Is China "Stealing" Intellectual Property and Does It Matter?

“I’ve never had an original thought in my life.” – Bob Huggins

Bob Huggins is the head coach of the West Virginia Mountaineers basketball team.  He’s one of ten coaches with over 800 career victories, he’s been to two Final Fours, plus you’d need fewer than five fingers to count how many times his teams have not made the NCAA tournament over the last twenty-five years. Huggins has achieved all of this while not coaching at one of the traditional powers like Kentucky, Duke, North Carolina, or UCLA. 

GPS for consumers was laughed out of many venture capital offices, as was Facebook.

Yet, as the quote that begins this piece makes rather plain, Huggins doesn’t hide from the fact that he’s routinely stolen good ideas from other coaches. Why would he? Whether music, sports, or business, it’s the norm to emulate. Absent idea “theft,” the world would be a much less evolved place defined by lower living standards and higher mortality. 

Importantly, it’s not abnormal for the most brilliant innovators to be on the outside looking in. For quite a while. Though it’s now accepted wisdom that the late Bill Walsh was one of the greatest offensive minds to ever pace the sidelines, what’s less well known is that he toiled for many, many years as an obscure assistant. His “west coast” offense was way ahead of its time as it were. 

Technologists could probably relate to Walsh. It’s a known quantity in the tech space that patents generally aren’t necessary given the basic truth that any really good idea will be roundly panned at first. GPS for consumers was laughed out of many venture capital offices, as was Facebook. There’s a reason Peter Thiel was able to purchase such a big stake in the social network despite his small initial investment of $500,000. 

Stealing “Intellectual Property”

Which brings us to the ongoing assault on China. While most on the right with a pulse have at least lightly critiqued President Trump’s indefensible tariffs foisted on the emerging nation, this same right is starting to crack. An editorial from a top right-wing publication partially defended Trump’s actions based on the “genuine problem of Chinese mercantilism.” The editorial added that “China’s government steals the intellectual property of U.S. companies or forces them to turn it over.” More troubling is that Douglas Irwin, a longtime free thinker, told the Wall Street Journal that no one “can really defend the way China has moved in the past few years, violating intellectual property and forced technology transfer.” Irwin’s shift to the dark side is the most disturbing. 

It’s one thing to steal, and quite another to execute on what’s allegedly “stolen.”

It is given the basic truth that the notion of good versus bad intellectual property (IP) is plainly hard to discern. Anyone who follows Amazon knows this very well. Jeff Bezos freely admits that he’s lost billions on bad ideas. And then there’s the execution problem. It can’t be repeated enough what Pixar founder Ed Catmull says about his studio’s movies: they all “suck” at first. What makes Pixar so good is that it combines talent with good ideas. 

The above must be considered in light of China’s alleged “theft.” It’s one thing to steal, and quite another to execute on what’s allegedly “stolen.” Huggins has been “stealing” ideas for decades, and while he’s a very successful head coach, he’s still in search of a national title. Though he took over as head coach after his Hall of Fame boss’s second Super Bowl win for the New York Giants, few mistook Ray Handley for Bill Parcells. Has anyone checked the track record of Bill Belichick’s former assistants?

So confident is he that his carmaking innovations can’t reasonably be stolen to Tesla’s detriment, Elon Musk has patented nothing. Better yet, he hopes others will imitate him so that electric cars become the accepted form of transportation. Yet members of the right are worried that the Chinese, for being based in “China,” possess supernatural skills that enable them to fleece us on the way to gold?

Forced Turnovers?

Not explained by the right is when governments have ever been good at what the Chinese are accused of doing. The Wall Street Journal’s editorial page for years poured cold water on the monumentally oversold threat of Japan Inc. The latter was based on the page’s proper belief that industrial policy doesn’t work. How could commerce that included so much state involvement prove competitive relative to the U.S.? Just the same, what IP could government officials in China know to steal? Are their bureaucrats wise relative to the intensely mediocre norm around the world?

As for the forced turnover of IP, the same applies. If it hasn’t yet been established as relevant in the marketplace, then it’s near worthless as is. Think yet again the billions invested by Bezos in dry holes, not to mention the tens of billions invested each year by Silicon Valley VCs despite a 90 percent plus failure rate. What if the IP is established as effective? If so, you still have the execution issue, plus established forms of commerce aren’t nearly as lucrative as the ones that aren’t. What’s established attracts imitators like moths to a flame. 

They can’t love market signals, then ignore them because someone who claims to be a Republican is in the White House.

After that, in their desperation to excuse President Trump’s mindless attacks on China, the right forget that a government big enough to intervene in order to allegedly stop IP theft is also big enough to do all sorts of other damage that these situational non-interventionists will not like. The latter rates prominent mention in consideration of what happened last week.

Indeed, while many on the right once again defended Trump’s indefensible attacks on China, investors plainly had a different opinion. The major decline in U.S. equities was and is a signal that investors fear government intervention meant to stop alleged Chinese theft much more than they do the alleged theft itself. 

Which brings us to an obvious question: when are Republicans and conservatives going to stand up to what’s indefensible? After all, they can’t have it both ways.  They can’t love market signals, then ignore them because someone who claims to be a Republican is in the White House. The GOP-controlled Congress has power of the purse. A tariff is a tax. Why doesn’t Congress step in to block what is a revenue act, and worse, that which is a tax on every single American?

Republicans and conservatives talk a big game about free markets and limited government. Unknown is what they’ll do when one of their own doesn’t share their views, and worse, is acting on it. Free thinkers are watching and waiting. 

Reprinted from RealClearMarkets.