The United States’ Biggest Vulnerability in the Trade War: Its Knowledge Economy

President Donald Trump’s trade war is premised on the belief that U.S. trade partners will acquiesce to higher tariffs, while lowering their own barriers, in order to maintain the benefits of access to the U.S. market.

So far, that logic has been borne out. With the exception of China, most states have either shrugged off the higher levies imposed on their exports to the U.S. or, in the case of a handful, made concessions to negotiate a lower rate than initially threatened. They have done this because the “deals” are in fact more like dueling press releases than legally binding long-term agreements, and because they know that U.S. importers and consumers will ultimately bear at least some or maybe most of the costs.

But as Trump’s threats escalate and tariffs begin to cost other countries more than just political capital, U.S. trade partners might respond to his coercive approach to negotiations not with higher tariffs of their own, but by retaliating where the U.S. is uniquely vulnerable: the knowledge economy.

U.S. companies generate roughly $233 billion annually from intellectual property rights owned abroad, making it the largest knowledge economy the world has ever known. Trump’s moves not only expose this sector to serious risks, but they undermine the system controlling access to some of the 21st century’s most valuable resources, namely data, technology, knowledge and other intangible assets.

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Trade in intellectual property is fundamentally different from trade in goods or other services. If a trading partner stops paying for goods, the goods stay put. If one stops paying for services, the services end. By contrast, the only thing holding the international intellectual property system together is respect for the rules.

That makes U.S. intellectual property the most vulnerable target in David versus Goliath trade battles. Unlike counter-tariffs on U.S. goods, which are inflationary for consumers in the country imposing them, suspending U.S. intellectual property rights can enhance welfare in retaliating countries by increasing the freedom of local firms to operate, reducing the costs of enforcing foreign rights, and widening royalty-free access to U.S. content. Furthermore, intellectual property rights are among the very few fields in which otherwise weaker economies can inflict major pain on the United States.

Pharmaceutical patents are a prime example. Trump worries about where pills are made. He should instead focus on who gets paid for them. That depends on intellectual property ownership, which in turn requires foreign legal systems to recognize such rights. The rules are set out in the same international treaties that Trump claims are ripping the U.S. off. But contrary to Trump’s claims, those rules work very much to the United States’ advantage.

In 2014, for instance, when the U.S. and Brazil were embroiled in a previous trade dispute over U.S. subsidies for cotton producers, Brazil threatened to ignore U.S. pharmaceutical patents as part of an $829 million retaliatory strategy. Sensing that such tactics might catch on elsewhere, the U.S. smartly settled the matter.

In addition to pharmaceuticals, there are other areas where Trump underappreciates the exposure of U.S. intellectual property rights abroad. Take semiconductors, another of his strategic targets. Yes, it is important to have a secure supply chain. But even if it made economic sense to make chips in the U.S., owning the technology matters more. The same goes for other tech products. For Apple and other major industry leaders, the business model is based on being “Designed in California,” not “Made in America.”

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Intellectual property rights are among the very few fields in which otherwise weaker economies can inflict major pain on the United States.

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Amid the whirlwind of Trump’s surreal trade announcements, it’s easy to forget that in May he purported to authorize 100 percent tariffs on movies “produced in Foreign Lands.” This idea hasn’t gone anywhere, at least not yet. Perhaps his advisers reminded him of how much money Hollywood rakes in through royalties from abroad.

Indeed, in a 2013 World Trade Organization ruling on a dispute with Antigua and Barbuda over U.S. laws prohibiting foreign online gambling services, the small Caribbean nation was also authorized to suspend protection of U.S. intellectual property, potentially allowing free distribution of U.S. music, movies and other content. Though this dispute remains unresolved, it hints at the retaliatory measures other countries could consider.

Overall, the U.S. earns far more from intellectual property exports than any other country: $170 billion in 2024, including licenses for trademarks, patents, trade secrets, copyrights and more. In addition, U.S. firms brought in another $46 billion worth of software licenses and customization, and $17 billion more for rights to use movies, television programs, books and sound recordings.

On top of these sums are the indirect contributions of intellectual property rights to the value of U.S. companies’ goods and services. The World Intellectual Property Organization reports that the U.S. is the world’s most “intangible asset-intensive” economy, with 90 percent of its top 15 firms’ value made up of intangible assets.

U.S. dominance in the knowledge economy is no accident: It understood the value of intellectual property earlier than most other countries. In the 1980s and early 1990s, Washington needed allies in reshaping trade rules to capitalize on its already-emerging advantages in technology. It found those allies in Canada, Japan and the European Union; together they decided who would own the knowledge economy.

The rules designed by the U.S. and its economic allies were adopted in the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights, or TRIPS. These allies have continued to boost the U.S. by entrenching and ratcheting up ever-higher intellectual property standards in subsequent trade deals. The U.S. trade agreement with Canada and Mexico, formerly NAFTA and subsequently renegotiated as the USMCA, remains the high-water mark in global standards for intellectual property protection.

However, convincing the rest of the world to respect U.S. intellectual property rights was no easy feat. In the 1990s, the bargaining chip to gain control over the knowledge economy was free trade in goods, of which manufactured goods and textiles were especially important to the world’s emerging economies. As Trump now reneges on the bargain Washington proposed and spent decades promoting, the U.S. cannot expect the rest of the world to just carry on promoting that same system or protecting U.S. intellectual property.

In fact, intellectual property experts are already calling on Canada to threaten U.S. patents as leverage in the two countries’ ongoing trade talks. The possibility that the EU could likewise curtail U.S. firms’ intellectual property rights, should the truce negotiated with Trump fall through, has also been raised. A bigger threat to U.S. intellectual property lies in China, with which negotiations for a deal continue.

Canadian and European firms have the technological capacity to use U.S. intellectual property without paying for it. Yet their governments are unlikely to pursue this path, at least so long as talks are ongoing or existing deals hold together. By contrast, China and many actors in its orbit would more willingly ignore U.S. intellectual property not only domestically but also to compete globally with U.S. firms. Trouble compounds quickly when multiple foreign governments, or their citizens and businesses, also become unwilling to respect U.S. “rights” to intellectual property.

Will the same allies that helped the U.S. write the rules of the global knowledge economy—the EU, Japan and Canada—step in to assist in the defense of U.S.-owned intellectual property today? No doubt these countries want to see the rules-based international trade order preserved. But if retaliation targets only the U.S. and takes place within established frameworks, like the WTO, the U.S. may find itself increasingly isolated, especially given how divisive Trump’s tariffs have been.

So far in the trade war, Trump has focused on trade-in-goods deficits, with aims like reshoring pharmaceutical manufacturing and chip production in the United States. But this ignores the real economic value from—and risks to—foreign protection for patented medicines, copyrighted films and the rest of U.S. firms’ immense intangible assets abroad.

For now, Trump’s tariffs have been met with more resignation than resistance. But the more he escalates his trade war against countries like Brazil, India, and the BRICS countries as a bloc, the more he risks provoking retaliation. And should that retaliation come, U.S. intellectual property will make for a very tempting target.

Jeremy de Beer is a senior fellow at the Centre for International Governance Innovation. He holds the Canada Research Chair in Innovation and Intellectual Property Law at the University of Ottawa.

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