How the world benefits from Chinese piracy

By Felix Salmon
June 25, 2013

Kal Raustiala and Christopher Sprigman have a  fantastic article in the latest issue of Foreign Affairs about IP laws and piracy in China. The title, which I love, is “Fake It Till You Make It,” and the gist is clear:

Given that Chinese copying has benefits as well as costs, and considering China’s historical resistance to Western pressure, the fact is that trying to push China to change its policies and behavior on intellectual property law is not worth the political and diplomatic capital the United States is spending on it.

This is if anything a vast understatement. Chinese IP piracy — if what we’re talking about can properly be called that, given the degree to which it is condoned by the Chinese government — is wonderful for China, for its economic growth, for helping hundreds of millions of its citizens out of poverty, and for the sake of global innovation more broadly. You and I, as US consumers, actually benefit from it. The only losers are the large US corporations who seek to extract rents from various copyrights and patents — even as they, notoriously, tend to be quite unwilling to pay taxes on any of their overseas revenues.

Raustiala and Sprigman make a strong case that Chinese piracy, far from being symptomatic of a deep-seated inability to innovate, is actually an economically vital form of innovation. After all, we’re generally not talking about outright counterfeits here. Within China, most piracy falls under the general heading of “indigenous innovation” — a euphemism, to be sure, but an accurate one all the same:

Nearly all creations rest on prior work, and the ability to freely copy and refine existing designs fuels fields as varied as fashion, finance, and software. Copying can also foster stronger competition, grow markets, and build brands…

Many Chinese have gained valuable design and manufacturing skills by copying goods originally produced elsewhere.

Raustiala and Sprigman use the example of Xiaomi, a phone company which has sold some 7 million phones, for a total of more than $1.6 billion, since its launch less than two years ago. Xiaomi copies a lot of Apple’s innovations, but it also generates many of its own, and it iterates much faster than Apple does. Much the same can be said for Weibo, which started by copying Twitter but which at this point is arguably more advanced than the original.

Or look at the Chinese YouTube, Youku, which is displacing television in large part because it has no copyright verification. As Chinese media companies evolve to take advantage of Youku, they will be much better placed to compete in the 21st Century than US companies which rely on copyright laws to keep consumers boxed in to increasingly-unnatural modes of consumption. If you’re playing litigious defense, that might help your current cashflows — but it’s not going to help you win a generation which will increasingly neither know nor care what “live TV” means.

Chinese piracy also brings innovation within the grasp of a huge population of poorer Chinese, with long-term positive effects for all. Raustiala and Sprigman talk about the phenomenon of shanzhai — low-cost copies of items which would not be affordable otherwise.

Like so much else in China, the meaning of shanzhai is undergoing a drastic change. As The Wall Street Journal recently noted, “Once a term used to suggest something cheap or inferior, shanzhai now suggests to many a certain Chinese cleverness and ingenuity.” Indeed, Beijing seems to believe that shanzhai is something to cultivate. In 2009, an official from China’s National Copyright Administration declared that “shanzhai shows the cultural creativity of the common people.” He added, “It fits a market need and people like it”…

China’s huge population is still poor, and few can afford Western products. Copies of Western products, as a result, do not necessarily represent lost sales. Instead, they often serve as effective advertisements for the originals: gateway products that, in the long run, might spur demand for the real thing as China’s burgeoning middle class grows… Although shanzhai products are celebrated, those Chinese who can buy the original products generally do.

None of this should be surprising to America, which, as Raustiala and Sprigman show, used pretty much all of these tactics when its own economy was rising. None other than Benjamin Franklin himself made a substantial sum from republishing the works of British authors without permission or payment. The phase that China is going through is a natural and healthy one, both for China and for the US; the big multinational IP giants might not like it, but they are clearly the winners in the global economy already, and hardly need an extra legislative boost.

Indeed, my only complaint with the article is that it doesn’t go far enough. For instance, it cites a 2011 figure from the US International Trade Commission that piracy costs the US economy some $50 billion a year; it doesn’t say that that figure is highly implausible. (The reasons why are left as an exercise for the reader; you might want to start here.) And the authors assert, without bothering to argue the case, that strong IP rights “are essential in fields such as pharmaceuticals”. I’d disagree.

In any case, I hope that Michael Froman, the newly sworn-in United States Trade Representative, pays close attention to this article. As Raustiala and Sprigman conclude, “the United States should consider its own history as a pirate nation — and relax.” Maybe if Froman takes that advice, he’ll have much more success making progress at the WTO.

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