Ending the Piracy Subsidy

What do information technology, intellectual property rights, and manufacturing have to do with each other? Everything. We focus on these issues at ITIF because they are more closely linked than ever and are integral to U.S. economic competitiveness and prosperity.

Therefore, I was glad to see over a dozen U.S. Senators from both parties (members of the Senate Committee on Small Business and Entrepreneurship) recently add their voices to a plea from the nation’s attorneys general for the Federal Trade Commission to crack down on foreign manufacturers who are ripping off U.S. intellectual property and using stolen information technology in their products. It signals a growing understanding that value-added manufacturing, intellectual property, and information technology are each important in their own right but also inextricably linked. These efforts also demonstrate a growing consensus that the U.S. needs to step up enforcement of commercial rights and obligations.

As ITIF has documented in compelling and sobering detail, the U.S. manufacturing sector has experienced declines worse than those of the Great Depression in the last decade. We contend neglectful public policies had a lot to do with the decline but let’s acknowledge the role that low-wage competition, currency misalignment and other factors have played. In other words, even if we had made critical investments in machinery, equipment, IT and our workforce, we would still be up against steep competition. The problem is more and more of this competition is neither fair nor consistent with global trading obligations. It is based on innovation mercantilism. More and more countries readily provide their innovators with advantages while simultaneously undermining U.S. innovators.

The letter from the attorneys general cite several cases where a domestic manufacturer, often a small or mid-sized business, is up against firms overseas using IT that was stolen – often millions of dollars’ worth of software. There is a two-fold problem with this situation. Domestic manufacturers who play by the rules put at a competitive disadvantage. Would a company sit back and accept it if a competitor stole all the machine tools used in the factory? Of course not.  It shouldn’t be any different with IP piracy. The other negative consequence is that software engineers are being deprived of compensation.

The long term implications are profound.  We will continue to lose more of our manufacturing base. Given the multiplier effect of manufacturing jobs, overall employment will suffer even more. We lost 5.7 million manufacturing jobs from 2000-2010.  Even if we add back 250,000 of these jobs a year, it will take the better part of generation to get back to manufacturing employment levels at the turn of the century. In addition, the incentive to innovate could be diminished if there is the sense that IP rights are not being honored or enforced. If we lose manufacturing and IP in the IT sector, what’s left?

China and other countries are aware of this. Since 2006, the Chinese have accelerated the use of what is known as indigenous innovation, in which they unabashedly identify areas where China can import technology and figure out ways to produce it with Chinese firms. If this was simply an honest effort to move up the value chain of goods, this would not be a problem. But China is not doing it in an honest way but through forced technology transfer, overt theft of IP (some 80% of Chinese government computers run on pirated software) or through covert theft via cybercrime and espionage.

The letters from the Senators and state AGs wisely avoid singling out China as the sole perpetrator of these unfair practices. Indeed, ITIF has catalogued the growing list of examples where countries are emulating China. In other words, China is leading by example – a poor example – and the long-term impact on the global trading system will be adverse for all countries.

Federal policymakers must take up a wide array of actions included in a Charter to Revitalize American Manufacturing, which has the support from a diverse group of stakeholders. It includes not only proactive investments to bolster U.S. firms’ competitiveness but also more funding for agencies tasked with tracking and enforcing IP rights. In addition, the United States must finally resolve to shut down rampant innovation mercantilism and use its still-considerable economic and political clout to marginalize countries that don’t play by the rules. Any steps the Federal Trade Commission can take in that direction cannot come soon enough for American manufacturers, design and process  engineers, software designers, scientists, chemists and inventors – in other words the core of our economic future.