Intellectual Property Rights in the U.S.-China Innovation Competition

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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.

The United States: IP Is in the Crosshairs at a Critical Time

In contrast to China’s gradual strengthening of IP protections, the United States has seen the robustness of its IP system steadily erode.

Much of this erosion comes from three changes to the U.S. patent system made over the last two decades. First, in the 2006 case eBay v. MercExchange, the Supreme Court weakened patent owners’ ability to receive legal injunctions blocking the sale of their patented technology by an infringer. While injunctions are still available, they are now sought and granted significantly less often. The decreased threat of an injunction may create perverse incentives that cash-rich firms can exploit, such as “efficient infringement,” where the benefits of patent infringement outweigh the costs of defending against and even losing a lawsuit.

Second, in 2011 Congress passed the Leahy-Smith America Invents Act, which created the Patent Trial and Appeal Board (PTAB) as a faster and cheaper alternative to district courts for retrospectively adjudicating patent validity. However, according to bill co-sponsor Lamar Smith, lawmakers unintentionally included several design flaws that are exploited to harass start-ups, small businesses, and individual inventors. For instance, the PTAB has a lower standard of proof for invalidating patents than district courts, which contributes to the PTAB invalidating over 80 percent of patents it agrees to review. Indeed, former federal circuit chief judge Randall Rader referred to the PTAB as a “death squad” killing property rights.

And third, a series of Supreme Court decisions between 2010 and 2014 greatly decreased the scope of patent-eligible subject matter. The decisions established a two-step test for determining patent-eligible inventions known as the Alice/Mayo test, which restricts patents related to laws of nature, natural phenomena, and abstract ideas. Under the restrictions of Alice/Mayo, many once-patentable inventions became patent ineligible, resulting in the nullification of hundreds of patents. Through 2020, 60 percent of patents challenged under the Alice/Mayo framework were invalidated.

Ultimately, the key issue with these three changes is the increased uncertainty they inject into the U.S. patent system. The increased risk of a successful retrospective patent eligibility challenge at the PTAB, for instance, introduces significant uncertainty for start-ups and other small actors who rely on IP to attract financing. Moreover, critics of Alice/Mayo assert that the test is vague and unpredictable, which hampers start-ups, reduces investment, and ultimately undermines innovation. Kimberly A. Moore, chief judge of the U.S. Court of Appeals for the Federal Circuit, expressed that Federal Circuit judges were “at a loss” in how to apply the current patent eligibility provisions, while some IP legal professionals claim that they are unable to provide clear guidance to businesses due to Alice/Mayo.

Uncertainty—situations where the range and probability of outcomes cannot be predicted—hampers economic activity, and uncertainty in patent eligibility may encourage investors to avoid companies in patent-intensive industries. For instance, a 2022 study estimated that disease diagnostic technologies, which are highly impacted by Alice/Mayo, lost out on $9 billion in investment in the four years following its implementation. Another 2020 study found that the share of venture capital investment in patent-intensive industries such as semiconductors, pharmaceuticals, and biotech decreased from 50 percent in 2004 to 28 percent in 2017 in the United States, a time period which coincides with these changes. While the American Chamber of Commerce ranked the United States number one in its 2023 International IP Index, it identified “continued uncertainty over patentability for high-tech sectors” as a key weakness in U.S. IP protections.

This uncertainty is particularly troubling in the context of international technology competition, as some of the subject matter most affected by these changes is clearly patent-eligible in Europe, China, and other jurisdictions. A 2017 study identified 1,400 patents, including cancer and diabetes treatments, that were granted in China and the European Union but not in the United States due to Alice/Mayo. The uncertainty introduced by these changes may divert research and development investment away from the United States, thereby undermining the international competitiveness of U.S. businesses.

Conclusion

When it comes to its innovation competition with China, the United States has an inherent advantage in its strong IP system. And yet, poor policies and legal decisions place this key asset at risk.

Rather than devalue IP rights at home, the United States should clarify and strengthen its IP system. If the United States is to prevail in an innovation-based national competition with China, it should play the long game and preserve and invest in what has been to date a world-leading innovation system anchored on robust and secure IP rights.

Chris Borges is a program manager and associate fellow with the Geoeconomics Center at the Center for Strategic and International Studies in Washington, D.C.

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Chris Borges
Program Manager and Associate Fellow, Geoeconomics Center