How to repair our economic ties with China

The United States has no economic relationship more important than its tense marriage with China, which sits on nearly a quarter of our foreign-held debt, supplies an outsize share of the consumer products on sale in our big-box malls and has quickly become an economic superpower in its own right.

Yet our economic relationship with China is dysfunctional. In China’s understandable zeal to develop and grow, it has become a partner that takes far more than it gives. Chinese policies affecting the software industry, which I represent, illustrate the problem.

Nearly four out of five software applications running on PCs in China have been stolen instead of paid for, the market research firm IDC has found. China has made commitments to the U.S. government to reverse this trend by enforcing intellectual property rights, but IDC data show no discernable progress. Indeed, between 2005 and 2009, the commercial value of stolen personal computer software in China doubled, to $7.6 billion. Roughly half that amount should have been paid to U.S. companies, which could have used the money to hire more U.S. workers and invest in research and development for new products.

With most of this rampant theft occurring in Chinese businesses, the economic impact reaches far beyond the software industry. Software is a critical tool for production in every sector of the economy. Stealing gives Chinese companies an unfair cost advantage over their paying American counterparts.

Beijing late last year compounded matters for the software industry and several others — from makers of clean-energy technology to producers of telecommunications equipment — by instituting a heavy-handed “indigenous innovation” strategy that excludes foreign companies from important segments of the Chinese market, such as government procurement, and tries to compel transfers of intellectual property rights for key technologies as the price of market access. This squeezes us at both ends — shutting many of our innovative products out of the market and stealing the rest.

American officials have pressed the Chinese government on these discriminatory market barriers, but the pattern has been that China gives ground in one area only to turn around and raise a new barrier somewhere else. That is why the software industry believes it is time for a new strategy to guide the bilateral economic relationship, a strategy that focuses on achieving results — measured in increased U.S. exports — instead of never-ending negotiations about discrete issues.

The chief executives of a dozen leading software companies met last month with President Obama’s senior economic team and congressional leaders from both parties and were encouraged to find widespread concern for the industry’s dilemma and broad support for a results-based strategy.

This concern and support were on full display in recent congressional hearings. Senate Finance Committee Chairman Max Baucus (D-Mont.) opened a hearing on the U.S.-China economic relationship with a call for steps to address the persistent problem of intellectual property theft. The hearing’s sole witness, Treasury Secretary Tim Geithner, echoed the chairman, noting that despite the size of the Chinese market, legal software purchases there are just a fraction of their size in other emerging economies. Geithner, who led a major economic mission to China in May, said that progress will not be measured by what Chinese officials say or the number of meetings held but in the terms and conditions under which U.S. companies compete. House Ways and Means Committee Chairman Sander Levin (D-Mich.), after hearing from representatives of a broad array of industries, commended to his colleagues’ attention the software industry’s recommendation for a results-based strategy for U.S.-China economic relations.

Beyond policymakers’ determination to forge healthier economic ties with China, our recent history of economic relations with other countries offers cause for optimism. In Japan, for example, software theft was pervasive in the early 1990s — accounting for two-thirds of all PC applications. In little more than a decade, however, thanks to public education and a strong judiciary system, the piracy rate there has dropped to 21 percent, a level on par with that of the United States.

China and the United States both have much to gain from a healthy economic relationship. The world’s two largest economies have an opportunity to feed each other’s continued growth well into the future. But we must give and take in equal measure.

Robert Holleyman, president and chief executive of the Business Software Alliance