The U.S. — China trade dispute is rooted in poorly designed Intellectual property (IP) rights.
The U.S. — China trade war has seen a slew of tariffs from both countries, causing imports of goods and services to fall 25% and 10% respectively. As the risks of a broader decoupling fall following a truce, business investment has nonetheless remained tepid, with sentiment falling well below the longterm average. I discuss the implications of the trade war here.
Meanwhile, China’s growing economy and middle class have created a stable domestic market, with Chinese companies growing increasingly innovative and China’s geopolitical ambitions becoming increasingly clear. The U.S. is increasingly wary of China’s rise, but its China strategy appears to conflate diplomatic squabbles with economic nationalism.
The next century is an Asian Century, not a Chinese one.
The next Century is turning out to be an Asian one, not solely a Chinese century as is wrongly asserted by most. China’s rise will be contingent on chips for mobile phones, computers, and electric vehicles from Singapore, Malaysia, India, and South Korea. Asian countries will be tightly integrated and knitted into Chinese supply chains ranging from auto manufacturing, green technology, transport equipment, and machinery as well as advanced weaponry and I.T hardware and software. The blind spots in the Asian story are not dissimilar to that of India’s as I argue here.
The United States now appears to be taking a less conflict-ridden route on China. President Trump imposed 85% on $352 billion worth of U.S products. As illustrated below, the Chinese swiftly responded with 50% of tariffs on $50 billion worth of U.S. imports as well as 5–25% and 5–10% on a further $60 billion and $75 billion.
This paper will discuss the implications of the U.S.-China trade war, discuss different types of innovation as well as outline a blueprint for reforming IP laws in a manner consistent with the development needs of WTO member and non-member countries.
Tariffs have affected both Chinese and Industry
The impact of the U.S. — China trade war is a slowdown in global trade, but the impact on both the U.S. and China is evident. It is, however, important not to overstate the impact of the slowdown in the Chinese economy which grew at 6.0% in Q3 from 6.2% in Q2 2019. The slowdown is also structurally driven as China moves from being an investment-driven to a consumer-led economy. One could, therefore, expect a slowdown in the Chinese economy, but its extent is contingent on the pace of its transition and the extent to which innovation is adopted in rural China.
In spite of the short term damage caused to the Chinese economy, Huawei, currently registered 2000 patents and its technology is used in electric vehicles, where China is a leader. Tariffs will have the fortunate impact of causing Huawei and China to insulate its supply and value chains and reduce reliance on U.S. chip and software manufacturers.
The U.S.- China trade war is rooted in an unbalanced and unfair global rules-based order
It is important to place China’s rise into a broader context. No economy in the world has developed without “borrowing” common-place technology to produce better and more efficient products or services.
The questions of intellectual property theft are somewhat justified but it is overstated. A quick example should provide some clarification. If country A creates an Asprin and five years later country B does without stealing it from country A, should country B be penalized for its innovation? The law that allows for such claims is based on a set of unfair and archaic rules that are designed to protect companies in country A to benefit continuously from what actually constitutes an unfair trade practice.
China has, indeed, stolen from technology from the U.S. and European companies, but should any company be allowed to benefit from intellectual property rights incessantly even after they have regained the initial investment that facilitated the innovation i.e Asprin. The answer is no and this is why we need to update IP laws in other to improve the legitimacy of the WTO, reduce continued U.S. economic imperialism & global imbalances as well as facilitate economic convergence.
There is no phase one
The media misrepresents the progress in the U.S.-China trade war, it describes the recent détente and postponement of tariffs as completion of a phase-one of negotiations. my rationale rests on the fact that prior to Trump’s decision to impose tariffs on Chinese exports, he sought to negotiate a trade agreement that addressed China’s weak enforcement of intellectual property rights, subsidies to state-owned enterprise and economic espionage.
The Duplicity of U.S. claims on China’s breach of IP is evident in its attack on Huawei.
Despite claims of China spying on the African Union, it has not mishandled consumers; unlike Facebook, who facilitated Russian interference in the U.S. election or Cambridge Analytica’s psychological profiling that interfered with Western liberal democracies. Unlike Google’s anticompetitive behavior, there is no evidence that Huawei presents a risk to countries in which it operates.
The U.S. also placed Huawei on
The U.S. carefully calibrated its attack to prevent Huawei from gaining global market share or becoming ubiquitous; the Chinese tech giant is one of the most widely used smartphones in the world, only second to Samsung. To give you an indication of the scale, China not only provides phones to people in Latin America, Americas, Europe, and Africa, it also powers the technology that drives government processes, manufacturing plants, service, and tourism industry as well as SME’s across a range of sectors due to its affordability. The closest companies Europeans have to Huawei are Nokia and Erikson.
In an attempt to impede Huawei’s rise and China’s expansion, the Trump administration placed it on an entity list and U.S. companies such as Qualcomm, Xilinx and Broadcom stopped supplying Huawei with Google banning it from its google store, leaving at a disadvantage for Android lovers.
