August, 2017

Should Trump press China now on IP issues?

Original article: Bloomberg

US President Donald Trump is stepping up pressure on China over perceived theft of intellectual property at a time when Washington and Beijing are trying to reign in a nuclear-armed North Korea. On Monday, Trump signed an executive memorandum directing U.S. Trade Representative Robert Lighthizer "to consider investigating China over its IP policies," according to Bloomberg. A major focus of the investigation will be China's tradition of requiring U.S. firms operating in the PRC to transfer their technology to local partners. 

If the U.S. decides that China is in violation of U.S. intellectual property rules, the Trump administration can respond in a number of ways. One option would be import tariffs. Robert Holleyman, a deputy U.S. trade representative under former President Barack Obama told Bloomberg that "A joint action at the WTO with allies would be the strongest position for the U.S." In contrast, "a unilateral action by the U.S. will be challenged in the WTO by China.”


Tensions are running high as the world's two largest economies square off on trade, IP issues and North Korea. The Trump administration insists its potential probe of China's IP violations are unrelated to North Korea. The Chinese think otherwise. In an editorial Monday, the state-run China Daily said that Trump's idea "of exploiting trade as a bargaining chip in dealings with China dates back to the campaign trail. But instead of advancing the United States' interests, politicizing trade will only acerbate the country's economic woes, and poison the overall China-US relationship."

Some analysts argue that directing the U.S. Trade Representative to consider investigating China over alleged IP violations represents a marked escalation of pressure on Beijing. That's what Brookings Institution senior fellow Eswar Prasad told Bloomberg. 

But Bloomberg points out that Trump's actions do not go as far some observers expected. TIPG believes the Trump administration's moves look more like incremental escalation - calibrated to apply pressure on China while giving it the opportunity to make concessions (however meager they may be). Indeed, the USTR will not begin a probe right away; instead it will consider whether an investigation should be launched under Section 301 of the 1974 Trade Act.  

To be sure, the Trump administration has mulled how squeezing China on IP will affect the two countries' attempts to reign in North Korea. In TIPG's view, Beijing sees North Korea as the U.S's problem. That's why it will never unequivocally support containment of the Hermit Kingdom. After all, from Beijing's perspective (at least that of Communist Party hardliners), the US military presence in South Korea isn't justified - the U.S. is meddling in Korean affairs and trying to contain China's regional ambitions. 

With that in mind, the US shouldn't sweep IP issues under the rug in the hope that Beijing will suddenly become more helpful on North Korea. Most importantly, the US has reason to pressure China on IP. A report by the National Bureau of Asian Research published this year estimates that IP thievery costs the U.S. economy between $225 and $600 billion a year. China is the principal perpetrator and the world's No. 1 IP infringer overall. 

"China is deeply committed to industrial policies that include maximizing the acquisition of foreign technology and information, policies that have contributed to greater IP theft," the report says. Those policies include "coercive activities by the state designed to force outright IP transfer or give Chinese entities a better position from which to acquire or steal American IP." 

In a separate report to Congress last month, the USTR accused China of “widespread infringing activity, including trade secret theft, rampant online piracy and counterfeiting." 

Washington's enthusiasm to combat IP crime is heartening, but it will need robust support from U.S. companies themselves - who on the one hand bemoan their loss of intellectual property - as well as "unfriendly market conditions" - in China while on the other tripping over themselves to gain a larger share of the China market. U.S. companies often hesitate to openly criticize the Chinese government for fear of reprisal.

Ultimately, U.S. firms need to diversify their global business instead of doubling down on China, especially when it involves handing over invaluable IP. Otherwise, one day those companies will find that their Chinese rivals have surpassed them in every respect - using technology and know-how the U.S. firms willingly handed over for the sake of short-term profits.