[Paleopsych] NYTBR: 'Hot Property': Freebooters of Industry

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'Hot Property': Freebooters of Industry
[First chapter appended.]

The Stealing of Ideas in an Age of Globalization.
By Pat Choate.
352 pp. Alfred A. Knopf. $26.95.


    IN recent years a series of reports have provided evidence about the
    erosion of America's scientific and industrial base. But
    ''strikingly,'' as Pat Choate observes in ''Hot Property: The Stealing
    of Ideas in an Age of Globalization,'' ''the massive theft of
    U.S.-owned intellectual properties as a contributing cause to
    America's technological decline has been almost totally overlooked in
    these reports.'' In this timely and important book, Choate sounds the
    alarm about the threat posed by such piracy.

    Choate, who is best known as Ross Perot's vice-presidential candidate
    in 1996, has sounded alarms before. When he published ''Agents of
    Influence,'' his study of Washington lobbyists funded by the Japanese
    government and Japanese corporations, he was denounced as a
    Japan-basher. Today the assertion that Japan has practiced
    result-oriented mercantilism rather than free trade for decades is
    rarely disputed. When Choate, like Perot, warned that as a result of
    the North American Free Trade Agreement, American corporations would
    move their factories to Mexico to take advantage of low labor costs,
    he was portrayed as a Mexico-basher. Bill Clinton and Al Gore argued
    that Mexico would be a market for American manufactured goods.
    Instead, according to the economist Charles McMillion: ''The large
    U.S. net export losses to Mexico since Nafta are concentrated in
    autos, machinery, electronics, apparel and furniture. U.S. net export
    gains are largely in agribusiness and bulk commodities such as cereals
    and organic chemicals.'' Score two out of two for Choate.

    In his latest campaign, Choate is likely to find allies in the
    business community -- and opponents among some champions of developing
    nations, as well as some libertarians who argue for weakening or
    eliminating intellectual property rights. Choate quotes the definition
    of ''copyright industries'' used by the International Intellectual
    Property Alliance: ''music and book publishing, radio and television
    broadcasting, cable television, newspapers and periodicals, records
    and tapes, motion pictures, theatrical productions, advertising,
    computer software and data processing'' -- to which others, like
    pharmaceuticals, can be added. According to the intellectual property
    alliance, ''worldwide digital piracy costs America's copyright
    industry $20 billion to $22 billion annually, and that approximation
    excludes illegal Internet downloads.''

    Patents, copyrights, trademarks and other intellectual property rights
    are useless if governments do not enforce them against thieves.
    However, officials in many developing nations are more concerned about
    promoting national economic growth by disseminating know-how than with
    protecting the rights of foreigners. Choate tells the story of Haima,
    a Chinese corporation that is the largest woven-carpet manufacturer in
    Asia. After Milliken & Company, the largest private textile company in
    the United States, lost a Chinese contract to Haima, ''Milliken
    personnel obtained a copy of Haima's 1999 carpet catalog. It featured
    16 copyrighted Milliken designs.'' Although an American court ordered
    Haima to pay Milliken more than $4 million, the American company has
    been unable to collect.

    Choate acknowledges that as an industrializing nation in the 19th
    century the United States engaged in many of the practices that it
    condemns today, including industrial espionage. He recounts the tales
    of Samuel Slater, who brought secret British spinning machine
    technology to the United States, and Francis Cabot Lowell, a Boston
    patrician who used his photographic memory to steal the trade secrets
    of British textile manufacturers. ''The most important feature of the
    Patent Act of 1793,'' Choate writes, ''was what it did not provide:
    protections for foreign inventors. Only American citizens were
    eligible for a U.S. patent. Thus, any American could bring a foreign
    innovation to the United States and commercialize the idea, all with
    total legal immunity.'' In later generations, Germany and Japan
    similarly manipulated intellectual property rights.

    In the 1990's, concern about the theft of intellectual property
    inspired the United States to promote the Trade Related Intellectual
    Property System. ''Ironically,'' Choate observes, ''after leading the
    long, historic fight to put these global protections into place,
    Washington is now strangely unwilling to use them.'' He notes that
    ''since June 2000, the U.S. has not filed a single intellectual
    property case at the World Trade Organization.''

    Choate contrasts the attention that the Clinton administration paid to
    these issues with the lack of interest the Bush administration has
    displayed. The difference may be one of constituencies. ''Copyright
    industries'' like the movie and technology sectors provide much of the
    financial support for the Democratic Party, and they are far more
    threatened by intellectual property violations than are the commodity
    producers of the Republican red states. This interpretation finds
    support in Choate's data on the World Trade Organization: ''Overall,
    the Bush administration filed only 12 cases with the W.T.O. during its
    first four years in office. Six of those dealt with foreign
    impediments to U.S. agricultural exports -- beef, rice, genetically
    enhanced foods, corn, wheat, cheeses, dairy products and apples.''

