China and the United States are squaring off in a blow-for-blow trade battle. In March, the Trump administration imposed U.S. tariffs on Chinese steel and aluminum. China responded in kind with its own round of tariffs on U.S. imported goods, with a heavy focus on agricultural goods such as American made nuts and wine. On April 3, the Trump administration announced a widely anticipated second round of tariffs, which are estimated to total $50 billion annually. These new tariffs cover an array of Chinese products with a pointed emphasis on electronics such as televisions and medical devices. Within 24 hours, China hit back with its own second wave of tariffs directed to 106 U.S. products including soybeans, cars and whiskey, which perhaps not so coincidentally are estimated at about $50 billion annually.
Critics of the Trump administration question the wisdom of instigating a trade war with China. Their concerns are fair. Trade wars are generally a lose-lose scenario, with consumers coming out the worst. China is also a critical partner in international relations, particularly with respect to stabilizing the threat of conflict with North Korea. And of course, Chinese lenders hold over $1 trillion in U.S. debt with no immediate end in sight to the growing deficit. So what could be worth picking this fight with China?
At the heart of the Trump’s administration’s rationale for these latest tariffs is China’s widespread theft of intellectual property. China has historically been a counterfeit safe haven. From the shadowy corners of the internet, Chinese-based counterfeiters can sell knock-off goods across a range of industries such as cosmetics, pharmaceuticals, clothing, jewelry, multimedia and software. These counterfeiters operate anonymously from China where intellectual property laws are lax and the heart of their enterprise lies beyond the reach of the U.S. court system.
The prevalence of counterfeit merchandise is a significant drain on both the U.S. and international economy. According to a Frontier Economics report, commissioned by the International Chamber of Commerce and the International Trademark Association, the estimated global value of counterfeit and pirated goods was about $1 trillion as of 2013. The cumulative loss of economic activity including suppressed investment, increased crime and loss of jobs due to counterfeiting was worth about $800 billion in 2013. A mere 1 percentage reduction in counterfeiting and piracy could yield an additional $50 billion to the global economy. China sits at the epicenter of both the problem and the solution. In 2008, the World Customs Organization estimated that 65 percent of all counterfeit shipments emanated from China.
The problem of counterfeiting extends beyond the economic impact of young adults purchasing knock-off designer bags. Counterfeit cosmetics and drugs can be dangerous to consumers who apply, ingest, or inject these uncertified products. Cheap, chemical ingredients used in these counterfeit products can lead to serious health hazards for unwary purchasers. Counterfeiting is also a known financial source for organized crime including international terrorist organizations. For example, the terrorist group that orchestrated the 2004 Madrid train bombings was found to have been funded through the sale of pirated CDs. Moreover, the Chinese factories churning out counterfeit product are potential human rights nightmares. For all the legitimate concerns about the working conditions for Chinese workers assembling famous clothing and accessory lines, imagine the conditions for the workers making the illegal knock offs in factories unaffiliated with U.S. companies who are compelled to maintain a positive public image. Counterfeiting is not a victimless crime.
If counterfeiters tried to operate from the United States, intellectual property owners would have serious enforcement tools at their disposal. U.S. law formally defines a “counterfeit” mark as a “spurious mark which is identical with, or substantially indistinguishable from, a registered trademark.” Anyone who uses a counterfeit of a registered trademark in U.S. commerce in connection with the sale, offer for sale, distribution, or advertising is liable for trademark infringement. In addition to injunctive relief, including seizures, counterfeiting carries statutory damages up to $2 million per counterfeit mark, 15 U.S.C. Sections 1116 and 1117. Criminal prosecution is also available, see 18 U.S.C. Sections 2318 and 2320.
Reforming China’s intellectual property enforcement will take time, but there are already signs of progress. In 2017, China became the second-largest source of international patent applications behind only the longtime leading U.S. The rise in Chinese patent filings may be a bellwether to China’s increasing acceptance of the value of intellectual property. China is also demonstrating a commitment to institutional changes. On March 13, the Chinese State Intellectual Property Office announced it would be restructuring the office to strengthen the protection of intellectual property rights. This restructuring comes on the heels of reports of increased Chinese civil actions for intellectual property infringement. One report estimated 13,000 Chinese patent infringement cases were filed in 2015, representing a 22-percent increase over 2014.
Analysts will continue to debate the wisdom of President Donald Trump’s newly minted tariffs. It remains to be seen if this recent shift in Chinese trade policy can effectively pressure China into better enforcing intellectual property theft. Regardless, it should be welcome news for U.S. intellectual property owners that China’s value of intellectual property rights appears to be trending in the right direction.
A. Robert Weaver is a board certified specialist in intellectual property law. He practices with Cozen O’Connor in Miami. Contact him at email@example.com.