What Are the Costs of IP Theft?

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.