    Choate says that while industrializing countries may benefit from
    piracy, the world as a whole loses. ''Piracy and counterfeiting impede
    innovation: thieves do not invest in research, design, production,
    development or advertising. . . . The result is fewer new medicines,
    fewer advances in science, fewer new products, fewer new music CD's,
    fewer new movies, less new software and higher prices for whatever is
    created.'' Everyone is harmed, either directly or indirectly, ''when
    thieves steal from Microsoft and Disney.'' And, he concludes, ''What
    is missing is the will of U.S. political leaders to confront those who
    are stealing U.S.-owned intellectual properties and with them the
    future of the American people.''

    Michael Lind is the Whitehead senior fellow at the New America
    Foundation in Washington.


First chapter of 'Hot Property'


    The Golden Covenant

    Manhattan's 30,000 citizens were awakened on the morning of April 30,
    1789, by the roar of cannons. But this day the gunfire was not for
    war, but to celebrate George Washington's inauguration as the first
    president of the United States.

    Soon after 10:30 a.m., the president-elect, led by a joint
    congressional committee, appeared in Lower Manhattan at Federal Hall
    (formerly City Hall), which was serving as the new nation's temporary
    capitol. Washington was dressed in a brown suit of homespun
    broadcloth-a gift from the Hartford Woolen Manufactory, a small mill
    in Connecticut. Before the Revolutionary War, this wealthy Virginia
    planter had had his suits made of silk and velvet by London's finest
    tailors. But now he wore a simple American-made suit-his personal
    gesture of support for domestic manufacturing. Yet the new president's
    appearance was far from drab. His suit was adorned with brass buttons
    embossed with the new national symbol, the bald eagle, and his cuffs
    had a row of studs, each marked with thirteen stars, symbolizing the
    founding states. Washington's overture was widely noted in the
    nation's newspapers, which reported that everything he wore that day
    had been made in the United States.

    George Washington's support of domestic manufacturing was not some
    passing political sop to a special interest group. Rather, his
    position had been forged by eight hard years of Revolutionary War
    experiences and huge debts to European suppliers and financiers.

    Several times, Washington's army almost lost the war because
    ammunition was in short supply. In the first year, soldiers often went
    into battle with no more than nine cartridges each. At the battle of
    Bunker Hill, the Americans quickly ran out of ammunition, finishing
    the fight by clubbing the English troops with the butt ends of their
    muskets. Thousands of Washington's troops spent the winter of 1777-78
    at Valley Forge, Pennsylvania, with no shoes for their feet, few
    clothes, and not enough blankets to keep out the cold. In a letter
    dated December 23, 1777, a desperate Washington wrote to the
    Continental Congress that he had "no less than two thousand eight
    hundred and ninety-nine men in camp unfit for duty, because they are
    barefoot and otherwise naked."

    From the beginning of the war, Washington's army lacked guns, gun-
    powder, rope, sails, shoes, and clothes, among many other military
    necessities, largely because Great Britain had long prohibited most
    manufacturing in its American colonies. Instead, the mother country
    restricted colonial production to timber, furs, minerals, and
    agricultural goods. Thus, the U.S. economy was overwhelmingly
    agricultural when war came, with more than 94 percent of the
    population living on farms. After independence was declared, the new
    nation had to buy its war matériel from the Dutch, French, and other
    European suppliers, and do that largely on credit. Any nation that
    sold goods to the American colonials risked a conflict with Britain,
    then the world's foremost military power. And when British leaders
    said they would hang any of the revolutionary leaders they captured,
    the threat was real, making government service a bit riskier than it
    is today.

    In late 1776, a distressed Continental Congress sent Benjamin
    Franklin, the best-known American, to Paris to seek French support and
    goods. His list of purchases in 1777 illustrates just how little
    manufacturing capacity America had. He bought 80,000 shirts, 80,000
    blankets, 100 tons of powder, 100 tons of saltpeter, 8 ships of the
    line, muskets, and 100 fieldpieces. Then Franklin arranged for
    smugglers to carry the goods across the Atlantic Ocean in a
    4,000-mile, three-month journey to St. Eustatius, a Dutch island in
    the Caribbean, where smugglers received the supplies and slipped them
    through the British naval blockade and into the colonies, a 1,400-mile
    trip that consumed another five to six weeks.

    For eight years, Washington and the Continental Congress struggled to
    obtain enough materials for their troops. By war's end, the need for
    U.S. military and industrial self-sufficiency was seared into their
    consciousness. For Washington, wearing a plain brown suit of
    American-made broadcloth on Inauguration Day was a small sacrifice
    that sent a large message to his fellow citizens.

