Thought Leadership on US-China Affairs and the Theft of Intellectual Property
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The US government has taken the Chinese government to task for inadequately protecting US-owned intellectual property (IP). As a member of the WTO, China is required to enforce IP rights in the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement. Yet, the US Trade Representative has found China to be consistently non-compliant with the TRIPS agreement, ultimately initiating formal investigations of China's trade practices and IP rights violations.
Why would China voluntarily enter into agreements that it persistently fails to satisfy? There is little consensus in the IP literature explaining this behavior, with some researchers citing the absence of the rule of law, and others calling out US hypocrisy, since it, too, stole others' IP a century earlier. Perhaps differences between China and the West regarding their political and cultural institutions can provide insight into this inconsistency between China’s public expression of intention and its actions.
The actions of any government are influenced by both the formal institutions (statutory laws, individual rights) and informal institutions (community taboos, social customs) of the society it governs. Both sets of institutions are influenced by religious creeds, ethnic traditions or other common belief systems that have historically proven effective at attaining community benefits. IP analysts have primarily focused on critiquing China’s formal institutions that influence IP rights protection regimes, noting recent increases in both domestic patent filings and IP theft lawsuits. However, the influence of informal institutions may be driving the persistent ineffectiveness of these public actions. Disregarding the role of informal institutions and their interplay with formal institutions paints an incomplete picture of how China’s IP policies are developed and implemented over time.
From the perspective of the US, the well-intended trade experiment with China has failed. China’s rise is closely tied to its forceful approach of acquiring IP, both legally and illegally, to achieve its economic—and thus—military might. Indeed, a significant source of tension across scholarly literature on US-China trade relations is whether China’s state-sponsored theft of US firms’ IP and its lack of IPR protections for MNEs with joint ventures in China warrant any true concern. Some scholars who promote open trade between the two nations believe that the threats to US economic and national security are minimal and are fading over time.
Others contend that the situation is serious and only getting worse. According to the IP Commission (2017), IP theft costs the US economy up to $600 billion annually, an estimate that captures only a small portion of the value of costs (rather than value of lost revenue) from counterfeit goods exchanged in the US, and does not capture the value of goods sold in overseas markets or pirated goods. The International Anti-Corruption Conference estimated that 69% of all confiscated counterfeit goods originate in China. Further, the European Union Taxation and Customs Union found that 54% of Eurozone confiscated items originated from China. Misappropriation of US IP reported under the Economic Espionage Act have caused direct and indirect economic losses of up to $600 million per firm—in 2001 dollar-terms (Carr & Gorman, 2001). Empirical analysis by Kamiya et al. (2020) using data from the Privacy Rights Clearinghouse found that after experiencing a cyberattack where personal information is lost, shareholder wealth drops on average by 1.8% or $1 billion per firm. When the same firm faces a subsequent attack within a year’s time, shareholder wealth decreases by nearly 5%. When the annual rate of firm revenue growth across the three years prior to an attack is compared with the rate of revenue growth for the three years after the attack, annual revenue growth fell, on average, from 8% to 4.6%.
Beyond the sizeable commercial losses to IP theft, others in the IP literature believe that expropriation has evolved into a bonafide national security threat. The extensive use of cyber espionage supported by China’s Communist Party-State, when combined with the increasing globalization of high-tech arms production, will eventually allow Beijing to close the military-technological gap with Washington. Given the tensions in US-China affairs—a relationship that diplomacy scholars consider the most important in the 21st century, the question of whether the Chinese Party-State will improve its IPR regime is a worthy topic of analysis, exceeded in substance only by the question of whether China’s political economy is capable of doing so as it is presently arranged.
It has often been said that when power is concentrated in the hands of too few for far too long, the system becomes corrupt. Power is the expected utility in both the study of national and firm governance. From the perspective of the US and much of the West, the question is, "How do we check mankind’s inherent quest for power without stifling mankind’s quest for progress?" The response to this question from US policymakers is an appeal to govern by the rule of law: How should economic and political power be dispersed among the governed so that it does not end up concentrated in the hands of too few? Similarly, the same appetite for checks and balances are apparent at the corporate level (although imperfectly applied), hence the alignment of executive interests to that of shareholders and stakeholders, and the presence of external boards to check executive performance.
