From the Chartroom: The Cost of China’s Intellectual-Property Theft

Imagine if pirates were sailing up and down America’s coasts, plundering treasure worth between 0.9 percent and 2.6 percent of U.S. GDP every year.

NRPLUS MEMBER ARTICLE A mid the partisan rancor of today’s politics, any new consensus is notable. And if any new bipartisan consensus has recently emerged, it may be this: The existing terms of the economic relationship between the U.S. and China fail to serve America’s interests.

Debate continues to swirl around the efficacy of specific policies, such as tariffs, as solutions to these problems. But even President Trump’s political opponents now acknowledge that there are, indeed, problems in need of solutions when it comes to U.S.–China economic relations.

And among the major irritants, for the U.S., the Chinese theft of American intellectual property (IP) is high on the list. Addressing Chinese economic espionage this week, FBI Director Christopher Wray said that “the stakes could not be higher, and the potential economic harm to American businesses and the economy as a whole almost defies calculation.” Among U.S. security officials, this concern predates the well-known pivot toward competition with China that has arisen since 2017. In July 2012, the director of the U.S. National Security Agency, General Keith Alexander, identified Chinese IP theft as the “greatest transfer of wealth in history.”

But how much, really, does Chinese theft of American intellectual property amount to? The question matters. If the actual number is relatively small, the U.S. should not be willing to incur too many costs in an attempt to sort this matter out.  If, on the other hand, the costs of the larcenous status quo are large, the U.S. should be willing to go to considerable expense to remedy the problem.

One answer, based on information from a 2017 report by the U.S. Intellectual Property Commission, is between 0.87 and 2.61 percent of annual U.S. GDP. The commission estimates that IP theft worldwide costs the U.S. between 1 and 3 percent of its annual GDP. The report, citing data from U.S. Customs and Border Protection, also indicates that 87 percent of the counterfeit goods seized by customs officials come from China (including Hong Kong). If you then assume that China’s share of seized counterfeit products (87 percent) corresponds to its share of the economic cost to the U.S. from IP theft, this range provides upper and lower bounds for China’s share of these costs.

This assumption leads, if anything, to an understatement of China’s share of the cost. As Director Wray laid out, China’s “diverse and multi-layered approach” to IP theft utilizes a plethora of tactics, from “outright physical theft” to cyberhacking. China’s true share of the damages is therefore likely to be, if anything, higher than its footprint in the market specifically for brick-and-mortar counterfeit goods.

To help put these upper (2.61 percent) and lower (0.87 percent) bounds for costs into context, the chart above plots them against the peak annual costs of America’s wars since 1945. Looking at the higher bound, Chinese IP theft is costlier than the Vietnam and Iraq wars at their respective spending peaks (only the Korean War’s peak was costlier). Even the lower bound of the cost of estimated Chinese IP theft exceeds the peak annual cost for both the Persian Gulf and Iraq Wars.

Drawing analogies between intellectual property and war as matters of policy may seem overwrought. And, of course, these estimates should be treated with care. But the distinction between America’s economic and security interests, even if it doesn’t vanish entirely, at least blurs in the case of Chinese IP theft.

According to former U.S. National Security Adviser H. R. McMaster, for instance, a prominent member of the Chinese leadership openly told him of Beijing’s hopes for a world in which the U.S. supplies raw materials, agricultural products, and energy to fuel Chinese production of world-beating industrial and consumer goods. According to McMaster, China’s goal is a “modern-day version of the tributary system” with an imperial China at its center. And few things aid this agenda more directly than the Chinese theft of U.S. intellectual property.

Imagine if pirates based in a particular country were sailing up and down America’s coasts every year, plundering treasure worth between 0.9 percent and 2.6 percent of U.S. GDP. Policymakers in Washington would not simply hope that the issue would go away. Now, they are confronted with a situation that is analogous in certain respects. Hence they should be willing to at least contemplate measures, short of outright war, even as the price tag approaches the costs of the status quo. And hope, as the saying goes, is not a strategy.

Joseph W. Sullivan served from 2017 until 2019 as special adviser to the chairman and staff economist at the White House Council of Economic Advisers.

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