Part I

Chinese officials announced new reforms earlier this month aimed at punishing individuals and companies accused of intellectual property theft after a meeting at the G20 that Donald Trump described as a “BIG leap forward!” for relations between Washington and Beijing.

Putting aside the unfortunate choice of words, we should be skeptical of the back and forth rhetoric made during trade negotiations. Instead, we should dispassionately and critically examine the role IP plays in the global economy and take time to examine all of the ways China is playing nice when it comes to IP “theft.”

For an example of the zeal applied to punishing and denouncing IP theft, take the case of Renopharma, a company co-founded by American citizen Yu Xue. Earlier this year Xue pleaded guilty to stealing trade secrets from her employer GlaxoSmithKline to develop and market anti-cancer drugs in China. In a scathing press release announcing the guilty plea, the prosecuting U.S. Attorney specifically calls out the Chinese government for its involvement:

“Dr. Xue used her position at GSK to steal valuable trade secrets to benefit a company bankrolled by the Chinese government,” said U.S. Attorney [William M.] McSwain. “We cannot allow U.S. citizens or foreign nationals to steal sensitive business information and hand it over to competitors in other countries. This sort of economic warfare presents a danger to our economic security, jeopardizes America’s position as a global leader in innovation, and will not be tolerated.”

The elevation of IP theft as a major point of contention in trade negotiations may be due to the outsized role these corporations play in Washington, as IP-intensive industries like “big pharma” and, increasingly, “big tech”, help write the rules of the economy to the detriment of firms and workers that would otherwise use ideas to advance their own wellbeing.

While officials in both countries make the issue seem enormously consequential, there is no strong consensus on whether or not Chinese IP theft poses such a significant “danger” to the American economy. While the widely cited 2017 IP Commission Report estimates the annual overall cost of IP theft to the U.S. economy at $225 to $600 billion (though the latter figure is a high-end estimate), the 2018 U.S. Chamber International IP Index ranked China 25th out of 50 countries reviewed for economies exhibiting effective IP architecture as defined by 40 indicators in 8 categories including pharmaceutical-related patent enforcement and resolution mechanisms, protection of trade secrets, and digital rights management legislation.

This ranking places China ahead of important American trade partners like India and Brazil and even geopolitical allies like Turkey and Saudi Arabia. Additionally, the report specifically cites China’s strengthening of patent and copyright enforcement as well as “strong efforts to raise awareness of and leverage value of IP rights in academic and private spheres” as positive developments.

So what is the truth? Is China waging “economic warfare” against the U.S. in the IP realm or is the issue simply a flashpoint in the larger tussle over trade?

The answer as to whether the Middle Kingdom’s IP theft is detrimental to economic growth overall is probably somewhere in the middle. IP theft does cause very real financial harm to firms, but because so much of the wealth derived from intellectual property is built on economic rents, it is not clear this is necessarily a problem.

Indeed, greater access to IP turns this so-called theft into a force for equalization and growth in a still-developing country. In addition to giving Chinese firms and workers greater opportunity to participate in the global market, it chips away at the sky-high profits of firms that have profited handsomely from monopoly rights to ideas.

Part II

In Part I of this post, we discussed just how great a threat Chinese IP “theft” is to the U.S. economy and growth more broadly. Lest the PRC be accused of complete indifference or negligence when it comes to U.S. IP, let’s look at a few recent examples of the Chinese cracking down on IP theft.

First, let’s look at an article in the Financial Times from earlier this year that includes the following optimistic assessments of Chinese moves to combat IP theft:

Holly White of global IP consultancy Rouse said China had made strides towards reform on combating intellectual property theft by individual companies. ‘There have been several high-profile cases of Chinese IP theft in the past, and as a result, the Chinese government is rapidly developing a first-class system to deal with IP infringements and to improve its international reputation,’ she said…

[Erik] Robinson [of law firm Beijing East IP] said China was once the ‘laughing stock’ in the world of intellectual property. But he said it ‘has created an effective, efficient, and remarkably fair patent enforcement system.’

Second are the new enforcement mechanisms proposed by Chinese officials and outlined by state-run news agency Xinhua. Though promises from authoritarian regimes should be looked at with a skeptical eye, they sound tough on paper.

The “memorandum of cooperation” signed by 38 government agencies vows to punish individuals and businesses accused of repeated patent infringements by placing them on a blacklist that will be publicly available and shared among government agencies. Being placed on the blacklist would theoretically make it difficult to secure government financial support and contracts, a potential death knell in a country that blurs the lines between public and private enterprise.

Finally, let’s take the most recent dispute between Qualcomm and Apple. From The New York Times:

The court ruling is the latest turn in the two companies’ fight over Apple’s use of Qualcomm technology in iPhones. But Apple and Qualcomm disagreed on the impact the decision will have on iPhone sales in China.

Qualcomm said a Chinese court ruled on Nov. 30 that Apple had infringed on two Qualcomm patents and issued a preliminary injunction that bars Apple from selling the iPhone 6S, the iPhone 6S Plus, the iPhone 7, the iPhone 7 Plus, the iPhone 8, the iPhone 8 Plus and the iPhone X in China. The ruling did not apply to Apple’s three newest iPhones: the XS, the XS Max and the XR…

Qualcomm, which has long sold key communications chips to Apple but has been excluded from its latest models, has filed a series of patent suits against the smartphone giant in multiple countries. Those lawsuits came after Apple filed suit in early 2017 challenging Qualcomm’s practices in licensing its patents.

Qualcomm’s behavior is so hostile to competition and free trade that they are under investigation by the International Trade Commission in the U.S. for their chip licensing practices. But, from a purely pro- or anti-IP perspective, the Chinese court’s decision is decidedly pro-IP.

So, it would appear that there’s some IP hawkishness in the Chinese system after all. This isn’t necessarily a good thing, but it does put a wrinkle into the “China is stealing our technology” narrative.

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