The China Hawks Are Lying Us into War

The GOP Hawks claim China’s ascendancy is owed to its totalitarian system, extraordinary organization, and immense population, as one of their leading lights has proclaimed. They brush aside the post-Mao liberalization as mere smoke and mirrors, a “40-year-long propaganda campaign” masking the “real China.”

This stance presents them with a real challenge. As life-long advocates of free enterprise, committed to the idea that liberty and prosperity go together, the GOP hawks must explain how, for the first time in history, a totalitarian state got rich. Their answer, repeated endlessly in books, op-eds, speeches, and congressional testimony is that China owes its economic progress and technology prowess not to an upsurge of freedom but to massive theft, especially of high-tech intellectual property.

In support of this claim, the hawks repeatedly cite dozens of official reports “finding” that China’s intellectual property (IP) theft was on the order of $200 billion to $600 billion annually, even a decade ago, and now likely reaches trillions of dollars per year, most of the theft being from the United States.

This is a lie, and assuming the hawks read their own footnotes, they know it is a lie. They are attempting to lie our country into war, which is a fair definition of treason.

We did read the footnotes. We found that this endlessly repeated claim of $200 billion to $600 billion a year is the product of just two aging reports assembled using methodology about as reliable as throwing darts at a dartboard. The $200 to $600 billion figure is based on assumptions the original authors admit are guesses chosen not for their accuracy but their surface plausibility.

One of the reports, by the U.S. International Trade Commission (USITC), China: Effects of Intellectual Property Infringement and Indigenous Innovation Policies on the U.S. Economy, was published in 2011. The second, an Organisation for Economic Co-operation and Development (OECD) study titled, Trade in Counterfeit and Pirated Goods, was first issued in 2008 and updated in 2016. Nearly every other report on the theme, not to mention hundreds of op-eds and speeches and mainstream media items, cites these two studies as their only quantitative evidence.

The OECD report is the source of the specific claim that China’s I.P. theft tallied up to a whopping $200 billion to $600 billion annually throughout the 2010s. The OECD model extrapolates from shaky data on customs seizures of counterfeit products to estimate global IP theft. We won’t rehearse the methodology in detail here. (You can find more in Richard’s recent article in Reason magazine, The Mirage of Chinese IP Theft). Suffice it to say that after a series of multiplicative and, at best, possibly defensible assumptions, at the critical moment the authors leave reality behind entirely.

A shot in the dark

Their $200-600 billion figure depends on the determination of a “fixed point”—essentially, an estimate of what percentage of goods in a specific baseline category are fake. Depending on that number, the scale of IP theft can swing wildly from mere billions to an eye-watering trillion dollars annually.

How did the OECD wizards arrive at their fixed point? They took a stab in the dark. Initially, they set their sights on a 20% figure for the baseline category used to model everything else. That, however, caused the model to spit out numbers that “appeared excessive.” To maintain credibility, they dialed the number back to 5%. They also noted, however, that the amount “could be higher.” Needing to establish a “credible ceiling” for counterfeit trade, they picked 10% as their high fixed point.

Ultimately, the OECD planted its flag on a $200 billion estimate for 2005’s counterfeit trade, with the caveat that it could be much more. A figure of legend was born.

In 2016, a second edition of the report, using similar methods, offered a new headline-grabbing figure: “In 2013, international trade in [counterfeit] products represented up to 2.5 percent of world trade, or as much as USD $461 billion. This is the equivalent of the GDP of Austria, or the combined GDP of Ireland and the Czech Republic.”

This 2.5% figure has since become the default estimate for claims of rampant I.P. theft by China. Just multiply total global trade by 2.5% and assume that’s what China steals.

This is the study routinely cited by the hawks as “rigorous.”

The 2011 USITC report is, if possible, even less credible. Focusing on I.P.-intensive U.S. firms operating in China in 2009, the report claims these firms “reported losses of approximately $48.2 billion in sales, royalties, or license fees,” due to I.P. infringement. It’s a made-up number. A closer look reveals the actual range of estimated losses stretches from $14.2 billion to $90.5 billion. More damningly, these numbers are not, as claimed, based on direct reports from companies. Most of the figures come from third-party guesstimates by industry associations. Essentially, these firms were parroting back guesses fed to them by industry groups with a vested interest in painting the grimmest picture possible to grab government attention.

Appalled yet? The worst deception is yet to come. These two reports, endlessly cited to explain China’s surging progress in cutting-edge electronic and defense technology, have nothing to do with high-tech.

We’re talking about sneakers

The “I.P.” allegedly stolen most consists of trademarks affixed to faux high-fashion sneakers (a perennial leader), watches, handbags, and other accessories, or copyrights on pirated music. Most shipments intercepted are in retail quantities, often fewer than 10 items. Most come by mail.

Somewhere in China, Mom and Pop are ripping off Rolex, Louis Vuitton, and probably Taylor Swift. They should worry about Number 87, but they are not the reason China is rich.

These phony numbers have been essential to the hawks’ war mongering. Without such eye-catching numbers to cite, no reporter would write this story. As it is, every major U.S. media outlet—the New York Times, the Wall Street Journal, the Washington Post, USA Today, all the cable and network news outlets—have published these numbers as evidence of rampant Chinese IP theft.

The two Chinas

To be sure, the Chinese espionage apparatus tries to steal U.S. technology and sometimes succeeds. Case in point: In March of this year, Chinese national Linwei Ding was indicted by a federal grand jury for four counts of theft of trade secrets in connection with an alleged plan to steal proprietary artificial intelligence technology from Google. He aimed to kick-start his own AI venture back home.

The hawks, however, know they can’t base the case for war on occasional wrongdoing. Essential to their case that today’s China is as Communist as ever is the claim that China’s growth is owed not to loosening up but doubling down.

Above all, the charge of IP theft enables the hawks to deny the relevant reality that should guide American policy: Since Mao’s death, two Chinas have struggled for dominance. There is the legacy authoritarian regime. And there is the amazing land of explosive entrepreneurship and stunning innovation, thriving on new freedoms.

Denying this admittedly challenging circumstance will not advance American interests. To the small extent we can influence the outcome of the struggle, we should celebrate and encourage the fruits of Chinese liberty, not wave the bloody shirt and talk of war.

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