How to Stop Intellectual Property Theft in China

I was asked in Beverly Hills what would improve if the amount of IP theft in China began to diminish. I pointed to three benefits. First, IP protection would chip away at China's low-cost manufacturing advantage. Second, it would create a large market for America's high-value technology and entertainment products. Third, it could also work to convince the Chinese to revise their currency policies, which today economists widely believe keep the Chinese yuan below its presumptive market value against the dollar. If China were to find that it had to pay to import technology it now simply takes, it might also have incentive to increase the value of its money and make the world's capital goods more affordable to Chinese buyers.

The creation of a compliance program can only come from political pressure here. But it won't come from consumers. Business will have to lead.

How should the United States go about enforcing a fairer system? William Jones believes stronger trade agreements and a willingness to enforce them is a crucial start. On that score, there have been some promising declarations from the Chinese government in response to recent U.S. pressure. Last spring, China prepared for an April visit to the United States by its president, Hu Jintao, with measures meant to warm the diplomatic atmosphere. Among those were announcements of stepped-up enforcement against pirates and counterfeiters. So yes, China will probably launch very public campaigns against knockoff polo shirts and handbags. But there is no sign that its more sophisticated policies designed to facilitate technology transfer, such as the CCC regulations, are up for change.

The problem is this: China's extremely loose intellectual property regime has been a key element in the country's growth. From the perspective of a national leadership looking to increase the wealth, health, happiness, and global competitiveness of 1.3 billion mostly poor people, co-opting intellectual property looks like a nice fast track out of the Third World. It's not surprising--in fact, it's entirely defensible, I've heard people in China say--that the Chinese would make this choice.

So change in China will depend significantly on the attitudes and practices here at home. American businesses will have to insist that the Chinese goods they buy emanate from factories that are legitimate users of technology. That won't be a simple thing. As with many of the grumblings Americans offer about China, we are party to the very dynamic that bedevils us.

China's ability to produce at low prices gives it strong allies in the U.S. among businesses and consumers. This is no secret. The Chinese know that our official expressions of unhappiness are rebutted by our willingness to trade on their terms. We buy $200 billion more in goods annually from China than we sell to the country because China gives us ever lower prices. China's participation in the U.S. market is not an invasion; it is by invitation. When orders come from powerful American buyers, they are usually accompanied by strong demands to keep prices low.

The question of how those prices are achieved is rarely asked. Never does a powerful American customer insist that costs not be cut by means of technology piracy. Instead, with a wink and a nudge, American buyers insist that Chinese producers cut costs any way they can. Where, one might ask, do our vast volume purchasers, including the big-box stores at the edge of town and all of us who go there to shop and save, think these savings will come from? When the pressure on suppliers is strong enough, respect for intellectual property isn't much more than a nicety.

No One Said It Was Going to Be Easy

A new regime that certified imported goods as "IP Compliant," and restricted goods that were not compliant, would have dramatic effects. Chinese producers would have economic incentives to comply with their country's legal commitments and to international norms. American companies that insisted on compliance from their suppliers would not be placed at a disadvantage relative to competitors that made no such demands.

And some consumers would holler. Would it cost money to protect American intellectual property abroad? Probably so. The rise of China's low-cost manufacturing machine has meant real savings for American consumers. Currently, China's low prices, and the prices it forces competitor nations to produce at, save each American, on average, around $600 a year.

Analogous compliance regimes exist already. They work. American companies in the toy and garment industries require certification that the factories do not employ children as workers, and executives at the Gap say that the company's efforts to make sure its foreign factories meet international workplace standards not only are manageable but actually help both the company's internal morale and its image in the marketplace. America's biggest home improvement companies work with lumber suppliers to ensure that the wood they import does not come from protected rain forests. And, of course, companies already routinely certify their suppliers on cost, quality, and delivery.

A compliance regime created in America can also create a culture of compliance in China. One of every eight dollars in the Chinese economy cycles through China-U.S. trade. If the Chinese companies that do business with Americans find they must improve their practices, they will likely exert political pressure on their governors so that their domestic competitors are forced to play by the same rules. The change in China could be swift and wide-reaching.

The creation of a compliance regime can only come from political pressure here. But it won't come from the usual source, which is consumers. Consumers are by and large contented, as they should be. That means political pressure on the subject of China will have to come from importers. They should be keen to get started--including the big-box importers, which can certainly use a dose of good news. They should be enthusiastic about leading an effort that helps keep American companies competitive.

American economic policy, unlike the policies of nearly every other industrialized country, tends to put the interests of consumers first. Experiences like William Jones's argue for a reevaluation of our approach. It's time to look at the strength we get from making sure our businesses can compete, even if it means higher prices in the near term for American buyers. American industry can do for itself what government has failed to do. It can create an economic reason for China to protect intellectual property, the knowledge economy, and America's great, innovative industries.

Ted C. Fishman's book China, Inc.: How the Rise of the Next Superpower Challenges America and the World has been printed in 24 languages. A revised edition is available in paperback.

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