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Intellectual property rights row misses the point

Trump demands will fall flat in China, which is following a well-worn path

| China

China is in the target for U.S. President Donald Trump's latest effort to rewrite the rules of international trade in line with the doctrine of "America First." Protecting America's intellectual property -- its patents, trademarks and copyrights -- is the specific objective.

Writing in the Financial Times, the U.S. Commerce Secretary Wilbur Ross declared that "American genius is under attack from China." This line was backed up by the recent report of the high-level U.S. Commission on the Theft of American Intellectual Property. Reinforcing the point, U.S. Trade Representative Robert Lighthizer has formally launched an investigation into China's alleged theft of U.S. intellectual property.

Intellectual property is intrinsically complex. The starting point is that knowledge is not like physical property: It is costless to provide it to another person. Thomas Jefferson, the principal author of the U.S. Declaration of Independence, put it this way: "He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me." Most of society's vast accumulation of applied knowledge has come to its users for free, just by copying what others do.

A second characteristic is that the advance of knowledge is incremental. Just as Isaac Newton, the British scientist and mathematician, said he saw further because he stood on the shoulders of those who came before, most technological progress involves relatively modest rearrangements of existing techniques.

Often those who claim the exclusive rights of a patent have just made a minor advance on earlier ideas. Just as often, it is a fortuitous accident that gives one person a valuable and enduring patent covering an idea that others would soon have arrived at themselves. Thus, a patent can give undue reward to its owner, and this may block further incremental advances.

Convergence -- the process by which poorer countries can raise their living standards toward the levels reached in richer countries -- is largely about copying existing techniques and technology from advanced economies. China's spectacular pace of economic growth illustrates the point. China has, by one means or another, copied many of the techniques that make the advanced economies so productive.

Sometimes China has paid for the right to use foreign intellectual property. Sometimes the Chinese government has made the sharing of intellectual property a condition for foreign businesses wishing to invest in China. China has also invested in foreign companies that own valuable intellectual property.

In other cases, China has simply used ideas without acknowledging any intellectual property rights. The many Chinese who have lived, studied and worked in advanced economies have brought back technical, operational and managerial knowledge that they have applied in China. Intellectual property, like information more generally, "wants to be free," as the U.S. futurist Stewart Brand put it in 1984.

Incentives needed

But it is costly to invent new things, and incentives for future research are needed. The ideal environment is one that encourages innovation but does not inhibit the use of this innovation by others, either for immediate benefit or as a building-block to advance knowledge further.

One way to reward innovation is to provide a patent -- a government-backed monopoly on the idea. Monopolies, however, are bad economics. A user has to pay the patent-holder for something that has no social cost, unnecessarily restricting its use. As well, historical evidence suggests that patents slow down the dissemination process and slow additional innovation.

In practice, this dilemma is resolved through a political process, balancing the interests of owners and users of intellectual property. But it is in the interests of the owners of intellectual property to make the monopoly period as long as possible, and to ensure that it is enforceable globally, so that it cannot be bypassed by foreigners freely using the innovation.

Ideally global rules should be developed multilaterally, as was the agreement on Trade-Related Aspects of Intellectual Property Rights developed by the World Trade Organization, so that the interests of both owners and users of intellectual property -- and society's more general interests -- can be balanced.

Of course, China has blatantly ignored legitimate intellectual property protection. But Ross's bald assertion that American-granted intellectual-property monopoly rights must apply in China does not offer much prospect of balancing the various interests.

If the administration of U.S. President Barack Obama had included China in the negotiations for the Trans-Pacific Partnership trade agreement, and if Trump had not decided to withdraw from the TPP, there might have been a basis for rules that would have reflected the interests of both users and owners of intellectual property.

As things stand, however, China is likely to continue its convergence toward the technological frontier, borrowing technology and techniques without too much regard for rules which have been written to advantage the owners, rather than the users, of ideas.

Stephen Grenville, a nonresident visiting fellow at the Lowy Institute for International Policy in Sydney, was deputy governor of the Reserve Bank of Australia from 1995 to 2001.

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