From the perspective of China and other authoritarian states, the object has been to govern by the rule of force: How do we preserve our power over the governed to maintain and protect our regime’s interests? Whereas the US, like most developed economies, relies on the rule of law, China rules through law. That is, the Party-State uses the legal system as an administrative tool to achieve its political ends. Thus, the Party-State is above the law. Scholars who fail to make the correct assumptions in postulating their theories do so at the people's peril.
The failure to recognize this fundamental difference between the two political economies seems to have discouraged the creation of a synthesis perspective on international trade across the many competing paradigms, and has clouded the implications for promoting an optimal IP regulatory regime for interacting with developing economies. For example, neoliberal economic theory has guided US trade policy for several decades, yet this framework has failed to predict the persistent patterns of outcomes that have emerged in trade between the US and an authoritarian regime, because economists have long predicted that a developing country that trades more will become more free. I reject such broad conclusions. Scholars did not account for the influence potentially working in the other direction. And it appears that scholars across many disciplines, especially in the fields of Economics and Business, are poised to make this mistake again.
Classical trade models accurately assess the economic inefficiencies that monopoly producers impart on the market: competitive pressures are stifled, production efficiency is lost, and product innovations are depressed over time. However, what the open trade premise overlooks is that economic interdependency across trading partners creates a national security interdependency when some of these traded goods are vital to national security goals. For example, the Ricardian model of open trade fails to recognize the unique role of strategic goods in a way that sacrifices national security for economic efficiency. This model assumes that all goods hold the same strategic value. Yet, when one nation or bloc controls the market for any strategic good (like OPEC in the 1970s), this endangers global economic stability.
For instance, rare earth minerals, nanotechnology and telecommunications are all components of military applications vital for protecting U.S. national security interests. Medical devices, pharmaceuticals, testing kits and supplies are vital for protecting the health of citizens during a pandemic. High-tech communications and computer components are vital for protecting the financial and industrial infrastructure of a developed economy. Chinese state-owned enterprises (SOEs) and private producers have pursued and attained a near global monopoly in all of these strategic sectors. This stranglehold not only decreases international competition that ensures efficient global trade, it also severely reduces the substitute sources available to resilient economies.
Classical trade frameworks, while useful in guiding international exchange among open-market economies—as evidenced by the economic and financial development of the U.S. and the West—is deficient in explaining trade outcomes with authoritarian states. It now falls on international business practitioner-scholars to develop a new framework that can guide international trade between open and protectionist economies.
China has been making significant investments in technology and manufacturing infrastructures, advancing human capital and increasing the high-tech manufacturing capabilities of its workforce, all with the goal of becoming more effective at technology and IP absorption. US trade policy should reflect the reality that continued US economic prosperity in a global economy is predicated on China’s protection of American IP. Merely assuming that historical-determinism or trade expansion will overcome China’s resistance to protecting foreign IP rights (IPRs) is an exercise in futility. Further, the rapid growth and technological advancement of China’s economy is positioning China’s IP theft as a national security challenge.
The changing nature of how technological development is being absorbed by any economy makes this emphasis even more poignant. Decades ago, US military technologies led to follow-on innovations in the private sector. For example, research on the atomic bomb prior to the 1960s led to the development of nuclear power generation for major cities. German rocketry research from the 1940s led to NASA landing a man on the moon. British radar development during WWII led to microwave ovens and police traffic speed detectors. However, this trend reversed when commercial innovations began leading military innovations, and high-tech products were often developed with dual-use applications in mind (defense and commercial), rather than single-use (defense or commercial). To wit, the development of semiconductors and microelectronics created more than just calculators and mobile phones. These innovations led to the development of smart bombs and military drones. Today, most global positioning satellites (GPS) provide both ground traffic guidance and missile trajectory guidance. Artificial intelligence (AI) has been applied to the logistics of disease propagation as well as decoding terrorist messages.
China’s extensive use of cyber, economic, and industrial espionage, combined with the increasing globalization of technology applications in arms production and deployment, will eventually allow China to close the existing military-technological gap with the US. This is dangerous to the extent that China has not historically demonstrated restraint in the face of rising power.