1. Introduction: Bridging Policy and Process

While the on-going trade war has understandably been a flashpoint for Sino-American relations, the politics of that economic struggle extend beyond tariffs and trade deficits. Through legislative changes, tariff wars, and executive actions, the Trump Administration has injected a new urgency into international technology and supply chain management. On 13 August 2018, President Trump signed into law the Export Control Reform Act (ECRA) and the Foreign Investment Risk Reduction and Modernization Act (FIRRMA), as part of the John S. McCain National Defense Authorization Act of Fiscal Year 2019 (the 2019 NDAA). The 2019 NDAA was passed by overwhelming majorities of both parties in Congress and suggests that a bi-partisan ‘new normal’ has emerged in US–China trade relations (Tran, Reference Tran2019). Both ECRA and FIRRMA have the potential to greatly extend the scope and impact of controls over US technologies for export as well as foreign technology investment in the US. The passage of FIRRMA and ECRA have also been accompanied by a number of regulatory and enforcement actions, such as limiting technology exports to foreign nationals that may be working in the United States (Fitch, Reference Fitch2019), the placement of companies such as Huawei on the US ‘Entity List’ to restrict acquisitions of US technology, and restrictions on foreign investment such as Broadcom's proposed acquisition of Qualcomm or Chinese divestment in the US gay dating site Grindr.

Through ECRA on the one hand and FIRRMA on the other, the 2019 NDAA has intensified scrutiny on global technology flows, with China as the clear (and often explicitly referenced) rival. In particular, the Bureau of Industry and Security (BIS) at the US Department of Commerce has sought to expand export controls over ‘emerging technologies’ with potential dual use applications, and the Trump administration is expected to promulgate final rules regarding ‘foundational technologies’ to impose controls on dual use technology upstream from military or dual-use applications.Footnote ¹ Such developments have notably coincided with the imposition tariffs on a wide range of goods from China. Critically, the geopolitical competition between China and the United States has put high-tech manufacturing in the spotlight alongside traditional manufacturing capabilities in a manner that is forcing importers to consider adjusting their supply chains to maintain customer relationships and profitability.

However, while the possibility of shifting production bases away from China in the wake of the trade war has received considerable attention, the precise implications of US technology protection and tariffs for this process remain under discussed. This article aims to bridge the gap between policy and process as commercial actors look to navigate a business environment that features increased techno-nationalism and trade friction between the world's two largest economies. Rather than investigate decoupling or engagement in an absolute sense, we instead focus on how supply chain restructuring may unfold with inclinations toward strategic diversification and risk mitigation. In this context, we highlight how the licensing of intellectual property (IP) affords companies a number of opportunities for pragmatically addressing the supply chain disruptions underway. While intellectual property concerns were a motivating factor behind the policy changes rattling global supply chains, they likewise can offer stabilizing solutions for supply chain management.

The article begins by summarizing the policy context and trade statistics necessary for understanding both the challenges posed to China-dependent supply chains and the challenges of rapidly restructuring them. To help bridge the gaps between policy and process, data on IP-intensive industries from global patent offices and concordance data on patent classifications illustrate the centrality of IP to extended supply chains. With this key relationship in mind, the article proceeds with a discussion of specific opportunities that intellectual property licensing provides for managing supply chain linkages between the United States and China in the current geopolitical environment. The conclusion remarks on how the preceding analysis can more fully inform our understanding of the bilateral and international trade environment.

2. Trade and Tech Tension: The Policy Context for Action-Based Analysis

The issues of IP theft and Chinese techno-nationalism were discussed at length in the initial Section 301 Report that initiated US tariffs against China; those tariffs were in a reaction to China's unfair activities in support of its efforts to implement its Made in China 2025 program.Footnote ² Initial tariffs imposed by the Trump administration were based on recommendations from ‘trade analysts from several US Government agencies [who] identified products that benefit from Chinese industrial policies, including Made in China 2025’.Footnote ³ While we do not wish to minimize the economic impact of those sanctions or their potential for shifting international production bases, complementary policy measures in the form of export controls and stricter investment review are equally critical. As indicated in the introduction, the 2019 NDAA has provided a policy context in which technology, trade, and national security are inextricably linked as analytic considerations.

