, a professor at the Peterson Institute for International Economics.

“It’s no surprise that some domestic Chinese brands resemble American or European models” because of this practice, said Scott Kennedy, a China expert at the Center for Strategic & International Studies.

New technology at stake

The race to develop the cutting-edge technologies that power electric vehicles has intensified concerns.

report published last week by US Trade Representative Robert Lighthizer claimed that Chinese government rules mean foreign firms have to hand over all of the key technologies used in electric vehicles if they want to sell them in China.

Foreign companies often have to “make difficult choices about managing the trade-off of technology sharing and market access,” said Parker, the US-China Business Council executive. He said that about a fifth of American companies operating in China have been asked to transfer technology to Chinese partners in the past three years.

The true figure could be even higher. Surrendering key technologies and intellectual property to Chinese firms is a sensitive topic.

“Firms currently operating in China may be reluctant to speak out against the practice because they fear it will hurt their current business,” Lovely said.

Companies that refuse to play ball are left on the outside, forced to pay potentially hefty tariffs at the border for the goods they ship to China.

That’s the case with electric car maker Tesla, which has been trying for years to strike a deal to build a factory inside China without a local partner.

CEO Elon Musk voiced his frustration earlier this month, tweeting at President Donald Trump that “the current rules make things very difficult. It’s like competing in an Olympic race wearing lead shoes.”

Boeing’s success

There are exceptions to the rule, though. Boeing has enjoyed bumper sales in China without having to surrender key technologies or expertise.

China is Boeing’s second biggest market after the United States, generating revenues of almost $12 billion for the company last year. But the plane maker only does a small amount of manufacturing in China and doesn’t have any major joint ventures there.

The company runs a Chinese factory in partnership with the country’s state-owned jet maker Comac, but it only puts the finishing touches on planes, like installing seats and stapling carpets. There’s “no real technology transfer,” said Richard Aboulafia, a vice president at the Teal Group, an aviation consultancy.

That’s most likely because China needs Boeing’s planes for its rapidly growing air travel industry. Its airlines have very limited alternatives to Boeing and European plane maker Airbus.

Unlike in the auto sector, China has had difficulty cultivating jet manufacturers that can compete with foreign rivals. Comac’s ARJ21, the Chinese government’s first attempt at building its own jetliner, has struggled commercially.

“Getting into the car industry is much easier than getting into the jetliner industry,” Aboulafia said.

Even Beijing’s new proposed tariffs of 25% on American aircraft imports may leave Boeing largely unscathed. The tariffs would only apply to planes below a certain weight, suggesting most Boeing jets on order in China would be unaffected, according to analysts at equity research firm Vertical Research Partners.

Beijing’s defense

Many foreign companies that are already established in China are also unhappy about how things work there.

In its latest annual survey, the American Chamber of Commerce in China found that almost half of its members feel foreign businesses are treated unfairly by the Chinese government compared with local ones.

They complain about regulations being inconsistently applied and continuing restrictions on their ability to invest across wide swathes of the economy.

Some recent Chinese deals have been blocked in the United States over national security concerns. But international business leaders have pointed out that Chinese companies are often able to carry out takeovers in Europe and North America in sectors that are off limits to foreign investors in China.

Chinese government officials have rejected accusations that foreign companies are treated unfairly and dismissed the findings of the US Trade Representative’s report on intellectual property theft as “unfounded.”

Beijing argues that any tech secrets that firms handed over in the country were part of deals that had been mutually agreed upon. And it insists that it is working to strengthen intellectual property protection in the country more broadly.

“We are ready to look at the specific cases if there is any violation of intellectual property rights … We are ready to deal with these issues in accordance with our own laws,” Cui Tiankai, China’s ambassador to the United States, said this week.