KOL282 | No, China Is Not “Stealing Our I.P.”

Here are my thoughts on this matter. I’ve been thinking about, discussing, and wrestling with these issues for many months now. I have yet to read or speak to anyone who satisfies me that they have “the whole picture” so I have been forced to work without net, mostly.

First. Let’s understand the basic background of American IP law–mostly, patent and copyright, but sometimes also less impactful variants such as trademark and trade secret (I would count defamation law too, but most legal scholars don’t seem to see the connection). Copyright is rooted in censorship, and today is entrenched primarily in industries that think they rely on it–namely, the music and movie industry. Software is now also covered by copyright but oddly many software systems intentionally opt out of copyright through the use of various licenses. In any case, the publishing, music, and movie industry, the latter two largely based in the US, are huge lobbying forces to maintain or expand US copyright law–both domestically (such as with continual lobbying “by Disney” to keep expanding the term of US copyright, to keep Mickey Mouse from becoming public domain, such as with the Sonny Bono copyright term extension at in the 90s –to the point where copyright, originally 14 years [the term of two consecutive apprenticeships] is now life of the author plus 70 years–usually well over a century. And, they also push for the US to use its hegemony to force other companies to ratchet up their IP law to match US terms etc. Case in point: the US told Canada it couldn’t participate in the TPP negotiations unless it increased its copyright terms, and Canada did so, by 20 years (in selected cases). Just for the privilege of negotiating in the TPP–which Trump nixed…

Similar things have happened with patent, which originated as crown-granted protectionism. Now many industries lobby to keep patent law alive too. Most of this lobbying pressure comes from US industries or western industries, such as hollywood and music and publishing houses in the case of copyright, and pharmaceutical industries in the case of patents. Even some Cato scholars were opposing free trade with Canada a decade or so ago–namely, the “reimportation” of drugs from Canada since they are sold at a lower price there, due to Canadian government price caps, and reimporting them back into the US would undercut Big Pharma’s ability to sell at a high monopoly price in the US market. The whole thing is absurd.

In any case, the other background to understand, is this. Free trade is one thing; foreign direct investment is another. To have free trade between countries merely requires lowering tariffs. This has happened in fits and starts via managed trade, as you no doubt know, since WWII, including the WTO, NAFTA, and various trade agreements. One can argue whether this is good or bad. I think it’s good, since it has resulted in more transnational free trade and lower overall trade barriers, since WWII, even though it’s managed trade and not as free as it could be. But the point is, the alleged purpose of such agreements is to mutually lower tariffs. It’s *NOT* about internal property rights policies–those are domestic matters that have little to do with international trade per se. And many of these trade agreements are in fact negotiated privately (in secret) and finally the details are released and the agreements are confirmed, as with the recent USMCA. Not in recent decades the US and other western powers have adorned these agreements with conditions like internal labor standards and environmental standards and so on, but this is just the messy business of trade negotiations. But the point is: the main purpose of trade agreements has to do with tariffs imposed by each state on the others’ imports. Of course you and I prefer lower tariffs, or no tariffs, and oppose managed trade, but still. If it results in more free trade, you could argue this is an improvement.

On the other hand countries have long represented their own nationals or citizens when they are treated in some ways by foreign governments–in particular, if a large western corporation invests in a developing economy, there is a danger of various forms of expropriation. I dealt with this in some books, including the one forthcoming next month from Oxford. (http://www.kinsellalaw.com/iipr/ ) Sometimes countries have have treaties with each other to deal with this issue–FCN (friendship, navigation, commerce) or other treaties, “bilateral investment treaties” (BITs), and so on. The point of these is to try to make each party (each host state) treat the other state’s nationals with some minimum standards, if they do business in or invest in that state. For example a US BIT with Brazil might try to prevent Brazil from nationalizing or expropriating an Exxon refinery operating in Brazil, without due process and paying just compensation. These agreements sometimes overlap with trade agreements, but their purpose has to do with the internal property rights law of the member states. And these agreements are usually negotiated by the State Department, in the open, not secretly. There is a model BIT that the US tries to use, for example.

And it is true that in many of these agreements, as with trade agreements, with NAFTA, with WTO, with the new USMCA, with the aborted TPP, and so on–various IP provisions are snuck in. In the former agreements, it’s done under the guise of property rights, since the common misconception in the west is that IP rights are part of property rights. So Brazil has to respect not only Exxon’s physical property rights but its trademarks etc–under the investment treaties. Under trade agreements, just as Brazil (and China etc.) are expected to agree to ratchet up their minimum wage laws, and other laws like environmental, child trafficking, and even IP law–as the price of getting a free trade deal.

So I call this IP imperialism, and it’s a way that both trade and investment treaties/agreements are used to slowly push US style IP law onto other countries.

