Intellectual Property Rights Protection In China

The weak Intellectual Property Rights protection in China is one of the cornerstones of the US-China trade issues. However, in order to realize/grasp the scope of the matter it is necessary to understand how important the IPR is for US economy in general and American firms in particular. First of all, “IPR are legal rights granted by governments to encourage innovation and creative output. … may take forms such as patents, trade secrets, copyrights, trademarks, or geographical indications.” (1). The US highly innovative economy heavily relies on new technologies as it ensures the economic growth, increase in productivity, substantial employment and wages increase (2; 1-2. 6). For decades around 75 percent of US economic growth is ensured by IP-intensive industries (1-2). Also these industries significantly affect in a positive way the amount of exports and imports.

Therefore, protection of IP is crucial for sustaining the US competitive edge. The functioning of US leading industries such as automotive, aerospace, computer, semiconductor and biotech depends on the reliability of patent protection same as copywriting for software development (6). And retail can be a good example how other industries but IP-intensive can also gain from effective IPR protection since they trade of the trademarked goods (6). Around 800 billion US dollars of exports and 1,340 US dollars of imports contributed the IP-intensive industries in 2014 to US economy which is around 70 percent of the US total trade that year. Another source of contribution to US economy is the flow of the fees and royalties as the payment for using US IP (1-2).

However, not all the countries follow Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) which defines the basic principles IPR protection (2). Since the technology protection is crucial for US economy, the Office of the United States Trade Representative (USTR) has recently conducted an analysis and released 2018 Special 301 Report. There it defines the countries that are either include in the Watch list or Priority Watch List categories meaning that they are lack of the strong IPR protection (2018 Special 301 Report, 6). China is among other 11 countries that fall under the Priority Watch List (2018 Special 301 Report, 9). And this is not a surprise. USTR has mentioned several concerns regarding China “…including as to trade secret theft, online piracy and counterfeiting, the high-volume manufacture and export of counterfeit goods, technology transfer requirements imposed as a condition to access the Chinese market, the mandatory application of adverse terms to foreign IP licensors, and IP ownership and research and development localization requirements” (2018 Special 301 Report, 5).

Not only US government but US businesses doing business in China are greatly concerned over the weak IPR. Companies bear significant loses because of the Chinese counterfeiting, piracy and economic cyber espionage (41). Importantly that China targets industries that were defined strategic for its economy and steels secrets and technologies to ensure that the shift to the innovation economy is fulfilled. However, exactly these industries are the core of US competitiveness, so China is not only causing US firms revenue loses but also eradicate the future competitiveness of the US firms (13). The problem is not that China is unwilling to undertake measures to enforce stronger IPR protection but that is part of the system that encourages local companies at any cost acquire needed technology from US or other foreign company and after that support national champions in redeveloping and implementing these technologies locally 44).

Nowadays China is the country that violates the IPR of the US companies the most (2). As for an example, almost 90 percent of all counterfeited good crossing US border actually come from China and Hong Kong (3). Besides other foreign brands Americans also buy its own without knowing that they are counterfeited. Not only US customers but also US companies face the consequences of China’s weak IPR protection. When investing in China, US companies should assess the risks of losing its trade secrets first since it might affect its operations severely. All these action are part of the industrial policies encouraging Chinese companies to achieve the goals at any cost.

The weak IPR protection of US firms in China leads to the abuse of the system and IP theft. According to the USCBC 2017 member survey there are four main types of IP theft that American business representatives are concerned about operating in China. The companies are equally anxious about trade mark and trade secret theft. Second and third places go to patent and copyright infringement respectively (2017 USCBC, 10). In order to understand in more detail how IPR violation impacts the US companies’ operations, revenues and future development it is necessary to have a closer look at all the types separately.

Theft of US companies trade secrets might be the most prejudicial type of IPR violation that companies face. “A trade secret is technical or business information that is generally unknown to anyone outside the firm and brings economic advantage to the owner over competitors, and for which the owner has adopted measures to maintain its confidentiality” (3-41). Industrial theft has received close attention recently because of the increasing economic cyberespionage against US firms from China. This topic will be discussed in a more detail in the next chapter. However, the traditional espionage also takes place in the forms of physical theft of hard drives, placing of the employees to the competitor’s company temporary, bribing the employees of the rival for the trade secrets, surveilling the phone calls and so on. However, due to increasing complexity of the international operations and multiple options of configuring the whole production chain, the number of parties that US companies interact on the way increase as well. Therefore, every additional step in the production chain which is shared with other partners bears the risk of trade secrets theft (41). Especially this issue is more relevant in such country as China because the IPR protection is weak.

According to the estimates of the Commission on the Theft of American Intellectual Property, the trade secret theft might have costed minimum 180 billion US dollars of US companies’ losses. Furthermore, if considering the maximum assessment then the losses might even have reached 540 billion US dollars which equaled 3 percent of US GDP in 2015 (11). The data has been provided generally for all the countries, however, taking under consideration the fact that China is the main IPR violator (2), it accounts for the majority of the losses. And the industries that face the most cases of the trade secret theft are reasonably IP-intensive industries such as chemical or high-tech (3-41). Even though the estimated losses have been provided it is still might not be the complete outlook on the issue. The calculations only take under consideration the known facts of the IP theft while some companies might not even have the full information whether their trade secrets have been stolen (2). Secondly not all companies even if they discover the fact of violation would like to disclose this information being afraid that it might affect their share value.

