Why the United States went from 19th-century violator to champion of intellectual property rights may show how the trade dispute with China will move forward

HONG KONG,CHINA - Media OutReach - 14 February2019 - There is growing uncertainty about how recent trade disputes betweenthe United States and China will be resolved -- and how it could affect the restof the world.

However, academics from The Chinese University ofHong Kong (CUHK) Business School, City University of New York, and theUniversity of Texas at Dallas in the United States -- who previously looked atthe two countries' global trading history and relationship -- believe they canprovide valuable insights into the possible outcome.

In November 2018, the trade disputewas halted -- at least for 90 days -- to allow formore talks. China's President Xi Jinping and U.S. President Donald Trump agreedto the move on December 1 in Buenos Aires -- at the end of the G20 summit ofleaders and central bank governors from 19 countries and the European Union --in their first talks since the trade dispute started. Representatives from thetwo nations held two days of talks at the end of January 2019, with the UnitedStates side saying they were considering a tripto Beijing in early February, after the Lunar New Year, to resumenegotiations. However, the tripwas ruled out by Donald Trump.

The halt to the dispute came after G20 leadersagreed a joint declaration that noted international trade divisions -- includingone between Beijing and Washington involving intellectual property rights(IPR).

"Given the scope and scale of potential IPR violations in China,the U.S. has frequently sought better IPR protection in China and has beenfrustrated by the lack of progress, in spite of recent improvements," saidDavid Ahlstrom, Professor of Department of Management at CUHK Business School,referring to his study entitled Historyand the Debate Over Intellectual Property.

Prof. Ahlstrom has been named by the ClarivateAnalytics list of Highly Cited Researchers 2018 as one of the world'stop researchers who has demonstrated significant influence by publication ofmultiple highly cited papers during the last decade from 2006-2016.

He and his co-authors of the paper, Prof. Mike W. Peng and Prof. ShawnM. Carraher, both of the University of Texas at Dallas, and Prof. Weilei(Stone) Shi of City University of New York believe the key to predicting thefuture development of IPR lies in a deeper understanding of the history of U.S.IPR development, which reveals interesting historical parallels with thecurrent situation in China.

"Manypeople take for granted that the U.S. is a leading IPR champion and China aleading IPR violator," Prof. Ahlstrom said. "Yet as recently as the19^th century, the U.S. was a leading IPR violator."

For morethan 100 years, between the founding of the United States in 1776 and theenactment of the Chace Act in 1891 -- which gave U.S. copyright protection tocitizens of other countries and a similar degree of protection to U.S. citizens-- the pirating of British and foreign publications, such as books, andentertainment, such as stage plays, was widely practiced by numerous Americans.

The UnitedStates, with its lower levels of literary and economic development, was slow tointroduce the protection of foreign IPR because it knew the potential benefitswould simply go to foreign inventors, authors and firms, such as British publishers,while domestic consumers would face higher costs for books, media products andinnovative goods.

Even U.S.author Edgar Allan Poe got involved, copying works of British authors for hiscoauthored 1839 textbook on molluscs. And it was the only book that Poe mademuch money on in his lifetime.

"Suchplagiarism was quickly discovered," he said. "Poe admitted as much inhis own writings, but with no international copyright agreement, the originalBritish publisher had no recourse."

Prof. Ahlstrom said China's current IPR laws were generallywell-crafted and had pushed a lot of IPR violation underground. But enforcementis weak.

"Thousands offirms and tens of thousands of individuals have made rational decisions -- fromtheir standpoint at least -- to engage in piracy and counterfeiting," he said.

Even forproven violations, current Chinese law generally imposes a maximum fine of onemillion yuan (US$160,000); however, the average award is only 190,000 yuan(US$30,000) -- hardly enough to deter violations and that may not even coverlegal costs.

Stronger IPprotection such as criminalising all counterfeiting activities -- instead ofonly criminalising large-scale counterfeiting above a certain threshold -- islikely to significantly reduce counterfeiters' incentives.

Beijing's reluctance to increase the maximumfine for IPR violations may be the result of concerns that, at this relativelyearly stage of China'sdevelopment, satisfying U.S. IPR demands may result in foreign -- and primarilyU.S. -- IP rights holders benefiting more: In short, costs may exceed benefits.

"Aninstitution-based view of IPR history suggests that both the U.S. refusal toprotect foreign IPR in the 19^th century and the current Chinese lackof enthusiasm to meet U.S. IPR demands represent rational choices."