3. Rattling Supply Chains without Breaking Them: Pulls toward China Remain

The policy context outlined above presents a sort of double whammy. Not only have tariff actions necessitated a reassessment of supply chains from the standpoint of profitability; export restrictions and investment scrutiny in the name of US national security necessitate a reassessment of supply chains from the standpoint of feasibility. Continued discussions of decoupling are understandable and warranted under such circumstances. But it is also important to remember that production units of the value chain located in different countries normally specialize in specific tasks that are not directly substitutable for tasks undertaken elsewhere (Athukorala, Reference Athukorala, Song, Garnaut, Fang and Johnston2017, 380). It is likewise important to bear in mind the length and complexity of many supply chains. For example, while it may be relatively easy to move low-tech textile production from one country to another, even seemingly less complex technologies may not be easy to relocate. For example, bicycle manufacturing – which requires numerous parts and therefore multiple supply chain linkages – is a more complicated task. As a Chinese bicycle manufacturer explained in a South China Morning Post podcast (Watt et al., Reference Watt, Ng and Bermingham2019), buying a new factory outside of China for production is certainly happening, but production there would still inevitably involve sourcing parts from China for final assembly. Of course, the political volatility of on again/off again trade negotiations complicates the decision of whether such a move is even worthwhile, at least in the short run.

While longer-term shifts may certainly be underway, there is reason to believe that wholesale decoupling may be much easier said than done. As noted economist and China scholar Nicholas Lardy points out, many US firms like Caterpillar maintain a presence in China to produce goods to sell there, and such firms have no incentive to relocate elsewhere in Asia or the United States given the high costs of shipping relative to value (Lardy, Reference Lardy2019). In a similar vein, China represents an important base for US multi-nationals to expand their exports to the rest of the world, due in no small part to its shift to assembly operations with producer-driven production networks (Athukorala, Reference Athukorala, Song, Garnaut, Fang and Johnston2017, 366, 379). Finally, issues involving scalability can mitigate pulls away from China. As an example, Apple contracted to have 220 million iPhones produced in China in 2018, drawing on Taiwanese manufacturer Foxconn's network of more than 1,500 local suppliers and hundreds of thousands of factory workers in China; quickly replicating an operation of this magnitude in commonly mentioned alternatives like Vietnam and India is daunting and likely impossible (Lardy, Reference Lardy2019).

One approach for getting a general sense of the continued pull toward China is to look at the flows of key commodities using trade statistics. While trade statistics are more of a broad-brush tool than a scalpel when it comes to investigating supply chains, they can still provide a sense of how key items, including component materials, are flowing across borders. The operative question is which items to specifically investigate. The United Nations Department of Economic and Social Affairs Division (UNDESA, 2016) points to Prema-Chandra Athukorala's list of 525 parts and components across a variety of industries (Athukorala, Reference Athukorala2010) as a useful analytic starting point when it comes to intermediary goods, which lie at the heart of transnational production. Specifically, Athukorala's list consists of parts and components that encompass the entire spectrum of manufacturing trade based on entries in the UN Broad Economic Classification Registry and the product list in the World Trade Organization Information Technology Agreement. That is to say, Anthukorala's study focuses on specific items for which network trade is heavily concentrated.

We apply this approach to an investigation of US Census Bureau Data between January 2015 and June 2020 for the major Standard International Trade Classification (SITC) categories that Athukorala identifies as being especially concentrated in network trade, i.e. categories that are especially supply chain intensive: office machines and equipment (SITC 75), telecommunication and sound recording equipment (SITC 76), electrical machinery (SITC 77), road vehicles (SITC 78), professional/scientific instruments (SITC 87), and photographic apparatus (SITC 88). Figure 1 charts the Chinese share of US imports/exports by aggregating data from these SITC categories.