    Before taking office, Washington informed Thomas Jefferson, the man
    who would soon be secretary of state, that the development of
    manufacturing and inland navigation would be his greatest concern as
    president. As the historian Doron S. Ben-Atar reveals in his 2004 book
    Trade Secrets, Washington was a strong proponent of importing European
    technicians, and in his first State of the Union message, he also
    encouraged the introduction of foreign technology. In his many
    speeches, Washington "voiced the widespread expectation that the
    federal government would devote its energies to industrial

    After assuming the presidency, Washington and the Congress moved
    quickly to reduce America's dependence on other nations for its
    national security needs. Action was imperative, because as the
    Revolution's leaders had seen, today's allies often become tomorrow's
    enemies. In that quest for self-sufficiency, Washington turned to
    Alexander Hamilton, a loyal, brave, and brilliant aide who had led a
    bayonet attack at Yorktown. Far more foresighted than most of his
    contemporaries, Hamilton envisioned an economic and political
    structure for a post-Revolution America. When Washington appointed him
    secretary of the Treasury, Hamilton was ready with recommendations. In
    January 1790, he presented Washington and Congress a white paper
    titled "Report on Public Credit," which outlined the actions necessary
    to make the new nation appear creditworthy to foreign investors,
    including a controversial recommendation to pay off all the state
    debts incurred during the Revolution. At almost the same time as it
    received Hamilton's credit report, Congress ordered him to prepare a
    report on manufactures that would "render the United States,
    independent on foreign nations, for military and other essential

    On December 5, 1791, Hamilton submitted to Congress his "Report on
    Manufactures," which outlined why and how the United States could
    achieve economic equality with Europe and an industrial
    self-sufficiency. Building a strong U.S. industrial base, he wrote, "
    'tis the next great work to be accomplished."

    To become a true equal of Europe, Hamilton proposed that the United
    States follow Europe's lead and erect a tariff wall behind which the
    American market could develop and American manufactures could prosper.
    This, he argued, was the only way to confront Europe's manufacturing
    subsidies, its high tariffs on U.S. imports, and its repeated pattern
    of dumping goods at artificially low prices in the U.S. market to kill
    America's infant industries. Without his proposed actions, American
    manufacturers could never compete fairly, either in Europe or in their
    own domestic market, Hamilton reasoned.

    Behind this tariff wall, the government could provide the protections
    of a strong patent system, giving inventors and investors a
    government-guaranteed right to the exclusive use of their innovations
    for a fixed period. To accelerate national development, Hamilton also
    wanted to encourage the migration of skilled foreign workers to
    America. They would bring badly needed abilities and state-of-the-art
    technology to the new nation. In his report, Hamilton commented
    favorably on the actions of Samuel Slater, a twenty-one-year-old
    mechanic who in 1789 had slipped out of England with one of the
    British textile industry's crown jewels: the secret of how to build
    and operate a machine that could spin cotton and wool into thread.

    Hamilton's message to potential immigrants was loud and clear: bring
    your nation's industrial secrets to America, gain citizenship, get a
    patent, be honored, and become wealthy.

    One irony of the American Revolution is that most of its leaders were
    Anglophiles. In the French and Indian Wars, Washington sought a
    regular commission in the British army but was rejected because of his
    colonial status. Franklin was the delight of London society until he
    defended the colonists' rights. And in the years leading up to the
    Declaration of Independence, Jefferson, Madison, and Monroe, among
    other revolutionary leaders, thought of themselves as loyal British
    citizens and sought a course that would allow the colonies to remain a
    part of Britain.

    Even after the Revolutionary War, with all the bitterness it
    generated, many English traditions and assumptions remained embedded
    in the hearts and minds of Americans. One of those fundamental notions
    was that patent and copyright protections encouraged innovation and
    national development. The appeal of those ideas is understandable, in
    part because they had an extended history. By the late 1700s, Britain
    had the longest continuous patent tradition in the world, one whose
    origins traced back to 1449, when Henry VI issued John of Utynam a
    letter patent (an open letter with the king's seal) granting the
    Flemish glassmaker a twenty-year monopoly on the process that produced
    the windows at Eton College. In exchange, the foreign glassmaker was
    required to teach English artisans his process.

    As former subjects of the English king, the newly minted Americans
    were familiar with the doctrine of the public interest, as
    incorporated into Britain's Statute of Monopolies (1624). It gave a
    fourteen-year monopoly to "the true and first inventor" of new
    manufactures-a law in effect for more than 150 years before the
    American Revolution. Likewise, the colonists were familiar with
    Britain's copyright law, the Statute of Anne, which was enacted in
    1710. Under that act, the monopoly power of publishers was weakened
    and the rights of authors of new works were strengthened with
    copyright protection for fourteen years, with the possibility of a
    fourteen-year renewal. And while the Statute of Monopolies did not
    apply in the colonies, the various colonial governments enacted patent
    laws that imitated it. After independence and before the ratification
    of the U.S. Constitution, twelve of the thirteen colonies enacted
    copyright laws based on the Statute of Anne.