"However, ascost-benefit considerations change institutional transitions are possible," as Prof. Mike Peng has written extensively about.

Back inlate 19^th century America, pressure for change came from numerousinventors, authors, and organizations, who were keen to market their productsabroad, but knew they would get better IPR protection from foreign governmentsonly if Washington offered equivalent protection to foreign IP rights holdersin the U.S.

Prof. Ahlstrom said research showed that itwas only when the U.S. economy was taking off, and its IP production wasextensive enough, that it felt could extend IPR protection to foreigners.

He saidsince the 2000s China had actively promoted innovation and IPR -- with patentapplications rising from 476,000 in 2005 to more than 1.2 million in 2010: today it is the world leader in patentapplications.

Given thedomestic and international complaints about the lack of IPR expertise amongjudges, China has also set up a system of specialised IP courts led by judgesspecifically trained in IPR enforcement.

As aresult, IPR litigation has skyrocketed, with China now the world's most litigious IPR nation, in terms ofthe number of cases.

This changeis thanks to foreign pressure, greater invention by firms and citizens, and thegradual public recognition of the wider cost benefits of stronger IPRprotection; both the Chinese government and businesses realize that moresustained economic growth will increasingly need to draw on IPR.

Prof. Ahlstrom said China's economic development will help improveIPR protection, just as U.S. economic development did in the 19^thcentury. Poor countries still have little IPR to protect.

Asinventive capacity emerges, competition remains based on imitation, so mosteconomic and political interests prefer weak IPR protection.

Yet when aneconomy develops further, additional inventive capacity and demands forhigh-quality products emerge, and commercial lobbies demand effectiveprotection -- a domestic interest that coincides with the foreign interest inbetter IPR protection.

He saidthat U.S. businesses now complaining about IPR violations in China could alsolearn how British authors, composers and firms dealt with Americancounterfeiters over 100 years ago. For example, British composers Gilbert andSullivan brought their entire troupe to New York to perform the comic opera The Pirates of Penzance -- wrong-footingthe copycats who had paid no royalties when performing their earlier hit, HMS Pinafore.

Incontemporary China, many multinationals had adapted to Beijing's IPR system by using aGilbert-and-Sullivan-style pre-emptive strategy, he said.

Specifically,they file patents and trademarks -- including Chinese language trademarks -- assoon as possible, or set up strategic alliances with dependable Chinesepartners right away, which make major patent infringement more difficult.

Prof. Ahlstrom said showing how the U.S. hastransformed itself into a leading IPR champion could throw light on the currentUS-China debate on IPR.

"We predictthat to the same extent that the U.S. voluntarily agreed to strengthen IPRprotection when the U.S. economy became sufficiently innovation-driven, soChina will similarly enhance its IPR protection," he said.

"We furtherpredict that when Chinese IPR are significantly violated abroad, China willbecome more serious about IPR protection. Therefore, we suggest that China's domestic innovation policies need tobe strengthened instead of discouraged by foreign IP rights holders,governments, and other stakeholders."

Reference:

Mike W.Peng, David Ahlstrom, Shawn M. Carraher, andWeilei (Stone) Shi. 2017. History and the Debate OverIntellectual Property.Management and Organization Review13:1, March 2017, 15--38.

Thisarticle was first published in the China Business Knowledge (CBK) website byCUHK Business School: https://bit.ly/2N2edKY.

About CUHK Business School

CUHKBusiness School comprises two schools -- Accountancy and Hotel and Tourism Management -- and fourdepartments -- Decision Sciences andManagerial Economics, Finance,Management and Marketing. Established in Hong Kong in 1963, it is the firstbusiness school to offer BBA, MBA and Executive MBA programmes in the region.Today, the School offers 8 undergraduate programmes and 20 graduate programmes including MBA, EMBA,Master, MSc, MPhil and Ph.D.

In the FinancialTimes Global MBA Ranking 2019, CUHK MBA is ranked 57^th. In FT's 2018 EMBA ranking, CUHK EMBA is ranked 29^th in the world. CUHK Business School has the largest numberof business alumni (35,000+)among universities/business schools in Hong Kong-- many of whom are key business leaders. The School currently has about 4,400undergraduate and postgraduate students and Professor Kalok Chan is the Dean ofCUHK Business School.

More information is available at www.bschool.cuhk.edu.hk or byconnecting with CUHK Business School onFacebook: www.facebook.com/cuhkbschooland LinkedIn: www.linkedin.com/school/3923680/.