America can’t control the global flow of ideas

ONE of the quirks of LinkedIn, a career-oriented networking site with over 562m users, is that strangers wish you a happy birthday even when your mum has forgotten. If this happens to you, don’t respond: it could be a Chinese spy. According to Reuters, American counter-intelligence chiefs think that China is running a “super-aggressive” campaign on LinkedIn to recruit experts in health care, green energy and technology. Other agencies are nervous, too. The FBI complains of an “unparalleled” level of economic espionage. The National Security Agency says America is being “pummelled”.

The spooks’ warnings are part of a wave of anger in the West about ideas leaking across borders. On June 1st the European Union complained to the World Trade Organisation (WTO) that China prevents European firms from getting a fair price for their intellectual property (IP). A 215-page White House report on China’s trading practices published in March was filled with accusations of IP violations, including outright theft and the forced transfer of IP to joint-venture partners in China. On August 1st Congress approved a law that gives the government sweeping powers to police cross-border deals involving “critical technologies”.

For American firms the stakes are high. They derive 80% of their market value from intangible assets such as patents and brands, as opposed to physical ones. They own half of the world’s IP. At the biggest 50 multinationals, 65% of foreign profits come from IP-intensive businesses such as tech and drugs. The latest star firms rely on selling intangibles across borders. Netflix has 73m users outside of Uncle Sam. NVIDIA, which designs artificial-intelligence (AI) chips, makes 87% of its sales abroad.

Yet in the eyes of many American bosses and security types the global IP regime is broken. The Economic Espionage Act of 1996 is intended to police IP theft by governments and firms but has led to few prosecutions; WTO rules on safeguarding IP abroad have little bite. What is required now, many believe, is tough, unilateral action by America to enforce its rights abroad. Companies want stronger control of IP, allowing them to maximise their profits. The IP Commission, a lobbying group in Washington, reckons that they are being robbed of up to $600bn a year.

Politicians and the security establishment have a grander aim: regulating the flow of ideas to preserve American technological supremacy. History is not encouraging. At any point in time an elite group of firms in a particular country are on the frontier of innovation. Businesses and governments in poorer places try to catch up, because that is the best way to get rich. According to the IMF, the absorption of foreign IP explains 40% of the growth in labour productivity in emerging economies between 2004 and 2014. The incentives for such countries are so powerful that hoarding ideas away from them is like clutching a wet bar of soap.

Thus in the Anglo-French wars of the 1700s France recruited British defectors to unlock the secrets of coal technologies. In the subsequent century America stole British designs for looms and trains. Japan mimicked the West during the Meiji Restoration. South Korea, Taiwan and Singapore industrialised by buying and stealing Western ideas on everything from ships to chips. Cries of foul play from the global hegemon are to be expected. In the case of Britain, it passed an act against economic espionage in 1719. In the 1980s Caspar Weinberger, America’s defence secretary, fretted about the haemorrhaging of high-tech ideas to the Soviet Union, which had a wishlist for its spies called the Red Book.

Despite this, the Soviets did less for computers than Steve Wozniak in the Jobs family’s garage. To take off, after all, foreign ideas need to be absorbed and commercialised by firms and entrepreneurs. One channel is contractual relationships, such as foreign direct investment or licensing. Another is persistent theft. But often there is a grey area that includes reverse-engineering products, tips from suppliers and headhunting experts from rivals. Globalisation and the web have deepened all these channels. Companies’ IP is more scattered owing to global production chains. A global jobs market exists for technical experts and armies of students learn abroad.

How might America control the flow of ideas? During the cold war it ran a Western embargo of the Soviet Union for military goods and some high-tech ones, through a secretive body known as COCOM. Today it would need an even more intrusive and coercive approach to assert its IP rights unilaterally. Establishing an extraterritorial deterrent would require crippling punishments for firms that violated IP, such as banning them from using the dollar-based banking system. A Big Brother regime would be needed at home. There are 67,000 AI experts working in America who are ethnic Chinese, according to an analysis of LinkedIn by Bernstein, a research firm. They can hardly all be suspects.

Brain freeze

Even then, China and other countries might balk at paying a bigger tribute to America’s IP supremacy. If USA Inc charged the world $600bn more, and this hit was absorbed by all foreign companies, it would cut total profits outside America by about a tenth. The return on equity of American multinationals abroad (excluding financial firms) would soar from 8% to 14%. Europe and emerging countries are already uneasy about the large and lightly taxed rents that American firms extract abroad, from the drugs industry to the big tech companies.

America’s economy is shifting further towards intangibles. The administration and bosses are right that China has misbehaved. But ideas are harder to police than gearboxes and coils of steel. The solution is a global regime that permits the flow of ideas, prohibits theft, offers a framework for pricing IP and sees that rules are enforced. A next-generation global trade treaty, in other words. Sadly, this is exactly the multilateral approach to trade that America has rejected. Not one of its best ideas.