The Mirage of China's I.P. Theft

Republican China hawks have a problem. They're eager to sell us on the notion that China is, as old GOP hand Newt Gingrich puts it, "the greatest threat to a free America that we have faced in our lifetime." Gingrich pins China's ascendancy on its "totalitarian system, extraordinary organization, and immense population," brushing aside the economic liberalization and market reforms initiated by former leader Deng Xiaoping—which ushered China out of Maoist isolation and into the global market—as mere smoke and mirrors, a "40-year-long propaganda campaign" masking the "real China."

This presents a quandary for the hawks. If they argue that China's meteoric rise is indeed the fruit of its "totalitarian system and extraordinary organization," does that mean they'll have to eat their words on the virtues of free enterprise and stop scoffing at socialist economies? Could it be that China has cracked the code on making a centrally planned economy thrive, a feat unseen elsewhere?

Fortunately for the Republican hawks, a more politically palatable theory has taken root: China's ascent to becoming the world's second-largest economy and a tech behemoth wasn't a result of economic reforms or strategic planning but rather stealing.

Behind the Numbers

In a landscape where political rhetoric often blurs reality, the narrative spun by America First Republicans and echoed by institutions from the FBI to the Organization for Economic Cooperation and Development (OECD) portrays China's remarkable growth as the grand larceny of intellectual property (I.P.). Claims that China has siphoned off $200 billion to $600 billion annually in I.P. have found a home in numerous reports, with some hawkish voices now inflating that estimate to trillions.

These reports, echoed through the media and in the halls of Congress, have one goal, perfectly captured by Trump-era Trade Representative Robert Lighthizer. "My objective was to convince people that China is a problem, an existential threat to the U.S.," Lighthizer told The Wall Street Journal. "I think we convinced people."

Indeed they did. A recent Gallup poll reported that 50 percent of Americans now view China as America's "greatest enemy"—four times as many as in 2018. (Russia took second place, despite its war with Ukraine.)

The campaign to make Americans hate and envy China has been so successful that American media and politicians now openly urge us to prepare for war with China. Sen. Ted Cruz (R–Texas) has claimed that "China is waging a thousand-year war against the United States." Washington Times foreign policy correspondent Bill Gertz recently posted on X that China clearly sees war with the United States as "inevitable." And in 2023, four-star Air Force general and head of Air Mobility Command Mike Minihan sent a memo to the officers he commands predicting that in two years, the U.S. will be at war with China. "I hope I am wrong," Minihan's memo read. "My gut tells me we will fight in 2025."

Beneath this crescendo of warnings, however, lie some questionable assertions. Central to the argument are two reports, one by the U.S. International Trade Commission (USITC) and another by the OECD, which have become the linchpins of the fearmongering campaign against China. A closer examination reveals that these reports, and the staggering figures they tout, are little more than sloppy guesswork grounded in speculative modeling rather than solid evidence.

The USITC study, China: Effects of Intellectual Property Infringement and Indigenous Innovation Policies on the U.S. Economy, was published in 2011. The OECD study, Trade in Counterfeit and Pirated Goods, wasfirst issued in 2008 and updated in 2016. Nearly every other report on the theme ultimately cites these two studies.

The OECD's bold assertion that China's I.P. theft tallied up to a whopping $200 billion to $600 billion annually throughout the 2010s hinges on a dubious concoction known as the General Trade-Related Index of Counterfeiting (GTRIC) for products. This algorithm supposedly crunches customs data to gauge the global counterfeit trade, attributing a significant chunk of it to China.

Delve into the mechanics of the GTRIC and you'll find it operates on a blend of educated guesses and less educated assumptions. Modelers assign two "propensities": the propensity of a given country to export counterfeits, and the propensity for certain product types—like sneakers or watches—to be counterfeited. Comparing these figures with data on all international trade, the model generates estimates of the total volume of counterfeit goods from various source nations.

The critical moment in the model's calculations, and the place where the methodology raises eyebrows, is the determination of a "fixed point"—essentially, a guess at what percentage of goods in a specific category are fake. Depending on which number you pull out of the hat, the scale of counterfeiting can swing wildly from mere billions to an eye-watering trillion dollars annually. Therefore, determining the most accurate fixed point to use is vital for the results of the study to be trustworthy.

So how did the OECD wizards arrive at their fixed point? They took a stab in the dark. Initially setting their sights on a 20 percent figure for "counterfeit or pirated apparel, leather articles, and tobacco products exported from Asian economies," they dialed it back to 5 percent after deciding 20 percent "appeared excessive." Noting that the amount "could be higher" and needing to establish a "credible ceiling" for counterfeit trade, they picked 10 percent as their high fixed point.

