Foreign IT IP Theft Damages U.S. SME Manufacturers

Information technology (IT) theft is rampant worldwide, especially in emerging economies. As the Business Software Alliance’s 2010 Global Software Piracy Studyfound, 78 percent of software installed on Chinese computers is pirated, as is 83 and 87 percent of the software installed on Vietnamese and Indonesian computers, respectively.

Most of the attention on victims of software or other IT intellectual property (IP) theft focuses on the economic loss incurred by firms producing IT software or hardware. But there is another subtler yet equally damaged set of parties—all those firms who have fairly purchased IT software and products and must reflect that in the price of their products whom must compete against foreign firms that have illegitimately procured IT inputs. As ITIF has noted, this is the piracy subsidy that thieves of information technology IP enjoy, and it severely damages U.S. producers, especially the small- and mid-sized enterprise (SME) manufacturers whom account for 98 percent of U.S. manufacturing enterprises. These SME manufacturers have a difficult time competing against foreign firms that unfairly achieve competitive advantage by using large quantities of stolen IT to reduce their operating costs and thus reduce the costs of their exported products. The costs of foreign IP theft to the U.S. economy are indeed profound: for example, Chinese IP theft alone, in the year 2009 alone, cost the United States an estimated $49 billion and 1 million jobs.

Therefore, it’s vital that that the United States pursue a “whole of government” approach to combat foreign IT IP theft. This starts with the quality of trade agreements the United States enters into (and the trade infringement remedies they permit) and continues through the effectiveness of U.S. agencies and policies charged with combatting IP theft and enforcing trade agreements. While these efforts are spearheaded by the U.S. Trade Representative’s Office, the U.S. International Trade Commission, and particularly U.S. Customs and Border Protection on the enforcement side, the U.S. Federal Trade Commission (FTC) also has a vital role to play in cracking down on foreign manufacturers who are ripping off U.S. intellectual property and using stolen information technology in their products.

On August 2, a bipartisan group of 19 Members of Congress sent a letter to FTC Chairman Jon Liebowitz urging the FTC to use its existing legal authority to crack down on foreign firms leveraging pilfered information technology resources to create an unfair advantage over domestic competitors. The Congressmembers’ letter follows a plea from the nation’s attorneys general for the FTC to use its authority under Section 5 of the Federal Trade Commission Act to combat unfair methods of competition. 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.

As ITIF explains in the Charter to Revitalize American Manufacturing, which has the support of a diverse group of stakeholders, federal policymakers must take up a wide array of actions to recharge American manufacturing. These include not only proactive investments to bolster U.S. manufacturing firms’ competitiveness and better tax and talent policies, but also more funding for agencies tasked with tracking and enforcing IP rights. Ultimately, 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. We need a trade policy that better supports the interests of U.S. firms, manufacturers in particular. In the absence of effective, coherent policies to support U.S. manufacturing, the rampant loss of jobs and market share that has eviscerated U.S. manufacturing industries over the past decade is likely to only continue.