Figure 1. China's share of US imports and exports of supply chain intensive items over time

These data suggest that even in the midst of a trade war and a global pandemic, the flow of supply chain-intensive goods between the United States and China has been relatively resilient. To be sure, the flows experienced periods of volatility since Donald Trump took office, but there have consistently been bounce backs within a band (albeit quite large in purely monetary terms). This aggregate pattern does not indicate uniform resiliency in trade flows across all areas; as one might expect from headlines surrounding Huawei and ZTE, the flows for telecommunication equipment have fallen considerably from mid to late 2017 levels.Footnote ²³ Moreover, China's share of imports of supply chain intensive items as a whole had dropped off considerably before spiking at the outset of the COVID pandemic. But exports – the purview of policies discussed in the opening sections of this article – have proven remarkably stable. Through it all though, China's share of imports and exports of supply chain intensive goods is comparable to what it was prior to Trump taking office.

These data are by no means meant as a dismissal of observations that an adjustment toward greater decoupling is underway. Indeed, China's share of imports in February of 2020 had dropped to approximately half of what it was in 2015 before spiking in the spring as the COVID 19 pandemic progressed. Long-term shifts are certainly underway, though the data indicate that a complete break from China makes for an easier political talking point than a policy outcome. China-dependent supply chains have very much been rattled, but they have by no means been broken. Indeed, a more robust decoupling that includes greater substitution by commonly mentioned but much smaller Asian alternatives like Vietnam and India could take time. For actors engaging in global supply chains who prioritize profits rather than a particular state's national interests, it would not be surprising to observe short-/medium-term efforts to mitigate politically induced disruptions and continued leaning on Chinese production to a certain extent. At a practical level, then, it is worthwhile considering the structural opportunities that may facilitate such an outcome.

4. The IP-Intensive Nature of Network Trade

Given the policy context discussed in the first section, it is valuable to bring intellectual property to the table as a possible starting point for supply chain managers looking to maintain aspects of the status quo, at least temporarily. Notably, the STIC categories identified in the previous section overlap considerably with industrial categories that three of the largest patent offices in the world have identified as IP-intensive. The United States Patent and Trade Office (USPTO), the European Union Intellectual Property Office (EUIPO), and China's National Bureau of Statistics (CNBS), in cooperation with China's State Intellectual Property Office, have each published lists of patent-intensive industries.Footnote ²⁴ The USPTO and EUIPO both define an industrial category as patent intensive when it has an above average ratio of patents to employees. The CNBS further defines an industrial category as IP-intensive if it exceeds the national average for discovery patent scopeFootnote ²⁵ and discovery patent concentration;Footnote ²⁶ discovery patent scope and R&D intensity;Footnote ²⁷ or discovery patent concentration and R&D intensity.Footnote ²⁸ Using concordance tables and software,Footnote ²⁹ we calculated the proportion of five-digit SITC codes in the previously defined supply chain intensive categories that fall within the USPTO, EUIPO, and CNBS specified industrial categories. Figure 2 illustrates this approach and our findings.

Figure 2. Extended supply chain products falling within patent intensive industries

Though this exercise requires a reasonable degree of translating between concordances, and there are possibilities that categories of goods may be omitted from the generalized categories set forth in the concordances, our data suggest considerable overlap between goods that are associated with extended supply chains and industrial categories that major intellectual property offices have identified as patent intensive: we found an 82% fall within USPTO patent-intensive categories, 56% fall within the top 20 EUIPO patent-intensive industries, and 67% fall within CNBS patent-intensive industries. Though these findings may be intuitive, given the sorts of products involved, they underscore the connection between IP and supply chain management that has become a political hotspot in the broader race for technological leadership.