    For the leaders of the new nation, the basic concept was simple:
    patents and copyrights encouraged inventors and authors to produce
    more new and useful creations. These innovations could help the U.S.
    progress. And as the details of these creations became public, the
    general knowledge of the nation would be expanded. The process as a
    whole could only make life better for most Americans and would help
    the new nation grow richer and stronger faster. The concept was so
    fundamental that the Founding Fathers integrated it into the
    Constitution, believing that the public good fully coincided with the
    claims of individual authors and inventors. When the "authors and
    inventors clause" (sometimes called the "progress clause"), drafted by
    James Madison and Charles Pinckney, was presented for consideration at
    the Constitutional Convention on September 5, 1787, there was no
    debate and not a single dissenting vote.

    Creating a working system of patents and copyrights was a top priority
    for George Washington. In his first State of the Union message
    (January 8, 1790), he recommended that Congress enact legislation to
    encourage the introduction of new inventions from abroad and foster
    their creation domestically.

    Congress acted quickly, and the president signed the first Patent Act
    into law on April 10, 1790, and the first Copyright Act less than two
    months later, on May 31, 1790.

    The Patent Act made the issuance of a patent a matter of the highest
    importance-a function administered by the president and three senior
    cabinet officers. There was no patent office. Rather, a patent
    petition was submitted directly to Secretary of State Thomas
    Jefferson. Then Secretary of War Henry Knox and Attorney General
    Edmund Randolph reviewed it. These three constituted a patent board.
    They established strict rules for obtaining a patent, and on the last
    Saturday of every month, they met to review applications. If two of
    the three approved, a patent letter was prepared for the personal
    signature of President Washington, who then sent it back to Jefferson
    who, as secretary of state, also signed the letter and then had the
    Great Seal of the United States affixed. The patentee then had a
    fourteen-year period during which to exclude others from using the
    creation. The total cost was roughly $5, which went not to the
    Treasury but to the clerks who copied and processed the paperwork.
    Those early patent grants are greatly valued today for their historic

    Jefferson was surprised by the number of innovations inspired by the
    prospect of a patent. Soon after passage of the 1790 act, more
    applications and models of inventions were appearing at his office
    than he and his two colleagues could handle.

    As often happens with something new in government, the first patent
    act was a false start, and Jefferson knew it. He urged Congress to
    alter the "whole train of business and put it on a more easy footing."
    To that end, he drafted legislation and sent it to his congressional
    allies in February 1791. Jefferson's escape from the patent board,
    however, was delayed for more than a year as Congress repeatedly
    postponed any vote on his or any other patent reform proposal.
    Meanwhile, the board was obligated to carry out its duties.

    In 1792 Jefferson wrote his old friend Congressman Hugh Williamson of
    North Carolina that of all the duties ever imposed on him, reviewing
    patent applications consumed his time the most and gave him the most
    "poignant mortification."

    By early 1793, only 57 patents had been issued and 114 applications
    were pending, while dozens of others had been denied. Inventors hated
    the system; it delayed consideration of their applications and imposed
    such scrutiny that for every one approved, another was denied. The
    board abhorred the process because it had neither the time nor the
    resources to meet its obligations.

    Eventually, Congress enacted the Patent Act of 1793, without most of
    Jefferson's recommendations. What emerged was legislation that sharply
    changed the patent system from one with strict rules to one with
    virtually no rules. Congress allowed inventors to register their
    inventions with the State Department without an examination. The
    courts were assigned the responsibility of sorting out which patents
    were legitimate and which were not.

    Not surprisingly, with such lax rules the number of applications and
    issuances rose. Between 1793 and 1836, when the patent laws were next
    altered, more than 9,500 patents were issued. In such a lenient
    environment, piracy flourished.

    Many applicants went to the State Department, where models of
    inventions were found, bought a copy of a patent, duplicated it, and
    then filed an application for the same invention. Often, the same idea
    was patented multiple times. The owners of the later grants would
    enter business, telling others they had the exclusive use of an
    innovation, or take the official documents to unsuspecting licensees
    and investors for money. In other situations, an inventor would create
    an innovation, unaware of the advances of others, secure a patent, and
    sincerely believe that the conception was his alone. The result was a
    patent holder's nightmare and a lawyer's dream. The courts were soon
    clogged with lawsuits.

    In the end, the most important feature of the Patent Act of 1793 was
    what it did not provide: protections for foreign inventors. Only
    American citizens were eligible for a U.S. patent. Thus, any American
    could bring a foreign innovation to the United States and
    commercialize the idea, all with total legal immunity. . . .

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