Lighthizer’s Double Challenge: Protecting IP by Managing Both China and Trump

By Logan Finucan
March 17, 2019

https://depositphotos.com/66236345/stock-photo-china-and-us-handshake.html

“Lighthizer faces an anxious president who lacks the patience or commitment to secure substantive changes for protection of U.S. IP.”

While a preliminary trade deal seems to have been struck between China and the United States over tariffs, the two sides have yet to seriously address the toughest and perhaps most economically crucial issues on the table: China clinging to a tech policy based on systematic theft of U.S. intellectual property (IP), forced technology transfer, and cybertheft.

President Trump has paid lip service to the need for any deal to include IP protections, and China responded on March 14 by rushing a law that would, according to CNBC, “prohibit the forced transfer of technology from foreign-invested businesses in China, step up protection of intellectual property and claim to give the companies equal footing with domestic players.”  Nevertheless, China watchers are skeptical that these commitments remain cosmetic, while it remains clear that Trump has focused his negotiators chiefly on those things nearest and dearest to his heart: physical goods and tariffs. As talks move forward, the question remains—how will U.S. Trade Representative (USTR) Robert Lighthizer resolve these challenges for the benefit of IP holders?

More Focus on Tech, Less on Tariffs

Technology is a vital export for the United States, and intellectual property issues—intangible as they are—are particularly challenging.  Many U.S. companies have long complained about pressure in China for technology transfer in exchange for market access, as well as outright corporate espionage.

However, because complaining about China has usually meant getting locked out of the market, until now, most U.S. companies have been unwilling to go high profile on the issue. The Trump Administration’s get-tough attitude has helped to catalyze many pent-up years of grievance, leading many in the U.S. business community to now egg on tough U.S. action against China on this front.

As a result, the USTR’s ensuing “Section 301” trade investigation on IP protection and forced tech transfer, which gave pretext for ratcheting up tariffs on China, garnered praise from many otherwise skeptical of the administration’s trade policy. But now that that leverage has been gained, how will the United States cash it out?

Devil in the Details

These types of trade issue are hugely complex and difficult to address through traditional trade rules.  Indeed, precisely because traditional trade rules often do a poor job of capturing IP issues, the United States used a legal tool (Section 301) that is not based on violations of formal World Trade Organization obligations but rather vague “unfair” and “discriminatory” standards.

U.S. trade negotiators have a long history of frustration on this front with China, all the way back to when Ambassador Barshefsky negotiated some of the first IPR agreements with China in 1999.  Those and subsequent agreements were successful in pushing legal reform, but ultimately disappointed because they relied on the Chinese government and stakeholders to enforce them—and enforcement was not forthcoming.

Chinese industrial policy—and the whole political economy, where growth underpins the legitimacy of the Communist Party—is wedded to ruthless and underhanded tactics to secure foreign IP.  Resolution requires new thinking and a meeting of the minds between the United States and China.

While longer term, China needs to envision other paths to development and growth, in the near term, the United States needs to get substantive commitments on structural things like limits on joint ventures, strictures for local and national officials, and problems with the enforceability of IP for foreigners. And if these commitments are going to mean anything, they need to go hand in hand with a meaningful system of verification and accountability.

This is really hard. The Chinese continue to deny that they do anything to coerce transfer of IP, and strenuously object on principle to intrusive oversight powers by foreign states or rights to unilateral retaliation by the United States.  USTR Lighthizer has his work cut out for him to compel a deal with teeth.

Trump and Short-Termism

However, Lighthizer also faces another front in the trade way: the domestic front. He faces an anxious president who lacks the patience or commitment to secure substantive changes for protection of U.S. IP.

Structural solutions are long-term, and don’t satisfy the near-term political needs of the administration.  Facing a potentially shaky economy and a roller coaster stock market as a major election looms in 2020, the President is transparently eager for a deal to end the whole business.

China has clearly perceived this, and, instead of working through the tough details of structural reform to address tech and IP issues, repeatedly seems to be dangling massive purchases of U.S. goods.  Now, with Trump’s enthusiasm for a deal, it seems he may be dangerously close to taking it.

Not only would this throw away a historic amount of leverage, it would sell out U.S. holders of IP at risk in China, leaving the market increasingly hostile for American technology.

The Two-Fold Challenge

The challenge for USTR Lighthizer in the near term is thus twofold: to negotiate a meaningful set of commitments as well as a system of verification and/or arbitration of disputes—which the Chinese will hate—as well as to stave off domestic pressures for a quick win that shrinks away from doing the hard work necessary to make any real progress on IP protection issues—not easy with the present mood of the President.

It’s impossible to tell where the discussion will go having struck an initial agreement to finish an agreement, and it’s hard to know whether any substantive change will occur. While President Trump seems poised to cut a quick transaction in his next meeting with President Xi, it is still possible—like Lucy from Charlie Brown and the football—that Trump could pull away at the last minute to build pressure for something bigger that really does address serious IP problems.  Either way, one thing is clear: we will continue to lose on tech unless the Administration treats it with the seriousness it deserves.

 

Image Source: Deposit Photos
Copyright: denisismagilov

The Author

Logan Finucan

Logan Finucan supports the implementation of advocacy strategies of several leading ICT clients, including device manufacturers, electronic and network service providers, and satellite operators at Access Partnership. He regularly provides analysis on key markets in the Asia-Pacific region, supports campaigns to shape spectrum management policies, and advises on the U.S. legislative process. Areas of expertise include international trade regulations, data protection laws, Internet governance, and multilateral processes.

