Intellectual Property (IP) Piracy as a Global Security Issue by Damian Niolet

Lastly, the statements of the author contained in this report do not reflect the views of the USAF.

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INTRODUCTION Piracy not piracy in regards to boats or Somalia, but in regards to intellectual property (IP) is exacerbated by globalization, contributing to a power shift in the global economic landscape, and is more likely to grow than subside in the long-term despite policymakers best efforts to combat it. The local impacts of IP piracy should be readily apparent, albeit, determinedly ignored; since, most, if not all, of the readers of this report have likely committed the most common form of IP piracy, copyright infringement, or for dramatic effect, theft. In each instance of copyright theft, money that should have gone to the creator of the copyrighted work did not, nor did a portion go to anyone involved in the products life cycle, nor did a portion go to the local government in the form of taxes. IP piracy steals revenues from the IP owner, which because of the interdependence of companies and governments, carries with it 2nd and 3rd order effects, which end up looping right back to the start, and continuing on again. The localized, country specific, effects go onward and outward affecting the global economy with the introduction of globalization; after all, globalization creates economic interdependence among countries. However, the effects are only hindering legitimate industries. There are entire countries with companies that were built on some or many forms of IP piracy. Any form of IP piracy, resulting in a negative effect for legitimate companies, could be said to have an equal, though converse, positive effect on these illegitimate companies. The countries, to which these illegitimate companies belong, are creating enormous economic momentum for themselves, to the point that a global economic power shift is beginning to occur. While this may pose a threat to U.S. pride, or what the U.S. would likely suggest, its national security, there is, however, or more potent concern for the globe. The more pervasive

these illegitimate companies become the more influence they can exert on their countries governments, or worse yet, the more pervasive a global culture encouraging theft will become. For all the U.S.s misgivings, a power shift towards a country built on thievery would have drastic consequences on the globe. Policymakers, aware of the global implications of IP piracy or not, are taking measures to combat it. However, policymakers may only be aware of IP piracy in terms of its local (national) impacts to the economy. Or they may only be looking at it as a problem in legal terms and attempting to protect IP holders legal rights to their IP. They may not be taking into account the global or ethical implications. They may be taking measures that are projected to stave off intermediate effects, but that do not address the long-term. The fact is, in the long-term, IP piracy is not likely to subside. Because of a variety of factors, it is more likely to grow. Paramount among the factors are the current trends, or the criteria that enable IP piracy, which are likely not to subside, but grow. Technological proliferation will only increase as developed nations make their own leaps and bounds forward in that field. The growth of the internet will continue to shrink the distance between countries, corporations, and people and the products they produce. And finally, certain countries, which act almost like a petri dish for IP piracy, will increase in number. MEASURED LOSSES FROM IP PIRACY AND THIS REPORTS INTENT While measuring the total losses an economy incurs as a result of IP piracy is important, this report will not be delving deeply into any figures or statistics. The primary purpose in avoiding these numbers is because this report is meant as a broad examination of the global implications surrounding IP piracy. It will instead focus on some of the ethical ramifications, difficulties in political and economic policy decision making, and future trends.

Another reason is because of the significant potential for error in the figures. Most all of the figures are conjecture after all, since tracking the totality of IP piracy is impossible, it being a black market. What figures are available, furthermore, vary widely one from another. Difficulty arises when the scope of any given study attempts to obtain an aggregate figure across the arenas of IP and at from various time periods. The most accurate figures come from studies that narrow the scope down to a single product category, such as DVDs, in a yearlong period, but such studies are few and far between. Existing figures do little in emphasizing IP piracys total impacts.1 2 3 Yet another reason is because of an ongoing debate as to whether there truly is a loss to be measured. It is surmised by some that the consumption of pirated IP products involves consumers that would not otherwise purchase the authentic IP products, more often due to low incomes.4 Others speculate that consumers of IP piracy are not likely purchasing pirated goods on single occasions, but in mass over lengthy periods of time; at least one authentic product could have been purchased. For the most part, proponents on either side still consider IP piracy theft; the argument is in how to measure the theft. This report is going to bypass this argument as irrelevant and attempt to demonstrate the bigger impacts that IP piracy is having and will have on the global stage. HOW GLOBALIZATION CONTRIBUTES TO GREATER IP PIRACY

