America and China Trade Relations
Intellectual property is very important as American business continues to expand and develops. Businesses are now attempting to penetrate foreign markets which are unique in their laws, customers and beliefs. International trade is no different in this regard as business attempts to capitalize on a burgeoning middle class in China. As such, it is important for business to protect the intellectual capital that made their operations thrive and flourish. Too many individuals are now copying or directly replicating American brands in an attempt to garner profits. Brands are in many instances, the most important aspect of an American business. By pilfering or using very similar brands, emerging markets are literally stealing profits that are earned by American business. This is an international trade issue as businesses must now attempt to enforce higher standards of transparency in regards to intellectually capital. Businesses must do so without destroying the international relationships between Asian consumers and their American counterparts. It is the nature of capitalism to copy or mimic successful products. It is when companies outright copy a trademark or patented process that complications arise. Intellectual property is no different in this regard. China specifically, has been notorious for infringing on American companies intellectual capital. This ultimately hinders international trade which discourages innovation among American businesses. Furthermore, international trade is hindered as businesses may be reluctant to expand in areas with high degrees of copyright and intellectual rights infringement.
To begin, WIPO defines refers to counterfeiting as “infringement on trademarks,” and piracy as “infringement on copyright or related acts (Jacobson, 2008).” 5 to 7% of all world trade is comprised of piracy and counterfeiting. Piracy rates within China were at an alarming 92% ( Cheng, 2011).Nearly 1.3 Billion people now live in China, of which approximately 90% of them pirate software or commit other versions of cybercrime against intellectual property. The likelihood of actually getting caught for this offense is unlikely due in part to the sheer volume of citizens within the country. Would it be practical or even worthwhile to catch every small business counterfeiter within China? If so, what is to prevent another person from committing the same offense? With the ease of access to technology, I believe that literally any one of the 1.3 billion citizens of China is liable to commit an intellectual property crime even if other counterfeiters are indeed caught. This again, poses a significant threat to the United States business and intellectual property in general. This is a particular problem for international trade because it discourages innovation in American intellectual capital. What incentive do American businesses have to develop intellectual capital if China is simply going to copy it later on with no form of reprimand? This causes issues in valuation as well. Companies will not pay a premium for intellectual capital if it will easily be copied by international competitors. This again discourages innovation as the profit incentive is greatly diminished.
America is characterized by its emphasis on capitalism, international trade and its subsequent benefits to society. International trade and the production of innovative goods and services in particular, have provided a solid foundation for American prosperity for centuries. American capital markets are among the best in the world which provides capital to flourishing businesses. Businesses however need to be protected from the influences of competitors, especially those of foreign origins. It is the nature of international trade to compete and attempt to erode competitor market share. It is through this behavior the goods and services are innovated. This behavior also creates cheaper goods and services which again benefits society at large. In some instances however, creativity must be protected within the context of capitalism and international trade. Intellectual property is one such aspect that should be protected from the influences of competitor mimicking. If a company or individual created a unique structure or idea, competitors should not be able to steal, mimic or directly copy that particular concept. A logo is symbol of a brand and the values in which that brand evokes within the consumers mind. Therefore, it should belong to one individual company. Could you imagine if every fast food chain copied McDonald’s logo for there own personal use? It would create havoc in both the consumer and business world (Oley, 2010). For one, commodity type businesses would be unable to differentiate themselves from competitors. Consumers looking for a particular value proposition would be unable to differentiate between companies. They instead would be forced to waste time, and energy looking at every store for the product characteristics in which the consumer is attempting to locate. This is especially true in our current technological age. Barriers to entry in many industries have been substantially reduced with the advent of the internet. Nearly anyone can now buy, sell, or even produce products over the internet.
Companies attempting to merger or acquire these internet companies also must be aware of their intellectual property and how to value it appropriately. As such, intellectual capital is very important within the context of capitalism. My aim, throughout the duration of this document is to detail the nuances of valuing intellectual capital of some methods in which not to do so.
