Chinese IP Theft Costs America Up to a Half-Trillion Annually

On Monday, August 14, President Trump announced that he is authorizing a public inquiry into China's predatory trade regime. Specifically, he is empowering Robert Lighthizer, the U.S. Trade Representative, to investigate China's trade policies as they relate to the theft of American intellectual property (IP). Hopefully this is the beginning of a policy shift that sees America finally address the ‘China question’ -- the systematic exploitation of America’s market by Chinese state actors.

Briefly, IP theft is a big problem because it costs America money, undermines the rule of law, and endangers America's national security.

The first issue is the most data-heavy, and therefore deserves the most treatment. Chinese companies, most of which operate with the explicit blessing, if not aid, of China’s government, steal hundreds of billions of dollars of American IP. They steal everything from industrial technology to branded products to software to entertainment -- it is open season on anything even mildly creative.

Calculating economic value of IP theft is difficult, but a few recent estimates provide some sense of the scale. According to estimates from William Evanina, the director of the Counterintelligence and Security Center under Obama, cyberespionage alone cost America's economy $400 billion in 2015. This estimate was extrapolated from reports filed by 140 American companies with interests in China. As costly as this is, the real concern is the origin of said cyberthreats. Evanina claims that China's government was behind 90 percent of all attacks -- not rogue companies or individuals.  

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 hacking, and does not include losses from Chinese copycat companies. For example, the Chinese market is stuffed to the brim with knockoff products.

Another estimate, this time made by the Commission on the Theft of American Intellectual Property, found that IP theft cost American individuals and businesses roughly $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. Taken together, these estimates show that IP theft is no laughing matter.

Of course, both of these estimates underestimate the true value of IP theft, because they ignore the value of counterfeit tangible products. A study from 2010 found that up to two percent of all global trade was in counterfeit products, and about two-thirds of these products originated from China. A more recent report published by the OECD from 2016 found that this number had increased to 2.5 percent of all global trade, and that 61 percent of said products originated from China. Given that the value of these counterfeit goods totaled $461 billion annually, China was responsible for $291 billion of them Remember, this does not include intangible IP of the sort previously discussed; this only refers to physical products.

All totaled, it is not an understatement to argue that China is likely responsible for up to half a trillion dollars in IP theft annually. For context, this is almost double the goods trade deficit that America runs with China.

Of course, this problem is bigger than 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. America has an obligation to defend its citizen's property, and this alone is enough to take a hard-line approach with China.

Finally, there is the question of national security: many American firms doing business in China make technologically sophisticated products, like computer chips, that have integral military applications -- they probably should not be manufactured abroad, least of all in a rival state like China. Not only does this allow China to reverse-engineer American technology, improving their military, but it lets them peek behind the curtain, potentially exposing flaws and weaknesses in American technology -- flaws which could be exploited.

IP theft, as well as a variety of other trade tactics, gives China the upper hand when it comes to trade. President Trump needs to make dealing with the 'China question' a priority -- not just to benefit America’s economy, but for the security of the nation.

On Monday, August 14, President Trump announced that he is authorizing a public inquiry into China's predatory trade regime. Specifically, he is empowering Robert Lighthizer, the U.S. Trade Representative, to investigate China's trade policies as they relate to the theft of American intellectual property (IP). Hopefully this is the beginning of a policy shift that sees America finally address the ‘China question’ -- the systematic exploitation of America’s market by Chinese state actors.

Briefly, IP theft is a big problem because it costs America money, undermines the rule of law, and endangers America's national security.

The first issue is the most data-heavy, and therefore deserves the most treatment. Chinese companies, most of which operate with the explicit blessing, if not aid, of China’s government, steal hundreds of billions of dollars of American IP. They steal everything from industrial technology to branded products to software to entertainment -- it is open season on anything even mildly creative.

Calculating economic value of IP theft is difficult, but a few recent estimates provide some sense of the scale. According to estimates from William Evanina, the director of the Counterintelligence and Security Center under Obama, cyberespionage alone cost America's economy $400 billion in 2015. This estimate was extrapolated from reports filed by 140 American companies with interests in China. As costly as this is, the real concern is the origin of said cyberthreats. Evanina claims that China's government was behind 90 percent of all attacks -- not rogue companies or individuals.  

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 hacking, and does not include losses from Chinese copycat companies. For example, the Chinese market is stuffed to the brim with knockoff products.

Another estimate, this time made by the Commission on the Theft of American Intellectual Property, found that IP theft cost American individuals and businesses roughly $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. Taken together, these estimates show that IP theft is no laughing matter.

Of course, both of these estimates underestimate the true value of IP theft, because they ignore the value of counterfeit tangible products. A study from 2010 found that up to two percent of all global trade was in counterfeit products, and about two-thirds of these products originated from China. A more recent report published by the OECD from 2016 found that this number had increased to 2.5 percent of all global trade, and that 61 percent of said products originated from China. Given that the value of these counterfeit goods totaled $461 billion annually, China was responsible for $291 billion of them Remember, this does not include intangible IP of the sort previously discussed; this only refers to physical products.

All totaled, it is not an understatement to argue that China is likely responsible for up to half a trillion dollars in IP theft annually. For context, this is almost double the goods trade deficit that America runs with China.

Of course, this problem is bigger than 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. America has an obligation to defend its citizen's property, and this alone is enough to take a hard-line approach with China.

Finally, there is the question of national security: many American firms doing business in China make technologically sophisticated products, like computer chips, that have integral military applications -- they probably should not be manufactured abroad, least of all in a rival state like China. Not only does this allow China to reverse-engineer American technology, improving their military, but it lets them peek behind the curtain, potentially exposing flaws and weaknesses in American technology -- flaws which could be exploited.

IP theft, as well as a variety of other trade tactics, gives China the upper hand when it comes to trade. President Trump needs to make dealing with the 'China question' a priority -- not just to benefit America’s economy, but for the security of the nation.

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