US–China Trade Relations and Intellectual Property Rights

Introduction: Intellectual Property and International Trade

Intellectual property is critically important as American businesses continue to expand and develop. Companies are now attempting to penetrate foreign markets that are unique in their laws, customs, and beliefs. International trade is no different in this regard, as businesses attempt to capitalize on a burgeoning middle class in China. It is therefore essential for businesses to protect the intellectual capital that has allowed their operations to thrive. Too many individuals are copying or directly replicating American brands in an attempt to generate profits. Brands are, in many instances, the most important asset a business possesses. By pilfering or using very similar marks, emerging markets are literally stealing profits earned by American businesses.

This is an international trade issue: businesses must now work to enforce higher standards of transparency regarding intellectual capital, while doing so without destroying the relationships between Asian consumers and their American counterparts. It is in the nature of capitalism to copy or mimic successful products. The problem arises when companies outright copy a trademark or patented process. China, specifically, has been notorious for infringing on American companies' intellectual capital. This ultimately hinders international trade and discourages innovation among American businesses. Furthermore, businesses may become reluctant to expand in markets where copyright and intellectual property infringement is rampant.

The World Intellectual Property Organization (WIPO) defines counterfeiting as "infringement on trademarks" and piracy as "infringement on copyright or related acts" (Jacobson, 2008). Between 5% and 7% of all world trade is comprised of piracy and counterfeiting. Piracy rates within China were at an alarming 92% (Cheng, 2011). Nearly 1.3 billion people live in China, of whom approximately 90% pirate software or commit other forms of cybercrime against intellectual property. The likelihood of being caught for this offense is low, due in part to the sheer volume of citizens within the country. Whether it would be practical or even worthwhile to catch every small-scale counterfeiter within China is debatable, and there is little to prevent another person from committing the same offense once one is caught. Given the ease of access to technology, virtually any of China's 1.3 billion citizens is capable of committing an intellectual property crime. This poses a significant threat to American businesses and to intellectual property protections in general.

Defining Intellectual and Traditional Capital

This situation is a particular problem for international trade because it discourages investment in American intellectual capital. What incentive do American businesses have to develop intellectual capital if China can simply copy it with no reprimand? This creates issues in valuation as well. Companies will not pay a premium for intellectual capital that can easily be duplicated by international competitors, which further diminishes the profit incentive and stifles innovation.

America is characterized by its emphasis on capitalism, international trade, and the benefits those activities bring to society. International trade and the production of innovative goods and services have provided a solid foundation for American prosperity for centuries. American capital markets are among the best in the world, supplying capital to flourishing businesses. Those businesses, however, need protection from the competitive pressures of foreign rivals. While competition in international trade naturally drives the innovation of goods and services and produces cheaper products that benefit society at large, some forms of creativity must still be protected. Intellectual property is one such area. If a company or individual creates a unique structure or idea, competitors should not be permitted to steal, mimic, or directly copy that concept. A logo is a symbol of a brand and the values it evokes in consumers' minds; it should therefore belong exclusively to the company that created it. If every fast-food chain copied McDonald's logo for its own use, it would create chaos in both the consumer and business worlds (Oley, 2010). Consumers seeking a particular value proposition would be unable to distinguish between companies and would be forced to spend time and energy searching for the product characteristics they desire — a problem that is especially pronounced in the current technological age, where barriers to entry in many industries have been substantially reduced by the internet.

Traditional capital is tangible capital — items that provide a direct economic benefit to a company, such as physical materials used in manufacturing or a building used to store inventory. Because a market price can be placed directly on these items, they are readily valued. The steel used to produce a car, for example, can be priced in the marketplace on a daily basis and, in the event of liquidation, can be sold for cash.

China's Legislative Record on IP Protection

Intellectual capital, by contrast, is defined as "the knowledge, experience, and brainpower of employees as well as knowledge resources stored in an organization's databases, systems, processes, culture, and philosophy" (Intellectual Capital, 2012). Unlike a logo or brand, tangible assets can be quoted daily. Businesses traditionally hold both tangible and intangible assets, and both are needed to advance company goals and drive business results. A common mistake many companies make when valuing intellectual capital is being overly optimistic in their assumptions. Many companies engage in mergers and acquisitions to obtain intellectual property — this occurs frequently in the technology sector, where large firms purchase smaller companies for their expertise and intangible assets. For example, Microsoft purchased Skype for $8.5 billion (Shankland, 2011). Skype's tangible assets were well below that figure; the remainder was characterized as "goodwill," representing the intellectual capital Skype provided. Microsoft CEO Steve Ballmer described Skype as "a phenomenal product and brand that is loved by hundreds of millions of people around the world." Placing a dollar value on the loyalty of hundreds of millions of users and forecasting their future profitability to Microsoft is inherently uncertain. It remains possible that Microsoft simply overpaid for intellectual assets that were grossly overvalued. Companies attempting to merge with or acquire internet companies must be acutely aware of how to value intellectual property appropriately.

China has done much on paper to counteract the pervasiveness of piracy of American goods and services within its borders; however, it has done little in terms of actually implementing those measures. The 1990 copyright law that China enacted was sound in concept but difficult to execute. The law provided for the protection of authors of scientific and artistic works and established a means of disseminating that information for the benefit of society (Cheng, 2009). Yet a closer review of the law's impact on piracy levels within China reveals that it did nothing to reverse the alarming trend. In 2003, piracy rates within China remained at 92% (Orley, 2010). This ultimately harms trade relations between the United States and China, as businesses are reluctant to operate in markets with unethical practices — a concern that is especially acute for American companies that rely heavily on brand image and the quality it represents. Luxury brands such as Lamborghini, for instance, would be very reluctant to engage in the Chinese market given the extreme importance of prestige to their consumer base.

In 2004, China enacted the Several Issues of Concrete Application of Laws in Handling Criminal Cases of Infringing Intellectual Property. This law effectively lowered the threshold for what constitutes piracy while enhancing overall punishments. China also revised its Civil Procedure Law in 1991 and its Criminal Procedure Law in 1996 (Slate, 2006). Yet, to the disappointment of other industrialized nations such as the United States and those in Europe, China has done little to actually enforce these standards. This failure is due in part to the ease of access to counterfeiting technology combined with a lack of severe punishment. As noted earlier, nearly 90% of China's population pirates software, motion pictures, and other goods, and the practical likelihood of prosecution remains very low. As TRIPS membership requires, China is obligated to provide criminal procedures and penalties for willful trademark counterfeiting; however, China has circumvented this requirement by claiming it lacks the resources and training necessary to conduct such proceedings (Orley, 2007).

Conclusion

Intellectual property value will continue to be a major issue as American businesses expand into foreign markets. The failure of the Chinese government to enforce intellectual property standards has placed an undue burden on trade relations. It is therefore increasingly important to value intellectual property accurately and to guard against its counterfeiting. Trade is beneficial for both America and China as international business continues to grow; however, the current intellectual property environment rewards thieves rather than the businesses that create the underlying value. By properly valuing and protecting intellectual capital, companies can continue to innovate while maximizing profits and revenue. Society as a whole benefits from better, more efficient products — products that ultimately raise the quality of life for all parties involved.