For more information or to contact Logan, visit his Firm Profile Page.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 7 Comments comments. Join the discussion.

  1. angry dude March 18, 2019 8:55 am

    Just bring up Google maps and type “Shenzhen”

    Zoom in on those massive factories – just one factory making iphones employs over 250 thousand (!!!) people working around the clock

    That humongous place grew up in the last 10-20 years on the backs of small to mid-size private US tech companies which consequently went out of business

    The ill-gotten fruits of IP theft are exported back to US to sell to US consumer lemming population for cheap..

    Then the cycle repeats over and over

    There is a mutually beneficial symbiosis of the largest US public tech companies like Apple or Google or Facebook and Chinese manufacturers … at the expense of small to mid-size American IP owners

  2. Benny March 18, 2019 9:31 am

    Angry,
    That “humonguos place” is a contract manufacturer for US companies, manufacturing US designed products for sale in the US market for US brands (think of a fruit, beginning with A, or a raincoat beginning with M). They also file vast numbers of US patent applications (over 2000 granted US patents). Outsourcing manufacturing is an economic necessity for survival. With the cost of local manufacturing, you simply cannot compete with Far-East contract suppliers, other than in niche markets. By the way, which brand of smartphone or computer do you own which might exclude you from the “lemming population”?

    As for IP theft- A Chinese business can only steal your IP if it is registered in China. If you filed for IP protection in the US and no other jurisdiction, you are essentially giving away your IP, free, gratis and for naught, to everyone outside the the US.

  3. Jason Lee March 18, 2019 10:41 am

    China is doing to America what Silicon Valley companies are doing to the small American IP inventor. It’s a catch 22 for Both countries, if China does not get something signed that protects Americans IP in China the tariffs go way up, and the big player like Apple and Google will be forced to bring back some manufacturing jobs and China will leave its own countries IP vulnerable as they are now inventing and moving into 5G and AI. If America does not fix EBay/Alice/Mayo at home China will captilize on the loopholes. So as the laws change they can not have a double edge sword available for either party there must be s compromises. The greater picture is China will have to adopt and implement amuch stronger IP for their own protection. Which will force America’s hand in protecting IPs at home where a small patent holder is not bleeded out in the courts with the same old rhetoric of yesterday. Patent values must be and will be protected even if you are a small garage inventor that hold a few IPs. It’s getting interesting they say the recession is coming and they greatest place to invent into is IPs. Will IPs see a massive turnaround? If it walks and quacks like a duck, smart money will be betting on strong IPs as the pendulum swings back.

  4. Mark Cohen March 18, 2019 1:03 pm

    The author has identified some, but not all of the problems in an IP deal. First of all, commitments of purchases of US goods has a long history of failure with China. If anything, the benchmark has been raised – since the trade deficit has expanded over the past year. Moreover, any trade commitment by China only buy USA soybeans or other products will necessarily raise MFN concerns from other trading partners. The IP problem is hard to resolve, but the problem is partially due to the Trump administration’s exaggerating the impact of FTT and not disambiguating the many ways that FTT occurs – some of which have WTO-cognizable remedies. Legitimate US sales of technology to China are only about 5 Billion USD per year, according to census figures – even if they were adjusted upwards to approximately equal China’s share of IT or high tech sales/exports, they would be perhaps 20 – 30 billion dollars more in lost sales. There are other more pernicious ways FTT occurs, although as Dan Prud’homme and others have noted, the actual instances where technology was forced are likely relatively few. Whatever the number, it isn’t equal to the trade deficit and its resolution is in highly technical details and understandings of business practices…

  5. JTS March 18, 2019 2:06 pm

    “The Chinese continue to deny that they do anything to coerce transfer of IP”.

    Why would China oppose new rules forbidding what isn’t done to begin with. It’s telling when someone strongly opposes something that supposedly will have no practical effect. If there is no forced tech-transfer, then what an easy concession this should be for China…

  6. angry dude March 18, 2019 4:31 pm

    Benny @2

    Dude, don’t play an idiot here, please

    Would you trust your blueprints to those “contract” manufacturers (assuming your product sells) ?
    They might as well print those “contracts” on toilet paper
    The least they can AND WILL do to you is run a “grey shift” at night making some “extras” of the exact same thing and not telling you
    Or more likely just steal the design outright and sell it under their own brand (on Alibaba or even on Amazon in the US)
    What Apple can do none of the small US companies can: Apple totally controls logistics and supply channels for hundreds of components from hundreds of suppliers reliant on Apple to get paid – those are just electronic components they can’t sell to final consumers
    It means Apple can cut off any supplier at any moment – I personally witnessed (should I say participated in ?) one such downfall
    What works for Apple and Co. DOES NOT work for small or even mid-size American companies without vast manufacturing/distribution networks in China

    P.S I assemble my servers/desktops from whatever (cheap) parts I need and can order online, and look for cheapest phone contracts from mobile carriers (like Galaxy S9 for $5 a month)
    I guess that makes me a “lemming” too 🙂

  7. Benny March 18, 2019 4:45 pm

    Angry,
    We trust our Eastern partners with the blueprints. But they don’t have the software. We have US and EU patents, and if the foreign manufacturers try anything funny we will take the US and EU importers apart. We are not so “idiot”, as you siggest, to try and manufacture locally and compete with others who outsource manufacturing to the far (south)east on equal terms. As for your Galaxy – looks like South Korea also has a leg up over the US, no? I don’t hear ipwatchdog griping about that.

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