The Weak Intellectual Property in China

Rights protection in China is one of the cornerstones of the US-China trade issues. However, in order to realize/grasp the scope of the matter it is necessary to understand how important the IPR is for US economy in general and American firms in particular. First of all, “IPR are legal rights granted by governments to encourage innovation and creative output. … may take forms such as patents, trade secrets, copyrights, trademarks, or geographical indications.” The US highly innovative economy heavily relies on new technologies as it ensures the economic growth, increase in productivity, substantial employment and wages increase . For decades around 75 percent of US economic growth is ensured by IP-intensive industries . Also these industries significantly affect in a positive way the amount of exports and imports  . Therefore, protection of IP is crucial for sustaining the US competitive edge. The functioning of US leading industries such as automotive, aerospace, computer, semiconductor and biotech depends on the reliability of patent protection same as copywriting for software development  .

And retail can be a good example how other industries but IP-intensive can also gain from effective IPR protection since they trade of the trademarked goods . Around 800 billion US dollars of exports and 1,340 US dollars of imports contributed the IP-intensive industries in 2014 to US economy which is around 70 percent of the US total trade that year. Another source of contribution to US economy is the flow of the fees and royalties as the payment for using US IP (1-2). However, not all the countries follow Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) which defines the basic principles IPR protection . Since the technology protection is crucial for US economy, the Office of the United States Trade Representative (USTR) has recently conducted an analysis and released 2018 Special 301 Report. There it defines the countries that are either include in the Watch list or Priority Watch List categories meaning that they are lack of the strong IPR protection (2018 Special 301 Report, 6).

China is among other 11 countries that fall under the Priority Watch List (2018 Special 301 Report, 9). And this is not a surprise. USTR has mentioned several concerns regarding China “…including as to trade secret theft, online piracy and counterfeiting, the high-volume manufacture and export of counterfeit goods, technology transfer requirements imposed as a condition to access the Chinese market, the mandatory application of adverse terms to foreign IP licensors, and IP ownership and research and development localization requirements” (2018 Special 301 Report, 5). Not only US government but US businesses doing business in China are greatly concerned over the weak IPR. Companies bear significant loses because of the Chinese counterfeiting, piracy and economic cyber espionage . Importantly that China targets industries that were defined strategic for its economy and steels secrets and technologies to ensure that the shift to the innovation economy is fulfilled. However, exactly these industries are the core of US competitiveness, so China is not only causing US firms revenue loses but also eradicate the future competitiveness of the US firms .

The problem is not that China is unwilling to undertake measures to enforce stronger IPR protection but that is part of the system that encourages local companies at any cost acquire needed technology from US or other foreign company and after that support national champions in redeveloping and implementing these technologies locally 44). Nowadays China is the country that violates the IPR of the US companies the most . As for an example, almost 90 percent of all counterfeited good crossing US border actually come from China and Hong Kong . Besides other foreign brands Americans also buy its own without knowing that they are counterfeited. Not only US customers but also US companies face the consequences of China’s weak IPR protection. When investing in China, US companies should assess the risks of losing its trade secrets first since it might affect its operations severely.

All these action are part of the industrial policies encouraging Chinese companies to achieve the goals at any cost. The weak IPR protection of US firms in China leads to the abuse of the system and IP theft. According to the USCBC 2017 member survey there are four main types of IP theft that American business representatives are concerned about operating in China. The companies are equally anxious about trade mark and trade secret theft. Second and third places go to patent and copyright infringement respectively (2017 USCBC, 10). In order to understand in more detail how IPR violation impacts the US companies’ operations, revenues and future development it is necessary to have a closer look at all the types separately. Theft of US companies trade secrets might be the most prejudicial type of IPR violation that companies face.

