Parmesan cheese and Sunbucks Coffee By Scott Sumner

What are we to make of firms that sell products under name that misleads consumers? Consider an American firm selling “Parmesan” cheese that is actually made is Wisconsin, or a Chinese firm selling “Sunbucks Coffee” using a non-Starbucks recipe?

I see good arguments both ways. On the one hand, actual Parmesan cheese and actual Starbucks coffee are likely (albeit not certainly) better than the counterfeit version. On the other hand, how much harm does counterfeiting actually do? I’d guess that 90% of cheese eaters know that Parmesan cheese often comes from places other than Parma, and most probably don’t care. I’d also guess that 90% of the (relatively sophisticated) Chinese who pay $4 for a cup of coffee know the difference between Starbucks and Sunbucks. Sunbucks may simply be signaling that they provide a coffee experience that’s almost equal to Starbucks, at a bit lower price. So I doubt that these sorts of IP infringement cause much of a problem.

I was reading a US government report on global IP issues, and noticed that the US government views these two cases quite differently. Before I tell you the views of the US government, I’ll give you a hint:

The vast majority of the world’s most famous product names that are linked to geography lie in Europe. (Think champaign, burgundy, or feta cheese.) Most of the most famous trademarked consumer products are based in America. (Think Coke, Nike, McDonalds, Facebook.) Have you guessed?

That’s right, the US government views laws preventing the counterfeiting of products with well known place names (“Geographical Indications”) as an outrage:

The United States is working intensively through bilateral and multilateral channels to advance U.S. market access interests in foreign markets and to ensure that GI-related trade initiatives of the EU, its Member States, like-minded countries, and international organizations, do not undercut such market access. GIs typically include place names (or words associated with a place) and identify products as having a particular quality, reputation, or other characteristic essentially attributable to the geographic origin of the product. The EU GI agenda remains highly concerning, especially because of the significant extent to which it undermines the scope of trademarks and other IP rights held by U.S. producers, and imposes barriers on market access for American-made goods and services that rely on the use of common names, such as parmesan or feta. . . . Despite these troubling aspects of its GI system, the EU continues to seek to expand its harmful GI system within its territory and beyond. Within its borders, the EU is enlarging its system beyond agricultural products and foodstuffs, to encompass non-agricultural products, including apparel, ceramics, glass, handicrafts, manufactured goods, minerals, salts, stones, and textiles. Beyond its borders, the EU has sought to advance its agenda through bilateral trade agreements, which impose the negative impacts of the EU GI system on market access and trademark protection in third countries, including through exchanges of lists of terms that receive automatic protection as GIs without sufficient transparency or due process.

In contrast, the US is outraged that a Chinese firm might sell coffee under a trademark that lures Chinese consumers into assuming that its product is quite similar to Starbucks coffee:

China has not shown significant progress in addressing the registration of trademarks in bad faith, despite a number of announcements by China’s State Administration for Industry and Commerce (SAIC) in September 2017. For many years, U.S. brand owners have reported that third parties are registering large numbers of trademarks that are identical to, substantially indistinguishable from, or similar to, existing U.S. brands. As a result, third parties are able to obtain trademarks in China in bad faith even when the U.S. trademark is famous or well-known, and the resulting registrations damage the goodwill or interests of U.S. right holders. The use of these trademarks is also likely to confuse Chinese consumers who may be unaware that a Chinese trademark is used for goods and services that are not connected with the U.S. right holder.

Reading the US report on IP protection, I was frequently struck by its moralistic tone. The US is the aggrieved victim of IP thieves all over the world. But when there’s an area where trademark protection would help European firms at the expense of the US, suddenly it’s the thwarted counterfeiters in the US who are the victims. Are the views of the US government based on utilitarian reasoning or narrow self-interest?

