Allegations of intellectual property theft and forced technology transfer are one of the primary grounds that the Trump administration relies upon in the trade war against China. Of the many criticisms of China from the Trump administration, those on forced technology transfer have been among the fiercest.
“Forced” Technology Transfer
Forced technology transfer means that when a foreign company wants to enter the Chinese market, it has to surrender its technology to Chinese companies through a joint venture agreement, or in some cases due to regulations.
There is no doubt that the Chinese Government has insisted upon technology transfer by multinationals seeking access to the Chinese market and its once relatively cheap labour force. But nobody forced these companies to do business in China. If multinationals make hefty profits investing in China, the question arises why shouldn’t China benefit from technology transfer?
US Marxist economist Richard Woolf says that the shift of manufacturing from the USA to China was the result of a deal done by Deng Xioping and US corporations in the 1980’s. Deng decided to allow US companies to enter China both through private enterprise and joint ventures. He offered cheap labour and access to Chinese markets and, in exchange, China would receive access to technology and assistance in accessing the US market. Walmart was a big part of this access giving Chinese based business an instant distribution network. Nobody was ‘forced’ into anything. There is no international law, or even norm, prohibiting joint ventures that require technology transfer.
But my Australian born friend Mr X has lived and conducted business in China for 40 years. He objects to what he describes as the Chinese Communist Party line “But nobody forced these companies to do business in China. If multinationals make hefty profits investing in China, the question arises why shouldn’t China benefit from technology transfer?”.
Further the criticism of China for insisting on technology transfer is hypercritical. The USA itself benefitted from technology transfer, principally from Britain, in the course of its own economic development.
Alexander Hamilton, who was soon to become the first Secretary of the United States Treasury, won a victory at the US constitutional convention by awarding the federal government a power to issue patents. Benjamin Franklin apparently opposed the measure arguing his inventions were the property of all humankind.
Hamilton then used patents to lure immigrants with skills and knowledge to the United States. George Parkinson, for example, was awarded a patent in 1791 for a textile spinning machine, which was really just a rip-off of a machine he had used in England. The United States also paid his family’s expenses to emigrate and re-locate to the US.
In 1810, Massachusetts businessman Francis Cabot Lowell visited England and spent his time trying to figure out how the Brits had managed to automate the process of weaving cloth. Back in the US he built a whole new city on the Merrimac River to house their new textile factories. The city was ultimately named Lowell after the enterprising spy.
Peter Drysdale, a professor at the Australian National University, has stated: “All catching-up economies, including in the US, have acquired the technologies of more technologically advanced economies to engineer their industrial growth. Most of it is not stolen. Most technology is purchased directly or through purchasing advanced machinery and equipment and it is learned. In the process, technology is adapted and it is also created. China is no different.”
“The rules don’t prevent countries from accepting foreign investment on the basis that investors will pass on technology and management know how,” he says.
Straight out theft of intellectual property is distinct from so called forced technology transfer.
Methods include employees stealing proprietary information from firms for their own startups, or employees with special knowledge being hired away by Chinese competitors. There is “self-help” IP theft of the sort where Chinese were caught in Iowa cornfields stealing genetically modified corn samples.
And there is cyber theft and even classic espionage – where Chinese government agents target people with access and recruit them.
This outright industrial espionage lacks the legitimacy of technology transfer because it does not occur through agreement.
But Professor Greg Austin from UNSW Canberra Cyber had described industrial espionage as just a normal part of international relations — practiced by China, but also by the United States, France and Israel.
“If you look at the CIA organisational chart, you’ll see that two of its four intelligence directorates are involved in scientific, technical and economic espionage,” he said. “I’m confident that the Chinese Government continues to engage in intellectual property espionage; I’m confident that the United States Government does the same thing.”
The issues of industrial espionage and so called forced technology transfer tend to be highly conflated in media reports about the trade conflict between the USA and China. Both are simply described as Chinese IP theft. It is difficult to find a comparison as to their relative cost to US companies. A 2018 US Trade Representative report estimated that Chinese IP theft costs the American economy between US$225 billion and $600 billion annually. As that figure shows, experts differ on how to calculate losses.
How strong is the policy justification for IP anyway?
There is a fundamental tension in intellectual property rights laws. On the one hand there is the desire to foster innovation and secure the private property rights of individual inventors and creators. On the other there is the public interest in broad dissemination, competition and the avoidance of monopoly rights.
