Chinese Intellectual Property Theft to Continue as Trump Mixes Messages

 | Aug 17, 2017 | 10:00 AM EDT
  • Comment
  • Print Print
  • Print

President Donald Trump this week ordered the United States to take bold action to stop China's theft and abuse of intellectual property.

Only, he didn't. That's just what it sounded like he did.

He talked tough on Chinese trade again, gave confusing instructions, and initiated an inquiry that probably won't go anywhere. The law being used hasn't been called on since the 1980s, and almost certainly goes against the commitments that the United States has made to the World Trade Organization.

To top it off, Trump has linked Chinese companies taking advantage of U.S. companies with China's national "inaction" in helping the United States as a nation on North Korea. Trump has linked, it seems inextricably, Chinese trade with foreign policy.

It's a mess, and a mistake. Several mistakes, in fact.

The position on intellectual property is much the same stance Trump has taken on steel and aluminum. Complain a lot about it, say China is stealing from or raping the United States (he used both on the campaign trail), order someone else to do something bureaucratic, and hope China is far enough away that everyone forgets.

On Monday, he says he ordered a "very big move."

What he actually ordered was for the U.S. Trade Representative Robert Lighthizer's office to spend a year looking at whether the United States, as a nation, should consider pressing a Section 301 claim against China on intellectual property. Such actions normally come from industry groups or companies. But he wants the Trade Rep to see if Uncle Sam should go it alone on software.

"Basically, what Trump issued is an order to 'investigate whether or not to investigate,'" trade lawyer William Marshall explains. That'll rumble on, and "the USTR is not likely to do anything," Marshall says. "It's largely hot air, as it is very clearly going nowhere under U.S. law."

Lighthizer is hamstrung. The Trade Representative's office has already said the United States can only take Section 301 action after taking the case to the World Trade Organization. After it does, a dispute-settlement panel or appellate body must authorize a 301 action. The United States could act on clauses violated in bilateral trade agreements outside the WTO, but the United States doesn't have bilateral trade agreements with China.

Anyway, one of the agreements under the WTO is that on the Trade-Related Aspects of Intellectual Property Rights, or TRIPS. That covers any issues involving theft of IP.

In fact, if the United States goes ahead with a 301 action without taking it to the World Trade Organization, China could basically sue the United States for doing exactly that -- and violating its own promise to deal with issues covered under WTO agreements through the WTO.

"And guess what? They'd be right!" Marshall, the trade lawyer, says. The European Union won on exactly the same issue in 1999. "Guess what else? The U.S. lost and hasn't pursued such a unilateral Section 301 case since."

There's no doubt that Chinese companies do steal intellectual property from companies the world over, including the United States, Europe and Japan in particular. U.S. officials estimate that intellectual-property theft costs U.S. companies as much as $600 billion a year, the bulk of it by Chinese companies.

Those companies are aided in this effort by Chinese government policy requiring that foreign companies hand over computer source code and keys to the government if they want to operate inside China. They must also store data in China. And share technology with partners. To top it off, it is virtually certain that the Chinese hackers who constantly attempt to invade the networks of foreign companies and governments are working with or for the Chinese government.

It's what to do about it that's the problem. Ordering an investigation as to whether there should be an investigation into an issue that basically everyone knows is already a problem probably isn't the way to go about it.

Beijing countered that it would "resolutely safeguard the legitimate rights and interests of the Chinese side." It is already pointing out that the United States should follow global rules -- i.e., under the WTO -- rather than violate them.

In fairness, while saying that this is a "very big move," Trump also said that "this is just the beginning."

But the beginning of what? Trump has consistently portrayed trade as a war, and linked it with preventing actual war.

Trump tweeted to complain both of China's actions on trade and on North Korea shortly before a United Nations vote on tougher sanctions against the Pyongyang regime. 

On his official feed, he said on July 29: 

"I am very disappointed in China. Our foolish past leaders have allowed them to make hundreds of billions of dollars a year in trade, yet... 

...they do NOTHING for us with North Korea, just talk. We will no longer allow this to continue. China could easily solve this problem!"

China then joined Russia in backing the tougher sanctions on North Korea in a unanimous 15-0 vote by the U.N. Security Council. "Very big financial impact!" Trump rejoiced, noting the participation of those two nations alongside the United States. "Over one billion dollars in cost to N.K." 

Sanctions are one thing. China makes up three-quarters of North Korean imports and exports, and it will shut its door to North Korean coal, metals and fish on September 5. That hurts.

But trade is a tango that definitely takes two. The argument that U.S. leaders have been fools to allow "China" to make billions of dollars in trade ignores, foolishly, the fact that U.S. companies also made billions of dollars in trade.

Trade is not a zero-sum game. One side does not "win" while the other "loses."

What's more, linking trade issues such as the undoubtedly unfair practice of Chinese intellectual-property theft with "fire and fury" and armed forces that are "locked and loaded" confuses both issues.

Should China stop helping the United States put pressure on North Korea because it wants to "win more" on trade? Will it "lose" if it helps America out?

U.S. investors can also take stakes in many Chinese companies, even alongside the Chinese state. Those companies often benefit from Chinese subsidies, which gives them an edge, sometimes unfair. And at the very least they have the imprimatur of the Chinese government in what they do. But U.S. shareholders can benefit, blurring the "us vs. them" narrative. Should those investors buy more shares to "win" more like the Chinese? Or sell their shares, to be patriotic?

Trump linked trade and policy again last Friday, when he called Chinese President Xi Jinping to praise him for China's support of tougher sanctions on North Korea. Having delivered this sugar, he laid out his salt: by the way, the United States is about to start investigating China on intellectual property, he said, according to The Washington Post.

"You scratch my back on Korea and I'll scratch yours on software" might make sense to a businessman or a Chinese tycoon. But it doesn't make a lot of sense geopolitically, or at a national level. Suggesting that China would be doing the U.S. a solid by putting more pressure on Kim Jong-un ignores the fact that putting pressure on him might benefit China, too, which is tiring of his antics. 

"China is no more a fan of North Korea or their tactics than the U.S. or Japan are. But they share a significant land border," Marshall says. Having an unstable nuclear-armed neighbor is hardly what China wants.

Foreign policy is the government's business, and a constant diplomatic balance. Business is business, for companies to do and the government to enable. And stealing intellectual property is undoubtedly theft, for the government to prevent. Let's not continue to mix them all up.

BEST IDEAS

REAL MONEY'S BEST IDEAS

News Breaks

Powered by

COLUMNIST TWEETS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.