How the US-China Trade Dispute Will Move Forward

He and his co-authors of the paper, Prof. Mike W. Peng and Prof. Shawn M. Carraher of the University of Texas at Dallas, and Prof. Shi Weilei (Stone) of City University of New York share similar points of view. They believe that the key to predicting the future development of IPR lies in a deeper understanding of the history of US IPR development, which reveals interesting historical parallels with the current situation in China.

“Many people take for granted that the US is a leading IPR champion and China is a leading IPR violator,” Prof. Ahlstrom explains. “Yet as recently as the 19th century, the US 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 US copyright protection to citizens of other countries and a similar degree of protection to US 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 US author Edgar Allan Poe copied works of British authors for his co-authored 1839 textbook on molluscs. And it was the only book that Poe made much money on in his lifetime.

“Such plagiarism was quickly discovered,” says Prof. Ahlstrom. “Poe admitted as much in his own writings, but with no international copyright agreement, the original British publisher had no recourse.” 

The professor adds that while China’s current IPR laws were generally well-crafted and had pushed much of the IPR violation underground, 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 says.

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 potential violators and that amount may not even cover legal costs.

Stronger IP protection, such as criminalising all counterfeiting activities – instead of only 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 US IPR demands may result in foreign, and primarily US IP rights holders benefitting more: In short, costs may exceed benefits.

“An institution-based view of IPR history suggests that both the US refusal to protect foreign IPR in the 19th century and the current Chinese lack of enthusiasm to meet US IPR demands, represent rational choices,” explains Prof. Ahlstrom.

“However, as cost-benefit considerations change, institutional transitions are possible,” Prof. Ahlstrom says, citing the work of Prof. Mike Peng. 

Back in late 19th century America, pressure for change came from numerous inventors, authors, and organisations, 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 United States.

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

He adds that 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 a result of foreign pressure, greater invention by firms and citizens and the gradual public recognition of the wider financial benefits of stronger IPR protection. Both the Chinese government and businesses realise that more sustained economic growth will increasingly need to draw on IPR.
Prof. Ahlstrom adds that China’s economic development will help improve IPR protection, just as US economic development did in the 19th century. Poor countries still have little IPR to protect themselves.

As inventive capacity emerges, competition is often based on imitation. Therefore most economic and political interests prefer weak IPR protection. However, when an economy develops further, additional inventive capacity and demands for high-quality products emerge. Commercial lobbies demand effective protection – a domestic interest that coincides with the foreign interest in better IPR protection. 

US businesses that are now complaining about IPR violations in China could also learn how British authors, composers and firms dealt with American counterfeiters over 100 years ago, according to Prof. Ahlstrom.

For example, British composers Gilbert and Sullivan brought their entire troupe to New York to perform the comic opera The Pirates of Penzance. By doing this, they succeeded in wrong-footing the copycats, who had paid no royalties when performing their earlier hit, HMS Pinafore.

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

Specifically, they quickly file patents and trademarks, including Chinese language trademarks, or set up strategic alliances with dependable Chinese partners, which makes major patent infringement more difficult.

Prof. Ahlstrom says that showing how the US 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 US voluntarily agreed to strengthen IPR protection when the US economy became sufficiently innovation-driven, so China will similarly enhance its IPR protection,” Prof. Ahlstrom says.

“We further predict that when Chinese IPR is 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,” he adds.

About the Researcher
David Ahlstrom (PhD, New York University) is a Professor in the Department of Management at The Chinese University of Hong Kong. His research focuses on innovation, entrepreneurship, and China business. More recently, he has been researching intellectual property rights and economic growth. Professor Ahlstrom has published numerous papers in international journals, as well as an international management textbook. He has extensive teaching and consulting experience. He has also served as Chief and Senior Editor of Asia Pacific Journal of Management and Journal of World Business. Recently, he was recognised as one of the most highly cited researchers worldwide in management over the past decade by Clarivate (formerly Thomson Reuters).