COMMENTARY: Data Challenges China's Reputation as Vast IP Thief

A study looking at outbound royalty and license payments shows country pays its fair share as much as other countries at similar income levels.

Mark Melnicoe
    Jan 04, 2020 5:00 AM  PT
COMMENTARY: Data Challenges China's Reputation as Vast IP Thief
author: Mark Melnicoe   

China's treatment of intellectual property continues to be a chief complaint among American officials and the business community. Chinese companies, the narrative goes, coerce transfer of IP rights as a condition of doing business or just outright steal property despite patents and trademarks. It's been going on for so long that it's taken as an article of faith in the U.S. media, and it's a central point of contention in the ongoing trade war.

Sure enough, one can venture to massive illegal markets in Beijing, Shanghai and other cities to pick up an array of pirated goods at bargain prices – DVDs of the latest Hollywood movies selling for about $2, fake LV or Coach handbags, phony Samsonite (HKEX: 1910) luggage or Nike (NYSE: NKE) sneakers.

But a new report shows how there is much less to this charge than meets the eye. A look at events over the past two decades reveals that China's record on intellectual property is right on par with other countries, considering its income level. 

Shang-Jin Wei, a former chief economist at the Asian Development Bank and now a finance professor at Columbia University, and Xinding Yu, associate professor of economics at the University of International Business and Economics in Beijing, performed the study and published their results in the South China Morning Post on December 30.

The two economists looked at outbound royalty and license payments countries make to other countries for foreign patent, copyright and other IP holders. Their source was the balance-of-payments statistics compiled by the International Monetary Fund. The authors say that a country's income level and IP payments are closely linked "with a clear, positive linear relationship."

"If Chinese firms were systematically using foreign intellectual property without compensation to a greater extent than other countries at a comparable income level, China's intellectual property payments would be low for its income level," they write. "Yet when we created a time series for China's per capita intellectual property payments between 1997 and 2017, we found that this was not the case."

They note that China's IP payments were less than the international average for countries at comparable income levels before China joined the World Trade Organization in December 2001.

"But in every year since its accession to the WTO, its intellectual property payments have exceeded that average," they note.

Push to High Tech Entails IP Protection

This is not to say that China doesn't violate IP laws on a wide scale. We all know it does, but perhaps not to the extent we thought. There are a number of ways to gauge China's compliance with IP rights. One is to look at the laws it has passed to fight the problem. On that front, Beijing has made a lot of progress in recent years. In 2017 the State Council, China's top administrative body, vowed to "effectively curb" IP infringement by 2020 via a series of legal, regulatory and judicial actions.

It created an archive and blacklist of companies engaged in illegal activities and tied the information to a brewing national social credit score system. The State Council even took a stab at changing the culture of counterfeits in China through the news media and the school system by organizing "propaganda and education activities."

Beijing has also set up a series of IP courts around the country, and they have gained a growing reputation for fairness, sometimes ruling in favor of foreign enterprises suing Chinese firms for infringement.

And China's recently enacted Foreign Investment Law bars enterprises from making technology transfer a condition of doing business in joint ventures or other agreements.

Wei and Yu cite another piece of evidence that China is less rogue than most people think: the country remains the top destination for FDI among all developing countries, as it has for 10 years running. Only the U.S. attracts more.

"Multinationals are not stupid," they wrote. "They are not inclined to enter markets where their property will be expropriated on a massive scale."

The authorities in Beijing have cracked down hard on pirated goods for sale on Alibaba (NYSE: BABA), (Nasdaq: JD) and other e-commerce websites. Those companies have worked hard to keep such illegal products off their platforms with increasing success.

Another friction point in the U.S.-China relationship is China's Made in 2025 initiative to push the country into a leadership position in an array of high-tech sectors, including artificial intelligence. Almost completely overlooked in this endeavor is the extreme likelihood that China will enforce IP rights more vigorously when its own companies are becoming more innovative.

Why? Chinese firms need the protection now because instead of just making clothing, toys and small appliances they are building robots, computer chips, advanced smartphones and jet aircraft. They have much more at stake.

China's innovation economy has taken off, grabbing the global lead in the number of patents issued each year, according to the World Intellectual Property Organization. WIPO says that patent applications in China in 2018 totaled a record 1.55 million – nearly half of the entire world total.

So while you might still find those knockoff products in the underground markets of Shanghai, Guangzhou, Wuhan and other cities, China is far from alone and, according to the numbers, no more guilty than other developing countries.