Moreover, it is possible to get a sense of the specific patent families most associated with these major categories of supply chain-oriented goods. Using data mining and computer algorithms to detect matches between the language in descriptions of international trade categories and international patent classes, Lybbert and Zolas (Reference Lybbert and Zolas2014) have constructed a dataset that estimates conditional probabilities to describe the concordance between patent and economic data.Footnote ³⁰ This dataset provides, inter alia, an estimate of the probability that a certain patent classification matches the technologies utilized within a given trade classification; such an ‘industry to technology’ probability can be interpreted as the proportion of technologies matching the trade classification that are from a given patent class (Lybbert and Zolas, Reference Lybbert and Zolas2014, 535). The dataset includes concordances between SITC codes and the Cooperative Patent Classification systems developed by the United States Patent and Trademark Office and the European Patent Office (CPC) patent families at a variety of levels. We can, for example, use the dataset's reported probabilities to gauge the degree to which technologies falling under patent class H (electronics) are representative of the various technologies used in telecommunications (STIC 76).Footnote ³¹ The concordance measures for each of the extended supply chain categories introduced above are indicated in Table 1. As one might expect from the nature of the goods involved, class G (physics) and class H (electronics) match with a rather significant share of the technologies used in the extended supply chain categories.

Table 1. Trade classification and patent classification concordance for extended supply chain items

Source: Lybbert and Zolas ALP Concordance Database (see footnote 30). Percentages may not sum to 100% exactly due to rounding from the original dataset.

Notably, patent applications for these patent classes are typically filed on a global scale. Because all patents are territorial, in order for a product to benefit from patent protection in its extended supply chain, the relevant patent rights would need to be secured in key markets of concern. According to 2019 data from the World Intellectual Property Organization (‘WIPO’), computer technology, digital communication, electrical machinery, medical technology, and measurement accounted for the largest shares of published applications under the Patent Cooperation Treaty (‘PCT’) System (WIPO, 2020), which allows filers to simultaneously seek patent protection in a large number of countries. Indeed, the top 10 categories of PCT applications in 2019 were dominated by technical fields falling under the umbrella of electrical engineering or instruments (WIPO, 2020).

Finally, the concordance dataset referenced above also provides estimates of the probability that there is a match with a certain trade classification given a specific patent classification. Such a ‘technology to industry’ probability can be interpreted as the proportion of a specific patent class technology that is utilized by a certain product or product class (Lybbert and Zolas, Reference Lybbert and Zolas2014, 535). It is therefore possible to calculate an estimate of the extent to which the SITC codes for extended supply chain categories identified in this section dominate the application of more detailed three-digit CPC classes. Table 2 presents the 10 most prevalent usage concentrations after running this calculation.Footnote ³² The data suggest that items associated with extended supply chains not only involve technical fields with a considerable volume of patent grants but also account for a substantial degree of the application of those patents in key sub-fields.

Table 2. Top-ten concentrations of cpc usage by extended supply chain categories collectively

Source: Author calculations using the Lybbert and Zolas ALP Concordance database (see footnote 32).

A thornier problem, however, arises in trying to assess the impact of national security controls upon US exports to China. As previously noted, the full impact of the national security controls for emerging and foundational technologies is not yet available, due to delays in rule making. In addition, the impact of these controls has historically been hard to calculate. Export control restrictions may affect decisions to purchase goods at the outset. However, they can also materialize in the form of cancelled transactions if licenses are denied. Tariff classifications and national security classifications also address markedly different concerns, with national security controls directed to military or ‘dual use’ (military/civil) technologies, that may represent more advanced forms of technology or products than are otherwise currently available, which may not be manifested on tariff schedules. Moreover, the underlying technologies may also be controlled and are the subject of secret patents,Footnote ³³ making it difficult to determine if there is publicly available technology that can be tracked. Finally, the tools for correlating national security-controlled exports with trade classification codes are limited, even if they might be helpful in order to assess the trade impact of such controls or if such exports should be controlled (Chatelus and Heine, Reference Chatelus and Heine2016). We leave this issue to future researchers, including those with relevant security clearances, to investigate.

Nevertheless, a number of perspectives support the notion that supply chains involve patent-dense and technologically sophisticated areas of the global economy. The centrality of intellectual property in global supply chains lends a degree of traction to US charges of IP-theft by China used as a justification for a more contentious trade and foreign investment policy. But this centrality also enables intellectual property to be a key a consideration in supply chain managers’ strategies, as we describe in the sections below.

