TMT with Mike O'Rielly - Ep 4: The Biden USTR & Impact on American Companies

Episode 4 of the "TMT With Mike O'Rielly" videocast was released on June 12. The TMT vidcast, available online, features former FCC Commissioner and Free State Foundation Adjunct Senior Fellow Michael O'Rielly. The episode is titled "The Biden USTR & Impact on American Companies." It showcaes a conversation with Ed Brzytwa, Vice President, International Trade with the Consumer Technology Association (CTA), on the technology sector, the Office of the U.S. Trade Representative, trade policy, foreign trade agreements, cross-border data flows, tariffs, and policy change. 

Signing of USMCA Spotlights International Copyright Protections

On November 30, President Trump and leaders from Canada and Mexico officially signed the proposed United States-Mexico-Canada Agreement (USCMA). Completion of the trade agreement's negotiation was announced in October. If approved by Congress, USMCA will replace the North American Free Trade Agreement (NAFTA). 

USMCA contains several provisions to better secure Americans' copyright protections. FSF President Randolph J. May and I address many of those provisions in our Perspectives from FSF Scholars paper, "Modernizing International Copyright Agreements to Combat Copyright Infringement." Among its pro-copyright provisions, USMCA would help American owners of sound recordings the full scope of public performance rights. Additionally, USMCA provides for stepped up enforcement through increased civil and criminal penalties for infringing activities such as "stream-ripping" and "camcording." 

However, USMCA incorporates language similar to the Section 512 "notice-and-takedown" provision contained in current U.S. copyright law. Section 512 is outdated and ineffective in protecting digital music and video content from mass infringement on popular user-upload websites. Future trade agreements and treaties should avoid that language. Congress and the Trump Administration should work to reform and update the notice-and-takedown system. We discuss these aspects of Section 512 in further detail our Perspectives paper, "Modernizing Civil Copyright Enforcement for the Digital Age Economy: The Need for Notice-and-Takedown Reforms and Small Claims Relief."

Robust Physical and Intellectual Property Rights Encourage Economic Activity

On August 8, 2018, the Property Rights Alliance published the 2018 International Property Rights Index (IPRI), ranking 125 countries around the world based on the strength of both physical and intellectual property rights. The countries included in the 2018 edition comprise over 98% of global gross domestic product (GDP) and over 93% of the world’s population. Most notably, the IPRI finds that property rights are a defining factor impacting a country’s investment, entrepreneurship, and economic activity.

The IPRI includes three core components (legal and political environment, physical property rights, and intellectual property rights) and ten corresponding categories. The legal and political environment component includes judicial independence, rule of law, political stability, and control of corruption. The physical property rights component includes the protection of such rights, the ability to register property, and the ease of access to loans. The intellectual property (IP) rights component includes the protection and enforcement of such rights, strength of patent protections, and the level of copyright piracy. Using data from other international indices, the IPRI compiles scores from each of these components into a 0-10 scale for each of the 125 countries.

Finland ranks highest with a score of 8.69, followed by New Zealand and Switzerland with scores of 8.63 and 8.62, respectively. The United States ranks 14^th with a score of 8.12, which is exactly where it ranked in 2017. But its 2018 score did improve slightly from 8.07. On the other end of the scale, the bottom three countries are Venezuela, Yemen, and Haiti, with scores of 2.96, 2.79, and 2.73, respectively.

Significantly, the Index provides insight into correlations between IPRI scores and many economic outcomes. Free State Foundation scholars often have stated that strong protection of property rights, specifically strong protections of IP rights, foster creativity, innovation, and economic growth. The strong positive correlations found in the IPRI are consistent with those statements. For example, IPRI scores have a correlation coefficient of 0.833 with GDP per capita, 0.756 with gross capital formation per capita, and 0.904 with global entrepreneurship. Other strong positive correlations include a 0.900 coefficient with networked readiness/connectivity, 0.807 with telecommunication infrastructure, 0.842 with civic activism, and 0.818 with overall economic freedom.

With these robust positive correlations, it should not be a surprise that the top 20% of countries in the IPRI have an average GDP per capita of over $56,000, while the bottom 20% of countries have an average GDP per capita under $3,000.