In the meantime, we often hear claims that China doesn’t enforce IP law as well as the US does–that “piracy” is “rampant”. Now China does have patent and copyright law, and agrees by virtue of various treaties, such as those mentioned above, and IP-specific ones such as IP related aspects (TRIPS) of GATT and WTO things–it has agreed to have local law respect patent and copyright law to a certain degree. This is also part of some treaties such as the Paris Convention (patents), the Patent Cooperation Treaty, the Berne copyright convention, and also the Madrid Protocol (trademarks). Now no countries enforce IP law perfectly just as drug laws are never enforced perfectly. There might be “more” “piracy” in China but China has an IP system, like the US does.  [See The Mountain of I.P. Legislation]

The point here is this: when China is more lax or allows more piracy of IP law, it is NOT IP theft of US corporations; it is ONLY a violation of their own local law. I bring this up because nowadays, as a backdrop to Trump’s trade negotiations with China, you will often hear complaints that “china steals US IP”. I think part of this complaint simply has to do with the fact that DVD piracy etc. is more rampant in developing countries, and in fact in most non-US countries, simply b/c the system is still developing, the people are poorer, or it’s becoming easier to pirate (with technology), and so on. But while international treaties and organizations like GATT/WTO are often used to try to pressure less draconian states to become more US-style draconian in their copyright and patent enforcement, in my view, as far as I can tell, this has almost nothing to do with the current trade negotiations and complaints that China is “stealing US IP”.

From my reading on this and discussions with people, as best I can tell, when people complain about China’s stealing IP from US companies, and wanting this remedied by China in the current trade agreement talks–they are talking about something totally unrelated to “piracy” or China’s copyright terms not being as long as the US terms. I think what they are talking about is “forced technology transfers.” This is why I mentioned above the distinction between trade and investment agreements. The former, which is presumably what Trump is trying to negotiate with China, has to do with tariffs, with trade. Not with how China treats internal property rights including FDIs by foreign companies (if it did, it would be covered by a China-US BIT, but as far as I can tell one has never been negotiated, even though the US leads the way in BITs and has many in place (https://ustr.gov/trade-agreements/bilateral-investment-treaties ; https://tcc.export.gov/Trade_Agreements/Bilateral_Investment_Treaties/index.asp).

so what I think the real complaint is, about China’s IP theft, is this: China is a half commie country. There is no pure free market. Private property right are of course not fully respected. If a foreign company, such as Apple, wants to open a factory in China, it needs all kind of local and regional government licenses or permissions. As a quasi-protectionist measure, China basically forces the US company to “partner up” with a local Chinese company before it will be granted permission to open a factory. I.e., Apple has to enter into a JV or joint venture with some local Chinese company. So Apply is making iphones in some factory that it jointly “owns” with some local Chinese dipshits. Of course, when you have local Chinese employees and some of them are employed by a Chinese company, they basically know your trade secrets (one type of IP). In other words, the price of doing business in China, for a western company, is to take the risk that local Chinese employees, or your “forced partners”, will learn your trade secrets. You can’t help divulging them because workers or managers in the factory see the blueprints of upcoming products, etc. So then the fear is that the Chinese JV  partner will leak the info to others or it will just use the knowledge to start a competing factory that makes knockoffs of iphones, and so on.

As far as I can tell, THIS Is what they are talking about when they refer to china stealing American IP: it is the fact that China doesn’t have a wild west propertarian free market, and thus foreign investors are forced to accept as a condition of doing business there, that they have to partner with locals, who then learn their trade secrets. I.e., it’s a price of doing business. Now it is true that this is not ideal, but to be clear, as far as I can tell, it is NOT a “theft” of patent or copyright. And it’s not really theft since the western companies KNOW that it’s a condition of doing business in China and they presumably choose to take this risk. It’s also true that it would be better if china didn’t require foreign companies to get a license to open a factory there, but (a) even if there WERE no such requirements, trade secrets can still be lost, since employees move back and forth, and (b) having China respect foreign investors’ property rights internally is properly the subject of investment agreements (like BITs) NOT trade agreements which really are just about lowering tariffs and having more free trade transnationally.

So I think that the focus of any trade agreement with China should focus on the benefits of free trade and should stop using as an excuse to impose tariffs on China, the stupid accusation that they are “stealing American IP”. The IP issue with patent and copyright is already dealt with by WIPO and various treaties, and really has nothing to do with trade; and the forced technology transfer issue has to do with trade secrets, and is the province of local property law and investment agreements, not tariffs and trade.

So I would say that IP “theft” (a) is not a real thing since there is nothing wrong with “piracy” in the first place, and all IP law is unjust and anti-free market and should be abolished; (b) even if you want China to strengthen its IP law, this has to do with patent and copyright and is mainly the province of international IP treaties, such as Berne, WIPO, PCT; (c) the fact that local Chinese governments require foreign companies who want to open factories in China, to get a license, and makes them partner with local firms, who then learn trade secrets–is no excuse to impose tariffs on China; at most, it should be part of treaties pertaining to foreign investment and local protection of the private property rights of foreign nationals.

That’s basically my take on all this. It’s based on my knowledge of international trade/investment law, IP law, and also libertarian/property rights policy/principles and Austrian free market economics views on trade and capitalism–and I basically never hear anyone talk about it this way, with this synthesized, overall view, since most people are confused by at least half of these issues. Witness everyone accusing China of IP theft when even they don’t know if they are talking about copyright piracy or forced trade secret transfers. But this is my take. I have written here and there on various aspects of this overall issue, but as of yet, I’ve not written a  single, defining, over-arching piece–but a few scattered things, in addition to my longer book’s more lengthy treatment of BITs and the like — see a few links below.

Again, if you want more detail or to discuss by phone please let me know, and good luck in your debate–

Stephan