What is traditional capital? Traditional capital is capital that is tangible. This will include items that provide direct economic benefit to the company. These items will include physical materials used in manufacturing a car, or the building used to collect inventory. These items are considered tangible as a market price can be placed directly on these items. The steel used to produce a car can be directly valued in the market place. This is unlike a logo which is intangible and cannot be accurately valued in the market. A valuation of a logo is at best, an educated guess which rarely is accurate. Traditional capital however can be quoted daily. In the event of liquidation, these tangible assets can readily be sold for cash.
What exactly is intellectual capital? Intellectual capital is defined as, “the knowledge, experience, and brainpower of employees as well as knowledge resources stored in an organization’s databases, systems, processes, culture, and philosophy (Intellectual capital, 2012).” Businesses traditionally have both tangible and intangible assets. Both are needed to further company goals and objectives while driving business results. A common mistake that many companies make in regards to valuing intellectual capital is being over optimistic in their assumptions. Many companies engage in M&A activities to acquire intellectual property. This occurs quite frequently in the technological sector as many large companies purchase smaller companies with particular expertise and intellectual capital. For example, Microsoft purchased Skype for $8.5 Billion (Shankland, 2011). Skype has tangible assets well below this figure. The remaining money is characterized as “Goodwill” which is the intellectual capital that Skype provides. In fact, Microsoft CEO Steve Ballmer was quoted saying, “Skype is a phenomenal product and brand that is loved by hundreds of millions of people around the world,” How much does brand loyalty of hundreds of millions of people around the world cost? Are these tangible assets? The answer is that it is difficult to value those customers in regards to future profitability towards Microsoft. Further compounding the issue is that Microsoft could easily have overpaid for this intellectual capital.If this acquisition will be successful will remain to be determined for many years. However, one reason it may not be successful is that Microsoft simply overpaid for intellectual assets that were grossly overvalued.
China has done much on paper to counteract the pervasiveness of piracy of American goods and services within its borders. However, it has done little in regards to actually implementation of these procedures. The 1990 copyright law that China enacted seemed great in concept but difficult in terms of execution. The law provided for the protection of authors of scientific and artistic works. It also provided a means to disseminate this information for the benefit of society (Cheng 2009). Again the law seems great in concept; however upon further review of the laws impact on piracy levels within China reveals it did nothing to reverse the alarming trend of piracy of American goods and services. This ultimately harms trade relations between the United States and China, as businesses are reluctant to do businesses with unethical entities. This is particular true for American companies that rely heavily on their brand image and the quality it represents. For example, Lamborghini will be very reluctant to do business in China due in part to its extreme image of prestige among the companies general consumer. The same can be true for American luxury brands as well. As mentioned earlier, the law was enacted in 1990, however in 2003 piracy rates within China were at an alarming 92% (Orley, 2010). In 2004 China enacted the “Several Issues of Concrete Application of Laws in Handling Criminal Cases of Infringing Intellectual Property.” This law effectively lowered the threshold for what constitutes piracy will enhancing the overall punishments. China has gone so far as to revise the Civil Procedure law in 1991 and the Criminal Procedure law in 1996 (Slate, 2006). Again, to the dismay of other industrialized countries such as America and Europe, China has done little to actually implement these standards. I believe this is due in part to ease of access to counterfeiting technology combined with a lack of severe punishment. Nearly 1.3 Billion people now live in China, of which approximately 90% of them pirate software, motion pictures and other luxury goods. The likelihood of actually getting caught for this offense is unlikely due in part to the sheer volume of citizens within the country. Would it be practical or even worthwhile to catch every small business counterfeiter within China? If so, what is to prevent another person from committing the same offense? With the ease of access to technology, I believe that literally any one of the 1.3 billion citizens of China is liable to counterfeit even if other counterfeiters are indeed caught. This again harms trade relationships with the United States on multiple fronts. First, as technology becomes more advanced, the ability to counterfeit property goods and services becomes much heightened. Trade relationships are thus more difficult as the burden to abate the influence of theft becomes even more troublesome.