I read the report hoping to better understand the outrage over the theft of US intellectual property. Unfortunately, I’m even more confused than before. There’s lots of discussion over Chinese investment rules that lead to the transfer of technology. But of course that isn’t theft at all. Lots of other examples are of trivial importance:

One report indicates that pirated books printed and exported from China appear in markets throughout the world, including in Africa. . . . Reports also indicate that the 2017 Film Industry Promotion Law does not include meaningful sanctions and has failed to address the ongoing problem of unauthorized camcording of movies in theaters, one of the primary sources for online audiovisual infringements.

I suppose I should be outraged by the book counterfeiting, as I’m a published author. On the other hand, I doubt anyone in China is counterfeiting “The Midas Paradox.” In practice, I’d guess it’s the popular books, CDs, software, etc., that get pirated and sold in Africa. Now consider that American copyright laws are already far too generous to creators. Is it really a big problem if a small portion of royalties is shifted from the pockets of Bill Gates, Kanye West, and J.K. Rowling to African consumers? I’m not defending counterfeiting; just wondering whether it’s the sort of problem that calls for the sledgehammer of a trade war. Here’s Paul Goldstein of Stanford Law School:

Section 301, which is the trade lever presently being deployed by the Trump administration, was amended in 1984 to authorize the president to impose trade sanctions against countries that failed adequately to protect intellectual property rights. However, trade sanctions are a very blunt policy instrument, satisfactory perhaps in the relatively unusual situation where a country’s legislation fails to protect subject matter or rights as required by a governing treaty, but far less satisfactory as a tool against individual depredations, which are usually better dealt with through criminal or civil law enforcement. American IP owners have in recent years enjoyed increased success in enforcing their rights in Chinese courts. Also, the Economic Espionage Act, passed by Congress in 1996 in response to FBI and CIA reports of industrial espionage not only by China, but also by Cuba, France, Israel and Russia, added federal criminal sanctions to the civil liability for trade secret theft already imposed by state law. In 2016, Congress added civil remedies to the criminal penalties. Addressing these discrete appropriations with trade sanctions is like performing microsurgery with a sledge hammer.

An earlier US government report warned that China was trying to use government policies to boost its high tech industries, with the aim of becoming an advanced economy:

China continues to issue other troubling measures. For example, China’s State Council issued the Made in China 2025 Plan and shortly thereafter the Chinese National Advisory Committee on Building a Manufacturing Power Strategy issued the related Technical Roadmap (sometimes referred to as the Greenbook). This Plan aims to turn China into an indigenously self-sufficient advanced manufacturing superpower with well-known Chinese brands across a wide range of high technology industries (e.g., semiconductors, industrial robots, smart sensors, and other advanced equipment, including aerospace/aviation, telecommunication, marine, rail, energy-saving vehicle 36 and electrical, medical, agricultural equipment), in many of which U.S. IP right holders have sizeable market shares globally. This drive may run counter to commitments China has made to the United States and be in tension with basic market economy principles. Other recent developments include amendments to China’s High and New Technology Enterprise tax preference, which further restricted the IP-related requirements in a manner disproportionately impacting U.S. and other foreign enterprises, and a draft State Council opinion offering accelerated regulatory approval to firms that manufacture their pharmaceutical products in China.

Personally, I prefer the market approach to development. But I’m in the minority. Lots of other economists believe that tech has importance spillover benefits, and that government policies should encourage the development of high tech industries. So while I disagree with this Chinese policy, it’s hard for me to get as outraged as the US government, which subsidizes technological progress through the military, the NSF, and other “non-market” methods.

To summarize, the US government report claims:

1. The Chinese are improving their institutions for IP protection, but have along way to go.

2. Other developing countries also have a poor record. But China is the biggest problem, presumably partly because it is so large.

As I expected, the US complaints seem to involve a mix of IP theft and legitimate Chinese practices that encourage technology transfer, which we don’t like. And the theft is a mixture of minor and innocuous issues, and more serious forms of IP theft. I still don’t have any sense of how big the problem is, but I am even more convinced than before that it’s better dealt with on a case by case basis, and not with the sledgehammer of a global trade war.

Update: I have a new MoneyIllusion post that discusses previous estimates of the cost of IP theft.