In releasing new rules instituting national security reviews before intellectual property (IP) may be transferred to foreign actors, the Chinese government last month underlined its view that indigenous innovation is crucial to national defense and economic security. In doing so, authorities focused on three key sectors—semiconductors, software, and new plant varieties.
The new “Work Rules on Outbound Transfer of Intellectual Property Rights (Trial),” translated in full by DigiChina below, were dated March 18—four days before the U.S. government released its Section 301 report on Chinese intellectual property and investment practices, and at a time when the U.S. and Chinese governments were engaged in an intense and public exchange on trade and investment rules, with a special focus on high-tech sectors. The rules were released on March 29.
This timing may well have been an intentional signal amidst talk of a possible technology-oriented “trade war” and following the Trump administration’s blocks of a Chinese group’s acquisition of Lattice Semiconductor and Ant Financial’s bid to take over Moneygram. The message: Two can play at the game of barring access to sensitive technologies.
Regardless, this development fits with a longer-term regulatory current of instituting security reviews for technology products with an eye to protecting national security and encouraging indigenous innovation. The rules themselves list ensuring “national security” and “innovation and development” as key objectives.
“China has mastered a series of key technology and developed some high-quality intellectual property,” State Intellectual Property Office (SIPO) official Zhang Zhicheng said, according to Xinhua. “If we fail to strictly review core IP transfers related to national security, we may put the country at the risk of losing control of key technology in important fields and suffering major financial losses.”
The three sectors specifically identified in these rules can be seen as signalling the direction for future review processes. Each is an area of intense focus and large investment by the Chinese government, and Chinese firms in all three areas are beginning to make real strides in innovation.
Integrated circuits (IC). Though Chinese semiconductor firms today can’t compete with the global leaders across the board, Chinese investment in the industry is significant. Recently, the state-backed National IC Fund reportedly sought to raise up to USD $31.5 billion in new funds to drive development, and in 2016 U.S. Commerce Secretary Penny Pritzker criticized the fund as a “$150 billion industrial policy.” In certain applications, government-linked efforts are producing market-ready chips. (See “V. Semiconductors: Attempting to Chart a Different Course” here for a DigiChina assessment of China’s artificial intelligence (AI) chip developments.)
Software. Chinese government investments in a variety of computer technologies are increasingly substantial. Specifically in the AI area, the government may wish to apply security reviews for export as domestic Chinese innovations gain in importance.
New plant varieties. Food security in general and China’s reliance on imports has long been viewed as a threat to Chinese government legitimacy. Thus in collaboration with scientists and entrepreneurs, the government has promoted the development of genetically modified (GM) crops since the late 1980s, with some domestically produced GM IP being commercialized since the early 1990s. Despite large investments, commercialization of GM consumables has stalled domestically, and some some actors are seeking markets outside of China. The Chinese government likely wishes to avoid losing control of the GM traits and hybrid strains to foreign purchase or exclusive licensing.
In addition to protecting indigenous innovation, the Chinese government in these and other sectors has sought to maintain some control of domestic firms as they engage global markets, hoping they will do so as Chinese firms, rather than as undifferentiated multinational actors. These rules may be only a beginning, as they leave great room for local variation and numerous details unspecified. The full translated text follows.