“A trade secret is technical or business information that is generally unknown to anyone outside the firm and brings economic advantage to the owner over competitors, and for which the owner has adopted measures to maintain its confidentiality” . Industrial theft has received close attention recently because of the increasing economic cyberespionage against US firms from China. This topic will be discussed in a more detail in the next chapter. However, the traditional espionage also takes place in the forms of physical theft of hard drives, placing of the employees to the competitor’s company temporary, bribing the employees of the rival for the trade secrets, surveilling the phone calls and so on . However, due to increasing complexity of the international operations and multiple options of configuring the whole production chain, the number of parties that US companies interact on the way increase as well. Therefore, every additional step in the production chain which is shared with other partners bears the risk of trade secrets theft . Especially this issue is more relevant in such country as China because the IPR protection is weak. According to the estimates of the Commission on the Theft of American Intellectual Property, the trade secret theft might have costed minimum 180 billion US dollars of US companies’ losses. Furthermore, if considering the maximum assessment then the losses might even have reached 540 billion US dollars which equaled 3 percent of US GDP in 2015 .

The data has been provided generally for all the countries, however, taking under consideration the fact that China is the main IPR violator , it accounts for the majority of the losses. And the industries that face the most cases of the trade secret theft are reasonably IP-intensive industries such as chemical or high-tech . Even though the estimated losses have been provided it is still might not be the complete outlook on the issue. The calculations only take under consideration the known facts of the IP theft while some companies might not even have the full information whether their trade secrets have been stolen . Secondly not all companies even if they discover the fact of violation would like to disclose this information being afraid that it might affect their share value . Even though the losses from trade secrets violation are incredible in China, there are only few US companies that actually took actions and went to court.

One reason might be the vague laws in China regarding that issue which makes it difficult to prove and secondly companies prefer to file the theft outside China where there is higher chance of having a positive outcome . Moreover, the fact that Chinese government supports local companies through substantial industrial policies can also imply that sometimes not even legally right/appropriate measures have been taken by Beijing. Only recently the investment process in China has been improved making it necessary only companies that operate in restricted industries file for approval. Nevertheless, some companies have to undergo the approval process where a lot of information including sensitive is disclosed to the regulatory authorities . And that is potentially the way how the trade secrets might be disclosed since a lot of corporations in China are state-owned.

Some argue that customers that have bought the cheaper version of the original brand would buy it for the full price meaning that US actually lose nothing even if their trademark is violated in China . However, from US companies’ perspective this is not the case and that trademark violation in China leads to revenue loses because in some cases they have to lower the prices in order to compete with cheaper versions of their goods or face competition practices from Chinese firms might lead to the loss of competitiveness or customer loyalty to the US brand due to poorer quality of the copied goods . And indirect impact is the hardest to assess because there is no direct link between revenue loss and decreased competitiveness. Moreover, the high tech companies might not be motivated anymore to innovate seeing how easily their IPR can be violated and that will affect both developing and developed economies because without innovation there will no further improvement and rise in productivity . Even though the IPR violation is a global problem and a lot of developing countries and emerging markets are involved into counterfeiting, piracy and trade secrets theft, China is one the leading violators  globally.

The questions are why Chinese government tolerates this and whether it takes any actions in order to improve the situation. Having a historical perspective on the development of the IPR regime in China one can say that it has achieved a significant improvement after opening up its economy in the 1980s. As an example might be the patent system that is encouraging local companies to apply for patents and already in 2010 China has overpassed US in the number of patents applied as can be seen on the graph and the number of applications continue to grow. Another question is the quality of the patents as has already discussed before. Chinese utility model patent implies that the registration office only needs the general information and does not even have the exact criteria to define the innovativeness of the technology. And more often this system brings more harm than protection to US companies. Nevertheless, Chinese authorities have admitted the issue and are trying to improve the patent application system . In its essence Chinese IPR protection system fulfils the basic requirements of the WTO and WIPO (World Intellectual Property Organization) and the questions mostly arise during the enforcement stage . There are two explanations provided from different perspectives, the first one is the position of the Chinese government and the second is the view of the US authorities and firms . Beijing claims that an IPR protection system in China has advanced over the past three decades, and the only factors that limit the successful implementation are the shortage of resources as well as effective court system .