 

Notably, China ranks 52^nd overall with a score of 5.91. As I stated in a blog last week, although China does not have the weakest IP system in the world, the size of its economy in conjunction with its lack of strong IP rights protections and enforcement means it is a major threat to U.S. creators and innovators. While the IPRI does not give specific policy proposals about how each country should improve its intellectual and physical property rights, it provides an aggregate view of how countries compare to each other and how strong property rights incentivize economic activity around the globe. The IPRI, along with the Global Innovation Policy Center’s (GIPC) International IP Index, provide policymakers useful tools for assessing ways to improve their country’s property rights systems.

From the correlations cited above, it is clear that robust physical and IP rights foster innovation and economic prosperity. As undeveloped and developing countries (like China, Mexico, and Haiti) continue to strengthen their property rights protections, U.S. companies will be more inclined to expand international trade with those countries, creating economic opportunities in impoverished parts of the world. Robust property rights reduce poverty by incentivizing economic activity because entrepreneurs understand that their innovations and earnings will be protected.

Finally, the U.S. must continue to strive to be a leader throughout the world by participating in free trade agreements that contain effective provisions that support the protection of property rights. The U.S. ranks first overall in GIPC’s International IP Index, but only 14^th in the IPRI. The United States’ lowest score was in the component of political stability, followed by judicial independence and ease of access to loans. While it may be difficult to create a stable political environment overnight, political instability often is the product of unemployment and a stagnant economy. Economic indicators suggest that unemployment is very low and the economy is growing. Expanding international trade and promoting innovation policy through the protection of property rights should stimulate the economy even further.

The United States should strive to improve its IPRI score even further. If it does, the effort should encourage additional entrepreneurship and economic activity.

A Trade War May Not Fix China's Weak IP Protections

Earlier this month, President Donald Trump threatened to impose tariffs on $500 billion of Chinese imports, the value of all U.S. imports from China in 2017, because he claims China has taken advantage of the United States. President Trump already imposed 25% tariffs on $34 billion of Chinese goods. He said his action was taken “in light of China's theft of intellectual property and technology and its other unfair trade practices.” China immediately retaliated with equivalent tariffs, 25% on $34 billion of imported U.S. goods.

President Trump’s concerns about China’s weak protections of intellectual property (IP) rights are justified, but imposing tariffs and igniting a trade war may not be the best way to fix the problem.

In 2013, international trade of counterfeit and pirated goods represented up to 2.5% of world trade, or as much as $461 billion. Of that, China alone is estimated to account for more than 70% of global physical trade-related counterfeiting, amounting to more than $285 billion. Physical counterfeiting accounts for the equivalent of 12.5% of China’s exports of goods and over 1.5% of its GDP. China and Hong Kong together are estimated to account for 86% of global physical counterfeiting, which translates into $396.5 billion of counterfeit goods each year.

China and Hong Kong account for 87% of counterfeit goods seized coming into the United States. The annual cost to the U.S. economy of counterfeit goods, pirated software, and theft of trade secrets exceeds $225 billion and could be as high as $600 billion. According to the Global Innovation Policy Center’s (GIPC) 2018 International IP Index, China ranks 25^th out of 50 countries in the study with regard to strong IP systems. So while China’s IP system may not be the weakest in the world, the size of its economy in conjunction with its lack of strong IP protections and enforcement means it is a major threat to U.S. creators and innovators.

IP-intensive industries comprised over 38% of the entire U.S. economy in 2014, equating to $6.6 trillion. And IP-intensive industries directly accounted for 27.9 million jobs and indirectly accounted for 17.6 million jobs, totaling 45.5 million jobs or about 30% of all U.S. employment in 2014. Therefore, when IP rights are violated in the U.S. or abroad, it stifles innovation and job-growth throughout the economy.

As FSF Senior Fellow Ted Bolema discussed in a Perspectives from FSF Scholars, “Why Economists Consistently Support Free Trade Policies,” free trade policies lead to higher paying jobs and lower prices. Protectionist policies, like tariffs and trade wars, ultimately harm consumers and entrepreneurs in both China and the United States and likely harm other countries because investment and innovation are hindered.

The best way to address violations of IP rights in China is through diplomatic efforts, like the adoption of a new free trade agreement creating robust IP protections in China. Hopefully, China will adopt IP protections that are similar to those in the United States, the global leader according to GIPC’s 2018 International IP Index. Then, consumers and entrepreneurs in both countries will benefit from mutual gains from trade and legitimate economic activity.

