What Is Intellectual Property, and Does China Steal It?

(Bloomberg) -- U.S. President Donald Trump’s justification for imposing tariffs on imports from China includes the alleged theft of American intellectual property. Such violations -- from counterfeiting famous brands and stealing trade secrets to pressuring companies to share technology with local companies to gain access to China’s vast market -- have long angered China’s overseas competitors. As a result, many companies are wary of doing business there. Efforts to improve enforcement, including a raft of new measures in December, have not come fast enough for Trump.

1. What is intellectual property?

It refers to creations of the mind, such as inventions, literary and artistic works, and designs, symbols, names and images used in commerce, according to the World Intellectual Property Organization. IP is protected in law by patents, copyright and trademarks, enabling people to earn recognition or financial benefit from what they invent or create. “The IP system aims to foster an environment in which creativity and innovation can flourish," the WIPO says.

2. What did Trump do?

U.S. Trade Representative Robert Lighthizer completed a seven-month investigation into China and intellectual property at Trump’s direction in early 2017. U.S. officials were said to find strong evidence that China uses foreign-ownership restrictions to compel American companies to switch technology to local firms and that China supports and conducts cyberattacks on U.S. companies to access trade secrets. In March, Trump instructed Lighthizer to levy tariffs on at least $50 billion in Chinese imports -- a figure based on U.S. estimates of the lost corporate earnings caused by China’s alleged IP theft or forced technology transfers. In an update in November, the USTR office said China was continuing its unfair IP policies.

3. How do non-Chinese companies lose money?

Besides missing out on possible sales to counterfeited goods or to Chinese products using their know-how, non-Chinese companies also need to lower their prices to compete in a country that supports domestic industry. They also spend billions of dollars to address possible infringements, according to a 2011 report by the U.S. International Trade Commission. That report said trademark infringement was the most common form of IP violation in China, while copyright infringement was the most damaging. They also lose competitive advantage: A 2015 paper by the Federal Reserve Bank of Minneapolis concluded that more than half of all technology owned by Chinese firms was obtained from foreign companies.

4. What does China say?

President Xi Jinping highlighted the need to speed up protections in a speech as far back as 2017, calling for stricter enforcement and for infringers to pay a “heavy price.” In December, China announced its most serious measures since the trade war erupted, including punishments that could restrict local companies’ access to borrowing and state-funding support over IP theft. The government said in January it would accelerate the passage of a new foreign-investment law that includes administrative measures to protect the IP of foreign companies and ease pressure on them to transfer technology.

5. Will this solve the issue?

Chinese law enforcers have been hampered by insufficient means of punishment, according to Xu Xinming, a researcher at the Center for Intellectual Property Studies at China University of Political Science and Law. Xu says the new regulations could render IP violators “unable to move even a single step.” Critics say the measures fall short by not including criminal penalties such as jail time. The approach, they say, doesn't address the myriad regulations and other ways in which foreign companies are forced to hand over IP. Scott Kennedy, a China expert at the Center for Strategic and International Studies in Washington, has noted that despite the increased attention paid to the issue, IP violations have increased.

6. How does China compare?

Of 50 countries in the U.S. Chamber of Commerce’s International IP Index, which measures a country’s commitment to fostering and protecting innovation through legal rights, China ranks 25th. (The U.S. is No. 1 and Venezuela last). China earns praise in that survey for its reforms on patents (the right to make, use or sell an invention) and copyright (the right to express an idea) and its efforts to raise awareness of IP rights. It loses marks for the high levels of infringement and insufficient legal safeguards. A survey by the European Union Chamber of Commerce in China found that “visible progress” had been made around IP, but 51 percent of firms said enforcement was still inadequate.

7. Is this a new gripe by the U.S.?

It’s a longstanding issue. That 2011 report by the U.S. International Trade Commission estimated that U.S. IP-intensive firms lost $48 billion in 2009 because of Chinese infringements. A 2016 USTR’s report highlighted serious problems, especially concerning the theft of trade secrets. "Offenders in many cases continue to operate with impunity," the report said.

The Reference Shelf

• QuickTakes on China’s social credit system and the trade war.
• Europol says most knockoffs come from China, which questioned those findings.
• The International IP Index.
• Protect your China operations the U.S.-China Business Council way.
• A U.S. International Trade Commission report rates copyright infringement the most damaging to U.S. businesses.
• The 2016 U.S. Trade Representative report.

--With assistance from Andrew Mayeda, Jennifer Jacobs, Saleha Mohsin and Shelly Hagan.

To contact the reporter on this story: Grant Clark in Singapore at gclark@bloomberg.net

To contact the editors responsible for this story: Leah Harrison Singer at lharrison@bloomberg.net, Karen Leigh

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