The Commerce-Security Nexus:
The Theft of American Innovation is the Most Important Issue of our Times
A developed nation's competitive advantage is its capacity for technological innovation, resulting in creations of the mind known broadly as intellectual property (IP), such as patents, trademarks, copyrights, and trade secrets. These idiosyncratic, intangible assets incentivize entrepreneurial risk-taking, and increasingly determine a firm's ability to thrive and sustain. In 1975, roughly when diplomatic relations with China were realized during the rapprochement era, intangible assets accounted for about 17% of firms' economic values. Then, the efficiency and effectiveness of the production system, rather than innovation, determined economic growth. Today, intangible assets account for over 90% of firms’ values, displacing traditional production factors such as land, labor, and physical resources. Deductively, intangible assets are the dominant producer of profitability in American enterprise, and such IP is increasingly the single greatest source of wealth for firms and developed nations alike.
America's Founding Fathers recognized the importance of IP as an engine of entrepreneurship and economic mobility, the realization of human potential, and a nation's economic growth. They endowed Congress with the power to protect IP and "promote the progress of science." When voluntary technology transfers from the US to China began under the Nixon and Carter administrations, such provisions from the US were deemed a reasonable exchange for creating and maintaining a peaceful resolution to the "One China" dilemma, as well as modernizing a potentially profitable future trading partner. President Clinton and a Republican Congress supported China's accession to the World Trade Organization (WTO) in 2001 largely on this basis, and on the belief that increased trade with China would lead to democratic and human rights reforms. Indeed, the US presidential administrations spanning the eras of Nixon through Obama largely supported trade liberalization with the authoritarian state on the supposition that there were few measures more effective at promoting the virtues of freedom, both domestically and abroad.
The Ricardian economic framework that guided US trade policy for decades predicted mutual gains from trade when each party specializes in the export of goods for which it has a comparative production advantage. However, this framework assumes the presence of key market institutions that promote efficient market exchanges, such as the rule of law, the rights to private property, the free flow of information, and unfettered prices acting as effective market signals. China violates all assumptions underpinning free trade. In fact, there is no evidence that the western paradigm of international trade was intended to be predictive of trade outcomes between democratic and authoritarian regimes.
China is now the world’s second largest economy, powered mostly by trade with the West in the last two decades. China did not achieve this outcome by exploiting its comparative advantage through economic partnerships alone. Instead, China pursued economic acceleration powered by closing the technology gap with the West--through IP theft and misappropriation, rather than innovation. A recent survey by CNBC found that one in every five global companies said China had stolen their IP in 2018.
The implications for such misappropriation extend beyond the realm of commerce because theft of technology spills into national security interests when such IP is used in military applications such as weapons development. The majority of IP developed today have dual-use applications in both the commercial and defense sectors, rather than single-use applications. Thus, China’s infringement of American IP creates an economic-security nexus.
Today, IP is positioned at the interface of business and national security, but only the public sector appears to appreciate this, even as it is slow to respond effectively. In commerce, firms pursue economic expansion without regard to the polity of the countries in which they operate, yielding faulty analyses of opportunity and threat environments. In academia, global business strategy and international security are approached as two disparate disciplines. In fact, international business studies rarely address the impact of host government policies on firms' actions and performance outcomes, even though what makes "international" business distinct from "business" is the influence of foreign (host country) governments.
I hope to contribute to both practice and scholarship by clarifying the unique role of IP and creating a new, integrative framework for strategic interaction among firms and states.
America's Founding Fathers recognized the importance of IP as an engine of entrepreneurship and economic mobility, the realization of human potential, and a nation's economic growth. They endowed Congress with the power to protect IP and "promote the progress of science." When voluntary technology transfers from the US to China began under the Nixon and Carter administrations, such provisions from the US were deemed a reasonable exchange for creating and maintaining a peaceful resolution to the "One China" dilemma, as well as modernizing a potentially profitable future trading partner. President Clinton and a Republican Congress supported China's accession to the World Trade Organization (WTO) in 2001 largely on this basis, and on the belief that increased trade with China would lead to democratic and human rights reforms. Indeed, the US presidential administrations spanning the eras of Nixon through Obama largely supported trade liberalization with the authoritarian state on the supposition that there were few measures more effective at promoting the virtues of freedom, both domestically and abroad.
The Ricardian economic framework that guided US trade policy for decades predicted mutual gains from trade when each party specializes in the export of goods for which it has a comparative production advantage. However, this framework assumes the presence of key market institutions that promote efficient market exchanges, such as the rule of law, the rights to private property, the free flow of information, and unfettered prices acting as effective market signals. China violates all assumptions underpinning free trade. In fact, there is no evidence that the western paradigm of international trade was intended to be predictive of trade outcomes between democratic and authoritarian regimes.
China is now the world’s second largest economy, powered mostly by trade with the West in the last two decades. China did not achieve this outcome by exploiting its comparative advantage through economic partnerships alone. Instead, China pursued economic acceleration powered by closing the technology gap with the West--through IP theft and misappropriation, rather than innovation. A recent survey by CNBC found that one in every five global companies said China had stolen their IP in 2018.
The implications for such misappropriation extend beyond the realm of commerce because theft of technology spills into national security interests when such IP is used in military applications such as weapons development. The majority of IP developed today have dual-use applications in both the commercial and defense sectors, rather than single-use applications. Thus, China’s infringement of American IP creates an economic-security nexus.
Today, IP is positioned at the interface of business and national security, but only the public sector appears to appreciate this, even as it is slow to respond effectively. In commerce, firms pursue economic expansion without regard to the polity of the countries in which they operate, yielding faulty analyses of opportunity and threat environments. In academia, global business strategy and international security are approached as two disparate disciplines. In fact, international business studies rarely address the impact of host government policies on firms' actions and performance outcomes, even though what makes "international" business distinct from "business" is the influence of foreign (host country) governments.
I hope to contribute to both practice and scholarship by clarifying the unique role of IP and creating a new, integrative framework for strategic interaction among firms and states.