Game Over: Trade Barrier Impacts on Intellectual Property in the Toy and Game Industry

Trade barriers between the U.S. and China have taken center stage recently, with the introduction of tariffs on certain imported goods. Another example of a recent trade barrier involved interference with social media platforms over privacy and intellectual property concerns (remember TikTok?).

The tariffs imposed, and even those threatened, caused drama all the way back in 2018. From about July of that year through the beginning of 2020, China and the U.S. (among other countries) engaged in essentially a tit for tat of tariffs.¹ The feud initially escalated during the summer of 2017, when the Office of the United States Trade Representative (USTR) released a report based on “[c]oncerns over China’s policies on intellectual property (IP), technology, and innovation.”² The report contained several core claims, including that China requires joint ventures consisting of technology transfers, forces U.S. companies to license without market-based terms, and engages in cyber intrusions to gain access to trade secrets.³

Shortly after the report, “a trade war began between the two countries when Trump slapped a 25% tariff on $250 billion worth of Chinese imports to the U.S.”⁴ Even toy and game companies were not spared. Hasbro, a global toy and game company with brands including Monopoly, saw its stock price plunge when news broke regarding the implementation of the tariffs (just in time for the holiday season).⁵ After more back and forth, China subsequently agreed to change some of its laws to alleviate concerns over intellectual property theft, thereby avoiding some of the threatened tariffs.

While tariffs specifically aimed at toys and games ultimately didn’t come to fruition, it’s still worth exploring the effects they would have on an already struggling industry and its consumer base.

Tariffs and Intellectual Property Theft

Tariffs are not a new construct, and have been used in the United States since before it was a nation. In fact, “‘[t]axation without representation’—including tariffs without representation—was one of the principal drivers of the American Revolution.”⁶ Tariffs have historically been used as a means to raise funds for the government and protect domestic workers and production from external threats and competition. Tariffs generally fell out of favor in this country with the introduction of income tax and payroll taxes during the twentieth century.⁷ But recently, new arguments are being raised that the U.S. should rely on tariffs to help solve issues like intellectual property theft by China.⁸ The estimated misappropriation of intellectual property by Chinese entities is roughly $225–$600 billion annually.⁹ These numbers, coupled with the fact that intellectual property assets amount to about 80 percent of the S&P 500 company list total value,¹⁰ provide a staggering reason to look at curbing bad behavior.

But is reverting to a policy of tariffs the right way to go? As the U.S. has generally moved toward a policy of free trade over the course of the last century, some see the recent usage as “represent[ing] a departure from a firm commitment to free trade that has been a mainstay of American diplomacy since the end of World War II.”¹¹ In addition, there could be unintended consequences as a result of the trade war escalating.

Tariffs are a form of trade barrier in which taxes are placed on imported or exported goods, and that tax revenue is collected by the government.¹² They’re not unique to the U.S. Tariffs can be placed as a protectionist measure, such as the tariffs placed on audiovisual equipment from the U.S. imported to Europe in the 1990s, in order to protect European culture.¹³ Tariffs can also be used as punitive measures such as the ones described herein. Who ultimately bears the cost of that tax may change, depending on the type and amount of tariff imposed. In the U.S., it’s the importer of record who works with Customs and Border Protection (at least on paper).¹⁴ Typically, this cost is then passed downstream to consumers or distributors, passed upstream to manufacturers or even the country importing/exporting the goods, or avoided altogether by moving production in or out of a country.¹⁵

Regardless of who ends up footing the bill for a tariff, there is a disruption to the free trade economy. The general consensus among economists is that “free trade increases the level of economic output and income, and conversely, that trade barriers reduce economic output and income.”¹⁶ In fact, historically speaking, “tariffs raise prices and reduce available quantities of goods and services for U.S. businesses and consumers, which results in lower income, reduced employment, and lower economic output.”¹⁷ This in turn leads to a slowing economy.¹⁸

So, how do tariffs fit into the overall goal of stopping illicit stealing and forced transfers of intellectual property? Tariffs and intellectual property protections (and restrictions) are both used to shape behavior and economic output, but they can act as potentially conflicting “policy levers.”¹⁹ Each acts to distort a truly free market: intellectual property rights attempt to incentivize certain behavior like innovation (making ideas more scarce, somewhat ironically); tariffs attempt to disincentivize certain behavior like counterfeiting or foreign competition (making certain goods and services more expensive).

