Technology is among the most contested sectors in trade with China. Without negotiated solutions, both sides will suffer.
As China’s economy continues to grow, access to and ability to compete in the country’s domestic market have become increasingly important for international firms looking to grow and scale up globally. This is particularly the case for technology firms, which rightly see significant opportunity in serving China’s growing domestic personal and business markets. At the same time, China’s government and industry leaders — aiming to continue the country’s rise up the global value chain — are seeking to enhance the positions of their domestic technology companies.
Not surprisingly, then, trade and technology policy has emerged as a major international issue. Tensions have been heightened by allegations of cyberespionage on the part of both China and the United States, and these have blurred the lines between economics and geopolitics. The revelations of former National Security Agency contractor Edward Snowden have proved particularly inflammatory, lending credence and support to Beijing’s assertions about the need to protect its domestic information technology infrastructure.
The most recent manifestation of this underlying discord came late last year when China announced new regulations requiring foreign firms supplying computer equipment to domestic financial institutions to provide source code and back doors to Chinese officials, and to be subject to “invasive audits.” Though the Chinese government suspended implementation of the policy in April, the environment remains tense, with the Chinese government looking to further enhance its cybersecurity review process.
As a result of these barriers some firms, notably IBM, have begun to barter their intellectual property resources or make other concessions in exchange for market access. Facing a reduction in sales following the Snowden revelations of 2013, IBM has sought to solidify its presence in China by forging partnerships with domestic industry and encouraging technology transfer. But while the company’s CEO, Virginia Rometty, argues that the deals are win-win for both sides, critics have expressed concern that the company may be mortgaging long-term resources for short-term gain.
On the Canadian side, Waterloo-based Blackberry has had limited engagement with China, choosing instead to focus on other large emerging markets such as India, Indonesia and Malaysia. In a January 2014 interview with Reuters, the company’s CEO John Chen highlighted information security issues as a potential stumbling block in expanding Blackberry’s operations in the country, noting that he did not want to “get sucked into a geopolitical equation.” Chen later noted that the company was developing a plan to increase its presence in China, though details remain sparse.
What is clear, however, is that information security and intellectual property rights issues remain a concern for Canadian technology companies seeking to make inroads into the Chinese market. Despite some successes, small firms and start-ups remain particularly hesitant. At the same time, a strategy of ignoring China’s large and growing technology market may not prove a viable — or advisable — long-term strategy for Canadian firms.
The now widespread use of technology policy and cybersecurity concerns as a trade barrier should be a cause for concern for policy-makers both at home and abroad. So-called forced localization measures, which may include onerous disclosure requirements, local data sourcing requirements, complex safety and security standards or outright discriminatory practices, are intended to tilt the playing field in favour of domestic firms. As a small country reliant on access to large export markets, Canada is particularly vulnerable to the effects of these practices. As such, policy-makers must continue to work proactively toward a comprehensive multilateral solution that puts forward clear rules that adequately balance these trade concerns with concerns related to sovereignty, privacy, and security.
Initiatives such as the Canada-China Foreign Investment Promotion and Protection Agreement and the recently established renminbi trading hub may signal a more general warming of bilateral relations between the two countries. But whether an improved bilateral relationship will help secure market access and ensure equitable treatment of Canadian technology firms in China remains unclear.
While progress on this front will undoubtedly be difficult, recognizing the importance of the Chinese market for Canadian firms is an essential first step. Indeed, while technology trade issues have become a significant concern in Washington, they have received comparatively little attention in Canada, likely because of this country’s focus on the Chinese market as a destination for natural resources and raw materials. But while these commodities make up the bulk of our current exports to China, Canada must also recognize the country’s potential as an importer of high-value-added Canadian products and services.
Amid rising geopolitical tensions, heightened techno-nationalist sentiment and an uncertain regulatory and market environment, Canadian companies face a stark choice. On one hand, by avoiding the Chinese market alltogether, Canadian firms are ceding ground to competitors in one of the largest and fastest growing markets in the world. On the other hand, bartering intellectual property or compromising on security in exchange for market access carries significant long-term risk. But until countries can agree on clear and mutually acceptable standards for technology trade — ideally through universal, multilateral processes via the WTO — significant commercial opportunities will be lost on both sides.