Wrecking Ball

Trump's Tariff Hammer Won't Hit China's IP Nail

New levies and restrictions won't add much to existing tools for protecting intellectual property, and may only escalate trade tensions.
Photographer: Mark Lyons/Getty Imagesd
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President Donald Trump is frustrated over trade imbalances and the theft of intellectual property by China. His proposed tariffs aren't likely to remedy the situation, and could make it worse. 

Trump on Thursday ordered tariffs on at least $50 billion in Chinese imports, with the proposed product list set to include items in aerospace, information and communication technology and machinery. Some people are talking about the pronouncement as if building a wall against the encroaching Chinese tide might be new or effective. Not so: The U.S. has been throwing obstacles in front of its largest trade rival for decades and has complained about intellectual property theft for just as long.

For years, the U.S. has used Section 301 of the Trade Act to target foreign IP infringement. While that part of the law doesn't specifically focus on intellectual property issues, the provision has become the umbrella for an annual report card on how countries protect IP. Being placed on the U.S. trade representative's Special 301 Watch List is a slap on the wrist for countries. After that, there is the Priority Watch List, considered even more severe.

On the Up

U.S. imports of electrical machinery -- a category that includes phones microwaves -- has risen steadily over the past decade

Source: U.S. International Trade Commission

Mostly, it's an embarrassment to be on either list, and countries tend to tighten IP enforcement in order to be delisted. This happened to Taiwan in the early 2000s because of music piracy, and spurred the government there to implement tougher measures including the introduction of an IP court. It has since been dropped from the list, and the U.S. can point to Taiwan as a case study in effective use of Special 301. Not that it always works this way.

China has been on the Priority Watch List since at least 2006. Alibaba Group Holding Ltd. has been named a Notorious Market" by the U.S. trade representative, and tends to shed crocodile tears every time it does. Beijing doesn't seem particularly embarrassed, nor in a great hurry to be delisted. So this particular carrot and stick doesn't appear to be effective.

Beyond Special 301, the U.S. doesn't have a lot of options when it comes to enforcing intellectual property rights outside its borders. One of them is to ban imports of infringed items, a process that is currently left to the U.S. International Trade Commission in a cumbersome process that requires litigation and lengthy court cases.  Samsung Electronics Corp. and HTC Corp. have both been subjected to this process through suits brought by Apple Inc., but it's not very efficient or effective.

Even the ITC is helpless when products are developed in China for use internally. Huawei Technologies Co. looks set to get kicked out of the U.S. -- for security reasons, not IP -- and there's not a lot of other Chinese technology products being sold in the U.S. either, which is why implementing tariffs as a measure to spur IP enforcement looks like the wrong tool for the job. You can't tariff a product that's not even being imported, and it doesn't make practical sense to tax items unrelated to the IP being stolen.

Out of Sync

Electronics is the most unbalanced sector of U.S. global trade

Source: U.S. Department of Commerce (collated by U.S. International Trade Commission)

In addition to tariffs, Trump has directed the Treasury Secretary to propose new investment restrictions on Chinese companies to safeguard technologies. This seems unnecessary. The Committee on Foreign Investment in the U.S., which is chaired by the Treasury Secretary, already monitors and rejects foreign investments. It acts in secret and rarely explains its decisions. And while it doesn't have the power to veto deals, it makes recommendations to the president. Trump rejecting Broadcom Corp.'s  takeover of Qualcomm Corp. is proof that this mechanism works. 

Enunciating restrictions in writing may not change the end result, but it would give China something concrete to rail against and provide ammunition for Beijing to escalate this trade war.

Clearly, Trump is itching for action. But while swinging a large hammer will make a lot of noise, it might not get the job done. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Tim Culpan in Taipei at tculpan1@bloomberg.net

    To contact the editor responsible for this story:
    Beth Williams at bewilliams@bloomberg.net

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