The U.S.-China Joint Commission on Commerce and Trade (JCCT) is a high-level dialogue on bilateral trade issues between the United States and China, dealing extensively with strengthening IP rights protections in both countries and fostering innovation. Also, the U.S.-China IP Cooperation Dialogue is a group of professionals from both countries who meet to discuss how IP systems can be improved to spur innovation and economic activity between the two countries. The common theme of both of these groups is that China’s IP rights protections can be improved in three main areas: reducing the amount of bad-faith trademarks, combatting online piracy, and decreasing theft of trade secrets.

Bad-faith trademarks are trademarks that are meant to look similar to popular brands and confuse consumers into buying seemingly familiar products. According to GIPC’s Index, China’s trademark law “provides limited criteria for obtaining design protection and no substantive review takes place, leading to many low-value patents and a high rate of invalidations.” China should combat the pervasive problem of bad-faith trademarks by strictly filtering trademark applications. On a positive note, the establishment of China’s IP courts in 2014 has already created a strong precedent on bad-faith trademarks when it found that the Chinese retail sports chain Qiaodan had violated Michael Jordan’s naming rights. Hopefully, this precedent will deter bad-faith trademarks from emerging in the future.

With regard to online piracy, China should adopt e-commerce-related legislation to strengthen the supervision and enforcement of online piracy and counterfeiting. China must continue to provide more licensing opportunities for Internet companies in the music and movie industries, which should discourage piracy by increasing access to legal content. Also, improving the patentability of software by allowing applicants to file partial design claims and extending the grace period that precedes the patent application should reduce rampant software piracy in China by encouraging competition and ultimately lowering prices.

Theft of trade secrets is defined as stealing, misappropriating, or receiving such secrets with intent to convert the trade secret into an economic benefit for anyone other than the rights holder. Although China recently amended its Anti-Unfair Competition Law to shift the burden of proof to the accused infringer for many trade secrets cases, this action does not address the issue sufficiently. The amended law likely will lead to a “one-size-fits-all” enforcement approach that may not be suitable for all types of trade secrets. Instead, China must adopt trade secret legislation which should include steps to assist rights holders in seeking preliminary injunctions and include evidence and asset preservation measures under China’s Civil Procedure Law. Also, China can do more to engage the public about trade secrets protection and streamline its processes for providing trade secrets licensing.

Instead of igniting a trade war, President Trump should welcome free trade with China. With the adoption of a new bilateral free trade agreement (or multilateral if other countries choose to participate), the United States could address the concerns regarding bad-faith trademarks, online piracy, and theft of trade secrets by establishing an IP chapter that creates strong IP rights protections in China. This would spur trade between the two countries even more because a strong IP system in China would encourage additional innovation and economic activity.

Economists Continue to Support Free Trade Policies

Earlier this week, the Free State Foundation published a new Perspectives from FSF Scholars by Senior Fellow Ted Bolema titled “Why Economists Consistently Support Free Trade Policies.” In the paper, Ted Bolema discusses how free trade policies promote economic growth, higher wages, and increased innovation in the economy.

Today, the National Taxpayers Union sent an open letter to President Donald Trump and members of Congress urging them to reject protectionist policies, such as tariffs and withdrawing from trade agreements. This is a response to President Trump’s decision to impose costly tariffs on certain goods and to withdraw from the Trans-Pacific Partnership. The letter was signed by more than 1,100 economists throughout the United States, including three members of FSF’s Board of Academic Advisors - Michelle Connolly, Stan Liebowitz, and James Prieger.

Free State Foundation scholars have maintained the position that bilateral and multilateral free trade agreements create innovation and economic growth, and strong protections of intellectual property rights implemented in those agreements encourage creation throughout the global economy. Make sure you read Ted Bolema’s new paper!

TPP Is Beneficial for Consumers and Entrepreneurs around the Globe

The Cato Institute held an event today releasing an abstract of a forthcoming paper entitled “Should Free Traders Support the Trans-Pacific Partnership (TPP)?” Yes, free traders should support TPP and so should Congress!

TPP would expand global trade by eliminating roughly 18,000 tariffs that member countries have imposed on imports from the United States, lifting millions of people out of poverty around the world. By removing these trade barriers and others imposed by the United States, TPP would allow consumers and entrepreneurs in all member countries to enjoy more economic activity and lower prices than what the status quo offers.

From an intellectual property perspective, TPP would establish strong protections of IP rights in member countries, allowing artists and entrepreneurs around the globe to earn a return on their creative works and the labor that makes them possible. U.S leadership regarding strong IP rights protections will incentivize more investment, innovation, and economic growth at home and abroad.

See my July 2015 blog on how multilateral trade agreements create global IP protections.