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.

United States Is Still a Global Leader in Broadband

On January 29, 2016, the FCC released its Fifth International Broadband Data Report, showing that the United States is a global leader in terms of broadband coverage, subscriptions, prices, and speeds. This is impressive considering that the U.S. is very large geographically and has a low population density, relative to the other global leaders. Therefore, it is difficult to compare the U.S. to a small and densely populated country, like Singapore, because it is significantly more costly to provide broadband in the U.S. to all Americans than it is to provide broadband to all Singaporeans. Nevertheless, the U.S. fared well in the rankings.

Here are some of the report’s key findings:

• At the end of 2014, 89 percent of households in the U.S. had access to high-speed broadband (at least 30 Mbps down), while only 68 percent of households in Europe had such access.

• From December 2013 to December 2014, U.S. rural broadband coverage increased from 45 percent of households to 58 percent of households. In Europe, over the same span, rural broadband coverage increased from 18 percent of households to 25 percent of households.

• The U.S. ranked first in the OECD in both fixed and mobile subscriptions, but that is mostly because it has the largest population. In terms of the percentage of the population, the U.S. ranked 16^th out of 34 OECD countries in fixed subscriptions and 8^th in mobile subscriptions.

• The United States ranked 26^th out of 40 countries in 2014 in terms of actual download speeds. The countries at the top of the ranking are very small geographically and densely populated. Singapore, Hong Kong, and Korea are first, second, and third, respectively. However, when compared at the state level, nine U.S. states ranked in the top quartile in 2014.

• In terms of pricing, the U.S. ranked 7^th least expensive out of 15 countries for fixed plans with speeds between 1 and 5 Mbps, 16^th least expensive out of 27 countries for fixed plans with speeds between 5 and 15 Mbps, and 22^nd least expensive out of 30 countries for fixed plans with speeds between 25 and 50 Mbps.

The prices of broadband plans in the United States are important for understanding how U.S. broadband providers have invested $1.4 trillion in broadband infrastructure since 1996. As broadband speeds increase, the United States’ rank among other countries in terms of prices goes down, meaning that prices and speeds are positively correlated. Because prices are scaled with the quality and quantity of broadband plans, such market pricing incentivizes broadband providers to invest in capital-intensive next-generation networks, while also allowing low-income consumers to afford basic level broadband plans. (See my April 2015 Perspective from FSF Scholars entitled “The Research is Clear: The U.S. Invests More in Broadband Than Europe” for more on how dynamic investment is the result of market pricing.)

The findings in the FCC’s report show that the United States is still certainly a global leader in broadband Internet access. (See this August 2014 paper by Roslyn Layton and me entitled “Innovation, Investment, and Competition in Broadband and the Impact on America’s Digital Economy.”) The data in the report stops at the end of 2014, which was just before the FCC adopted its February 2015 Open Internet Order. Although the U.S. may not lead in all categories, market-based policies over the past 20 years have incentivized broadband providers to expand broadband coverage, increase the quality of connections with faster speeds, and lower prices for consumers. Ultimately, this has led to more broadband subscriptions and satisfied consumers throughout the country.  

On the other hand, Internet regulations, like those in the Open Internet Order, could stifle investment and innovation among U.S. broadband providers, closing the gap between the United States and the rest of the world. (See my October 2015 blog for more on the adverse impact of Internet regulation on broadband investment.)