Free Trade and the Threat to Intellectual Property Protection in China - Global Trade Magazine
  July 3rd, 2016 | Written by

Free Trade and the Threat to Intellectual Property Protection in China

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  • No matter the election outcome, the bipartisan consensus on free trade is now under severe threat.
  • Under Chinese proposals, U.S. technology companies could be forced to license IP for their core technologies.
  • If Chinese IP proposals are implemented, U.S. companies may withdraw from doing business in China.

Criticism of free trade from leading U.S. politicians has become increasingly popular, particularly in this year’s Presidential campaign. The presumptive Republican nominee Donald Trump promises to “rip up all those trade deals” and “make really good ones” instead.

On what should be the other end of the spectrum, Senator Bernie Sanders proclaims that free trade agreements “have been disastrous” for the United States and promises to “stop it by renegotiating all of the trade agreements that we have.” Even the presumptive Democratic nominee Secretary Hillary Clinton sought to distance herself from her husband’s free trade legacy in the White House and—in an abrupt about-face—announced she no longer supported the Trans-Pacific Partnership.

While they agree on little else, it is clear that both Hillary Clinton and Donald Trump have decided that anti-free trade rhetoric makes good politics. As a result, no matter the election outcome, the decades long work of the U.S. government in support of free trade—part of a hard fought bipartisan consensus forged in both executive branch and Congress—is now under severe threat.

While much attention has been focused on the anti-free trade rhetoric and posturing in the 2016 Presidential campaign, a significant development in Asia, particularly in China, has gone almost completely overlooked. In recent years intellectual property rights in high technology industries in China and other leading Asian economies have begun to come under attack in favor of protecting domestic companies. This attack on intellectual property rights could be another significant event undermining the international consensus for free trade.

International trade has been a huge boon to the U.S. economy, with U.S. exports supporting an estimated 11.3 million jobs in 2013, and 14% of US. GDP. And trade with China is responsible for a large portion of these economic benefits, as China is now one of the largest trading partners of the U.S. U.S.-China trade grew from $2.37 billion in 1979 to $ 456.8 billion in 2010, a 193-fold increase. In 2010, U.S.-China trade accounted for 19.1% of U.S. total imports. In consumer goods ranging from clothing and toys to high tech products such as computers and mobile devices, American consumers every day reap the benefits of lower production costs and lower prices from goods manufactured in China and elsewhere in Asia. American companies benefit as well, as it has been estimated that 40 percent of Chinese exports to the United States are produced in China by American companies.

Recent proposed revisions to China’s anti-monopoly law bring the issue of intellectual property rights into sharp focus. Last summer, China’s National Development and Reform Commission (NRDC) announced that it would be drafting a guideline on its anti-monopoly law on the abuse of intellectual property rights. One of the proposed provisions state that “[t]he implementation of patent rights shall abide by the good faith principle, shall not harm public interests, shall not improperly exclude or restrict competition, and shall not impede the advancement of technology.” What is meant by the “good faith principle” and what type of activity would be deemed sufficient to “harm public interests” is undefined and unclear. The draft guidelines also state that “if the business operators with dominant position license its IPRs with unfairly high royalties, it is possible to eliminate or restrict competition and harm consumer interest.” Again, what is “unfairly high royalty” is not defined, but this provision could be used to impose what are essentially price controls on patent royalties.

While these guidelines remain in draft form, there are concerns of a worst-case scenario: if such a regime is implemented by the Chinese government, there is a substantial risk that American technology companies will both withdraw from doing business in China and pull back from their support for free trade with China.

Article 7 of the draft Chinese Patent Law (CPL) Amendments, released in April 2015, prohibits “dominant” market participants from refusing to license their intellectual property “if such intellectual property constitutes an essential facility for business operations.” Such a sweeping requirement is virtually unknown in any competition law regime worldwide. In the words of Jeremie Waterman, executive director for greater China with the U.S. Chamber of Commerce, “no other competition law jurisdiction in the world would have such broad, unbalanced essential facilities doctrine.” Bill Baer, the former assistant attorney for antitrust at the U.S. Justice Department, when asked at a March 2016 Senate hearing about these developments, noted that China is using its competition law to further industrial policy, stating that “the administration worries about it a lot.”

If these proposals are adopted and implemented, the consequences are clear. If interpreted broadly, leading American technology companies could be forced to license their intellectual property for their core technologies to their Chinese competitors.

A key element of the trade liberalization with China was the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) of 1994. This agreement requires member states to provide strong protection to IP rights, and applies to everything from high-tech industries to health care and pharmaceuticals, and clothing design to copyright and entertainment content. China’s accession to TRIPs was a key element of its admission to the worldwide free trade regime and to organizations such as the WTO. Its current attempt to impose substantial limitations on the rights of owners of technology patents is plainly inconsistent to the pledges it made in the TRIPs agreement.

The benefits of free trade have unquestionably benefited the U.S. and Chinese economies and millions of consumers in both nations, although that is not reflected in the ongoing political debate. It is clear that the hard fought consensus for free trade is fragile and under substantial threat. China’s proposals to restrict the rights of technology patent owners for so-called “essential” patents or to vaguely prohibit “abuse” of intellectual property rights is a dangerous development that could substantially undermine trade liberalization between the two counties.

Our next President and the U.S. government should make it a priority to work with the Chinese government and encourage it to rethink its current proposals and to develop proposals that incentivize innovation, rather than regulations that will harm intellectual property rights and add to the calls to restore trade barriers that will seriously harm both economies.

Seth Bloom is the president of Bloom Strategic Counsel PLLC and is an expert in antitrust law and competition policy. He spent nearly 14 years on the staff of the Senate Antitrust Subcommittee from 1999 to 2013, the last four years as general counsel of the subcommittee.