This week, President Trump signed a presidential memorandum asking the U.S. trade representative, Robert Lighthizer, to decide whether his office will investigate the transfer of U.S. intellectual property to China. If the investigation goes forward — and if it concludes that China is indeed responsible for widespread theft of intellectual property — it might result in economic sanctions against Beijing and the companies involved.
White House officials maintain that “China’s unfair trade practices and industrial policies, including forced technology transfer and intellectual property theft harm the U.S. economy and our workers.” The semantics of how technology is transferred under Chinese leadership is subtle but important. The outright theft of intellectual property is different from, say, a U.S. firm knowingly transferring its intellectual property to Beijing at the demand of the communist government.
Chinese investment laws are relatively explicit in this regard. They may require some U.S. investors to find a Chinese partner before they are allowed to do business in the country. Others state specifically that the Chinese government may request intellectual property for “national security” reasons. As long as such transfers are voluntary, there is nothing nefarious about the practice. Companies like Apple, for example, have willingly agreed to adhere to recent requirements on data localization to maintain their access to Chinese markets.
The outright theft of intellectual property is a different story, and here China has a long and very well documented rap sheet. A 2017 report by the Commission on the Theft of American Intellectual Property recognizes China as a habitual and still quite active perpetrator of intellectual property theft. The report also found that China focuses its larceny on the most innovative firms. It recommends an aggressive response.
The presidential memorandum calls into action Section 302 of the 1974 Trade Act. This provision states that the U.S. trade representative is responsible for reviewing whether the policies, laws or practices of foreign nations are restricting U.S. commerce. In principal, Section 302 investigations are initiated at the behest of concerned businesses unable to reach foreign markets. Potential remedies, if required, can be wide-ranging and severe, but will need to be determined based on the results of the review.
The best outcome of the president’s action would be for China to voluntarily reform its treatment of intellectual property, bringing its practices into conformity with international norms. The rewards could be significant. In 2016, American companies invested about $281 billion in other countries, while companies from other countries invested about $457 billion in the United States.
But just 3.4 percent of U.S. foreign direct investment went to China. Most new U.S. foreign direct investment went to Europe, where intellectual property rights are respected. U.S. companies actually invested more in tiny Singapore than they did in China. According to the Heritage Foundation’s 2017 Index of Economic Freedom, Singapore ranks first the world at protecting property rights. China ranks No. 101.
The lesson for China should be clear. Research in the European Economic Review summarizes it well: “Strengthening intellectual property rights protection promotes innovation and [foreign direct investment] in both the long and the short run.”
As China progresses technologically, it will value its own intellectual property more and more. Perhaps then it will change its treatment of the intellectual property of others. But until that time, the country’s bad business practices will remain a source of contention for those who wish to do business with Beijing.
This piece originally appeared in The Hill on 8/16/2017