What You Need to Know about the Great IP Dispute Between the US and China

Intellectual property (IP) is notoriously difficult to enforce in a single country. Trying to enforce one country’s IP laws in another country is nearly impossible. This is the hard reality behind the ongoing dispute between the United States and Chinese trade negotiators. For China to enter into full compliance based on US standards – even if that were possible – would require the government to vastly expand and increase its police power over its own domestic economy, which is exactly the opposite direction that the Chinese government wants to go.

Legislated Rights

Keep in mind that, unlike real private property, IP is necessarily created, defined, and enforced by legislation — by statute. For that reason, it is necessarily territorially restricted based on state jurisdiction. Despite efforts for a full century to unify world IP law, vast differences exist country to country. It applies to some products and services and not others, and there is no way to tell a priori which ones pertain.

In the US, for example, perfume cannot be patented but it can be trademarked. Sports plays can’t be copyrighted, but sports branding can be. Clothing designs and food recipes can be neither copyrighted nor patented (with a few exceptions), but trademark enforcement is fierce. Software didn’t used to be copyright protected, but now it is; even so, the open-source movement has proven that copyright is not always a good business strategy. Jokes can’t be copyrighted, but there is a huge professional cost to misattribution. And so on.

The terms of copyright are always subject to legislation, and this is always subject to change. For books and music in the US, the term for most of the 20th century used to be 28 years. Now it is the lifetime of the claimant plus 70 years, which many authors argue is far too long (they are long dead by the time their own works can be reprinted). Moreover, as copyright affects literature, what matters is not so much the formal copyright possession but the distribution rights, which behave the way people think copyright does.

Far From Perfect

And while the US in its international relations likes to pretend it has the perfect IP system, hardly anyone here is willing to defend it. Critics of the patent system include companies forced to spend vast resources on “defensive patents” — that is, the practice of acquiring rights simply to stop competitors from getting them later and suing the creator for infringement. Then there is the problem of patent trolls, which everyone seems to be against but no one seems to know how to stop.

And consider the problem of liability for infringement. In copyright cases, you generally have to possess standing to bring a suit as a plaintiff. But private companies are presented with a range of options for how to deal with violators.

The case of Tiffany vs. eBay from 2010 illustrates the point. eBay was found to be selling counterfeit Tiffany products and quickly pulled them from the store and put in place measures to prevent it from happening again. Tiffany argued in court that eBay should be held financially liable for infringement. Further, Tiffany demanded that sellers should be prevented from listing five or more Tiffany items at once, that sterling silver from Tiffany should be banned from sale, and that eBay should stop advertising the availability of all Tiffany merchandise.

Now, it is rather obvious here that Tiffany was only trying to use the courts to enforce a retail monopoly on its own products and essentially curtail the secondary market. That attempt was absurd. The right to resell something is pretty much a human right. The court found in eBay’s favor both in the initial ruling and on appeal.

This case becomes highly relevant in the case of China’s IP law. In a case discussed by the East Asian Forum, the California sunglasses maker Spy Optics sued the Chinese shopping giant Alibaba for selling counterfeit products. Alibaba has taken down the offending products, but Spy Optics argues that it should do more. It should stop selling Spy Optics altogether on grounds that so many infringing items are added daily.

Alibaba was able to cite US court precedent here and refuse the order. Still, a US judge found against Alibaba, citing the fact that the company continued to allow infringing sellers to do business. Obviously China disagreed, and, based on prior US law, it was correct to do so. What’s more, enforcement of the California judgment would be impossible because Alibaba has no assets in the US. The issue still remains highly contentious and is a great example of the kind of practice about which the US is currently complaining.

Does the US really want to impose on China, via threats of tariffs, a system that is less business friendly than that in the US? Based on this case, the answer would seem to be yes.

What Compliance Means

That said, there is no question that China is trying to comply. It created IP courts in 2014 and internet courts in 2017. And starting in January, a new IP law on internet commerce will come into effect in China.

That hardly covers the full range of issues now in dispute. There is no end to the disputes over pharmaceuticals. They were nearly unknown in China 30 years ago but are now a growing industry. The pertinent law was passed in 1984 and amended in 2000, 2008, and 2009. The most recent amendment protects traditional Chinese health remedies, so it forbids any patents, domestic or foreign, that rely on “genetic resources or traditional knowledge.”

US pharmaceutical companies despise this provision on grounds that it creates a chilling effect for its own products. Meanwhile, in the US, we face a massive opioid crisis born of the pharmaceutical industry and a cultural scramble to become more acquainted with home remedies and less with medicines made in labs. China’s insistence on protecting traditional knowledge is more consistent with US cultural trends than US law as crafted by Big Pharma.

Further, the Trump administration claims that China’s restrictions on foreign investment have muscled US firms into turning to Chinese firms to manufacture its products, the designs of which are then leaked to bootleg companies. This complaint seems designed to pressure China into liberalizing its laws concerning foreign ownership and impose much stiffer penalties on infringers. That is already happening, but to expect China to more carefully police and enforce American trade secrets and American trademarks is asking the government to do the opposite of liberalizing.

What About the Consumer?

There is a final matter of consumer welfare to consider. Anyone who has shopped anywhere in the world in the last 20 years knows for sure that “counterfeit” products from China are readily available, even on the streets of Washington, D.C. The reality is that both the seller and the buyer know them to be fake (you don’t really think a Gucci bag can be bought on 42nd Street for $10) but both parties still benefit from the exchange. This reality affects not only US-China trade but all trade anywhere.

Every holiday season is replete with warnings about counterfeits. Consumers are told to stay away and beware. That’s fine, but it doesn’t deal with the larger reality that people would rather pay far less for copycat products that work just as well. It’s not “fraud” that keeps this market open; it’s buyer behavior. Regardless, US authorities have been unable to enforce their own IP laws domestically; they stand far less chance of getting these same laws enforced in a country as gigantic, complex, and far away as China.

This is precisely why Chinese trade negotiators have concluded that all this talk about IP infringement is nothing but an excuse for the US to do what the Trump administration wants to do anyway, which is to hobble Chinese prospects for continued economic expansion to become the world’s largest wealth creator in history. After all, the complaint is only one of many that include subsidies, trade deficits, currency manipulation, and market access.

For China to crack down on its supposed violators of IP, import US law as its own, permit US courts to enforce it, and acquiesce to every other point demanded by the US, even if these impossibilities were possible, would end in making its economy less free, less productive, and more dangerous for free enterprise.

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Jeffrey A. Tucker

Jeffrey A. Tucker is Editorial Director for the American Institute for Economic Research. He is the author of many thousands of articles in the scholarly and popular press and eight books in 5 languages. He speaks widely on topics of economics, technology, social philosophy, and culture. He is available for speaking and interviews via his emailTw | FB | LinkedIn