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Understanding Infringement – The Economic Argument

  • TIME: 2017-08-08 11:05:24
  • HIT: 401

Author:Ellis Davies

In 1980, the People’s Republic of China (PRC) joined the World Intellectual Property Organization, and thus agreed to ‘promote the protection of intellectual property throughout the world’. Since then, it has become a signatory to several other international conventions on intellectual property (IP). Moreover, the PRC has its own legislative framework for protecting intellectual property rights (IPR) in the form of the Trademark Law, the Patent Law, and the Copyright Law of the PRC, and various unified judicial interpretations of these laws. Despite this, in 2014 the PRC was placed on a priority watch list for IPR violations by the Office of the United States Trade Representative. So, despite committing to protecting IPR, and enjoying the protection of its own IPR under international conventions, intellectual property infringement is still rife in China. For those wishing to bring their IP to China, an analysis of the economic benefits generated by infringement, and the detrimental effects that would be caused by strict IPR enforcement can help outsiders better understand why infringement occurs in China and the importance of ensuring the protection of their own rights.

Despite its illegality and the potential litigation that it may attract, infringement has many economic benefits for Chinese enterprises and China’s economy as a whole. Developing economies such as China tend to import more technology than they export, thus imitation prevails over invention. The low-cost production and subsequent low prices of goods and services benefit the Chinese consumer and fuel China’s economic growth in turn. Economists argue that, in weighing the benefits of higher production and consumption of goods against the potential consumer surplus costs of IPR protection, from an economic point of view, it may be advantageous to skirt the rules to promote development. So, if China were to enforce IPR stringently, firms would likely have to either spend heavily on their own research and development or pay royalties to foreign companies (who may be competitors) for the use of their IP. This would lead to higher prices for consumers and may compromise the above mentioned economic benefits of imitation over invention for China.

Since opening its doors to foreign investors in the 1980s, China has become one of the world’s largest recipients of foreign direct investment. With this capital, there also came an influx (often as a condition in investment or joint venture agreements) of some of the world’s most valuable technology. This technique of absorbing and copying foreign technology into Chinese manufacturing has done much to improve China’s domestic technology standards and has allowed it to compete globally in the production and sale of high-quality products, without incurring the costs of invention. Therefore, there is clearly a strong economic incentive to copy which outweighs China’s interests, economically, in protecting IPR of foreign companies.

Furthermore, a stricter enforcement of IPR in China would carry with it a series of economically detrimental effects. Some argue that, whilst IPRs offer many economic benefits, developing economies often incur net welfare losses due to the cost of IP protection before the benefits of IPR emerge. After all, international IP accords were created by developed nations to protect their own interests; developing countries such as China need an extended transitional period before they can be expected to protect IPR as well as countries such as the US, or else risk retarding growth.

There is a further argument that IPR supports monopoly pricing. Product patents in certain industries, such as pharmaceuticals, can confer a greater market power on IPR holders. In the case of the pharmaceuticals industry, patents generate higher prices for protected products than for generic copies. Such monopoly pricing hits the pockets of consumers and importers, and therefore would be an economically detrimental effect of adhering to IPR protection rules in China.

There are also other wide-ranging economic reasons for Chinese firms to continue infringing IPRs. Piracy is a norm in China because of the cultural value that is placed on the collective good over the individual’s rights; in other words, China understands IP differently to the West. ‘Piracy is smarter because it’s cheaper’ is the ethos drives the small Chinese entrepreneurs and vendors, who wouldn’t have access to IP under a strict IPR regime, to increase their sales margins by replacing genuine products with copies - a sale is a sale, and some money is better than no money. This difference in attitude and culture should not be ignored by Western companies considering bringing their IP to China.

Turning social values like this on their heads by cracking down on infringement could result in a significant economic upheaval. Commentators cite the Yiwu government’s establishment of the Zhejiang China Small Commodities City Group (CSCG) as an example of the importance of the production and sale of counterfeit products to local economies in China. Some argue that this wholesale indoor market, where about 99% of the goods sold are infringing, has become integral to the economy of this Chinese city. It provides essential employment and tax revenue to the local area, it is closely tied to the local government, and has a significant interdependency with legitimate businesses in the area.

The CSCG example is an analogy for how piracy and infringement have become ingrained in China. There are factories full of workers, and marketplaces (physical and online) full of vendors whose livelihoods are dependent on commercial piracy and a crackdown would subsequently cause crippling labour displacement and economic troubles for China’s local economies.

In conclusion, infringement is commonplace in the PRC. Whilst this is not ideal, it is important to understand that Chinese enterprises have been able to thrive by ignoring IP regulations in a young economic system, and play ‘catch-up’ with their foreign competitors. However, despite cultural differences and attitudes towards IP, the Chinese government recognizes the need to create an IP protection system that benefits right holders as it seeks to continue the country’s impressive economic development through encouraging domestic innovation. This is particularly evident in the most recent amendment to China’s Patent Law, which not only seeks to significantly strengthen patent enforcement measures and broaden design patent protection, but also gives Chinese courts the power to grant higher statutory damages in infringement cases and grants broader powers to administrative agencies. So, there is plenty of cause to be positive. As China proceeds with its rapid development, and Chinese firms continue to make strides in innovation, the infringement situation will undoubtedly improve, but nevertheless, it is vital that foreign companies be wary of infringement in China and understand the reasons why it occurs so that they may make the necessary allowances and preparations for entering the Chinese market.