Another deterrent to the implementation of the intellectual property laws in China are the actual court systems themselves. Chinese courts handle a small percentage of actual infringement claims (Cheng, 2009). As of 2002, only 4% of software used within china was authentic (Intellectual Capital and Business Value, 2012). What China has used to combat the misuse of intellectual property is a combination of provincial offices along with independent monitoring groups (Jacobson, 2010). Most of the enforcing duties are left to administrative bodies such as the State Administration for Industry and Commerce. This again is a great concept in theory however; these administrative bodies are given little power to punish actually offenders. The most these bodies can do in regards to remediation is confiscation and monetary fines (Cheng 2009).TRIPS even requires that some form of criminal court remedy is apparent ( Orley, 2007).The rule states that TRIPS members shall provide for ” Shall provide for criminal procedures and penalties to be applied at least to cases of willful trademark counterfeiting. (Orley, 2007)” China has subsequently circumvented this rule by stating they don’t have the apparent resources and training necessary to conduct such a remedy. Even if the issue is resolved through civil litigation, usually only small settlement are awarded. Often times these settlement fall short of covering damages (Slate, 2006). I believe that stiffer penalties must be enforced in order to deter counterfeiters. Confiscation does little to deter the piracy of goods especially if the business has economies of scale and scope. With wage rates and production costs so low in China, confiscation of product is of little importance. Hourly wage rates in China can be as low as $3.50, with cost of actual materials even lower (Patel, 2005). If China intends to make to heavy impact on piracy, more severe punishment is surely needed. In 2002, only 19 cases of piracy where decided in Beijing (Shankland, 2012). Beijing has an overall population of 22 million (Slate, 2006). To catch only 19 offenders in a year, with a population of 22 million is abysmal, especially when more than 90% of the population is pirating software. The recording industry hasn’t fared much better only 235 apprehensions between 2002 and 2005 (Slate, 2006).
Chinese history could also be a potential deterrent to the overall success of copyright protection. In Chinese society, works that are generated from within are often viewed as works that benefit the community and society as a whole (Intellectual Capital and Business Value, 2012). This is in direct contrast to the American view that works and intellectual property are used for profit motives or financial gain. To further complicate the issue, the Chinese government oversees nearly all aspect of press, print and censorship to further the ideals of “Society.” Serving the people also would also encompass protecting the people. In this example, the Chinese government, wanting to preserve its own culture would therefore protect it from the influences of American society. Allowing for American society copyright leverage would thus lessen the government’s control over its print, press and censorship power (Intellectual Capital and Business Value, 2012).
Furthermore, even if the Chinese government does allow for American Intellectual property rights to be enforced, they would essentially be punishing its own citizens. This would at first seem logical to enforce the IP laws imposed by foreigners but a deeper look into the nuances of the situation would reveal a reluctance of China to impose such laws on its citizens. To begin with, in general, only American or foreign companies would be bringing lawsuits against a majority of Chinese citizens. From a political standpoint, this would be unacceptable because foreigners are essentially punishing Chinese citizens within China’s borders with laws originating from overseas. With China having nearly 1.3 billion people, the government would essentially be punishing nearly 1.3 billion people for the profit of foreigners. According to the CIA fact book, the average Chinese income in 2009 was $6,600 which is ranked 128th in the world. This is compared to the United States and Japan, who have average incomes of 46,000 and 32,700 respectively (Jacobson, 2008). China does not have a substantial benefit to punish its already poor citizens at the expense or wealthy, industrialized nations.
