Bad Math on Chinese IP Theft is Used to Justify Trade War

Bad Math on Chinese IP Theft is Used to Justify Trade War

The current trade war is based on a number of fundamental misunderstandings about the positive-sum nature of international trade and the costs of protectionism. In one relatively minor but characteristically embarrassing mix-up, the Trump administration’s estimate of the cost of Chinese intellectual property “theft” is based on statistics of dubious quality—which it then misstated.

The oft-cited statistic is that “Chinese theft of American IP costs between $225 billion and $600 billion annually,” according to a 2018 report from the Office of the U.S. Trade Representative (also called the Special 301 Report). This figure has been repeated by news outlets like CNN and Fortuneand in trade war apologetics, such as this piece by Ying Ma in The National Interest.

The 2018 report referenced above bases its figure on the cost of IP theft from a 2017 update to the 2013 report by the Commission on the Theft of American Intellectual Property, not itself a government entity. Calculations from the 2017 report led the Commission to “estimate that the annual cost [of IP theft] to the U.S. economy continues to exceed $225 billion in counterfeit goods, pirated software, and theft of trade secrets and could be as high as $600 billion.” [Bolded in original, italics added]. The original report estimated the cost was around $300 billion, based on a summary of other research on the topic.

In providing intellectual ammunition for the trade war, the 301 Report misstated the total cost of IP theft as the cost of IP theft by Chinese firms and government agencies.

But even the correctly cited statistics are suspect. Going down the rabbit hole of sources the Trump Administration and the IP Commission used to determine the costs of trade secret theft, we find a 2014 report from the Center for Responsible Enterprise and Trade (CREATe), which estimates the value of trade secrets using R&D spending. It also uses as proxies tax evasion, corruption, narcotics trafficking, and other “black market activities”—things that have nothing to do with trade secret theft other than also being illegal.

(China is also far from the only source of trade secret theft. Companies from around the world steal U.S. trade secrets, as do domestic competitors and hacktivists.)

CREATe then estimates that trade secret theft costs between 1% and 3% of GDP because their estimates for other black market activities “cluster” in that range. But this cluster is purely based on eyeballing a scatter plot of the costs as a share of GDP, not any statistical analysis. Even worse, when plotting the points in their cluster, they interchangeably use percentages of global and U.S. GDP, and the publication uses statistics whose origins range from 2005 to 2011.

Apples and oranges couldn’t begin to describe the problems with CREATe’s “calculations,” but that did not stop the IP Commission from estimating the cost of trade secret theft to be between $180 and $540 billion.

It is simply impossible to make any reliable estimates of IP theft, and irresponsible to make substantive policy decisions based on those estimates. The Government Accountability Office said, “based on our review of literature and interviews with experts, we concluded that it was not feasible to develop our own estimates or attempt to quantify the economic impact of counterfeiting and piracy on the U.S. economy.” The IP Commission doesn’t even attempt to quantify the magnitude of patent infringement for this reason.

But, even if the government could correctly cite the numbers it uses, it fails miserably to put the costs of IP theft into the proper context. First, there’s the cost of the trade war. An analysis from the New York Fed found that the 2018 tariffs cost $52.8 billion to consumers. Add in the projected annualized costs of the imposition of an additional 15% tariff on Chinese imports, the trade war will cost over $150 billion.

Second, while the word “cost” is attached to all of these figures, the ontology of ideal objects (trade secrets, software, etc.) means the only “costs” come from a reduction in the competitive advantage that comes from having a monopoly on certain information. Much like how lighting a candle from another doesn’t take away flame from the first,“stealing” an idea doesn’t diminish its value—only the monopoly power of the original holder.

Whether or not intellectual property is property, and thus can be “stolen,” is a subject of debate among the right. (In the interest of full disclosure, I believe that IP is a government-granted monopoly.) But restraint of free trade is a far clearer violation of private property rights. The inherent regressivity of tariffs make them a gut punch for ordinary consumers and a kick in the teeth for farmers and others whose livelihoods have been jeopardized, whereas IP theft is mere ankle-biting to wealthy firms.

Make no mistake, the PRC has engaged in countless acts of economic intervention to the benefit of the politically connected and the Chinese state itself. The Special 301 Report contains details of CCP officials strong-arming foreign investors and state-owned enterprises purchasing large stakes in foreign companies with the goal of acquiring technology as part of its economic development plans. Even so, the inability of the USTR to get the facts straight on IP theft calls into question where else they’ve gotten the facts wrong.

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By |2019-10-15T07:07:59-07:00October 15th, 2019|Uncategorized|