Even though the losses from trade secrets violation are incredible in China, there are only few US companies that actually took actions and went to court. One reason might be the vague laws in China regarding that issue which makes it difficult to prove and secondly companies prefer to file the theft outside China where there is higher chance of having a positive outcome (3-44). Moreover, the fact that Chinese government supports local companies through substantial industrial policies can also imply that sometimes not even legally right/appropriate measures have been taken by Beijing. Only recently the investment process in China has been improved making it necessary only companies that operate in restricted industries file for approval. Nevertheless, some companies have to undergo the approval process where a lot of information including sensitive is disclosed to the regulatory authorities (3-43). And that is potentially the way how the trade secrets might be disclosed since a lot of corporations in China are state-owned.

One of the recent trade secret theft cases that has lasted for years but in 2018 it finally came to the conclusion involves American Superconductor from Massachusetts and Sinovel Wind Group Co Ltd from China. The story behind is that Chinese wind turbine manufacturer bribed the AMSC’s employee to get the source code needed for wind turbine control system (https://www.reuters.com/article/us-sinovel-wind-gro-usa-court/chinas-sinovel-fined-in-u-s-trade-secrets-theft-case-idUSKBN1JW2RI). US wind turbine producer started its operations in China in 2007 and realize at that time what risks it posed together with opportunities. Therefore, the company undertook all kinds of measures in order to protect the company from, for example, cyber espionage, however, in the end the human factor which was not possible to predict took into action. The consequences of the theft were severe with more than 1 billion US dollars losses and gradual staff reduction of 700 people (https://www.reuters.com/article/us-sinovel-wind-gro-usa-court/chinas-sinovel-fined-in-u-s-trade-secrets-theft-case-idUSKBN1JW2RI). Also knowing that 8000 wind turbines in China were operated by the stolen technology from AMSC making it possible to imagine the impact that the fraud had unless the legitimate source code had been used (45).

What makes things worse is that like many other companies Sinovel Wind Group Co Ltd is partly funded by state (https://www.bloomberg.com/news/articles/2018-01-24/chinese-firm-sinovel-convicted-in-u-s-of-trade-secret-theft). At that when the theft happened in 2011 the Chinese company was one of the world leaders in wind turbine market. And even though it was announced that two Sinovel employees who were directly involved in the fraud behaved without any knowledge or consent of the company, I reality it might have been planned action in order to support local champion at any cost. Nevertheless, the company is recovering thanks to the won case against Sinovel, technology improvement and the signed contract with the American Navy (https://money.cnn.com/2018/03/23/technology/business/american-semiconductor-china-trade/index.html).

As was mentioned at the beginning, US companies’ top IPR concern is a trademark violation from Chinese companies on a par with trade secrets theft. “A trademark or service mark includes any word, name, symbol, device, or any combination, used or intended to be used to identify and distinguish the goods/services of one seller or provider from those of others, and to indicate the source of the goods/services” (https://www.uspto.gov/trademarks-getting-started/trademark-basics). Trademark protection can be violated in two different ways. Firstly, the exact US company’s trademark can be used by other party without any knowledge or consent (47) and, secondly, another company might use very similar or almost exact brand symbol or name as original and it is used in order to mislead customer and not spend efforts and resources in promoting its own brand.

The complication with counting exact losses of US firms from production and trade of counterfeited goods is that the available data is based on the confiscated items by Customs and Border Patrol entering US. The limitation is that CBP only discovers small part of the real volume and counterfeited products entering another markets cannot be counted as well as (8). The approximate calculation of counterfeited goods from China can be calculated following way. Knowing that in 2016 CBP confiscated the products on the overall amount of 1,4 billion US dollars and seized good only account for on average estimates 1,7 percent making the total value of counterfeited goods around 82 billion US dollars (52). And China accounts for astonishing 87 percent of all counterfeits (87), therefore making it possible to assume that the overall value of counterfeited goods entering US from China reached on average 71 billion US dollars in 2016.

Nevertheless, even though the data with the costs of the counterfeited goods can be calculated it does not automatically mean that this is the amount of losses that US companies bear. Some argue that customers that have bought the cheaper version of the original brand would buy it for the full price meaning that US actually lose nothing even if their trademark is violated in China (48). However, from US companies’ perspective this is not the case and that trademark violation in China leads to revenue loses because in some cases they have to lower the prices in order to compete with cheaper versions of their goods or face reduced sales due to strong competition or even both. Moreover, due to weak trademark protection in China might not even enter the market and this can cause the decrease in revenues (3-15). Another outcome of the misuse of the US brand names by Chinese counterfeiters is that with the poor quality and the confusion of the customers that the cheaper version is the original product, the perception about the US company brands may decrease and affect the brand name severely