5. Opportunities to Consider: Liberalization of China's Tech Transfer Regime

Chinese legal and policy reforms now provide increased flexibility for foreign licensors negotiating technology transfer transactions with China. These new laws and policies offer opportunities to restructure existing license agreements as well as to reduce some of the trade risks already noted. China accelerated its liberalization efforts in response to the 301 investigation into China's ‘forced technology transfer’ policies, including the filing of a WTO case regarding China's regulation of inbound technology transfer. The WTO case is now suspended in light of the legislative reforms China has made to its tech transfer regime (Cohen, Reference Cohen2019b).

Among the important recent changes in China's tech transfer regime are the elimination of certain non-negotiable licensing terms in China's Administration of Technology Import–Export Regulations (‘TIER’). These non-negotiable terms included requiring that foreign licensors indemnify Chinese licensees against third party risks; that Chinese licensees own improvements to any transferred technology; and that Chinese licensees should have reasonable access to foreign markets.

There have been other legislative changes to improve the condition of tech transfer to China. China's Foreign Investment Law now mandates that technology transfer cannot be made a condition of foreign investment approval. Amendments to the joint venture (JV) regulations have also abrogated provisions that required ownership by Chinese joint ventures of technology licensed to the JV by a foreigner after a 10-year period had elapsed. There have also been other changes in laws that have facilitated tech transfer to China, including: (a) the reduction of the ‘negative list’ of prohibited investments, and (b) the opening of certain sectors of the Chinese economy to majority or exclusive foreign investment, such as new energy vehicles. Finally, there remain tax incentives through tax credits and recognition of ‘high and new technology enterprise’ status to transfer technology into China or develop technology in China. Other improvements have also been made to China's trade secret laws, and additional reforms are expected in other IP laws and enforcement practices. Taken together, these steps should serve to encourage more foreign technology transfer to China as well as to promote technology development provided that the new laws are implemented in a non-discriminatory fashion and in a manner that protects licensor's expectations, including expectations of being able to protect their IP in China.

The TIER extended to a range of activities including for-profit licensing, non-profit licensing, scientific collaboration, and open source licensing. The indemnity requirement was particularly problematic for smaller start-up companies seeking to license their technology to large Chinese companies, particularly in litigation-dense areas such as cell phone technology. The impact on non-profit licensing was documented in an appendix to the 301 report, where the University of California at Berkeley stated that it had declined to directly license technology to China because these requirements – particularly ownership of improvements – were inconsistent with standard practice of Berkeley as well as the University's mandate to promote dissemination of technology. A Government Accountability Office (GAO) report on clean energy research similarly highlighted serious concerns about the ability of the US government to own any improvements to US licensed technology when research is conducted in China (USGAO, 2016, 27).

While the TIER should no longer apply to newly negotiated licenses, its retroactive impact is uncertain. The amendments do not require the invalidation of offending terms in previously concluded license or collaboration agreements. It is also unclear how the Chinese courts and antitrust authorities will handle licensing practices that were previously considered illegal per se under the TIER.

China has also taken steps to help improve IP protection, which may contribute to higher IP valuations in the long run. These steps include: the establishment of a new national appellate IP court, which has jurisdiction over technology contracts (Cohen, Reference Cohen2019a); relatively stable and liberal treatment of software, fintech, and genetic inventions; and the continuing availability of injunctive relief without an ‘eBay’ type doctrine to limit the availability of injunctions. The courts and legislative authorities have also taken steps to increase damage determinations, through increased statutory or punitive (quintuple) damages. However, damage calculations remain low. To be sure, the country's rapidly growing and highly litigious IP environment may also pose challenges. According to the recent report ‘Intellectual Property Protection by Chinese Courts in 2018’ prepared by China's Supreme People's Court, Chinese courts heard 334,951 civil, administrative and criminal IP cases in 2018. This caseload was an increase of 41.19% over 2019 and is huge both relatively and in absolute volume. Civil patent cases of first instance increased to 21,699 or by 35.53%. Technology contract cases increased at a less rapid rate, by 27.74% to 2,680 cases. Despite Guangdong's efforts to establish norms for standard essential patent litigation and improve the environment for commercialization of IP in China's technological hotbed, the 2018 data suggest limited progress. Overall IP case filings for the entire province did increase by 40.04% to over 100,000 case filings.Footnote ³⁴ However, cases involving Hong Kong, Macao, and Taiwan were only 1,514 cases of this total, an increase of 56.40%, but only about 1.5% of the IP docket. Footnote ³⁵ Nonetheless, foreign companies do appear more interested in litigating cases than in prior years. Moreover, judicial data may understate the amount of licensing-related litigation occurring, as the courts do not provide extensive data on settled cases.

