The White House announced on Monday that it would instruct the U.S. Trade Representative to begin the process for deciding whether to initiate a Section 301 investigation against China. That investigation, which could potentially result in the imposition of trade sanctions against Chinese imports, will look at whether “any of China’s laws, policies, practices, or actions . . . may be unreasonable or discriminatory and . . . may be harming American intellectual property rights, innovation, or technology development.”
Numerous officials and news reports have used the term “IP theft” to describe the various policies and actions the investigation will look at. This is a very ambiguous term that’s being used to describe a very diverse set of problems with very different origins and very different solutions.
The most obvious example of “IP theft” is infringement. China has been accused of permitting or tolerating large scale infringement of foreigners’ IP rights. The White House cited a report by the IP Commission finding that counterfeit goods, pirated software, and theft of trade secrets cost the U.S. economy between $225 billion and $600 billion per year. A large part of this is happening in China.
Another, more trade related, issue that’s being put under the umbrella of “IP Theft” is “forced technology transfer” as a component of China’s goal of promoting indigenous innovation through industrial policy. Although the complaint alleges a number of informal mechanisms, the focus is on Chinese rules requiring foreign companies to form joint ventures with Chinese counterparts and transfer patent rights to the domestic entity.
This practice is definitely something the U.S. government should challenge. The Chinese are placing a restriction on foreign investment, known as a “performance requirement” that leverages the attractiveness of their market to benefit particular domestic industries or economic policy goals. Performance requirements are not uncommon and many types are prohibited by various international treaties. In fact, Paragraph 7.3 of China’s Accession Protocol to the WTO prohibits the conditioning of investment approval “on performance requirements of any kind, such as local content, offsets, the transfer of technology, export performance or the conduct of research and development in China.”
Technology transfer as a condition for investment is bad policy. It would be better for American companies and better for China if they let foreigners do business without this restriction. But I wouldn’t call it “IP theft.” “IP-transfer performance requirement” doesn’t jump off the page quite as well or fill readers with a sense of outrage and fear, so “theft” is what it’s going to be called.
Another practice that may be included in the Section 301 investigation is commercial espionage by agents of the Chinese government. As the Fact Sheet accompanying the White House Section 301 Memo explains, “China has gained unauthorized access to the computer networks of United States businesses for commercial purpose and, on a number of occasions, has stolen firms’ commercial information.”
This is an especially nasty problem. U.S. companies face the risk that the Chinese government will hack into their computer networks to discover sensitive commercial information and then share that with competitors in China.
I wouldn’t call this “IP theft” either. In this case there’s definitely theft, but what they’re stealing isn’t intellectual property. It’s happening with a computer and involves technology and maybe even innovation, if what they’re stealing is a trade secret. But calling this IP theft is just lazily throwing the term IP around for stuff that doesn’t have its own catchy name.
The most egregious example of a complaint that is not in any way “IP theft” was given by Commerce Secretary Wilbur Ross in a Financial Times op-ed. It isn’t included in the White House’s Fact Sheet, but Ross devoted three paragraphs of his op-ed to condemning this practice:
The Beijing government and Chinese companies also pursue an investment strategy whereby they identify US start-ups with scientific breakthroughs and then make investments in those companies on better-than-market terms. The primary consideration in this investment is not rate of return, but the capture of new technologies.
This is literally an example of China promoting American innovation by investing in the intellectual property of U.S. companies. I won’t say it’s a good thing–it might result in mis-investment to the extent the Chinese government is using noncommercial criteria to make investment decisions. But that would mean that China was subsidizing U.S. innovation. In any event, it is pretty much the opposite of “IP theft.”
At some point we’ll get a clearer picture of what USTR is going to investigate under Section 301. And people will probably continue to use the term “IP theft” to summarize those complaints. But it’s not a very accurate description.