Should Intellectual Property be Protected in International Trade?

SUMMING UP To do business in China, American firms often lose some of their intellectual property. James Heskett's readers think that price is too high.
by James Heskett

Summing Up

Does IP Ownership Belong in International Trade Deals?

Intellectual property (IP) regulation remains an active issue in trade negotiations between the China and the United States. The most straightforward element of the negotiation—US attempts to reduce its trade deficit by persuading China to buy more American goods—gets the publicity.

But it’s likely to have less long-term impact than if China would agree to relax Chinese ownership requirements on American firms desiring to do business in that country through business partnerships. Such partnerships, in which Chinese ownership typically is required to be 50 percent, often lead to transfer of intellectual property from the US firm to its Chinese partner and perhaps to other entities.

This is an illustration of a more general issue, whether or not international trade in IP should be regulated, the subject of this month’s column. Addressing that question, David Wittenberg presented the argument for the negative when he commented that, “That idea (that government acquires an ownership interest in IP created within its borders) is inimical to our legal and economic system. Ownership inheres in the creator of IP and no other party…” Questions of national economic interest, he continued, “should take a back seat to questions of individual interest when considering this issue.”

Rick Mueller countered this argument. “IP developed in this country is largely a result of public investment augmented by private interest…” Those private interests must be held accountable to a certain level of stewardship, “meaning that they are not allowed to give it away to those with interest counter to our endeavors as a nation.”

Others were doubtful that regulation, whether desirable or not, could be effective. As Walter put it, “the pace of many IP developments today far outstrips the ability of governments to develop adequate IP protection in a timely manner.” Edward commented, “Make all the rules you want … if people or countries don’t follow them you’ve wasted your time and shown that the rules don’t matter much… Bottom line: rules need enforcement.”

The current Chinese-US trade negotiation provides a real-life test of these ideas. For example, there have been discussions about China phasing out ownership requirements over time that could reduce the amount of IP transfer as the price of admission for American firms.

It raises the questions: How hard should US trade negotiators seek to encourage such a change in Chinese policy? Does IP ownership belong in international trade deals? What do you think?

Original Column

Unusual attention currently is focused on trade policy, triggered by new tariffs on imports announced by the United States. Nearly all of it involves the trade of manufactured goods.

Much less attention is being paid to trade in services, which represent 84 percent of all employment in the US, 80 percent of global spending, and significant positive trade balances for many developed economies. In the US, for example, travel and creation of intellectual property provide massive positive trade balances. Innovation, and the intellectual property that it creates, provide the lifeblood for the world’s centers of creativity.

Regulating trade in manufactured goods like steel and aluminum is a relatively straightforward matter; tariffs are easy to understand and to apply. But trade in intellectual property (IP) is much harder to measure and shape. Unlike manufactured goods, IP can be shared and in a sense multiplied, it is hard to hoard, and it leaks.

Intellectual property is created, protected, sold, traded, shared, and stolen on an ongoing basis. When this is done across international borders, it complicates the matter further. That’s why the World Trade Organization’s TRIPS (Trade-Related Aspects of Intellectual Property Rights) agreement was negotiated during the 1986-1994 Uruguay Round, which introduced intellectual property rules into the multilateral trading system for the first time. It provides for minimum standards of protection for IP rights, such as patents, that signers of the agreement agree to maintain. It has provided some protection against thieves.

TRIPS does not discourage IP owners from selling and trading it in ways that may provide short-term business benefits but damage long-term international competition. For example, companies wishing access to China’s huge markets often have to enter into joint ownership agreements with Chinese companies. This inevitably leads to the transfer of intellectual property as the price of entry. The matter has come up for discussion between trade representatives of the US and China, but little has been done about it.

This raises the question of the day for us to consider. Is it possible or even advisable to regulate trade in IP other than for purposes of national defense? First, it has proven difficult to do. Second, it can be argued that IP in the long run should benefit of the world’s inhabitants. To restrict its transfer or sharing across companies and borders is not in the best long-run interest of society. Its “transfer” is, in some cases, the price of free trade. And, as the argument goes, the benefits of free trade—in terms of job creation, lower costs, and lower prices—far outweigh the loss of IP.

On the other hand, the argument for protection often centers around national long-term interests. IP transferred to gain access to Chinese markets, for example, can be used for long-term global advantage It encourages the concentration of trade in the hands of a relatively few world economic powers. It redistributes the fruits from the world’s leaders in innovation to its laggards.

Should international trade in intellectual property be regulated? What do you think?

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