Intellectual Property (IP) is the key to the Sino-U.S. trade clash. Over the past two decades China has gone from an IP consumer to an IP producer. And the question now is whether China will take the next step towards becoming part of the global IP enforcement mechanism?
By Dr. Barbara Lauriat, special to the AJOT
Recently Federal District Courts in both New York and Washington State indicted the Chinese company Huawei, the world’s largest supplier of telecom network equipment, on a number of charges including violating international sanctions against Iran and theft of trade secrets. The company’s CFO Meng Wanzhou is under arrest in Canada awaiting possible extradition. Huawei denies the charges and is supported by Beijing, which claims the action is false and politically motivated—another tactic in the escalating Sino-American trade war that has been a prominent feature of the Trump administration’s foreign policy.
Intellectual property (IP) has been a central part of the recent dispute between the US and China, but American complaints about China’s inadequate protection and enforcement of IP were raised by past administrations. Infringement of foreign copyrights (particularly in films and software), trademarks (often branded luxury goods), and patents by Chinese businesses have been endemic for decades. Presidents Obama and Clinton both addressed the trade imbalances caused by damaging levels of IP infringement in China and vowed to increase pressure on China to improve its laws and policies.
Enforcement of patents, trademarks, and copyrights in China is not the only IP-related concern. The Huawei case is just one high-profile example of the many allegations of trade secret violations against Chinese business, some of which have implicated the State. Many industries protect valuable proprietary information through the law of trade secrets and confidential information rather than relying on patent protection or other forms of IP that require publication of the sensitive material in order to obtain a registration. There have been complaints about carefully-kept secrets from foreign companies mysteriously ending up in the hands of Chinese interests. Another controversial practice is that of forced technology transfer, where Chinese companies in joint ventures insist that their foreign partners directly transfer their IP rights as a cost of doing business.
In August 2017, President Trump directed US Trade Representative Robert Lighthizer to “look into Chinese laws, policies, and practices which may be harming American intellectual property rights, innovation, or technology development.” This investigation falls under Section 301 of the Trade Act of 1974; it was partly under the authority granted by Section 301 to respond to and deal with the unfair trade practices of another nation that Trump justified levelling punitive tariffs against China in December 2017 and afterwards. Unsurprisingly, China responded in kind.
There is no question that IP enforcement is a critical component of the trade policies of developed nations in the 21st century. A 2011 British study found that licensing of IP alone constituted 5% of world trade. Yet, IP experts in many countries have concerns about continuing to elevate levels of protection on an international level—it’s clear from an economic standpoint that more doesn’t always equal better when it comes to IP protection. Balance is necessary because a certain amount of copying stimulates competition, innovation, and growth, while too much removes incentives to create and stifles markets. With the ongoing trade war, speculation rages on the possible outcomes of imminent talks between the US and China.
If countries can be accused of hypocrisy, China might have a decent case against the US; in its younger days, the US economy developed on the back of lax recognition of foreign IP rights. The American industrial revolution was heavily reliant on technology “borrowed” from foreign powers. Notably, in 1789, Samuel Slater emigrated to the US in disguise, having memorized numerous specifications for cotton manufacturing inventions. He played a crucial role in the genesis of the American textile industry—and earned himself the moniker “Slater the Traitor” back in his native country. Thomas Attwood Diggs, a friend of George Washington, spent decades in Britain convincing talented inventors and artisans to move to the US, bringing machine models and technical documents with them. Back home, Washington praised Diggs’s contributions…despite the fact that they were criminal acts under British law at the time. In 1791, Alexander Hamilton even argued that protection should be granted not just to inventors but to individuals who brought new foreign technology to the US. Inventions were not the only controversial proprietary material to cross the Atlantic; American publishers copied foreign books with abandon, much to the chagrin of British authors like Trollope and Dickens. The US didn’t allow foreign authors to obtain copyright protection until 1891, and then only under limited circumstances.
IP Consumer to Producer
Like the US a century before, China has made the shift from being primarily a consumer of IP to a producer of IP. For years now, it has been a leader in patent filings around the world. According to a World Intellectual Property Organization study, China’s share of global patent filings in 2017 was 43.6%. China also has very high levels of domestic patent and trademark filings, and these continue to grow at an exceptional rate every year. On the enforcement side, specialist IP courts were set up in Beijing, Shanghai, and Guangzhou in 2014, followed by specialist IP tribunals in Nanjing, Suzhou, Chengdu and Wuhan in 2017. These courts have a high case load and there is talk of creating a specialist appellate court.
History has a lesson here. As the US developed and became a net producer of IP, it started on its path to becoming the most active proponent for high standards of international protection. While some have suggested that Chinese culture has an inherent disregard for IP as a concept and proper enforcement will never be possible, it seems more likely that China will follow a similar pattern of increasing support for international protection because it is in its own economic interest. There are clear signs that this is already happening. In addition to the many domestic reforms, China’s new draft foreign investment legislation released in December addresses a number of long-standing complaints, in particular, forced technology transfer for foreign investors. Yet, many foreign businesses are skeptical of the legislations, which they say may change the law without changing the reality of business practice.
In the future, the US is likely to see China’s IP policies move in the direction of increased protection and enforcement. But rather than being a sign of China’s weakness, it will be a sign of its economic strength.
Editor’s Note: Dr. Barbara Lauriat is a Senior Lecturer in Intellectual Property Law at the Dickson Poon School of Law, King’s College London and a Research Fellow of the Oxford Intellectual Property Research Centre. She is both a U.S. lawyer and U.K. barrister.