1 Robert Stoll, "Protecting Intellectual Property Rights in a Global Economy: Current Trends
and Future Challenges," (statement before the Subcommittee on Government Management, Organization, and Procurement, Washington, D.C., December 9, 2009) 2 Stephen Siwek, Policy Report #189: The True Cost of Copyright Industry Piracy to the US Economy, Policy Report, (Lewisville, TX: Institute for Policy Innovation, 2007), 1-22. 3 Daniel Ikenson, Manufacturing Discord: Growing Tensions Threaten the U.S. China Economic Relationship, Trade Breifing Paper, (Washington, D.C.: CATO Institute, 2010) 4 Ted Fishman, China Inc: How the Rise of the Next Superpower Challenges America and the World (New York: Scribner, 2006), 247.

IP piracy has existed for centuries. To quote Adrian Johns from his book Piracy: The Intellectual Property Wars from Gutenberg to Gates, Printing posed serious problems of politics and authority for the generations following Gutenberg. It was in the process of grappling with those problems that they came up with the notion of piracy.5 What has made IP piracy easier and more prevalent over the years is the diffusion of education, advances in technology, and most of all globalization. Four aspects of globalization contribute to IP piracy. The aspects are interrelated and exist in an endless note of sorts; however, some aspects contribute more than others. Perhaps the primary aspect of globalization that contributes to IP piracy is the lack of stringent international IP laws.6 Any regulations in place are more like agreements than laws. Different countries treat IP in different ways. China, for instance, possessing a communist government, treats its peoples IP as an asset that belongs to the state, which carries over to how it treats IP from other nations. Any particular country is not likely to enforce international agreements ahead of their own laws. This is the second contributing aspect of globalization, lack of enforcement even when laws or strong regulations are in place.7 8 How the aspects are interrelated is evident in the fact that neither of the above aspects would play into IP piracy if the international, economic doors were not open to businesses due to globalization. The fact that businesses can now export their goods and services the world over, which is the third aspect, gives IP pirates the opportunity to thieve IP. But it is the lack of regulations and enforcement that truly makes international businesses susceptible to IP piracy in other countries. The opportunity for IP piracy will always exist in a globalized economy;
5 Adrian Johns, Piracy: the Intellectual Property Wars from Gutenberg to Gates (Chicago: University of Chicago Press, 2009), 8. 6 Stoll, 2-3. 7 Fishman, 237. 8 Stoll, 4-5

however, susceptibility to IP theft requires certain criteria be in place, which will be explained shortly. There is one final aspect of globalization that contributes to IP piracy, almost propelling pirates on their course. The aspect is best described by referring to what is known as hand-me-downs in families. As older generations of children in families grow, their toys, clothing, etc. are passed down to the younger generations. Likewise, as developed nations take leaps and bounds forward in terms of technology, the older technologies are passed down to developing countries. For instance, the U.S. will one day move to quantum computing and todays very powerful computers will be handed down to developing nations. The process of handing down technologies to developing nations began long ago.9 Reverse engineering, repurposing manufacturing equipment, and mass producing products is much more easily managed with computers, even if they were hand-me-downs.

HOW IP PIRACY IS CONTRIBUTING TO A GLOBAL ECONOMIC POWER SHIFT In order to understand how IP piracy is contributing to a global economic power shift, it is ideal to follow the trail of the four aspects above in reverse. In most developing nations there is little in the way of natural resources and/or the means to process natural resources are still too new and expensive to be handed down. What these nations do have is a large population, high birth rate, poor to moderate education system and potential for vast unemployment if not already existing vast unemployment. The technology and manpower are present, but there is not enough

9 Dr. K.G.K. Nair, and P.N. Prasad, Development through Information Technology in Developing Countries: Experiences from and Indian State, (Kerala, India: The Electronic Journal of Information Systems in Developing Countries, 2002) 1-13.

