Trump may have postponed his IP trade war with China, but both sides are still playing for very high stakes
Last Thursday, President Trump set out a series of measures that the US is set to pursue against China over alleged violations of American-owned intellectual property. They were wide-ranging, but perhaps not as deep or as far-reaching as some may have been led to expect. Perhaps most important in the short-term is that none of them will come into force immediately. Instead, we now head into a period of consultation before any unilateral action kicks-in, while possible WTO-related measures are likely to take years, rather than weeks or months.
Following the announcement, I asked our North America editor Richard Lloyd and our Asia-Pacific editor Jacob Schindler – based in Washington DC and Hong Kong respectively - to give their takes; but before I hand over to them, here are a few random thoughts of my own on recent events:
This is not the first time the US has threatened Beijing with trade sanctions over perceived failures in the Chinese IP system. It happened twice in the 1990s, but thanks to concessions made by China nothing ended up happening. Back then, the concerns were all about counterfeiting and piracy. These days it’s a lot more complex, with protection of technology to the fore. China was also a lot less powerful economically back in the 1990s – the country did not own huge amounts of US debt and its companies did not employ many Americans, for example – so perhaps it had more reason to give ground than it does now.
It was noticeable that on the same day as President Trump signed off on the proposed measures, his administration also announced that – for the time being - EU member states were to be exempt from proposed tariffs to be applied to steel and aluminium. In that light, this caught my eye in the USTR press release:
The European Union Chamber of Commerce in China likewise concluded in a report entitled “China Manufacturing 2025: Putting Industrial Policy Ahead of Market Forces” that there has been an “unprecedented wave of outbound investments” in recent years from China into firms in industries of relevance to Made in China 2025, and many of these investments have been in areas where foreign business is unable to make equivalent investments in China.
It could just be that the president believes he is going to need friends if he is to win any IP trade war with China.
One of the areas the administration will be looking at is how to make it tougher for Chinese entities to acquire US technology. Of course, one obvious and relatively simple way to do this is to prevent them from buying US technology businesses. But to be effective as possible it will have to be a lot more wide-ranging than that. For example, Chinese companies have been acquiring US patents for a number of years now from very willing sellers, as well as hiring senior scientists and engineers from US technology businesses. Will these activities need to be restricted? Will there need to be a further tightening of the US trade secrets regime? Will greater restrictions be placed on the ability of Chinese students to live, work and settle in the US?
Even if Chinese companies do not buy US patents, they can read them. Of course, these do not ever tell the full story about a technology and its roll-out, let alone how to work it, but they are important sources of information; and big data and AI have the potential to make them even more significant in this regard. It will not be possible to prevent Chinese entities from accessing this knowledge.
Patents – unlike copyrights - do not come into being automatically. They are predicated on a procurement process. No-one can “steal” a patent if it does not exist; and the only way a patent can exist in China is if one has been applied for in the first place and the State IP Office has then granted it. If someone is working an unpatented invention in China that is no-one’s fault but the inventor’s (or his/her employer). Could it be that a lot of “stolen” US IP is IP that might have been registered in the US, but never protected in China?
US patent owners in China are far more likely to have their rights upheld in Chinese courts, should they enforce them, than were they to seek to do the same via the US courts. The courts in China are probably more patent-friendly than those in any other major jurisdiction. That does mean there are not significant issues with enforcement, but it does provide some context.
Finally, as things stand there are many more US technology companies active in China at a significant level – and selling products in the Chinese market – than there are Chinese technology companies actively selling products in the US. As a result, there are likely to be a fair few businesses in Silicon Valley and other US tech hubs hoping things do not get out-of-hand over the coming months. We shall see.
Now over to my US and Asia based colleagues. First of all here are Richard Lloyd’s thoughts from Washington DC:
China’s rapid emergence as an innovation and patenting powerhouse might prompt images of stable doors and bolting horses to come to mind in response to the release of Thursday’s 301 report. But even if China’s rise will be hard to halt, at the very least, President Trump is clearly keen to make sure that the innovation gap between the world’s two superpowers doesn’t continue to narrow.
From within the DC bubble, one question Thursday’s announcement throws up is what it might mean for domestic IP policy. If the approach to perceived Chinese IP theft is part of some joined-up thinking between the disparate parts of the Trump administration, then logic suggests that we should see a policy focused on strengthening patent rights in the US, too.
