Tariffs Against China Increase China IP Problems

Earlier this week I spoke at and attended the 2nd Annual Berkeley-Tsinghua Conference on Transnational IP Litigation at Berkeley Law School, put on by the Asia IP Project of the Berkeley Center for Law and Technology and Tsinghua University. Before I get to the point of this post I must give a big shout out to this event and to Mark Cohen, who was the driving force behind it.

This is the second “Mark Cohen” event I’ve attended and both were truly singular. The first one was back in August, 2018, mostly focused on the then nascent US-China trade war. Mark pulled together around 100 people for this invitation-only event, roughly divided between practicing lawyers with China and/or International Trade practices, academics with a China focus, and high-level executives with substantial China experience. There was also a smattering of high level political and military and China consultants, along with (I think) a few judges and US government officials.  Without a doubt, this event influenced my thinking on China more than any other event I have attended and I have talked about this event more than any other as well. Put simply, it convinced me that the US-China trade war would be the New Normal and my opinion on this has only hardened over time. See The US-China Cold War Starts Now: What You Must do to Prepare.

That event was singular because of the quality and diversity of backgrounds and opinions of those who attended and spoke. But more than that, what made it so good was how so many people gave short (like 5-10 minutes short) talks and how so many people who were not scheduled speakers were encouraged to and did speak up — well over half of those there. On top of this, Mark and other leaders from the Berkeley Center and from Berkeley’s Law School did a great job in helping to steer (but not dictate) and moderate the discussions, preventing anyone from dominating it or from dragging it down.

This latest event was similar, as you can see by its agenda. Just a bunch of really knowledgeable people — judges professors, economists, and practicing lawyers — from both China and the United States speaking on topics they know well. The discussions were interesting and oftentimes controversial, but always respectful. I unfortunately had to leave before its conclusion so I can only speak to the time I was there. Most importantly, I learned a ton.

Now to the point of my post. Much of the discussion at the event was on China IP protections: the trends, the nuts and bolts, the statistics, etc. The trade war and the increasing tensions between the United States and China (and even the West and China) were underlying themes/issues for much of the day.

At one session, “Trade Secrets and the Trade War,” US-China tensions were more front and center and Mark at one point asked the group how the trade war was impacting trade secret protections. I had plenty of time to mull over that question during my long and and traffic infested ride to the airport after leaving the conference and I have concluded that the trade war has been really bad for foreign companies trying to protect their IP (including but not limited to trade secrets) in and from China. Really bad. I say this based on what I have been “seeing” and on what I am hearing from China lawyers both within and outside my own law firm, which is a big increase in China IP problems and thefts. As I explain more fully below, I attribute this to a sea change in the risk-reward calculations being made by Chinese companies.

I first wrote about the increase in China IP risks back in August, 2018, in China Trademark Theft. It’s Baaaaaack in a Big Way. Back then I attributed it mostly to China factories “hurting”:

Many (most) Chinese factories are hurting and they desperately want to improve their profit margins. What better way to do so than to sell a product under a prestigious or well-known American brand name — or even just any American brand name? See Your China Factory as Your Toughest Competitor.

I now attribute the increase in China IP thefts/problems to the trade war. Many Chinese companies are hurting and that explains the increase in IP theft, but of course many are hurting because of the trade war. But even beyond that, Chinese companies view foreign companies — especially US and Canadian companies — as looking to leave China, and that is because so many US and Canadian (and many European companies too) are indeed looking to leave China, or at least reduce their footprint there.

In response to so many foreign companies having one foot out the China door, many Chinese companies no longer consider their relationships with foreign companies as long-term. When a Chinese company does not believe its relationship with its foreign company counterpart will be a long term one, its incentives for stealing the foreign company’s IP greatly increases. It does not make economic sense to steal IP worth a million dollars from a company from which you can make $500,000 in yearly profits over the next ten years, but it does make economic sense to steal IP worth a million dollars from a company you believe will be jettisoning you within the next year.

In pretty much every speech I give on how to protect your IP from China, I include this PowerPoint slide, that says “Structure your deal and write your contract so that your Chinese partner believes it will make more money with you than without you.” Way more Chinese companies today than two years ago rightfully believe that they can make more money without their foreign company counterpart than with them, and the way for them to make more money without the foreign company is by taking the foreign company’s IP.

What this means for foreign companies doing business in or with China is that they must do what they can to protect their IP from China. In subsequent posts we will lay out what exactly foreign companies should do to protect their IP.