The improved environment for technology licensing in China may help mitigate some of the other challenges that foreign tech companies are facing from US regulations and pressure put on their supply chains. Foreign licensors may wish to examine their license agreements to ensure that their license agreements benefit from the flexibility afforded by the new regulatory regime and to investigate whether they should restructure their license agreements with the current partners in China or in third countries in light of disrupted supply chains. China's emergence as an important technology licensor may also facilitate new opportunities in collaboration through participation in technology standardization or creation of patent pools.

6. Practical Solutions: IP Licensing and the Supply Chain

While commercial actors may indeed pursue long-term relocations, the legal framework in China provides opportunities even amidst weaponization of trade and tech policy. Companies can readjust their approaches in handling the issues detailed in the first several sections of this article. We now turn to a discussion of how to translate those opportunities into action with respect to the dynamics identified in the preceding sections: export control and investment regulation under the 2019 NDAA and punitive tariffs brought on by the trade war.

7. Concluding Remarks: IP as Driver and a Solution

Analytically, this paper has considered in detail how the trade environment emerging from the combination of ECRA, FIRRMA, and Trump administration tariffs relates to global supply chains and China's liberalized tech transfer regime. At a higher level of abstraction, approaching the issue from the perspective of commercial actors also presents crucial insights that warrant articulation given their relevance to business and policy decisions.

Intellectual property is at the heart of the matter, both on the grounds of national security and economic competitiveness. The use and protection of intellectual property is a driving force behind the adoption of the US policies that have created real implications for global supply chain managers. But in a world where relocation and radical alterations to the supply chain are more likely to respond gradually even amidst sudden political shocks, intellectual property may likewise be thought of as a solution. Our analysis highlights the very real connection between intellectual property and supply chains, and the licensing and filing possibilities sketched above suggest a broader set of considerations are on the table for commercial actors who prioritize profits and who may wish to preserve aspects of the status quo. The manner by which those solutions are pursued is in a very real sense the true measure of how the politics driving the environment play out. It is therefore critical to be open to acknowledging that intellectual property can in fact be an element of Chinese industrial policy. Categorically scoffing at China's intellectual property regime can blind analysis to more nuanced possibilities for re-working supply chains, which in turn narrows the perspective on the range of possible outcomes that could emerge from current Sino-American frictions. While there are many factors to consider in a complete analysis of the subject, attention to the interactions between intellectual property as both a driver and a solution is a fruitful place to start.

While our analysis has focused on the relationship between the United States and China, this perspective extends to the global trading system. Keeping in mind how IP intensive supply chains actually are, emerging markets have much to gain from establishing a robust regime for intellectual property licensing above and beyond the minimum standards in the TRIPS Agreement. As supply chains from China are disrupted, companies may look to the environment for licensing in other markets, and opportunistic actors may proceed accordingly as this process diffuses. Future research may thus engage the prospect of regulatory arbitrage through intellectual property licensing vis-à-vis supply chains. Moreover, the emergence of local networks around manufactured goods warrants attention moving forward. One prime example will be the international licensing environment that may emerge as Chinese companies look to restructure industrial operations through the Belt and Road Initiative, though others may likewise emerge in line with the previous points in this paragraph. Finally, viewing intellectual property as a solution as well as a driver of trade friction suggests that it presents avenues for easing trade tensions. While the global trade regime may or may not formally incorporate such avenues, they may nevertheless become an important feature of bilateral and international trade relations.