This manifestly arbitrary methodology was then glorified in various reports as "rigorous." Further guesswork was needed to factor in how much counterfeit merchandise customs actually seize—a variable that drastically swings the estimated total of counterfeit trade from less than $40 billion to over $200 billion.

Ultimately, the OECD planted its flag on a $200 billion estimate for 2005's counterfeit trade, with the caveat that it could be much more. Thus, a figure of legend was born.

Fast forward to 2016, when the OECD unveiled a headline-grabbing figure: "In 2013, international trade in [counterfeit] products represented up to 2.5 percent of world trade, or as much as USD $461 billion. This is the equivalent of the GDP of Austria, or the combined GDP of Ireland and the Czech Republic."

This 2.5 percent figure has since become a talisman for anyone keen to substantiate claims of rampant I.P. theft by China, despite the foundation of these claims being as solid as quicksand.

Even with all of this guesswork at play in the OECD reports, the 2011 USITC report makes them look like high scholarship. Focusing on I.P.-intensive U.S. firms operating in China in 2009, the report claims these firms "reported losses of approximately $48.2 billion in sales, royalties, or license fees" due to I.P. infringement. Yet a closer look reveals the range of estimated losses, stretching from $14.2 billion to $90.5 billion, was based not on direct reports from companies but on third-party guesstimates from industry associations. Essentially, these firms were parroting back guesses fed to them by industry groups with a vested interest in painting the grimmest picture possible to grab government attention. The claim that the oft-cited USITC report was based on accounts by victim companies is a fraud.

We're Talking About Sneakers

But the plot thickens—or rather, the truth thins out. Though these two reports are wielded in accusations that China's tech ascendancy is owed to stolen I.P., neither has anything to do with high tech. The "I.P." allegedly stolen mostly consists of trademarks affixed to faux high-fashion sneakers (a perennial leader), watches, handbags, and other accessories, or copyrights on pirated music. Most shipments intercepted are in retail quantities, often fewer than 10 items. Most come by mail.

Somewhere in China, Mom and Pop are ripping off Rolex, Louis Vuitton, and probably Taylor Swift. They may have some bad karma coming their way, but they are not the reason China is rich.

Yet that is what we are meant to believe. Nearly every commentary on the subject promotes itself as evidence that China stole its way to technological prowess and then cites these irrelevant numbers as the sole quantitative evidence. Again and again, we are told "China steals hundreds of billions or trillions in intellectual property," with no mention that we're talking about sneakers.

Without these phony numbers, the China hawks' fearmongering campaign would lose its legs. No reporter would write this story without such eye-catching numbers to cite.

Diving deeper into the quagmire, a collaboration between PricewaterhouseCoopers and the Center for Responsible Enterprise and Trade used "several proxy measures" to conclude "that trade secret theft could be estimated to be between 1% and 3% of [U.S.] GDP"—yet another exercise in creative estimation.

These audacious leaps in logic are how we came to believe that China stole its way to becoming an economic and technological powerhouse.

If It Were Any Other Country

These flawed findings keep company with claims that China's engagement with "open-source intelligence" is espionage rather than what it genuinely represents: a commendable dive into the world's collective knowledge pool.

The book Chinese Industrial Espionage: Technology Acquisition and Military Modernisation by William C. Hannas, James Mulvenon, and Anna B. Puglisi sheds light on this extensive journey, tracing its roots back to Mao Zedong's era. By the mid-20th century, China had already begun assembling an impressive repository of global scientific and technological knowledge—including 11,000 science and technology periodicals, half a million published research reports, more than 5 million patents, and more than 200,000 industry standards—a practice that has expanded over the decades to provide invaluable resources to millions.

Had it been undertaken by some obscure, impoverished nation, this effort would likely be hailed as an extraordinary leap toward enlightenment and development. After all, the West does not benefit from the rest of the world being poor and illiterate. It does benefit significantly when other nations adopt its technological standards and contribute to the global knowledge economy.

Despite these vast repositories of information, China's technological landscape under Mao remained largely barren. Little advancement was seen until economic reforms in the 1980s triggered a boom powered by the unleashing of market forces and entrepreneurial spirit.

It was freedom, not spying or stealing, that made China rich.

