Intellectual property right infringement, state involvement in industrial espionage, and North-South trade

Despite the recent trade war triggered largely by Chinese firms’ intellectual property infringement, the literature on the role of state-sponsored industrial espionage in the trade war is limited. To explore this, we construct an endogenous choice game where a South government chooses whether to support a domestic firm’s industrial espionage while a North government chooses whether to retaliate with a tariff. The main finding shows that cooperation between countries (no infringement/no tariff) leads to a higher level of social welfare than under a trade war. In addition, cooperation is more stable when the South government has a stronger tendency to support its domestic firm’s intellectual property infringement. However, the cooperation becomes less stable as the technology gap between the countries narrows. Our findings help predict that the ongoing trade war between the United States and China will continue if China narrows the technology gap.