By Christine McDaniel
March 22, 2018

President Trump is considering a “big fine” or tariffs to punish China for unsavory business practices, like stealing the intellectual property of U.S. businesses. But history shows that tariffs are futile, and pursuing fines requires more leverage than American businesses or the president has. Since this administration is bent on making China change its ways, Trump and his economic team should instead unite with like-minded countries and reshape key trade rules.

When theft of U.S. intellectual property occurs on our soil, the U.S. court system can provide recourse. When it happens outside of the United States, there are fewer options for American firms. Those that choose to do business abroad must abide by the rules in those countries, or by the rules in existing international trade and investment agreements.

In principle, that’s none of Uncle Sam’s business—Americans should determine for themselves which pieces of their property wind up on the bargaining table when seeking to do business abroad. For U.S. firms doing business in China, many find that handing over the crown jewels—or risking theft—is a price worth paying if it means access to the world’s fastest-growing and second-largest economy.

Yet this administration is determined to take unilateral action against China by invoking Section 301 of the Trade Act of 1974, which gives the U.S. Trade Representative broad authority to respond to a foreign country’s unfair trade practices. This action is usually reserved for intellectual property matters.

Trump and his trade team’s knee jerk reaction appears to be a tariff. But President Trump’s earlier desire for a “big fine” would be the better of those two options. It has a lighter touch in the marketplace and does not distort the prices consumers pay or healthy competition among businesses.

But there are practical matters to consider. How do you compel a sovereign nation to pay a fine?

In short, you don’t. Both parties need to come to the table to negotiate a settlement for it to work. And there is no indication that China is ready or willing to change its ways. China’s government will reform its intellectual property right regime when it believes it is in its interest. And not a day sooner.

We have been through this before with the legendary Texas Instruments vs. Japan fight over the semiconductor industry in the 1980s. Japanese firms had been stealing intellectual property from U.S. firms for decades. But, in the end, getting Japan to come to the table had more to do with its own self-interest than with U.S. pressure.

With American ingenuity at work, Texas Instruments (TXN) engineer Jack St. Clair Kilby’s U.S. patent for the integrated circuit revolutionized the semiconductor industry beginning in the 1960s. As his Japanese patent application languished—for 30 years—Japanese businesses, by some accounts, built their own semiconductor industry off of his idea.

Decades of U.S. pressure and trade tensions had little effect. But over time, a critical mass of Japanese firms had reached the technological forefront of industry. Once those leading firms found themselves suffering at the hands of local copycats, they were keen to protect their own position. They were the ones to exert the pressure on the Japanese government that ultimately tipped the scales for patent reform and set in motion the significant strengthening of Japan’s intellectual property rights.

In other words, China may someday change its ways, but don’t count on that happening until it is good and ready.

 

If President Trump is determined to take on China, then all roads lead to the United States working with like-minded countries to strengthen and rewrite the trade rules. Our Trans-Pacific and Trans-Atlantic allies are just as eager to pen in market-oriented rules on state-owned enterprises, cross border data flows, technology transfer requirements, and intellectual property rights.

Shaping the rules of the global economy remains the more practical and, indeed powerful, response to China.

Christine McDaniel, a former senior economist with the White House Council of Economic Advisers and deputy assistant Treasury secretary, is a senior research fellow with the Mercatus Center at George Mason University.

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