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The Year Ahead 2020

A Fair Assessment of China’s IP Protection

For years, US policymakers have described China as a lawless Wild West where foreign intellectual property is stolen with abandon. But if that were true, Western firms would stop basing their operations in China, and Chinese annual payments to foreign IP holders (relative to GDP) would not exceed the international average year after year.

NEW YORK – As 2020 approaches, US tariffs on Chinese goods have reached levels not seen since the US Smoot-Hawley Tariff Act of 1930, which played a key role in exacerbating the Great Depression. A key complaint of US President Donald Trump is China’s failure to respect intellectual-property rights. Trump and his trade advisers regularly accuse China of stealing US inventions, designs, and other forms of IP without compensation, and many in the media repeat these allegations as a matter of course.

It used to be that one could walk down the street in Vietnam, India, or Mexico and easily find pirated foreign movies and music on DVDs and CDs. Now that everything is digital, pirating has become less visible to tourists, even though it is probably no less rampant than before. In any case, IP protections are weaker in developing countries than in rich ones. The question, then, is whether China’s record on IP is better or worse than what one would expect for its income level.

For systematic data on such questions, we examine countries’ outbound royalty and license fee payments to foreign patent, copyright, and other IP holders, which is included in the balance-of-payments statistics compiled by the International Monetary Fund. These data reveal that a country’s income level and IP payments are tightly linked, with a clear positive linear relationship (when both are measured in logarithm). As the following graph shows, a 1% increase in per capita income is associated with a 1.85% increasein per capita IP payments, on average. The implication is that as a country grows richer – and as its economy becomes more technologically sophisticated and capital-intensive – its IP-protection regime tends to strengthen. (Recall that the United States was accused of violating British IP in the nineteenth century.)

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