With his actions against China and possible talks with North Korea on the horizon, President Trump has bigger fish to fry than concerns over bias at the PTAB, uncertainty over Section 101 and SEP owners not getting a fair return on their R&D, but his decisions set the tone; and thanks in part to some of his administration’s key appointments, there is a growing expectation over here that protecting American IP in China will also translate into protecting it more aggressively on home turf.
The investigation by the Department of Justice antitrust division into the practices of standards setting bodies and whether they’re skewed in favour of implementers over patent owners certainly suggests a marked change in approach from the Obama White House. That has come after some particularly pointed remarks by division head Makan Delrahim on the application of antitrust law in the world of SEPs.
But if Trump’s IP policy is to be fully joined up then it will need action at the USPTO by new Director Andrei Iancu. He is yet to fully reveal his hand, but as he told IAM, one of his guiding principles is to provide greater predictability to patent rights when they’re granted. Logically that should also lead to greater protection of US grants.
If Iancu was under any illusions over the motivations of his ultimate boss then Thursday’s announcement helped shatter them in true Trump style.
And following Richard, here’s the take form our Hong Kong-based Asia-Pacific editor Jacob Schindler.
China’s leaders have sought to project quiet confidence as their trade spat with the Trump Administration escalated to its most serious level yet. The official line from the country’s Ministry of Commerce in the wake of the USTR’s release of its 301 findings was: “China does not want to fight trade wars. Yet China is absolutely not afraid of trade wars.”
The USTR has essentially declared China guilty on all four counts it was charged with – forced tech transfer, discrimination in licensing, state-directed tech investment and cyber espionage. What’s in store is a possible WTO case over licensing practices, $50 billion in tariffs on as-yet-undetermined goods and investment restrictions in tech (through a more active CFIUS, you could argue this is already happening).
The Chinese response to the 301 report can be expected to match US actions, but not escalate them. On Friday, just after the USTR announcement, China announced tariffs on $3 billion worth of goods, including fruit, wine, pork and recycled metals. But these shouldn’t be misinterpreted as a rather muted response to the 301 report. They’re the counter to the $3 billion in steel and aluminum tariffs which were announced on 2nd March and took effect on Thursday.
About a year ago Bill Perry, a trade lawyer and the author of the US China Trade War Blog, told me that US tech-sector companies would be vulnerable in any kind of US-China trade dispute: “When they look at how to retaliate, the big, bright target is high tech. Maybe where they get you is with intellectual property.” This was before the 301 investigation.
So for Big Tech, the lobbying will be taking place on both sides of the Pacific. It just so happens that CEOs Tim Cook of Apple, Sundar Pichai of Alphabet and Gina Rometty of IBM are heading to Beijing this week for the China Development Forum – a chance for face time with China’s top officials.
Big Chinese tech companies may be sleeping somewhat easier than their Western counterparts. Like any multinationals, they certainly could lose money in a trade war. But networking companies like Huawei and ZTE have always faced market barriers in the United States, and many consumer-focused tech companies don’t have many sales in the US. I don’t believe there are any large Chinese tech companies with US exposure even approaching the China risk faced by the likes of Qualcomm and Apple. That should give China’s leaders a bit of confidence as they plot a response to the 301 sanctions.
What does all this mean specifically for IP? Last week, we published a story about a Chinese company called Digital Rise. A state-owned enterprise, it’s engaged in developing Chinese national domestic standards in the audio space. These types of ‘national standards’ are considered important in China. Even though they are rarely used in place of international protocols like AAC and WiFi, they are often made mandatory for products sold in the country. But last month, SIPO threw out one of Digital Rise’s key patents – one of only 25 it owns, in fact – after a successful invalidation request by Samsung.
It’s a good illustration of the fact that in specific IP cases, even those that appear to have some political elements, the underlying facts and laws are what matter above all. (Of course, this may be cold comfort to Samsung, which is not faring well in its battles with Huawei in the courtroom or at the patent office.)
But this does not mean that political factors – like an ongoing trade war – do not filter into the IP world. No patent owner or other major corporate should have any illusions about what kind of legal system China has. A recent high-level document on reforms to the IP litigation system called on judicial training authorities to “Improve IP trial teams’ ideological and political quality, professional attainment and specialisation level” with the aim of producing judges who are “politically determined, globally oriented, proficient in law and familiar with technology”.
With that tucked safely in the back of everyone’s minds, life will certainly go on in China’s bustling IP market. Deals are going to be done and disputes are going to break out. Some licensors will ink new agreements, others will be stonewalled. Some foreign litigants will win, some will lose. Business as usual, in other words.