Geithner’s tough talk on China

Treasury Secretary Timothy Geithner accused China of maintaining a strategic orientation toward stealing American IP last Thursday, according to a Reuters report. The language is the most aggressive used against China yet, signaling a further downgrade of Washington-Beijing relations.

Geithner’s sentiment isn’t new. Many in the business community resent China’s trade and IP policies. Geithner’s recent speech, however, was noteworthy as far more frank and pointed than usual. American firms have long complained about the PRC's demanding patent and IP transfers in exchange for access to Chinese markets and technology. China has repeatedly promised to change its ways, though the international business community has largely found efforts to be lacking.

Chinese law specifically demands a certain level of flexibility with regard to IP. Goods receiving government subsidies must contain at 50 percent or more local content. Until earlier in 2011, the PRC further required “indigenous innovation,” a euphemism for China’s policy that Chinese firms must own key patents worked on by foreign firms. While China certainly benefits from its lax IP enforcement, there’s a bit of calculus involved. At a certain point, the benefits of lax enforcement are outweighed by the detriments of international opinion.

Patent theft, however, has larger consequences than most think. The U.S. International Trade Commission released a report last May stating that Chinese piracy cost American business $48 billion and 2.1 million jobs in 2009. Of the losses, $26 billion were in service and information, while $18 billion were in manufacturing and technology. Further, these figures are limited to the United States and focused on software piracy. Broader figures taking into account other sectors of the economy and international business would likely be much higher.

IP isn’t the only area where American and international business have trouble with China. The U.S. complains frequently and vociferously about Chinese monetary policy, allegedly designed to undervalue the yuan. This gives the Chinese a competitive edge on the world market. Conflicts over IP and monetary policy cannot easily be separated and are part of an overall problem of Sino-American trade relations.

Geithner’s tough talk on IP comes at a time when the American economy is in the worst shape since the end of World War II. As America’s trade deficit with China reaches record highs ($273 billion for 2010, with 2011 expected to top that), China increasingly becomes a whipping boy for America’s economic blues. There is a tangible atmosphere of Sinophobia and saber rattling on Capitol Hill. The U.S. Trade Representative specifically called out China on its lax IP protection enforcement laws for the seventh year in a row. Bipartisan efforts in Congress seek to apply increased pressure on China regarding the value of the yuan.

All told, the Geithner comments might be just another blip on the screen during a nadir of relations between Washington and Beijing. However, the latest salvo fired in the war of words further underscores that intellectual property and monetary policy are the twin pillars of decaying relations between the U.S. and China. In the 21st century, good IP law is as crucial to smooth international relations as trade and monetary policies. Only the future will tell whether China can walk the tightrope between the benefits of lax enforcement and backlash from the international community.