education, not enough creative, scientific, entrepreneurial expertise to devise new and innovative technologies.10 Enter outside corporations. Individuals with just enough education seize the opportunity to pirate the products that these international corporations bring to their countries. They reverse engineer, duplicate in mass, repurpose, and rebrand or simply counterfeit anything and everything knowing that they will be able to undercut the international corporations. The more successful IP piracy becomes, the more attractive it becomes, and the more prevalent it becomes. All the while, more hand-me-down technologies are flooding in and more international corporations taking root, at least initially. IP piracy thrives as a result, which in turn may lessen international business involvement in those countries; however, the economy has grown enough to be able to sustain its growth apart from international corporations.11 WHY THIS POWER SHIFT POSES A PROBLEM TO GLOBAL SECURITY Countries that meet the above criteria are countries like China, India, and the entire continent of Africa. China and India certainly do not have poor to moderate education systems, but they did at one point, before they began receiving hand-me-down technologies. These countries are creating economic momentum for themselves using IP piracy as lighter fluid. Nowhere is this more apparent than in China. By some estimates 1/3 of Chinas GDP is believed to be the result of IP piracy.12 Some examples of the profuseness of IP piracy include: 5 in 6 Yamaha motorcycles in China are fakes; 90% of Microsoft products in China are pirated; 100 billion counterfeit name-brand cigarettes are produced in China per year.13 Chinas

10 Fishman, 238. 11 Fishman, 236. 12 Henry Blodget, How to Solve Chinas Piracy Problem. http://www.slate.com (accessed October 29, 2010). 13 Fishman, 231-341.

productivity is such that they surpassed the U.S.s closest rival, Japan, in GDP at the end of the second quarter of this year.14 A truly global mind would not be concerned with one country surpassing another in terms of GDP so long as the needs of the worlds people are being met. The U.S., however, cherishes its spot at the top and deems any bridging of the GDP gap between them and their rivals to be a threat. Chinas economic rise, therefore, has been a hot topic in scholarly, think tank, and policymaker circles. Likewise, U.S. policymakers and the like are showing concern for rampant IP piracy. Several measures have been undertaken to curb IP piracy at home and abroad.15 The concerns within both areas are misplaced however. The concerns, Chinas economic rise and IP piracy in China, for instance, should not be treated as separate beasts that need be tamed; they should be treated as one and the same. China very likely would not be on an economic rise if not for the amount of IP piracy in the country. Eventually, as IP piracy gains ground in such countries as China, political leaders may be required to adjust how they deal with the political leaders of these countries, finding that their previous methods are ineffective in addressing the needs of a den of thieves. As more and more illegitimate corporations prop up the economies of these countries, the more influence they can exert on leaders in less than respectable ways. In time, those who began pirated corporations may even become the leaders of the countries. The more abundant IP piracy in a country, the more it seems acceptable, the more IP piracy, and perhaps theft of other kinds, will pervade the culture of that country. It does not behoove the international community that a country whose economy is 1/3 comprised of piracy should usurp the U.S.s position at the top of the global

14 China GDP Surpasses Japan, Capping Three-Decade Rise. http://www.businessweek.com (accessed October 29, 2010). 15 Declan McCullagh, Piracy Domain Seizure Bill Gains Support. http://news.cnet.com (accessed October 29, 2010).

