Technology competition with China is inevitable, but strong IP is vital to maintaining US leadership

The United States is engaged in a competition for technology and innovation leadership with China, with both nations making significant investments in their domestic innovation systems while seeking to undermine the other’s innovation system. The United States, for instance, has implemented export controls and investment restrictions to slow China’s rate of technological innovation, while launching innovation initiatives covering emerging energy technologies, quantum computing, and wireless communications, among other industries.

As the competition intensifies, many policymakers and analysts are caught up in the blow-by-blow of this industrial policy race. However, by focusing on these high-profile policies, they risk overlooking a fundamental driver of innovation: a system of secure and market-based intellectual property (IP) rights.

IP rights are foundational for a strong innovation system. By converting ideas into property, secure IP rights allow firms to safely license their innovations, fostering more collaboration across the economy. A secure IP system also gives market actors the confidence to share their expertise and information with others, expanding the knowledge base of the innovation system. Further, the temporary ownership of an innovation afforded by an effective patent system provides the rents and hence the incentive for entrepreneurs and investors to take on the risks of driving new ideas to the market.

For these reasons, the community of inventors, entrepreneurs, and start-ups repeatedly emphasizes the importance of secure IP rights in providing a path to market entry, growth, and fair participation. This view is validated when taken in the aggregate: academic studies find that secure IP rights positively affect innovation and economic growth in developed economies.

Given the benefits of a robust, market-based IP system, the United States would seem to have the long-term advantage in any innovation competition with China. Yet, a series of court decisions and pieces of legislation over the last two decades has weakened IP rights in the United States, potentially undermining the competitiveness of the U.S. innovation ecosystem. China, in contrast, has spent decades strengthening IP protections to encourage innovation and attract private investment.

While the United States remains the gold standard for IP protections, this standing should not be taken for granted. To effectively compete with China, the United States should reprioritize the development and maintenance of a system of secure IP rights to promote the strength and competitiveness of its innovation system.

China Takes IP Seriously

When it comes to IP, China is typically associated with its theft, not its protection. Indeed, China did not have a single patent law in place until 1984. At that time, China was just beginning to liberalize its economy and was considerably underdeveloped. In 1984, 78 percent of China’s population lived in rural areas, and its GDP per capita was 70 times smaller than that of the United States.

As China began its economic rise, it largely prioritized the acquisition of foreign IP—often by appropriation and theft—rather than produce it on its own. Academic studies largely conclude that secure IP rights have a weaker effect on innovation in those developing economies where it is simpler to imitate external innovations. In other words, it is in a country’s rational self-interest to devalue IP protections when it is lower in the technology value chain. Even the United States was not immune to these incentives: George Washington’s administration openly urged stealing trade secrets from the British. However, as countries advance technologically and begin generating world-leading IP, securing this IP becomes more of a concern.

While Chinese IP theft remains an issue today, IP protection in China has come a long way since 1984. A major first step was taken in 2001 when, upon accession to the World Trade Organization, China implemented extensive revisions of its IP laws to meet international standards. This progress has continued over the last decade as China’s IP protections have developed alongside its technological prowess. In 2014, China opened its first court that specifically adjudicates IP cases, which has since grown into a network of IP courts. China has even begun developing niche areas of patent law to incorporate new technologies. Today, establishing a robust system of IP rights to promote innovation is a national priority. In 2021, China released its 14th Five-Year Plan, which includes a notice on IP with ambitious goals such as doubling the number of patents it awards to foreign firms by 2025.

Critically, China’s IP laws appear to equitably protect foreign actors. Observers note that foreigners fare well in IP cases adjudicated in China, and this observation is supported by data: studies from 2018 and 2019 found that foreign plaintiffs fared better than their Chinese counterparts in patent litigation in Chinese courts. And foreign companies have taken notice. A 2022 survey from the American Chamber of Commerce in China found that 44 percent of its members believe IP enforcement in China is improving, while only 23 percent reported that China’s IP regime limits their investments in China. Patent filing data, while an imperfect indicator of innovation overall, can be indicative of the robustness of a country’s IP laws, as inventors prefer to file their patents in locations where the protection of their ideas is best safeguarded. Over 46 percent of all patents filed in 2022 were filed in China, the most in the world.

China’s IP system still has considerable room for improvement. Foreign firms operating in China remain wary of IP theft, and analysis of IP litigation in China is restricted to data from government-curated databases. Still, while China’s IP system remains behind the United States’, China is undoubtedly taking steps to improve it, thereby strengthening the competitiveness of its innovation ecosystem in the process.