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 intellectual property (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 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 US was accused of violating British IP in the nineteenth century.)
If Chinese firms were systematically using foreign IP without compensation to a greater extent than other countries at a comparable income level, China’s IP payments would be low for its income level. Yet when we created a time series for China’s per capita IP payments between 1997 and 2017, we found that this was not the case. Before China joined the World Trade Organization (WTO) in December 2001, its IP payments were below the international average for countries at a comparable income level. But in every year since its accession to the WTO, its IP payments have exceeded that average.
China’s rapidly increasing IP payments have tracked its overall growth rate. In 2000, the last year before it joined the WTO, its total IP payments to foreigners were just $1.3 billion; by 2017, they had grown to $28.7 billion, implying a 20% average annual growth rate. For comparison, the median annual growth rate of IP payments across all countries during the same period was just 9.5%. China’s IP payments have been growing at a significantly faster annual rate than that of France (7.9%), South Korea (6.5%), and Mexico (-1.9%). India, with a population comparable in size to China’s, has experienced a comparable rate of growth in IP payments; but its total IP payments, at $6.5 billion in 2017, were just 22% of the Chinese level.
Another way to gauge the effectiveness of Chinese IP protections is to look at where multinational firms locate their operations. Multinationals are not stupid. They are not inclined to enter markets where their property will be expropriated on a massive scale. In 2018, with the trade war already well underway, China was the top destination for foreign direct investment among all developing countries (as was the case in each of the previous ten years). In fact, among all countries, only the US attracted more FDI.
Reasonable people can draw different conclusions from these facts. On one hand, one could say that, compared to the US and other high-income countries, China is not doing enough to protect IP. Its IP regime could certainly be made stronger, and its per capita IP payments could be increased. But one could also say that China is doing exactly what is expected for a country at its income level. Indeed, its IP payments have long exceeded the international average. And as it becomes richer, the record suggests that its IP regime will grow stronger.
A final question is whether an agreement can be reached between China and other countries over IP. One key factor will be the pace of innovation within China. Chinese firms have made massive investments in research and development, and they are quickly increasing their own innovative output. The number of patents registered by Chinese firms is growing exponentially. Even if one does not trust official Chinese figures, a similar trend can be found in US patents granted to Chinese companies.
The accelerating pace of innovation within China should improve the prospects for cooperation on this issue. Whereas stronger IP rights used to mean higher rents for foreign firms, now those same protections will benefit Chinese firms, too.
China’s IP regime is far from perfect. But the available evidence casts serious doubt on the claim that IP expropriation is unusually rampant there. Once the US can put the problem in proper perspective, greater cooperation with China in this area will look more promising. That, in the end, will benefit both sides far more than a tit-for-tat escalation of tariffs.
Shang-jin Wei & Xinding Yu are professor of finance and economics at Columbia Business School and associate professor of economics at the University of International Business and Economics in Beijing, respectively.