Made in China 2025 Initiative at Center of Growing IP Tensions Between United States and China

Over the past year, tensions regarding international trade issues between China and the United States have been making a series of news headlines. Such tensions began building last year after the Trump Administration announced probes into deceptive trade practices which were allegedly enforced by the Chinese government, including a probe into the theft of U.S. intellectual property which was launched last August. In early March, President Trump announced tariffs on foreign shipments of steel and aluminum to counter the alleged dumping of Chinese steel into global markets. In early April, President Trump announced additional tariffs of up to $100 billion in part to combat Chinese theft of American IP.

The trade restrictions imposed by the White House in recent days have definitely elicited a strong response from China and the country’s President, Xi Jinping. About one month after the White House announced steel and aluminum tariffs, the Chinese government put into effect tariffs totaling about $3 billion on nearly 130 U.S. products including fruit and pork; China is the world’s largest consumer of pork. About 48 hours after that announcement, the Chinese Ministry of Commerce announced potential additional tariffs which could reach $50 billion, targeting U.S. goods like cars, soybeans and planes. On April 10th, the World Trade Organization (WTO) announced that China had filed a formal complaint with the international trade regulator over the steel and aluminum tariffs put in place by the U.S.

One of the economic policies put in place by the Chinese government which is coming into more focus as international trade tensions have increased is the country’s Made in China 2025 initiative. Made in China 2025 is a program of the Chinese national government to comprehensively upgrade domestic industries to reach a goal of raising the domestic content of of core components and materials produced in China up to 70 percent by 2025. The Made in China 2025 program identifies 10 key industry sectors to support its domestic goals, including new advanced information technology, aviation, rail, new energy vehicles, agricultural machinery, new materials and biopharma.

A high ranking Chinese official has announced that the Chinese government rejected a request from the United States to end its subsidization of industries identified by the Made in China 2025 initiative. These key industry sectors are areas where technological development is very important and as such, they’ve been at the center of allegations over the forced transfer of patented technologies to Chinese domestic firms as well as outright theft of trade secrets. The Chinese government has responded to concerns over the Made in China initiative with one senior economic official defending the program as open to foreign and private companies according to a report by Hong Kong’s English daily The Standard.

But Made in China 2025 is not the only Chinese government program in place which aims for technological dominance in important sectors of global industry. Last December, China’s Ministry of Industry and Information Technology published guidelines aimed at fostering the development of artificial intelligence to increase the energy efficiency of China’s manufacturing sector by 10 percent by the year 2020. China eventually aims to become the world’s leading AI sector by 2030 with the goal of increasing the value of its domestic AI sector up to nearly $150 billion at that time. China’s AI initiatives are already paying off as an AI market report issued this February showed that AI startup funding in China led the world during 2017, attracting 48 percent of global equity funding for AI startups that year. The United States trailed in second place with 38 percent of global AI startup funding.

The same day that reports about China’s rejection of the United States’ request to end subsidization of Made in China 2025 key industry sectors, The Associated Press reported that China’s President Xi did promise to cut tariffs in the auto industry as well as improve the protection of intellectual property, saying that the country would “protect the lawful ownership rights of foreign enterprises.” Although the AP report indicated that President Xi did not speak to U.S. concerns over forced tech transfer for market access, a scheme which operates in violation of China’s obligations as a member of the WTO, the Chinese leader has shown himself to be very savvy in intellectual property matters, especially over the past year. Last July, President Xi reportedly commented at an important Chinese economic forum on issues surrounding intellectual property infringement, saying that “Wrongdoing should be punished more severely so that IP infringers will pay a heavy price.”

President Xi’s remarks in support of stronger protections have resulted in the shaping of an IP economy which presents almost a photo-negative version of the IP regime developing in the United States, at least where patents are concerned. In recent months, the Chinese government has relaxed the patentability standards for software and business method patents, sectors of innovation which have been disincentivized in America thanks to precedent set by the U.S. Supreme Court in 2014’s Alice Corp. v. CLS Bank International. China has also streamlined the examination process for big data, Internet and cloud computing inventions. As a result, China is the leading nation in terms of the number of patent applications being filed by a long shot and it’s helping domestic firms like Huawei build a great deal of corporate value. Conversely, the United States’ patent system has fallen to 12th this year in large part because of the uncertain patentability in sectors like software as well as the patent opposition system enforced at the Patent Trial and Appeal Board (PTAB).

Analysis of President Xi’s more recent comments on protecting intellectual property along with the auto tariff cuts has indicated a belief that those concessions are a step towards diffusing trade tensions with the United States and concerns regarding the Made in China 2025 policy. Xi’s silence on enforced tech transfer, however, speaks volumes given his understanding of the importance of strong patent rights to the national economy. Of course, as long as the United States keeps shooting its foot in terms of patent rights and related policy, China will continue to be the destination for the upcoming generation of new tech development regardless of any joint venture tech transfer rules.