Those in favor of imposing tariffs to reduce counterfeiting and other misappropriation argue that tariffs are a great tool to hit ’em where it hurts: the bottom line. The theory is that by making it more expensive to produce and sell goods, the level of goods being produced and imported into other countries will decrease over time.²⁰ Imposition of tariffs was also a way to get China to come to the bargaining table on a trade deal with the U.S.²¹

Critics counter that tariffs cause more intellectual property theft and wouldn’t make that much of a difference in rerouting the dollars spent to purchasing the real deal. In fact, there is an argument that “sales contributing to the counterfeit market are not sales that would otherwise contribute to the real market,”²² thereby making the impact speculative at best. Critics also point out that enforcement of counterfeiting remains lax,²³ and ultimately U.S. businesses and consumers will end up paying for these tariffs to substantiate the argument that tariffs aren’t suited for the purpose of reducing intellectual property theft.

Tariffs on Toys

When tariffs on toys were announced (then re-announced²⁴), those inside and outside of the toy industry were quick to raise a red flag. Their concerns were that tariffs would result in: (1) lower production, (2) higher cost to consumers, (3) depleted intellectual property creation, and (4) increased intellectual property theft.

The production of toys in China is well established. As of June 2019, production of toys in China amounted to over 88 percent of total imports to the U.S. market.²⁵ The use of tariffs would be ineffective in bringing this production back to the U.S. in the foreseeable future.²⁶ In fact, “[t]he ability of U.S. retailers to shift sourcing from China to other suppliers is limited and could take years to complete.”²⁷ In the meantime, tariffs imposed would result in lower production capability and lost wages.²⁸ The most immediate impacts to producers in this industry were canceled orders, revised shipping plans, and an increase in demand for storage—all of which were unanticipated costs prior to the threatened tariffs.²⁹

Even if the changes to sourcing were possible, “the proposed tariffs would have a substantial negative impact on American consumers for the targeted products.”³⁰ That’s because higher costs to producers, more often than not, result in higher costs to consumers as the impact gets passed down the line. An analysis found that the proposed tariffs “would be too large for U.S. retailers to absorb and, once passed on, would result in prices higher than many consumers would be willing to pay.”³¹ Even if the producers did manage to come back to the U.S., it’s projected that consumers would still be on the hook for $3.7 billion more than they would pay without the tariffs.³² This, in turn, would lead to a reduction of 32 percent in consumer purchases.³³

Creation of intellectual property in the toy and game industry would also be impacted, from content development to character licensing. It used to be that the major film and television studios would create and license characters to be produced in various mediums by toy companies. Over the years, a new trend has developed whereby toy companies are actually the ones who create their own characters and then license them to film studios for use.³⁴ This intellectual property is largely created in the U.S. But, as the ability to produce to scale decreases (or is threatened to decrease³⁵), so does the incentive and desirability to focus on creating and cultivating this intellectual property. A common complaint of introducing tariffs is that the downstream impacts result in a stifling of innovation and creativity that would otherwise produce ideas that keep a company or industry on the cutting edge. If companies can’t make it worthwhile to create in the first place, there is less incentive to develop, produce, or license the intellectual property assets. Imposing the tariffs does, however, show to the world how important intellectual property rights are to the U.S.³⁶

In addition, there is also the threat that these tariffs would result in some unintended consequences in the form of increased intellectual property theft. According to those in the toy industry, “[i]mposing tariffs on toys would provide little leverage in helping eliminate China’s offending practices as the country has placed little emphasis in promoting and developing its domestic toy industry.”³⁷ China does not recognize intellectual property rights with the weight desired by other countries, including the U.S. Once tariffs are in place, there is even less incentive to attempt to play by the rules. This reality, coupled with the increased costs that consumers will likely bear, “may result in an increase of IP infringing toys as consumers seek out cheaper options.”³⁸ A lack of incentives all around won’t do much to shift behavior to the desired outcome; a stick with no carrot doesn’t usually produce the best results.

Conclusion

The toy and game industry provides just one example of the impact tariffs create on producers, distributors, and consumers. Tariffs provide a blunt instrument intended to produce specific results, like curbing intellectual property theft and reducing unfair trade practices.³⁹ Since intellectual property theft is a “clear violation of international law” that “can deprive the rightful owners of significant potential revenue [and] blunt incentives for innovation,”⁴⁰ the U.S. is using tariffs to signal that there are concerns with China’s behavior and provide immediate consequences.

