Donald Trump makes China out to be a terrible intellectual property thief. But is it?

In every year since China joined the WTO, its intellectual property payments have exceeded the average in countries of a comparable income level
As the pace of innovation in China increases, it will be in its own interest to strengthen intellectual property protections

Shang-Jin WeiandXinding Yu

Published: 9:00am, 30 Dec 2019

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As 2020 approaches, US tariffs on Chinese goods have reached levels not seen since the US Smoot-Hawley Tariff Act of 1930, which played a key role in exacerbating the Great Depression. A key complaint of US President Donald Trump is China’s failure to respect intellectual property rights. Trump and his trade advisers regularly accuse China of stealing US inventions, designs, and other forms of intellectual property without compensation. Many in the media repeat these allegations as a matter of course.

It used to be that one could walk down the street in Vietnam, India or Mexico and easily find pirated foreign films and music on DVDs and CDs. Now that everything is digital, pirating has become less visible to tourists, even though it is probably no less rampant than before.

In any case, intellectual property protections are weaker in developing countries than in rich ones. The question, then, is whether China’s record on intellectual property is better or worse than what one would expect for its income level.

For systematic data on such questions, we examine countries’ outbound royalty and licence fee payments to foreign patent, copyright and other intellectual property holders, which are included in the balance-of-payments statistics compiled by the International Monetary Fund. This data reveals that a country’s income level and intellectual property payments are tightly linked, with a clear positive linear relationship (when both are measured in logarithm).

As the following graph shows, a 1 per cent increase in per capita income is associated with a 1.85 per cent increase in per capita intellectual property payments, on average. The implication is that as a country grows richer – and as its economy becomes more technologically sophisticated and capital-intensive – its intellectual property protection regime tends to strengthen. (Recall that the United States was accused of violating British intellectual property in the nineteenth century.)

If Chinese firms were systematically using foreign intellectual property without compensation to a greater extent than other countries at a comparable income level, China’s intellectual property payments would be low for its income level. Yet when we created a time series for China’s per capita intellectual property payments between 1997 and 2017 (the red line in the graph), we found that this was not the case.

Before China joined the World Trade Organisation in December 2001, its intellectual property payments were below the international average for countries at a comparable income level. But in every year since its accession to the WTO, its intellectual property payments have exceeded that average.

China’s rapidly increasing intellectual payments have tracked its overall growth rate. In 2000, the last year before it joined the WTO, its total intellectual property payments to foreigners were just US$1.3 billion; by 2017, they had grown to US$28.7 billion, implying a 20 per cent average annual growth rate.

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For comparison, the median annual growth rate of intellectual property payments across all countries during the same period was just 9.5 per cent. China’s intellectual property payments have been growing at a significantly faster annual rate than that of France (7.9 per cent), South Korea (6.5 per cent) and Mexico (-1.9 per cent).

India, with a population comparable in size to China’s, has experienced a comparable rate of growth in intellectual property payments, but its total IP payments, at US$6.5 billion in 2017, were just 22 per cent of the Chinese level.

Another way to gauge the effectiveness of Chinese intellectual property protections is to look at where multinational firms locate their operations. Multinationals are not stupid. They are not inclined to enter markets where their property will be expropriated on a massive scale.

In 2018, with the trade war already well under way, China was the top destination for foreign direct investment among all developing countries, as was the case in each of the previous 10 years. In fact, among all countries, only the US attracted more foreign direct investment.

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Reasonable people can draw different conclusions from these facts. On one hand, one could say that, compared to the US and other high-income countries, China is not doing enough to protect intellectual property. Its intellectual property regime could certainly be made stronger, and its per capita intellectual property payments could be increased.

But one could also say that China is doing exactly what is expected for a country at its income level. Indeed, its intellectual property payments have long exceeded the international average. And as it becomes richer, the record suggests that its intellectual property regime will grow stronger.

Members of the press look at a porotic laparoscopic surgery robot system during a press preview of the 2018 National Mass Innovation and Entrepreneurship Week in Beijing on October 8, 2018. Chinese firms have made massive investments in research and development. Photo: Xinhua

A final question is whether an agreement can be reached between China and other countries over intellectual property. One key factor will be the pace of innovation within China. Chinese firms have made massive investments in research and development, and they are quickly increasing their own innovative output.

The number of patents registered by Chinese firms is growing exponentially. Even if one does not trust official Chinese figures, a similar trend can be found in US patents granted to Chinese companies.

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The accelerating pace of innovation within China should improve the prospects for cooperation on this issue. Whereas stronger intellectual property rights used to mean higher rents for foreign firms, now those same protections will benefit Chinese firms too.

China’s intellectual property regime is far from perfect. But the available evidence casts serious doubt on the claim that intellectual property expropriation is unusually rampant there. Once the US can put the problem in proper perspective, greater cooperation with China in this area will look more promising. That, in the end, will benefit both sides far more than a tit-for-tat escalation of tariffs.

Shang-Jin Wei, a former chief economist at the Asian Development Bank, is professor of finance and economics at Columbia Business School and Columbia University’s School of International and Public Affairs. Xinding Yu is associate professor of economics at the University of International Business and Economics in Beijing. Copyright: Project Syndicate

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