Time for Korea-US cooperation to limit China's advanced tech gains

By Robert D. Atkinson

Even if Korea implements additional advanced technology policies, it will be increasingly difficult for Korean firms in advanced industries, like electronics, semiconductors, machinery, and autos, to compete against Chinese firms that are backed to the hilt by the Chinese government. China's innovation mercantilism playbook is to steal or coerce the transfer of technologies its firms and industries need to succeed, then back an array of national champions with massive subsidies while squeezing foreign competitors out of the Chinese market. From that assured "aircraft carrier" base of growth, Chinese firms then launch attacks on the global market share.

This strategy is particularly dangerous in innovation-based industries like semiconductors and electronics because they have relatively high fixed costs and low marginal costs, so added sales are key to earning enough to invest in the next round of innovation. Once that scale is eroded, there is often a tipping point at which a challenger gains a decisive advantage and effectively crushes its competitors. China has done this successfully in a host of industries, including what was once a Korean strength, the LCD TV industry. Once China gained market share there, it eroded the earnings and R&D of the leaders while boosting its own, all the while moving up to the next most complex technology, in this case, OLED displays.

Take the case of Chinese display leader BOE. Almost bankrupt, it was rescued by the Chinese government and now leads in the LCD market and is number two globally in OLED displays, making serious inroads into Samsung and LG's OLED sales. These display companies also depend on stolen intellectual property. Recently, three Samsung employees were charged with illegally passing trade secrets to Chinese display firms. Chinese innovation mercantilism also threatens many other advanced industries, including semiconductors and autos.

So, what can Korea do? Without limiting these predatory state-based attacks, even the best Korean domestic competitiveness policies will not suffice. Korean policy could focus on developing the next "new thing," such as Internet of Things, biotech, quantum computing, AI and others. But it's not clear that Korea will succeed in all these new technologies, given how much money China is investing and how much IP it is stealing. Moreover, focusing on the next new technologies without maintaining strength in existing ones will not be enough. If China captures all legacy chip production, electric vehicles, electronics, robotics, machine tools, chemicals, and biopharma production, and Korea has only new cutting-edge products, then Korea's overall advanced-industry capabilities will be significantly degraded.

So, what should Korea do? Until recently, America's tried to "slow down China" by pressuring the Chinese government to roll back its predatory policies. But while such a strategy might have worked 15 years ago, China is now too powerful, as evidenced by the limited results the Trump administration's efforts produced.

Meanwhile, a multilateral approach is no longer possible either, not only because the World Trade Organization is impotent, but also because many U.S. allies, particularly in Europe, see China as an economic opportunity too important to rebuff, and fear that Beijing will retaliate economically if they do.

So, since Korea won't be able to do enough to help its own companies withstand the impact of China's "attacks" and allies can't get China to abandon its predatory techno-economic policies, what is the solution? Korea and its democratic allies need to now focus on limiting China's ability to profit from industrial predation ― the techno-economic equivalent of a missile defense system.

In other words, Korea and its core allies should prohibit the import of advanced industry products if there is reasonable proof that the Chinese firm selling them has systematically benefited from unfair trade practices, such as a closed Chinese market to competitors, massive subsidies, and intellectual property theft. In the United States, Section 337 of the U.S. International Trade Commission's statute allows the government to exclude goods and services from companies that benefit systemically from their governments' unfair trade practices the way Chinese firms do. Korea needs to adopt a similar measure.

However, to be effective, this regime needs close alignment between allied nations, for two reasons. First, the more countries limit unfair Chinese imports the less revenue the Chinese firms will have to ramp up their R&D and production, and the more revenue allied firms will have to do the same.

Second, not every country will have the same import concerns. Take the advanced display industry. Given that it appears that Chinese display companies like BOE have unfairly benefited, allied nations should ban the imports of their displays for a 10-year period. But as there is almost no advanced, consumer market display in the United States there will be little pressure on the U.S. government to limit Chinese display imports. However, if Korea and the United States worked together, then they could both ban imports that help each country. The United States (along with Korea) could ban imports of Chinese displays, while both could ban imports of a product like medical drugs where the United States is vulnerable to Chinese predatory practices.

The reality is that unless allied nations, including Korea, take effective action to "throw sand in the gears" of China's innovation and production system, even the most effective domestic policy actions will not be enough. Time is on China's side because it is making faster progress and because of the nature of innovation industries, where increased competitive advantage can lead to decisive tipping points. Adding a regime to limit imports of Chinese goods produced unfairly will be critical to keeping key allied industries from tipping into decline or extinction.

Robert D. Atkinson (@RobAtkinsonITIF) is the president of the Information Technology and Innovation Foundation (ITIF), an independent, nonpartisan research and educational institute focusing on the intersection of technological innovation and public policy. The views expressed in the above article are those of the author and do not reflect the editorial direction of The Korea Times.