Opinion

Felix Salmon

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.

Comments
11 comments so far | RSS Comments RSS

So… what you’re saying in effect is that if someone were to set up a new site called, let’s say, Royters.com and copied all your articles onto it so fewer people visited your actual site, ad revenues for Reuters dropped and they stopped paying you a salary it’d be OK because someone’s grandfather did this to someone else? :-?

As for patents in pharma, of all patents these must surely be the most sensible as they have a short time limit before expiry – and unlike your column, valued as it is, a pharma product needs to be able to make $500 million per year in revenue to pay for all the costs of discovering and producing it.

Posted by FifthDecade | Report as abusive
 

The whole “indigenous innovation” thing will last until the bulk of Chinese companies have valuable brands, at which point you’ll see them suddenly become much more pro-IP (and considering the oligarchical nature of the Chinese government, the switch might occur even faster than it happened with the US in the late 19th century). Same thing if or when their companies reach the technological frontier.

And the authors assert, without bothering to argue the case, that strong IP rights “are essential in fields such as pharmaceuticals”. I’d disagree.

Which is why India is famous for its incredibly innovative pharmaceutical sector, having arisen over decades of near-total lack of IP protection for any pharmaceuticals. Hey, wait, that’s not what happened at all!

Posted by TheBrett | Report as abusive
 

This type of loose policy on IP Protection will last until critical Chinese corporations have valuable brands that need protection, or when they hit the technological frontier – or both. As the Foreign Affairs article says, the US had similar “indigenous innovation” policies, and look where we are now.

As for pharmaceuticals, why don’t you ask India how much a no-patent policy on pharmaceuticals did to promote the development of new ones in-country? There’s a reason why they eventually came around, and it’s because they had virtually zero pharmaceutical innovation during the period when they just didn’t care about pharma patents (the entire business there was based around selling generics of foreign-developed drugs).

But then, as chemist Derek Lowe has pointed out over on his blog, the pharmaceutical industry tends to be one of the most misunderstood in terms of IP.

Posted by TheBrett | Report as abusive
 

Or, they could reduce their advertising budgets which exceeds their R&D budgets by a substantial amount! And why is this necessary!?! To sucker in unsuspecting doctors and patients with drugs that are often less (or little more) effective than those already in use but with a far smaller profit. US Big Pharma gets anywhere from several time the $$ amount per drug to thousands of times– far, far greater than anywhere else in the world. No wonder they have to use the government to protect them from reasonable competition at the borders. (Domestically, they buy off the generic manufacturers of drugs to avoid competition– even after their patents run out.)

Posted by normxxx | Report as abusive
 

@FifthDecade: “a pharma product needs to be able to make $500 million per year in revenue to pay for all the costs of discovering and producing it”

and the even-higher costs of marketing it.

Big Pharma spends more on marketing than on basic research (new molecule discovery). Short of a lifesaving drug that is somehow little-known, only the latter is socially useful, while the former is pure rent-seeking.

It is very arguable whether monopoly patent protection is the most effective or efficient way to innovate new drugs. It is not arguable that it is a good way to deliver rents to pharmaceutical companies.

See: http://www.cepr.net/index.php/blogs/beat -the-press/tyler-cowan-recognizes-public -health-problem-of-pandemics-more-money- for-drug-companies (brief)

or

http://www.cepr.net/index.php/Publicatio ns/Reports/financing-drug-research-what- are-the-issues (long)

Posted by SteveHamlin | Report as abusive
 

@SteveHamlin

Yeah, most of the cost of research and initial testing is paid for by the public. Pharma does pay a LOT for clinical trials though.

I don’t think it’s realistic to expect pharma to keep their margins going forward, so realistically, this means that the US government is going to need to do something about reducing the cost of trials. Perhaps allow drug trials to be outsourced as well… that way the same countries that want to produce cheap generics can bear some of the risk in determining their safety and efficacy as well.

Posted by craigyk | Report as abusive
 

Amen to FifthDecade for calling out the obvious fallacy that Reuters would obviously fight to defend their IP but it is some how different for tech or medicine.

@SteveHamlin I read once on the internet that Statins (Lipitor and the like) have prevented over 1 million heart attacks. Rent seeking as Pfizer might have been it’s hard to argue with the results.

Posted by y2kurtus | Report as abusive
 

I think that one of the things that most Americans don’t realize is that many non-western countries and cultures do not have the same concept of intellectual property as the US does.

I currently live in China, for example, a country where private property did not even exist from roughly 1949-1979, let alone intellectual property, and where the logic of first use doctrine (once I pay for something, I should be able to do anything I want with it) predominates. So most Chinese therefore see nothing wrong with copying/pirating items, since this does not violate first use doctrine in their eyes.

Likewise, let’s not forget that piracy exists only because rent-seekers seek too much rent. If Hollywood priced DVD’s at a price the market was willing to bear, for example, there would be no market for pirated versions. Likewise with digital TV shows/movies…if Hollywood made them available via Netflix or other similar platforms at a reasonable price a day or two after they aired on TV, demand for free pirated downloads would also largely disappear.

Posted by mfw13 | Report as abusive
 

“If Hollywood priced DVD’s at a price the market was willing to bear, for example, there would be no market for pirated versions. Likewise with digital TV shows/movies…if Hollywood made them available via Netflix or other similar platforms at a reasonable price a day or two after they aired on TV, demand for free pirated downloads would also largely disappear.”

@mfw13 – that economic argument doesn’t work. For works with high fixed costs of development and extremely low variable costs to copy – entertainment products and software both come to mind – a pirated copy is going to be able to undercut the original producer. The pirate only has to cover a low variable cost for each copy, while the original producer also has to recoup a portion of the fixed development cost from each sale.

Also see plenty of other discussions – including on this site – about how Netflix’s $7.99 per month isn’t going to pay for anything like the current budgets spent to produce TV shows and movies.

Posted by realist50 | Report as abusive
 

RE: Steve Hamlin

So what if the Pharmaceutical Industry spends money on marketing? They spend a higher fraction of their budgets on R & D than any other industry except for semiconductors.

Frankly, I’m inclined to be skeptical of alternatives until they actually show some promise in full drug development (i.e. from finding candidates all the way through clinical trials) on anything resembling scale. If you want to see what a pharmaceutical industry looks like without patent protection for decades, go to India – they finally started protecting drug patent rights because nobody was doing pharmaceutical innovation in the country despite actually having a pharmaceutical industry.

RE: mfw13

The problem is that what you might consider a “reasonable” price is not the price that would actually make it worthwhile to spend money producing much of this stuff.

Posted by TheBrett | Report as abusive
 

very funny
China has weibo BECAUSE they can’t use twitter or facebook
they use Youku BECAUSE they are not able to access Youtube
it is a tyranny state without freedom and rule of law
and you are suggesting that they have no need to promote intellectual property law?

you talk about Benjamin Franklin, i am wondering if they had the idea of intellectual property at that time, how can you compare him with China?

Posted by natyshow | Report as abusive
 

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