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

• Author: Kathryn Dachille
• Pages: 18-61

Published in Landslide® magazine, Volume 13, Number 3, a publication of the ABA Section of Intellectual Property Law (ABA-IPL), ©2020 by the American Bar Association. Reproduced with permission. All rights reserved.

This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

18 LANDSLIDE n January/February 2021

Game over

Trade Barrier

Impacts on

Intellectual

Property in the

Toy and Game

Industry

BY KATHRYN DACHILLE

Image: GettyImages

Published in Landslide® magazine, Volume 13, Number 3, a publication of the ABA Section of Intellectual Property Law (ABA-IPL), ©2020 by the American Bar Association. Reproduced with permission. All rights reserved.

This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

January/February 2021 n LANDSLIDE 19

While tariffs specically aimed at toys and games ulti-

mately 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 repre-

sentation—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 work-

ers 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 twen-

tieth 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 misappro-

priation 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 rm 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 unin-

tended 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

Intellectual property theft continues to be a global concern.

In the U.S., different administrations have taken differ-

ent approaches to addressing the increasingly problematic

issue, including imposing or increasing trade barriers on

targeted countries.

Trade barriers between the U.S. and China have taken cen-

ter 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 pri-

vacy 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 Ofce 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 bil-

lion 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 implemen-

tation 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 prop-

erty theft, thereby avoiding some of the threatened tariffs.

Published in Landslide® magazine, Volume 13, Number 3, a publication of the ABA Section of Intellectual Property Law (ABA-IPL), ©2020 by the American Bar Association. Reproduced with permission. All rights reserved.

This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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 consen-

sus among economists is that “free trade increases the level of

economic output and income, and conversely, that trade barri-

ers 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 eco-

nomic output.”17 This in turn leads to a slowing economy.18

So, how do tariffs t 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 conicting “policy levers.”19 Each acts to distort a

truly free market: intellectual property rights attempt to incen-

tivize certain behavior like innovation (making ideas more

scarce, somewhat ironically); tariffs attempt to disincentiv-

ize 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 prop-

erty 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 counter-

feit 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 argu-

ment 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 ag. 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 per-

cent 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 imme-

diate 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 pro-

posed 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 with-

out 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 indus-

try would also be impacted, from content development to

character licensing. It used to be that the major lm and televi-

sion 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

lm studios for use.34 This intellectual property is largely cre-

ated in the U.S. But, as the ability to produce to scale decreases

(or is threatened to decrease35), so does the incentive and desir-

ability to focus on creating and cultivating this intellectual

property. A common complaint of introducing tariffs is that

the downstream impacts result in a stiing of innovation and

creativity that would otherwise produce ideas that keep a com-

pany or industry on the cutting edge. If companies can’t make

it worthwhile to create in the rst 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 indus-

try, “[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 domes-

tic 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

Kathryn Dachille is an attorney practicing intellectual property,

marketing, and advertising law in the greater Baltimore, Maryland,

area. She can be reached at kathryn.dachille@gmail.com.