Unfortunately, imposing these tariffs doesn’t really address or solve the intended issue of intellectual property theft for various reasons: other avenues are better suited for these sorts of issues; there is a lack of enforcement of existing laws for battling counterfeiters; and there is a marked difference between cultures on how intellectual property is viewed.⁴¹ In the end, domestic businesses and consumers are harmed, but it’s hard to quantify the damage (if any) imposed on the intended recipient.

Ultimately, the principle for imposing tariffs may come from a good place but produce less than desirable results. In the case of China, counterfeiting and intellectual property theft still remain an incredible threat to businesses, consumers, and economies around the world. Tariffs may get China to come to the bargaining table but are not the correct solution to address these concerns long-term.

Endnotes

1. Heather Timmons, Timeline: Key Dates in the U.S.-China Trade War, Reuters (Jan. 15, 2020), https://www.reuters.com/article/us-usa-trade-china-timeline/timeline-key-dates-in-the-u-s-china-trade-war-idUSKBN1ZE1AA.

2. Wayne M. Morrison, Enforcing U.S. Trade Laws: Section 301 and China, Cong. Res. Serv. (June 26, 2019), https://fas.org/sgp/crs/row/IF10708.pdf.

3. Section 301 Investigation Fact Sheet, Off. U.S. Trade Representative (June 2018), https://ustr.gov/about-us/policy-offices/press-office/fact-sheets/2018/june/section-301-investigation-fact-sheet.

4. George Jared, U.S. Trade Representative Opens Comment Period on Intellectual Property, Chinese Tariffs, Talk Bus. & Pol. (May 20, 2019), https://talkbusiness.net/2019/05/u-s-trade-representative-opens-comment-period-on-intellectual-property-chinese-tariffs.

5. Abha Bhattarai, Hasbro Shares Plunge after Toy Giant Blames Tariffs for Canceled Orders, Wash. Post (Oct. 22, 2019), https://www.washingtonpost.com/business/2019/10/22/hasbro-shares-plunge-after-toy-giant-blames-tariffs-canceled-orders.

6. Ryan P. Smith, A History of America’s Ever-Shifting Stance on Tariffs, Smithsonian Mag. (Apr. 12, 2018), https://www.smithsonianmag.com/smithsonian-institution/history-american-shifting-position-tariffs-180968775.

7. Jed Graham, What Is a Tariff; Who Pays Tariffs, and What Are Their Impacts?, Investor’s Bus. Daily (Nov. 25, 2019), https://www.investors.com/news/economy/what-is-a-tariff.

8. Tyler Halloran, A Brief History of Tariffs in the United States and the Dangers of Their Use Today, Fordham J. Corp. & Fin. L. (Mar. 17, 2019), https://news.law.fordham.edu/jcfl/2019/03/17/a-brief-history-of-tariffs-in-the-united-states-and-the-dangers-of-their-use-today.

9. Id.

10. Jared, supra note 4.

11. Halloran, supra note 8.

12. Jim Tankersley, How Tariffs Work, and Why China Won’t See a Bill, N.Y. Times (Nov. 29, 2018), https://www.nytimes.com/2018/11/29/us/politics/how-tariffs-work-china.html.

13. Meredith A. Harper, International Protection of Intellectual Property Rights in the 1990s: Will Trade Barriers and Pirating Practices in the Audiovisual Industry Continue?, 25 Cal. W. Int’l L.J. 153 (1994), https://scholarlycommons.law.cwsl.edu/cwilj/vol25/iss1/5.

14. Tankersley, supra note 12.

15. Id.

16. Erica York, Tracking the Economic Impact of U.S. Tariffs and Retaliatory Actions, Tax Found., https://taxfoundation.org/tariffs-trump-trade-war (last updated Sept. 18, 2020).

17. Id.

18. Collateral Damage: US Consumers May See Higher Prices, TechLife News (Sept. 7, 2019), https://www.magzter.com/article/Computer-Mobile/Techlife-News/Collateral-Damage-US-Consumers-May-See-Higher-Prices.

19. Federico Mandelman & Andrea Waddle, Intellectual Property, Tariffs, and International Trade Dynamics (FRB Atlanta, Working Paper No. 2019-10, 2019), https://ssrn.com/abstract=3383242.

