Intellectual Property Rights Infringement in China

China’s history with the United States on IPR violations is no secret. One can buy Hollywood movies or the latest Top 40 hit single for a dollar or less on the street in Beijing. If that’s not your cup of tea, illegal knockoffs of Nike, Armani, Louis Vitton, or thousands of other counterfeit products can be bought as well. Approximately 90 percent of all DVDs and software in the China market are illegal. While these only seem to impose harm on the businesses that produce these items, counterfeit food products, medicines, and car parts are in circulation that pose real health and safety concerns.

Chinese counterfeits are now making their way into the export system. In the US, about two-thirds of fake goods confiscated by US Customs originate in China. American businesses are losing an estimated $200 billion in business a year. Even Chinese businesses are starting to feel the detrimental effects of IPR infringement. However, aside from the occasional raid on a counterfeiter’s operation, these pirates see it more as a cost of doing business and get right back to work producing fake products.

Legislation granting protection to foreign businesses, while sometimes not the most logical, is not the main issue. The challenge is China’s lack of enforcement of already codified laws, stemming from the onus on the administrative system rather than the police. The State Intellectual Property Office established in 1998 was meant to coordinate China’s IP enforcement efforts, but this has yet to occur.

The US Embassy to China suggests that American companies register patents in China, although this gives no guarantee of protection but may be helpful as China slowly progresses in the area of enforcement. Of note, China’s law stipulates a first-to-file patent protection rather than the first-to-invent system of the US. Companies like Apple saw first-hand the fallout from this distinction. A Chinese company was the first to file the Ipad name in the country, even though Apple claimed ownership of the name after inventing the product. Apple had to eventually pay a large fee to the Chinese company to continue selling Ipads in China.

One can argue that China is taking positive steps to beef up IPR protections, as Figure 1 shows the more than double of IPR cases between 2008 and 2011. However in recent years, there has been a shift from physical counterfeit of say DVDs, music, clothes, etc. to that of cybertheft. Last year, US officials realized all too late that private information of nearly 22 million American citizens was stolen by Chinese hackers. That being said, President Obama and President Xi Jinping came to an agreement in late 2015 with wording that read, “Neither country’s government will conduct or knowingly support cyber-enabled theft of intellectual property, including trade secrets or other confidential business information, with the intent of providing competitive advantage to companies or commercial sectors.” Even if China fails to adhere to these guidelines, the fact that the two countries could come to an baseline agreement on IPR is significant.

An example of one such way the Chinese government is working to increase enforcement of IPR can be seen with the country’s relationship with Disney. Last November, Chinese authorities announced a special one year crackdown of counterfeit Disney products, the first time that China has singled out a single entity. That being said, it would appear that guanxi and kickbacks are in play here. Disney is currently in talks to build a new $5.5 billion theme park in Shanghai, including a designation of 2.7 square miles around the Shanghai park as a Disney trademark protected area.

Some organizations such as the Social Science Research Network (SSRN) have done extensive legwork to lay out an action plan to repair the IPR relationship between the US and China. The SSRN suggests a 12-step action plan using an already existing and agreed upon constructive strategic partnership model pronounced in the Joint Statement issued after the 1997 US-China Summit. A deeper look at the specific plan outlined by the SSRN can be found here. No matter the case, until China takes dramatic steps to recognize the barrage of violations in the area of IPR infringement, progress will continue to be a long, arduous process.

Evan Nicoll

MBA Candidate 2016