economy. The U.S. should approach China firmly and challenge them to continue their economic rise sans IP piracy. THE ETHICAL IMPLICATIONS Demanding the complete cessation of IP piracy in a country like China, besides being impossible practically speaking, carries with it ethical implications as well. Local leaders in China make a decision every day to look away despite IP piracy being all around them, knowing that if they were to crack down and enforce IP protection laws they would be taking the livelihood away from hundreds of millions of people.16 The standard of living in China is assisted by IP piracy.17 At this point one has to question the true purpose of globalization. Is the purpose to spread technologies, wealth, and well-being? Or is globalization simply an arm of capitalism in its most stoic, sterile, and greedy form? More than likely, the answer to such questions rests somewhere in the middle. It then becomes necessary to ask: if IP must be protected, how can it be protected while still affording a livelihood for generations of people? The answer to this question is what policymakers must determine. This report can offer little in the way of advice as doings so is beyond the capabilities and expertise of this author. Suffice it to say that policymakers must work closely with U.S. based international corporations and the local leaders of the countries involved. It is imperative that solutions be devised soon because in the long-term, the current conditions are likely to grow exponentially. WHY IP PIRACY IS MORE LIKELY TO GROW THAN SUBSIDE The first reason that will be examined here as to why IP piracy is likely to grow, rather than subside in the long-term, concerns a concept sometimes known as the Hydra concept. The

16 Fishman, 238. 17 Fishman, 238.

Hydra was the mythological many-headed snake that had the ability to regenerate a head after it had been cut off. In the realm of IP piracy, if laws were put in place and stronger enforcement enacted, IP pirates would only find more sophisticated efficient and effective means and ways to thieve. The number of active culprits may be reduced, but the output likely would not, partially because of learned best-practices in the face of tougher IP protection and partly because of the next reason. Faster, more powerful computers means there will be greater ease in completing the process that is IP piracy. Greater broadband penetration and speeds entails greater piracy as well, especially in the arena of copyright infringement. Because developing nations will be the benefactors of these future trends just like all others, current IP piracy in these nations will expand and new avenues of IP piracy present themselves. Countries that are currently in the position China and India were in 50 years ago will be in a position to make IP piracy a cornerstone of their economies in the same manner China has. The entire continent of Africa, within the next 30 to 40 years will be in a position much like Chinas today. It will take less time for Africa to develop than it took China and/or India because of the faster and more powerful technologies that will be handed down to Africas countries. Once IP piracy has sparked economic momentum for Africa, they may begin to utilize what natural resources exist there and thus eventually legitimize their economic rise. However, the fact will remain that Africas economic rise was at the expense of IP holders rights and IP piracy itself will still be a looming and lucrative industry. CONCLUSION Globalization exacerbates IP piracy. This report has shown the validity of this statement by revealing four aspects of globalization: 1) lack of stringent international laws, 2) lack of

enforcement where laws do exist, 3) the essence of globalization itself, the fact that corporations can set up shop in other countries, and 4) the hand-me-down phenomena. From here this report explained how IP piracy is contributing to a global economic power shift. As technologies are handed down to developing countries, the need arises to make use of the countries available resources, particularly manpower. These countries, seizing an advantage, make use of the time, energy, and money international corporations have already invested into their products and make them their own. These illegitimate companies then conduct business as though they were any other company. Local leaders cannot ignore the benefits these IP pirates are passing along to their local communities; and therefore, local leaders do little if anything to enforce international regulations. After several decades of unmitigated IP piracy, any such country can expect to be doing considerably well in terms of GDP since enough economic momentum was generated so as to create legitimate companies as well. Policymakers are in a dubious position because they have to weigh the apparent benefit, the fact that developing nations are gaining affluence, against the downside, the fact that the affluence is at the expense of IP owners. When dealing with countries like China, which has surpassed Japan in terms of GDP this year and whose economic rise is largely due to IP piracy theft, it is important not to separate concerns about their economic rise and IP piracy theft. If a hard nose stance is not taken now, someday policymakers may be dealing with outright thieves. However, the ethical implications cannot be ignored. Hundreds of millions of livelihoods would be in jeopardy. Lastly, this report presented viable reasons why IP piracy is likely to grow in the longterm rather than subside, citing the probability that 1) stricter enforcement will only create more

sophisticated pirates, 2) enhancement trends in the internet domain, and 3) the existence of a greater number of countries ready to pirate IP. This report believes that in the next 30 to 40 years Africa will be in a position much like China is today. At that point, policymakers hopefully will have learned how to deal with the issue of IP piracy, either by way of successfully dealing with China today, or learning from its mistakes.