This is unlikely to stop Huawei’s rise as it holds market share in more markets than Apple. Meanwhile, some companies’ revenues are significantly affected, which explains the tech-driven meltdown in U.S. stock markets throughout the trade war. Companies with the most revenue exposure include NeoPhotonics, Lumentum, Qorvo, with 45–47%, 10–11%, and 8.0% respectively
Claims of IP theft and economic espionage are overstated
Not only are claims of Chinese weak enforcement of intellectual property rights, economic espionage and forced technological transfers overstated in the absence of reforms to global IP laws, its decision to assail Huawei and place it on an entity list suggest a more nefarious and targeted approach to discredit the global smartphone manufacturer.
Intellectual property needs must reflect development needs!
As such, pausing tariffs puts China and the United States are merely back where they started in 2018, so it is important not to overstate the pace of progress. Meanwhile, China’s industrial policy and development path are not particularly different from that of the U.S. The United States stole failed to implement like China during the early phase of its development and stole weaving technology as well as literature and plays. It is normal for countries to steal basic technology at the start of their development; the United States and China are far from being the last countries to engage in such a practice.
Claims of IP breaches are overstated and based on archaic interpretations of international law
Rather than weaponize and abuse the global trading system by employing sanctions-diplomacy and a tariff-driven approach to trade negotiations, the global rules-based order must rather reform to ensure basic innovations and inventions are not protected any more than is warranted. This is currently the case, and claims of IP breaches are therefore overstated, based on an archaic set of rules designed to cement global dominance of U.S. firms and China, as well as other emerging markets, must design domestic international property laws that suit their development needs.
Incremental or process innovations warrant a change in IP laws
More worrying is the fact that IP laws have not been updated to reflect differing approaches to development and innovation, which are nothing more than a reflection of structural changes in most economies. At the turn of the millennium, companies and governments were innovating at a breakneck pace, with the internet creating a global market place and social media allowing businesses in Latin America to sell to Chinese, European and American consumers, and vice versa.
To give an example, the internet and social media were revolutionary. But additional features in a car manufacturer’s assembly line can only serve to boost productivity not revolutionize the production process as humans are needed to control the machines or at the very least ensure a seamless process from the placement of chairs, fitting the engine to painting. These sorts of incremental progress are termed “process innovations”. An improvement to the above process in a car manufacturing plant shouldn’t prevent countries or businesses pursuing patents, as protecting an incumbent or earlier innovation under such a context exacerbates global imbalances, slows development and increases the risk of protectionism and economic nationalism.
How long should inventions or innovated be protected for?
A question at the heart of IP laws is how long should a patent be protected for? At inception, patents were designed to protect innovators, but also enable them to recoup some of the capital spent during the Research and Development process. The additional cost of a product or service should be closely linked to the time taken to recover the cost of the R&D.
Failing to do this is not only detrimental to the global economy but “innovation” itself. If basic innovations in health care, transport, climate, and software are indefinitely protected, this creates the perfect for inequality to flourish on a global scale. More worrying, is the fact that countries at earlier stages of their innovation are unlikely to leapfrog significantly, but rather find less costly ways of producing pharmaceutical drugs for a particular disease. It is therefore counterproductive to expect the basis of such innovations to be entirely different from the original innovator!
There’s no evidence of “original sin”
Most academics consistently implement incremental innovations, updating models in a manner consistent with other findings and a range of sources. If research in the sciences’ and humanities are informed by previous research, why should Huawei’s technology not be informed by Apple of Samsung, except, optimized to be ubiquitous and used in a variety of ways? This approach explains why China, not America created 5G as well as the cheapest I.T software used by governments, restaurants, hotels and financial centers around the world. Most governments around the world have agreed to runt heir networks on China’s 5G technology despite baseless, unsubstantiated and unjustified claims of Huawei sharing consumer data with the Chinese communist party.
Fairer reforms to IP laws are needed to ensure the legitimacy of the Rules-Based order
There are no set of rules that can be applied across all jurisdictions but incremental innovations should be given more legitimacy, provided companies recoup some of the cost spent in the R&D process. The United States must not be allowed to use its IP laws to protect U.S. companies and impose its rules on the global economy, any updates to IP laws must be cognizant of developmental needs in other to gain any legitimacy whatsoever.
Absent comprehensive reform to IP laws, the Chinese model of forced technology transfers should be employed by countries around the world to address development needs, productivity and reduce global imbalances. Country-specific IP laws must be fully developed and enacted, and must take precedence over WTO enforcement, should it fail to occasion IP laws that reflect diverse economic and developmental needs or acquiesce to a U.S.-centric narrative of IP interpretation.
Reformed IP laws will reduce the risk of economic nationalism
The inability of the WTO to prevent a breakdown of the rules-based order speaks to its impotence, but it must seek to reform IP and patent laws in a manner that bolsters its credibility and incentivizes cooperation from member countries. Absent that, countries will likely implement China’s development, which legitimately utilizes forced technology transfers to develop their industries in exchange for market access. The balkanization of the world is not inevitable, but an increasingly irrelevant WTO must think hard on how to protect multilateralism rather than simply serve as a tool for the US economic imperialism.