China is responsible up to 80 per cent of US intellectual property theft, which a government report has estimated accounts for $300bn in lost exports, roughly the equivalent of the current American trade balance with Asia.
"Unless current trends are reversed, there is a risk of stifling innovation, with adverse consequences for both developed and still developing countries," the IP Commission report warns. "The American response to date of hectoring governments and prosecuting individuals has been utterly inadequate to deal with the problem."
The commission, headed by the former ambassador to China and Republican presidential candidate Jon Huntsman, former director of national intelligence Admiral Dennis Blair, and aided by former Intel boss Craig Barrett, has spent the last year examining the state of IP theft in the US, and the results aren't pretty.
An estimated 70 per cent of US corporate assets are tied up in "intangible assets" such as intellectual property, and around 6 per cent of this is being lost in IP theft every year, according to the commission. If China operated at the same level of IP law as the US, the result would be an estimated $107bn in additional annual sales for American companies and net employment could increase by 2.1 million jobs.
The most immediate problem is that US companies are being directly harmed by IP theft. The report cited a recent case where a US firm had perfected a miniaturized smartphone component, only to have its designs (and markets) stolen when Middle Kingdom companies undersold them using the purloined material.
China was also fingered in a US Senate Armed Services Committee investigation that found over 1,800 counterfeit electronic and mechanical products that were traced back to over 100 Chinese firms. Some factories building these fake goods employ 15,000 people at a time.
Other countries are also taking part in skinning the US on IP, according to the report.
"Russia, India, and other countries constitute important actors in a worldwide challenge," it states. "Many issues are the same: poor legal environments for IPR, protectionist industrial policies, and a sense that IP theft is justified by a playing field that benefits developed countries."
This is all leading to the long-term effect of discouraging research and development by US companies, the report suggests. There's little point in spending vast amounts on R&D if someone's going to steal the result and manufacture it offshore.
Send lawyers, guns, and money
The report makes 21 recommendations, with the initial push being legislative. Congress needs to view IP theft as a matter of national security, the report suggests, and a foreign company's record on the issue must be taken into account when deciding whether to allow foreign investors to operate in the US and use its banking and financial services.
Disclosure laws also have to be beefed up, so that when US companies suffer theft they have to report it and can be held accountable. The US should move away from the policy of trying to persuade governments to enforce IP laws and be more willing to use bodies like the International Trade Commission to pursue claims.
The report says increases are needed in the funding and investigative capabilities of the FBI and Department of Justice to go after IP offenders and, somewhat more controversially, it also recommends US companies should be freed up to take measures to fight back against attackers and retrieve stolen information.
"Currently, Internet attacks against hackers for purposes of self-defense are as illegal under U.S. law as the attacks by hackers themselves," the report states. "If counterattacks against hackers were legal, there are many techniques that companies could employ that would cause severe damage to the capability of those conducting IP theft."
Finally, offending companies must be penalized in cases of proven theft, to reduce the financial incentive for crime. This could involve a tariff on Chinese imports amounting to 150 per cent of the estimated value of IP theft and/or the withholding of an equivalent amount from the World Health Organization budget.
All this will make uncomfortable reading for President Obama as he prepares for his first meeting with the new Chinese president Xi Jinping next month. No doubt they will have lots to talk about on the IP front. ®