Donald Trump?s path to intellectual property wars

By Dan Steinbock

Dr. Dan Steinbock is the founder of Difference Group and has served as Research Director at the India, China and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore).

In mid-August this year, President Donald Trump asked the United States of America (US) Trade Representative Robert Lighthizer, a veteran Reagan administration trade hawk, to open an investigation into China’s intellectual property (IP) practices. The first public hearing with relation to Chinese trade conduct is scheduled for 10th October 2017,  in Washington DC.

The White House IP narrative

As Lighthizer initiated the investigation, he made full use of the notorious Section 301 of the Trade Act of 1974, which was used by the US in the 1980s against the rise of Japan. Japan and the European Union (EU) regarded this decision of the US as a violation of the rules of the World Trade Organization (WTO). Under the garb of free trade, Section 301 actually represents “aggressive unilateralism” and authorises retaliatory tariffs. Lighthizer drew inspiration from the highly partisan US Commission on the Theft of American Intellectual Property, which was mobilised in the early 2010s – amid the rise of China’s indigenous innovation and foreign investment.

Relying on contested estimates, the Commission believed that IP theft amounted to $225-600 billion annually in counterfeit goods, pirated software, and theft of trade secrets. As a result, it advocated for a more aggressive policy enforcement framework “to protect American IP.” Essentially, the US IP narrative claims that the Chinese government forces US companies to relinquish its IP to China. The narrative is consistent with Trump’s “America First” policy and it has been quoted uncritically by media, despite it being deeply flawed.

The real IP narrative

While foreign companies in China are often warned not to part with “too much” in technology transfer and IP deals, they are not forced by the Chinese government or other interested parties into those deals. Moreover, in contested legal cases, the Chinese government has often supported foreign companies. As The Wall Street Journal reported last year, when foreign companies sue in Chinese courts, they typically win. From 2006, right up till 2014, foreign plaintiffs won more than 80% of their patent-infringement suits against Chinese companies, virtually the same rate as domestic plaintiffs.

For years, foreign multinationals have effectively exchanged their technology expertise for market share in China. The rush of IP companies to China intensified a decade ago amid the global crisis when the Silicon Valley giant Intel opened a $2.5 billion wafer fabrication foundry in Dalian, northeast China. As advanced economies struggled with stagnation, China continued to grow vigorously. So the bet proved very lucrative. At the time, Craig Barrett was Intel’s chairman. Today, Barrett is one of the five commissioners of the US IP Commission which portrays America as a victim of massive IP fraud. Not surprisingly, some US observers see the Trump administration’s IP investigation as less a scrutiny of forced technology transfers than a negotiation ploy. In reality, much of China’s IP progress can be attributed to past technology transfers and the government’s huge investment in science and technology. Moreover, as Chinese companies have moved up the value-added chain, they stress the need for IP protection, particularly patents.

Timing matters

In 2006, I noted in The National Interest, a prestigious US foreign policy journal, that emerging Chinese multinationals were “no longer satisfied with imitating. Instead, they seek to convert cost advantages to more sustainable competitive advantages—often through innovation.” Very few took the prediction seriously at that point in time. Typically, the Trump IP debacle is escalating as Chinese companies join the global rivalry for cutting-edge innovation. In terms of the number of total patent applications, China’s share has exploded. Two decades ago, it was far behind the US, Japan, South Korea, and Germany; the world’s leading patent players. Now it is ahead of all of them.

However, in these rivalries, not all patents are of equal value. The so-called “triadic patents”, which are registered in the US, the EU, and Japan to protect the same invention, tend to be the most valuable, both commercially and globally. In triadic patents, too, China’s patent power has increased dramatically and will surpass that of the Republic of Korea and Germany soon. The patents of Japan and the US peaked around 2005-06. Despite some progress, US patents are still 15 percent (15%) below their peak, whereas those of China have increased more than six-fold in the past decade.

Threat to US hegemony

Since patent competition is accumulative, playing catch-up requires time. However, it is pertinent to note that, if for instance, the level of US and Chinese triadic patents continue increasing at the pace that they have been increasing in the past five years, China could surpass the US by the late 2020s. This is probably why Trump is targeting China’s IP today. However, neither innovation nor intellectual property is an exclusive privilege of the West.

Featured Image Source: Visual Hunt