Where a country lies in this spectrum is likely to depend on its level of economic development at a particular point in time as well as the areas in which it currently possesses a competitive advantage.
Unlike the power that comes from controlling scarce raw materials the economic power derived from intellectual property rights depends upon creation and enforcement of law.
These laws necessarily designate certain property as “private” and other as ‘freely available”. The laws themselves will often reflect existing power relations- thus a computer chip may be regarded as intellectual property but indigenous folklore not.
The British designed their early patent system to encourage importation of foreign technologies into their country. They provided monopoly protection not to inventors but to those who brought inventions into public knowledge. The US on the other hand established their patent system to encourage domestic innovation while denying protection to foreign technology. The Dutch were followers in technology and in 1867 abolished their patents’ legislation.
During and after World War II cartels were associated with German and Japanese nationalism and militarism. This led to questioning of patent protectionism. Courts tended to presume patents to be invalid and criticised their holders for fixing monopoly prices for items already in the public domain. But in 1952 the US congress addressed the then relatively lax patent environment by passing the Patents Act. The Act reflected the wishes of large corporations.
From the 1980’s a series of US court decisions also entrenched a more pro-patents approach. A series of decisions prioritised protection and exclusion over diffusion and competition.
The 1990s saw the development of multilateralism and endorsement of the Agreement of Trade Related Aspects of Intellectual Property Rights (TRIPS). TRIPS covers all intellectual property rights: patents, trademarks and copyright as well as containing provisions on industrial designs, trade secrets and recordings. It extended the term of patent protection to 20 years. Complainants about breaches of TRIPS have access to World Trade Organisation dispute resolution mechanisms.
Susan Sell has written a detailed history of the development of IP law. She says that the consequences of TRIPS are grave for developing countries.
TRIPS prohibits latecomers from adopting the very policies that proved successful in the economic development of the USA, Spain, Switzerland and the Netherlands. It makes access to information and technology more expensive while defending monopoly privileges. It closes off significant segments of what was once in the public domain. States whose competitive advantage lies in imitation and adaptation lose out under the regime.
The HIV pandemic in sub-Saharan Africa, and the inability to access cheaper generic drugs, thrust the controversy over intellectual policy into stark light. The question arose: at what point do intellectual property incentives to foster innovation in the development new life saving drugs come to defeat the purpose of saving lives because of IP limitations on access?
Today patenting has reached absurd levels. Amazon has been able to patent its “one click” ordering function, and Microsoft holds a patent related to the scheduling of meetings on smartphones. Boldrin and Levine argue that there is no empirical evidence that patents increase innovation or productivity. Their research indicates that in less than thirty years the number of US patents has quadrupled, but there has been no particular upward trend in R&D expenditure, factor productivity or innovation.
“The fundamental problem with the patent system is simple: it is based on restricting the use of knowledge… The patent system not only restricts the use of knowledge; by granting (temporary) monopoly power, it often makes medications unaffordable for people who don’t have insurance… In the Third World, this can be a matter of life and death for people who cannot afford new brand- name drugs but might be able to afford generics. For example, generic drugs for first-line AIDS defenses have brought down the cost of treatment by almost 99% since 2000 alone, from $10,000 to $130….There is an alternative way of financing and incentivizing research that, at least in some instances, could do a far better job than patents, both in directing innovation and ensuring that the benefits of that knowledge are enjoyed as widely as possible: a medical prize fund that would reward those who discover cures and vaccines. Since governments already pay the cost of much drug research directly or indirectly, through prescription benefits, they could finance the prize fund, which would award the biggest prizes for developers of treatments or preventions for costly diseases affecting hundreds of millions of people.”
While there will always be arguments about the correct balance between protecting innovation and wider dissemination and competition one thing is clear: There is no philosophical consistency between intellectual property protection and traditional liberal Laissez Faire economics. IP law is state intervention in the economy writ large.
In his book ‘Against Intellectual Property’ Stephen Kisella argues that there is no such thing as IP in a free market. He argues that ideas are not scarce and are infinitely copiable. You cannot steal what is infinitely copiable. With IP, the government grants a monopoly to a single producer. Monopoly is the opposite of competition. IP is monopoly. Therefore, it is against free-market competition. Real property rights have existed at least since the advent of agriculture. Intellectual property is an invention of modern legislation.