And yet, despite the open, almost academic nature of this endeavor, the hawks inevitably characterize the Chinese open-source effort as nefarious, pointing to "nontraditional" researchers, who may be employed by the Chinese security apparatus. No doubt these bureaucrats—like our own—gleefully report to their masters on their "intelligence yield." It's still just going to the library.

The final piece in the "we wuz robbed" argument is the claim that Chinese companies "steal" the I.P. of their American partners in joint ventures. China's prowess at the negotiation table is undeniable, and it wields its bargaining power aggressively to trade access to Chinese markets for learning. Yet the American companies that claim to be victims enter into these agreements freely and rarely come out net losers. These U.S. businesses have raked in trillions in sales and pocketed hefty profits—a testament to their ability to navigate the competitive landscape.

The hawks vastly overestimate the value of any I.P. that can actually be stolen. Clueless about the technologies that most concern them, the hawks fixate on the blueprints without appreciating the craftsmanship required to bring them to life. After all, the secrets of technological innovation aren't hidden. The recipes for making microchips have been available in university libraries for almost 70 years, but building them takes far more than just following instructions.

The Innovation Curveball

At the heart of technological breakthroughs is the learning curve, a phenomenon as influential as it is elusive. It illustrates how, with each doubling of accumulated unit volume, costs plummet by 20 percent to 30 percent. The learning curve summarizes economic progress in the industrial era. Even Moore's law, the doubling of transistors on a microchip every two years, is the curve at work. It looks "special" only because unit volume doubled and redoubled so rapidly. Yet the essence of this curve—the tacit knowledge and hands-on experience that truly drive innovation—remains a captivating mystery.

This leads us to a crucial realization: The true driver behind technological advancement isn't theft or coercion but a natural and admirable process of discovery and learning.

When American companies set up shop in China, they're not just outsourcing labor—they're exporting a wealth of knowledge far beyond what any textbook or lecture could offer. Viewing this exchange as theft oversimplifies the complexities of knowledge transfer and undervalues the process of learning. Only if you think knowledge should be locked up and workers are your property can learning be seen as stealing.

Despite China's vast open-source effort reaping the rewards in tech, innovation proved challenging long after Deng's economic reforms. Designing and manufacturing a microchip crammed with billions of transistors ranks among the industrial world's most daunting tasks. Sure, you might get a head start from scholarly articles, but the real breakthroughs come from hands-on, often costly, experimentation.

The journey of Morris Chang, the ex–Texas Instruments executive who established Taiwan Semiconductor Manufacturing Company (TSMC) and transformed it from a modest operation into a semiconductor behemoth, exemplifies the real essence of innovation: It's not just about knowing the recipe but mastering the art of creation through practice and adaptation. TSMC's beginnings were humble, focusing on basic, nearly outdated tech. It was through embracing the learning curve that TSMC evolved into a semiconductor titan. Chang's story isn't just about business strategy; it's a testament to the transformative power of learning by doing.

In the real world, that's how it's done. The path to technological leadership is paved with learning and experimentation, not the mere acquisition of existing knowledge. This is how progress is made—not through appropriation or coercion, but through the diligent application of learning and the relentless pursuit of improvement.

The Two Chinas

Sure, Beijing has its hands in the espionage cookie jar, tapping into its sprawling security network to swipe a secret treat when it can. Case in point: In March of this year, a federal grand jury indicted Chinese national Linwei Ding, charging him with four counts of theft of trade secrets in connection with an alleged plan to steal proprietary information related to artificial intelligence from Google, aiming to kick-start his own AI venture back home.

But the real bone of contention isn't about occasional theft. Critics of China argue that the nation's economic boom and tech triumphs are largely built on these underhanded tactics. They paint a picture of modern China as merely a glossy cover over the same old Maoist playbook, suggesting the U.S. brace for imminent war.

Yet nearly half a century since China began opening up, it's clear there's more to that story. Today's China is a land of contradictions: part authoritarian regime, part burgeoning hub of entrepreneurship and innovation. It's a place where the state's heavy hand and the dynamism of free enterprise are in constant tug of war.

These two visions of China have been struggling for dominance since the death of Mao. It remains to be seen if President Xi Jinping, the current leader of the autocrats, will drag China back into the shadows. One thing is clear: Denying the roots of China's explosive growth—a blend of learned American innovation and a push toward greater economic freedom—isn't the answer. Instead of gearing up for conflict, we should champion and nurture the entrepreneurial spirit that's as much a part of China's DNA as it is America's. That's the path to a richer, more collaborative future.