Payments from China for Foreign Intellectual Property

Payments from China for Foreign Intellectual Property

Timothy Taylor 23/07/2019 5

It seems clear that China's government and firms have been aggressive in their pursuit of intellectual property from firms in other countries. Sometimes this aggressiveness comes from government rules that if a foreign firm wished to sell or produce in China, it needs to have a Chinese firm as a partner and to share technology with that firm. There are also widespread allegations of technology theft. I once chatted with a group of California tech executives who did business in China, and they all said that if they take a computer or a phone to China, they only take one where the memory has been previously wiped clean.

Measuring the total amount of technology transfer to China is, in its nature, hard to do. But one approach is to look at royalty payments from China to outside firms.  Ana Maria Santacreu and Makenzie Peake of the Federal Reserve Bank of St. Louis offer some data in "A Closer Look at China’s Supposed Misappropriation of U.S. Intellectual Property" (Economic Synopses, 2019, No. 5).

The top panel shows China's payments for use of US intellectual property, which have risen sharply, the second panel shows that this growth in China's payments has been faster than the growth of China's GDP.

Of course, the rise in payments doesn't mean that the appropriate level of payments is being made. Annual payments from China to the US of about $8 billion for intellectual property don't seem extraordinarily high. And given that China's economy has been shifting from reliance on low-wage labor to an economy based more in technology and services, the pattern of intellectual property payments rising faster than GDP is the pattern one would expect.

Here's some additional data from Nicholas Lardy at the Peterson Institute for Economic Economics (April 20, 2018). This This figure shows the rise total payments from China to all countries for the use of foreign intellectual property.

Chinese payments for the use of foreign intellectual property, 1997–2017

This figure, also from Lardy, shows countries ranked by how much they pay in intellectual property fees. This figure illustrates something rather odd: the two countries that pay the highest charges for intellectual property are the relatively small economies of Ireland and Netherlands. As Lardy explains: "However, licensing fees in Ireland and the Netherlands are paid mostly by foreign holding companies that are legally domiciled in these countries for tax reasons. Since the subsidiaries of these holding companies using the licensed foreign technology are located in other jurisdictions worldwide, China probably ranks second globally in the magnitude of licensing fees paid for technology used within national borders." (A few years ago, I offered a description of the famous "Double Irish Dutch Sandwich" technique for multinational firms to reduce their tax liabilities.) 

Top 15 countries paying highest charges for the use of foreign intellectual property, 2016

It may well be true that China should be paying more to other countries, including the US, for use of intellectual property. But the numbers in these tables suggest that in purely economic terms, a negotiated solution would be affordable and therefore possible. If a set of trade negotiations led to China doubling its royalty payments to the world as a whole, that additional $27 billion or so would certainly not cripple China's $13.6 trillion (converted at the current US dollar exchange rate) economy. On the other side, while this shift would be a nice windfall for some multinational companies around the world, it's not an amount that is likely to change the course of the $20.5 trillion US economy, either. Also, if the rules for making payments for foreign intellectual property were tightened up, it's likely that US firms already making such payments (as shown in the figure above) would see those payments rise, as well.

A version of this article first appeared on Conversable Economist


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  • Rob Donaldson

    China is pulling so many dirty tactics to win the tech race.

  • Laurie Evans

    Ban their products !!

  • Gavin Crittenden

    If they spy on us, we will do so as well

  • Ed Reynolds

    Serious disrespect of foreign intellectual property

  • Nick Brennan

    Thoughtful read

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Timothy Taylor

Global Economy Expert

Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.

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