20. Trump’s Tariffs on China: How Do They Work and What Do They Aim to Achieve?, CBS News (May 11, 2019), https://www.cbsnews.com/news/tariffs-on-china-what-are-they-and-how-do-they-work-and-what-do-they-aim-to-achieve.

21. Collateral Damage, supra note 18.

22. Peggy Chaudhry et al., Preserving Intellectual Property Rights: Managerial Insight into the Escalating Counterfeit Market Quandary, Bus. Horizons (Jan./Feb. 2009), https://www.academia.edu/19731863/Preserving_intellectual_property_rights_Managerial_insight_into_the_escalating_counterfeit_market_quandary.

23. See James Bacchus et al., Disciplining China’s Trade Practices at the WTO: How WTO Complaints Can Help Make China More Market‐Oriented, CATO Inst. (Nov. 15, 2018), https://www.cato.org/publications/policy-analysis/disciplining-chinas-trade-practices-wto-how-wto-complaints-can-help.

24. UPDATE: Trump Renews Tariff Threat, Possible 25 Percent Tariffs on Toy Imports from China, Toy Ass’n (May 7, 2019), https://www.toyassociation.org/PressRoom2/News/2019-news/update-trump-renews-tariff-threat-possible-25-percent-tariffs-on-toy-imports-from-china.aspx.

25. Trade P’ship Worldwide, LLC, Estimated Impacts of Proposed Tariffs on Imports from China: Apparel, Footwear, Toys, Household Appliances, Furniture, Travel Goods and Televisions 4 (June 12, 2019), https://tradepartnership.com/wp-content/uploads/2019/06/China-301-List-4-Tariffs-Apparel-Footwear-Toys-Appliances-Study-FINAL.pdf (based on a 25 percent tariff rate).

26. Letter from Steve Pasierb, Toy Ass’n, to Hon. Robert E. Lighthizer, U.S. Trade Rep. (Sept. 6, 2018), https://www.toyassociation.org/PressRoom2/News/2018-news/september-2018-toy-association-comments-to-ustr-on-tariffs-list.aspx.

27. Trade P’ship Worldwide, supra note 25, at 1.

28. Letter from Steve Pasierb to Hon. Robert E. Lighthizer, supra note 26.

29. James Zahn, Tariffs on Toys Still in Limbo as Effective Date Looms, Toy Book (Dec. 10, 2019), https://toybook.com/tariffs-on-toys-december-pushback.

30. Trade P’ship Worldwide, supra note 25, at 1; see also Letter from Steve Pasierb to Hon. Robert E. Lighthizer, supra note 26.

31. Trade P’ship Worldwide, supra note 25, at 1; see also Avery S. Thomson, Import Tariffs and the Flow of Counterfeit Goods into the United States, Wright St. Univ. (Spring 2020), https://corescholar.libraries.wright.edu/cgi/viewcontent.cgi?article=1002&context=econ_student_papers_economies.

32. Trade P’ship Worldwide, supra note 25, at 4–5.

33. Id.

34. Don Loepp, The Toy Market Is About a Lot More Than Fun and Games, Plastics News (Dec. 11, 2019), https://www.plasticsnews.com/viewpoint/toy-market-about-lot-more-fun-and-games.

35. Zahn, supra note 29.

36. Trump’s Action on China Helps All Inventors, Christian Sci. Monitor (Mar. 22, 2018), https://www.csmonitor.com/Commentary/the-monitors-view/2018/0322/Trump-s-action-on-China-helps-all-inventors.

37. Letter from Steve Pasierb to Hon. Robert E. Lighthizer, supra note 26.

38. Jennifer Lynch, Toy Association Testified at the USTR Special 301 Committee for Toy Tariffs, aNb Media, Inc. (June 2019), https://www.anbmedia.com/news/retail-news/2019/06/toy-association-testified-at-the-ustr-special-301-committee-for-toy-tariffs.

39. A Quick Guide to the US-China Trade War, BBC News (Jan. 16, 2020), https://www.bbc.com/news/business-45899310.

40. Daniel Griswold & Donald J. Boudreaux, How the United States Should Respond to China’s Intellectual Property Practices, Geo. Mason Univ. 3 (Apr. 2019), https://www.mercatus.org/system/files/griswold_and_boudreaux_-_policy_brief_-_how_should_the_united_states_respond_to_chinas_intellectual-property_practices_-_v1.pdf.

41. See Bacchus et al., supra note 23; Chaudhry, supra note 22.