COMMENTARY: IP reform a dead end

U.S. seems likely to investigate China IP theft, but China's trade leverage is powerful enough to offset any sanctions

By: Eric Johnson
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Photo: Tashatuvango / Shutterstock.com
   Intellectual property protection has long been a trade bugaboo between the United States and China.
   As China progressed from existing outside the World Trade Organization to the inside of it, other WTO members’ expectations of IP rights in China rightly started to increase. Now, 16 years after accession to the WTO, and with China the second largest economy in the world, those expectations are in a different category altogether.
   This week, President Donald Trump was expected to unveil an investigation under Section 301 into Chinese theft of American IP.
   As Quartz put it this week, “this section authorizes the U.S. government to investigate foreign government acts or policies which ‘burden, restrict, or discriminate against United States commerce.’ The president can then act unilaterally to impose tariffs or other trade restrictions in retaliation.”
   The announcement might well be delayed, according to reports Thursday, but the issue doesn’t go away even if the investigation doesn’t immediately come.
   IP protection is fundamental to the livelihoods of developed economies and the businesses that comprise those economies. China knows this, and yet has not put the brakes on IP theft to a suitable degree to please its trading partners.
   In fact, it can be argued that the theft of IP is more institutionalized now than ever before. As such, a bigger issue than pirated DVDs or handbags is China’s insistence that foreign companies operating in China share their technology with local partners, the government, or subsidiaries set up within the country.

It can be argued that the theft of IP is more institutionalized now than ever before.

   The current U.S. Trade Representative, Michael Lighthizer, seems takes a dim view of this practice and sees Section 301 as a powerful tool to combat it. It should come as little surprise, then, that Lighthizer was deputy U.S. Trade Representative in the 1980s, when Section 301 was used to combat Japanese economic incursions. It’s barely been dusted off since the advent of the WTO.
   However, what this all boils down to is leverage. Even the staunchest trade advocates recognize that China plays by a different set of rules than other economies. Yet, China retains the leverage to dictate the terms of its trade relationships.
   That leverage comes from having an established foundation for manufacturing and logistics. But it also comes from having systematically invested in state-owned or quasi-state-owned industries that are hard for private entities to compete against.
   Lighthizer surely understands the three-dimensional nature of trade, but it’s not clear President Trump fully gets it. He often seems to act as though every action in the global marketplace doesn’t have an equal and opposite reaction. Trade is more physics than mixed martial arts.
   Hitting China with an investigation makes total sense in a vacuum. But China has levers that could be as detrimental to the U.S. economy as IP theft. An 301 investigation in and of itself doesn’t initiate a trade war. As trade analysts have smartly pointed out, that will only come if the investigation leads to actions.
   Trump’s tough public stance on China isn’t the path toward rectifying structurally unfair trade practices. China won’t be cowed by threats or tariffs. The horse is out of the barn. A more nuanced, incentive-laden, behind-the-scenes approach will be more effective, especially once China’s fall party congress is completed.
   Of course, the Trans-Pacific Partnership would have helped. It would have established IP protection among all 12 members, and that might have either induced China to conform to more fair IP norms, or join the trade agreement outright and have no choice to conform.
   That option, like trying to deny China’s trade leverage, went out the window long ago.