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.
READER COMMENTS
Thaomas
Dec 9 2018 at 3:56pm
Some of the Chinese practice to encourage technology transfer involve restrictions on trade and investment that we rightly should seek to eliminate.
Scott Sumner
Dec 10 2018 at 1:15am
Thaomas, We can ask them to do so, but ultimately it’s their choice as to how to run their economy. We should also ask Cuba and North Korea to stop being communist, but I wouldn’t expect them to accede to our wishes.
Philo
Dec 10 2018 at 10:38am
At the least, there are narrow limits concerning what methods the government of one country can legitimately use to influence the actions of the government of another country. By the way, I think the “we”-language you and Thaomas are using is potentially misleading. We–you and I–are individual people, but the topic here is the behavior not of us but of certain collective entities, namely, governments.
Mark
Dec 10 2018 at 6:41am
The Parmesan cheese example actually seems worse to me. The difference between Starbucks and Sunbucks is obvious from the sign, but supposing a consumer wanted actual Parmesan cheese from Parma, how could the consumer tell? I frequently want to try the most authentic version when buying a new product I’ve never used before, but have to spend a lot of time finding one, if I can find one at all.
Our stance against geographic indicators also seems like it could encourage more state-owned economic activity, which is bad. The easiest way to get around our opposition to geographic indicators would be to have, for example, the local government or industry council in Parma trademark Parmesan and then license the trademark out to its producers.
The point about African consumers using Chinese-pirated IP is also good. It seems clearly utility-maximizing to provide IP at a lower price to consumers in places like Africa; that is just textbook price discrimination in a monopoly. Most IP owners themselves would be happy to sell their product at a lower price in poor countries if it weren’t for the risk of re-imports.
Jon Murphy
Dec 10 2018 at 8:22am
What I’ve seen happen is companies advertise that clearly. Things like “made with real Colombian coffee beans” (printed on my coffee bag) or “Proudly made with American-sourced ingredients” (a sign hanging outside my favorite deli). Unless there’s some regulation preventing it from happening with cheese, I see no reason why it’d be any different.
Airman Spry Shark
Dec 10 2018 at 12:46pm
But what if I want that style of cheese and don’t care where it was actually made? How many people (or at least Americans) even realize that parmesan is so named because the style originated in Parma?
At least some GI’s have no other meaningful way to refer to the class of product; even non-GI trademarks are held invalid once they’ve been so genericized.
dede
Dec 11 2018 at 10:18pm
“How many people (or at least Americans) even realize that parmesan is so named because the style originated in Parma?”
That’s exactly why the Europeans consider that selling Parmesan or Champagne made in the US is fraudulent… Their geographical source is part of the product.
As Sunbucks, you can drink Champaign made in the US if you like but a winemaker in California should not be allowed to write Champagne on his bubbly wine label (I believe that this particular case has been settled now)
Tom G
Dec 11 2018 at 6:39am
Thanks for being clear here, Scott:
“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? ”
It is NOT a big problem.
Still, I think a 10% tariff “nudge” in response to Chinese IP/patent copying seems quite appropriate, and is far from the “sledgehammer” excess response you call it.
WalterB
Dec 13 2018 at 2:30pm
I’ve just decided to run for president in 2020. Part of my platform will be that I’ll impose import tariffs in Chinese goods – and make the Chinese pay for them.
Floccina
Dec 11 2018 at 3:04pm
Related to the subject of Parmesan cheese and Sunbucs coffee, There have been a lot of journalists pointing out that olive oil that is supposed to be from Italy is not from Italy, and is it really extra virgin, but at this point I think buyer beware as long as it’s safe you can taste it than look at the price and make your choice. Probably not ideal but not so bad a situation either.
BTW if someone can make a soybean oil that tastes as good, that would be a really good thing.
Trademark infringement seems like real fraud, but giving patent seems a little questionable, especially since 2 or more people could make the same discovery independently but the first one to file the patent gets the monopoly .
Also I’m not certain that humanity is better off with patents.
mario rossi
Dec 12 2018 at 8:31am
In large part the different enphasis between GI and trademarks comes directly from the level of fragmentation. Producers in Italy tend to be small and very often collaborate only loosely through cooperatives. They lack the size to apply for trademarks in the traditional sense and there are endless conflicts between them (since they are direct competitors).
GI were invented to protect the producers even if they were unable to coordinate enough to create a single recognized trademark.
It’s also a linguistic issue. Parmesan (parmigiano o parmigiano reggiano) is a specific geografical cheese in Italy, while we have a different word (grana) to describe the type of cheese. But not everybody agrees on that classification to be honest.
GI also seem very different from trademarks and patents. GI producers are not monopolist. Anyone can set-up shop in the geographical area, follow the traditional rules and use the name legally.
Scott Sumner
Dec 12 2018 at 1:38pm
Tom, The problem is that it hurts us just as much as them, so it’s not an effective weapon.
Mario, Thanks for that info.
Nick Ronalds
Dec 12 2018 at 11:15pm
Scott’s point about the counterfeit sold in Africa is an important one. With all the pixels lavished on trade issues and IP specifically, who is hurt, and by how much? Consumers? Perhaps if they think the product they bought is the real thing, buy they typically also payed a lot less for the product, so on net they surely benefit. The producer of the IP-protected product is unambiguously hurt, but how often is it pointed out that the benefit to consumers offsets some, and maybe all, or even more than all, of the economic damage to the producer? And is the level of protection for the producer set at the right level anyway? There are good reasons monopolies are reviled. IP protection is a time-limited monopoly to stimulate innovation. But as Scott says, “American copyright laws are already far too generous to creators.” Econtalk had a great episode a couple of years ago about the rampant abuse of patent laws in the drug industry.
None of this is to excuse IP violations, but the actual economic damage is less, perhaps much less, than one might think from the typical media accounts.
Nick Ronalds
Dec 12 2018 at 11:16pm
Of course that should be “paid” not “payed”.
andy
Dec 13 2018 at 2:24am
The GI restrictions seem to be a double-edge sword; it seems to me that the result is actually a monopolization of the market. The big producer can afford to push their product and let consumers know what they are selling (i.e. advertise ‘Don’t buy parmesan, buy XXXX’, or ‘Taste Italy on your pasta with XXX’, or simply show the product and everybody gets the idea); the smaller ones cannot. Sure, the people seeking ‘original’ wouldn’t be lured, but most people easily switch; as a result you might not even get a chance to buy the original parmesan. The smaller producers get less a chance – they cannot name it parmesan, they don’t have enough resources to push their own brand name.
Sam Roberts
Jan 4 2019 at 9:03am
The vast majority of the world’s most famous product names that are linked to geography lie in Europe. (Think champagne, burgundy, or feta cheese.)
Just for detail, feta is not quite the same as champagne or burgundy, although all three have “protected designation of origin” status from the EU. Champagne and Burgundy are names of actual areas in France; feta is just the Greek word for “slice”, it’s not a place name at all. Nevertheless, to be called “feta”, it has to be produced in particular areas of Greece, using traditional methods and ingredients.
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