Tackling the ‘China Question’

It is an open secret in Washington, D.C. that China, to put it mildly, is “ripping us off” on trade. This fact is tacitly acknowledged by congressmen, Republican and Democrat alike, businessmen, and economists, and yet the “China question”—how to correct the U.S. trade asymmetry—is conspicuously absent from policy discussions.

Or, rather, it was until this week. President Trump on Monday announced he would authorize a public inquiry into China’s predatory trade regime. Specifically, the president is empowering U.S. Trade Representative Robert Lighthizer to investigate China’s trade policies as they relate to the theft of American intellectual property (IP).

This is big news: until now Trump has talked a big game, but done surprisingly little to deal with China. It’s surprising because preventing IP theft should be a bipartisan issue that receives the full support of Congress, and because the president has a large degree of unilateral authority over foreign trade policy.

Either way, intellectual property theft is a big problem for the United States. Why? Three reasons: 1) it costs America a lot of money; 2) it undermines the rule of law; and 3) it endangers national security.

A Half-Trillion Dollar Problem, At Least
The first issue is the most data-heavy, and therefore deserves the most attention. Fact is, Chinese companies, the majority of which operate with the explicit blessing of the Chinese government, steal hundreds of billions of dollars of American intellectual property. This includes industrial technology, branded goods, software, and entertainment—anything and everything even mildly “creative” is up for grabs.

Tracking the economic value of IP theft is difficult, but a few recent estimates should give us pause. According to estimates from William Evanina, the director of the Counterintelligence and Security Center during the Obama Administration, cyber-espionage alone cost the U.S. economy $400 billion in 2015. This estimate was extrapolated from reports from 140 American companies with interests in China.

As costly as this is, the real concern is the origin of said cyber-threats. Evanina claims that China’s government itself was behind 90 percent of all cyberattacks—not rogue companies or basement-dwelling lone-wolf hackers. This is troubling: at best we should see it as “sharp dealing” and at worst IP theft of this magnitude could be considered an act of war.

This figure also underestimates the actual damage of IP theft. Why? Because companies, especially publicly traded companies, are likely to mitigate damage estimates so as to avoid hurting their fragile business relationships with Chinese government officials—or their stock prices. After all, very few investors would be enthused if 20 percent of their profits were stolen by a hostile government.

Likewise, Evanina’s figure only includes losses from cyber-threats; it does not include losses from Chinese copycat companies. For example, the Chinese market is stuffed to the brim with knock-off products—were America free to sell its wares in China, it is doubtful that our trade deficit would even exist.

A second estimate, this time by the Commission on the Theft of American Intellectual Property, found that IP theft cost American individuals and businesses approximately $300 billion annually, and that China accounted for “between 50 percent and 80 percent of the problem.” Therefore, Chinese intellectual property theft costs America between $150 billion and $240 billion every year according to this study.

Taken together, it is quite clear that IP theft is no laughing matter; it costs America big-time. Yet both estimates actually underestimate the true value of IP theft, which often takes the form of counterfeit products. A study from 2010 found that up to two percent of all global trade was in counterfeit goods, and about two-thirds of those phony products originated from China.

A report published by the OECD in April 2016 found that this number had increased, that 2.5 percent of all global trade was in counterfeit products, and that 61 percent of those products originated from China. The value of these counterfeit goods totaled $461 billion annually, and China was responsible for $291 billion of them. And remember, this does not include intangible IP of the sort previously discussed; this only refers to physical products (things like knock-off action figures, fake sneakers, and counterfeit laundry detergent).

In all, China is likely responsible for half a trillion dollars in IP theft annually. For context, this is almost double the goods trade deficit that America legally runs with China every year.

Handing Over Our Best Tech
Of course it isn’t just about the money: China’s complete disregard for America’s IP rights undermines the rule of law—particularly at the international level. When foreign firms (and countries) see China stealing American IP with impunity, they are likely to learn from their example; theft is profitable if there are no consequences. This is the entire reason why patents, trademarks, and copyrights were invented in the first place, no? America has an obligation to defend the property of its citizens, and this alone is enough to take a hard-line approach with China.

Finally, IP theft undermines U.S. national security. Many American firms that do business in China make technologically sophisticated products, such as computer chips, that have integral military applications. They probably should not be manufactured abroad, least of all in China. Not only does this allow China to reverse-engineer our technology, which improves their military, but it lets them peek behind the curtain, potentially exposing our own technological flaws and weaknesses.

IP theft, as well as a host of other dirty tricks, gives China the upper hand when it comes to trade. President Trump needs to make dealing with the “China question” a priority—not just for our economy, but for the nation’s security.


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