A U.S. probe into China’s intellectual infringement raises trade risk

The U.S. government continues to depict China as a practitioner of unfair trade practices. Its growing threats to impose countermeasures pose a direct threat to companies with trans-Pacific supply chains.

U.S. steps up scrutiny

In August 2017, the U.S. Trade Representative (USTR) began a formal investigation into Chinese infringement of U.S. intellectual property (I.P.) under Section 301 of the Trade Act of 1974. The probe could take up to a year, but two anonymous sources told U.S. news outlet Politico that the agency has already completed a draft report, suggesting that the inquiry could report sooner than expected.

I.P. rights have long been a bone of contention in Sino-U.S. relations. China has appeared on the ‘priority watchlist’ of the USTR’s ‘Special 301 Report on I.P. Rights’ since it was first launched in 1989. Under U.S. President Donald Trump, Washington appears to be adopting a tougher approach, and seems intent on punishing the Chinese over this issue.

I.P. rights have long been a bone of contention in Sino-U.S. relations

Should the probe find China guilty, it is unclear how the U.S. intends to pursue its I.P. rights grievances. The chief of the USTR Robert Lighthizer has suggested that the U.S. is prepared to undertake unilateral trade action, which could range from imposing penalty tariffs on Chinese products to denying market access to Chinese companies.

Such a move deviates from recent White House practices in the past decade which have tended to seek redress through the World Trade Organization, which is in itself a lengthy process and has a high standard of proof. More crucially, any unilateral penalties increase the risk of tit-for-tat retaliation, driving both parties towards a trade war, an outcome which would have widespread negative consequences for trans-Pacific trade.

Also read: Trump versus China

China’s I.P. policies

In response to the Section 301 investigation, China’s commerce ministry launched its first ever countrywide campaign to protect the I.P. rights of foreign businesses. The drive, which began in September 2017, will commence this month. Apart from the authorities’ usual rhetoric about tougher crackdowns on I.P. theft, there are no indications that government agencies have adopted different tactics or policies and no major cases have emerged since the announcement.

Nevertheless, China has made progress in improving its I.P. framework in the past four years. The authorities have aligned relevant domestic legislation with international standards, and encouraged local firms to file patents, both domestically and internationally. According to the U.N. intellectual property agency, firms in China filed more patent applications in 2016 than the E.U., Japan, South Korea and the U.S. combined.

A year earlier, Chinese President Xi Jinping and then-U.S. president Barack Obama entered into an agreement that neither the U.S. nor China will engage in mutual cyber-enabled theft of intellectual property. This understanding is significant because it is the first of its kind China has reached with a foreign power. While it did substantially lead to a reduction in the level of Chinese-backed hacking incidents, it was accompanied by an increase in the sophistication of such attacks.

Firms in China filed more patent applications in 2016 than the E.U., Japan, South Korea and the U.S. combined

In 2014, the government set up specialised I.P. courts in Beijing and the coastal cities of Guangzhou and Shanghai. A U.S. academic study showed that between 2006 and 2011 foreign plaintiffs made up only 10 per cent of patent litigation suits in China, but they won 70 per cent of those actions. The low number of cases reflected Western concerns that China’s patent system has been structured to benefit domestic companies at the expense of their foreign competitors. Two notable victories this year involve Danish toymaker Lego A/S and U.S. sportswear company New Balance Athletics, which won copyright and trademark suits, respectively, against Chinese brands.

Also read: Foreign business concerned by China’s new cyber-security regime

Foreign entities are also beginning to file patent disputes in Chinese courts that do not involve Chinese plaintiffs. Canadian I.P. licensing firm WiLAN Inc sued Japanese electronics firm Sony Corporation in November 2016 for patent infringement in the eastern Chinese city of Nanjing. WiLAN’s decision is notable as it suggests that patent owners are beginning to view China as a reasonable place to resolve patent litigation.

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