CUHK Business School Research Offers Insights on How the US-China Trade Dispute Will Move Forward

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 February 2019 - There is growing uncertainty about how recent trade disputes between the United States and China will be resolved -- and how it could affect the rest of the world.

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

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

The halt to the dispute came after G20 leaders agreed a joint declaration that noted international trade divisions -- including one 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 been frustrated by the lack of progress, in spite of recent improvements," said David Ahlstrom, Professor of Department of Management at CUHK Business School, referring to his study entitled History and the Debate Over Intellectual Property.

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

He and his co-authors of the paper, Prof. Mike W. Peng and Prof. Shawn M. 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 the future development of IPR lies in a deeper understanding of the history of U.S. IPR development, which reveals interesting historical parallels with the current situation in China.

"Many people take for granted that the U.S. is a leading IPR champion and China a leading IPR violator," Prof. Ahlstrom said. "Yet as recently as the 19^th century, the U.S. was a leading IPR violator."

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

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

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

"Such plagiarism was quickly discovered," he said. "Poe admitted as much in his own writings, but with no international copyright agreement, the original British publisher had no recourse."

Prof. Ahlstrom said China's current IPR laws were generally well-crafted and had pushed a lot of IPR violation underground. But enforcement is weak.

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

Even for proven violations, current Chinese law generally imposes a maximum fine of one million 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 cover legal costs.

Stronger IP protection such as criminalising all counterfeiting activities -- instead of only criminalising large-scale counterfeiting above a certain threshold -- is likely to significantly reduce counterfeiters' incentives.

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

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

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

Back in late 19^th century America, pressure for change came from numerous inventors, authors, and organizations, who were keen to market their products abroad, but knew they would get better IPR protection from foreign governments only if Washington offered equivalent protection to foreign IP rights holders in the U.S.

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

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

Given the domestic and international complaints about the lack of IPR expertise among judges, China has also set up a system of specialised IP courts led by judges specifically trained in IPR enforcement.

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

This change is thanks to foreign pressure, greater invention by firms and citizens, and the gradual public recognition of the wider cost benefits of stronger IPR protection; both the Chinese government and businesses realize that more sustained economic growth will increasingly need to draw on IPR.

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

As inventive capacity emerges, competition remains based on imitation, so most economic and political interests prefer weak IPR protection.

Yet when an economy develops further, additional inventive capacity and demands for high-quality products emerge, and commercial lobbies demand effective protection -- a domestic interest that coincides with the foreign interest in better IPR protection.

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

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

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

Prof. Ahlstrom said showing how the U.S. has transformed itself into a leading IPR champion could throw light on the current US-China debate on IPR.

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

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

Reference:

Mike W. Peng, David Ahlstrom, Shawn M. Carraher, and Weilei (Stone) Shi. 2017. History and the Debate Over Intellectual Property. Management and Organization Review 13:1, March 2017, 15--38.

This article was first published in the China Business Knowledge (CBK) website by CUHK Business School: https://bit.ly/2N2edKY.

About CUHK Business School

CUHK Business School comprises two schools -- Accountancy and Hotel and Tourism Management -- and four departments -- Decision Sciences and Managerial Economics, Finance, Management and Marketing. Established in Hong Kong in 1963, it is the first business 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 Financial Times 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 number of business alumni (35,000+) among universities/business schools in Hong Kong -- many of whom are key business leaders. The School currently has about 4,400 undergraduate and postgraduate students and Professor Kalok Chan is the Dean of CUHK Business School.

More information is available at www.bschool.cuhk.edu.hk or by connecting with CUHK Business School on Facebook: www.facebook.com/cuhkbschool and LinkedIn: www.linkedin.com/school/3923680/.