A solution to this problem would first be international collaboration to help mediate the situation. This can occur through the use of specialized personnel with civilian backgrounds. These individuals are experts within their respective fields and provide a diverse perspective in regards to cybercrime. Both America and China wants to avoid a homogenous mix of individuals who think in the same manner. With a homogenous mix of personnel, many of the individuals within the organization will have nearly identical solutions to international trade problems. This creates the common phenomenon known as “Group Think,” where there is little conflict and everyone within the group can easily come to a consensus. This is the exact antithesis of what is needed to international trade issues. First, the essence of trade is such that it can occur literally from anywhere in the world. As I alluded to earlier in the document, cultures that have few deterrents in regards to trade, such as China, can easily justify their position. Therefore, it is quite necessary to acquire divergent perspectives in regards to trade and its appropriate solution. It first allows multiple scenarios to be accounted for while also building a better perspective as to the capabilities of other nations. This therefore allows for all parties involved to arrive at the best solution.
In conclusion, intellectual property value will continue to be a major issue as American business continues to expand into foreign markets. The failure from Chinese governments to enforce intellectual property standards has put an undue burden on trade relations. As such, it becomes increasingly important to properly value the cost of intellectual property. It is also becoming important to guard against the counterfeiting of intellectual property as mentioned in the introduction. Trade is great for both America and China as business continues to expand internationally. However, intellectual property laws are creating an environment in which thieves prosper rather than the business that creates the intellectual property. By properly valuing and protecting intellectual capital, companies can continue to innovate while maximizing profits and revenue. Society will benefit with better and more efficient products as well. These products ultimately increase the quality of life for all individuals involved.
1) Heiberg, Carl Erik. “American films in Kuwait: an analysis of Kuwait intellectual property record and reconsideration of cultural trade exceptions amidst rampant piracy.” Minnesota Journal of International Law. 15.1 (Wntr 2006): 219-262. LegalTrac. Gale. Florida International University. 29 Sept. 2010 http://find.galegroup.com/gtx/infomark.do?&contentSet=IAC-Documents&type=retrieve&tabID=T002&prodId=LT&docId=A220642862&source=gale&userGroupName=flstuniv&version=1.0
2) “Intellectual Capital and Business Value – The Hidden Resource.” Intellectual Capital and Business Value. Web. 08 Apr. 2012. .
3) Jacobson, Anna-Liisa. “The new Chinese dynasty: how the United States and international intellectual property laws are failing to protect consumers and inventors from counterfeiting.” Richmond Journal of Global Law and Business. 7.1 (Wntr 2008): 45-63. LegalTrac. Gale. Florida International University. 29 Sept. 2010 http://find.galegroup.com/gtx/infomark.do?&contentSet=IAC-Documents&type=retrieve&tabID=T002&prodId=LT&docId=A177087358&source=gale&userGroupName=flstuniv&version=1.0
4) Cheng, Jacqui. “By the Numbers: Piracy Rate in China down 10%.” Ars Technica. 22 May 2009. Web. 16 Oct. 2010. .
5) Orley, Ashenfelter and Jurajda, Stephen. “Cross Company Comparisons of Wage Rates: The Big Mac Index.” Web. 16 Oct 2010.http://www.crei.cat/activities/sc_conferences/12/ashenfe.pdf
6) Patel, Nilay. “Open source and Kuwait: inverting copryright. ” Wisconsin International Law Journal. 23.4 (Fall 2005): 781-805. LegalTrac. Gale. Florida International University. 29 Sept. 2010
7) Shankland, Stephen. “Microsoft Closes $8.5 Billion Skype Acquisition.” CNET News. CBS Interactive, 14 Oct. 2011. Web. 08 Apr. 2012. .
8) Slate, Robert. “Judicial copyright enforcement in China: shaping world opinion on TRIPS compliance. ” North Carolina Journal of International Law and Commercial Regulation. 31.3 (Spring 2006): 665-701. LegalTrac. Gale. Florida International University. 29 Sept. 2010 http://find.galegroup.com/gtx/infomark.do?&contentSet=IAC-Documents&type=retrieve&tabID=T002&prodId=LT&docId=A148489744&source=gale&userGroupName=flstuniv&version=1.0
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