Intellectual property and China

Let's transfer more technology to China, writes Scott Sumner, with approving comments from Don Boudreaux. They're exactly right, skewering one of the common backstop defenses of protectionists on both left and right.

The question is whether China can buy US technology, or require technology transfer to Chinese partners as a condition of the US firm entering China. Scott and Don have sophisticated versions of my reaction: If Chinese access isn't worth it to you, don't do the deal.

It stands to reason that stealing technology and IP is bad, and should be stopped. Whether imposing tariffs is the smart way to do that, we will discuss another day. But on an economic basis, even that is questionable!

A key point: Selling technology is not like selling a car. If you sell a car, you can't use it. If someone steals your car, you can't use it. But everyone can use knowledge. Scott:

The beauty of information is that use by one person does not preclude use by others

If I know how to wax my car in half the time it takes you, and you sneak in to my house to learn my secret, you wax your car in half the time too. But so do I.


So why is stealing knowledge bad? Well, if I'm running a waxing business, my waxing technique secret gives me a profit. I have, in essence, a monopoly on waxing technique.

But monopolies are supposed to be bad, no? Yes, and that's the heart of the case that technology transfer is not so bad. And technology theft isn't so bad either.

There is an economic argument against IP theft, of course -- it's not just protecting US company's monopoly profits. Some period of monopoly profits is the incentive people have to discover new ideas. Patent protection works that way -- to give people an incentive to find new ideas, they get a limited time to make a monopoly profit with the old ideas.

That is not an argument against IP sales, or voluntary sharing of IP in return for Chinese market access. It's also not an argument for much IP protection, like the endless extension of copyright so that Disney can still own Mickey Mouse. Some IP protection is well crafted to induce invention. A lot of IP protection is just like taxicab monopoly protection, epi-pens, or the hundreds of other little monopolies that give incentives for lobbying not invention.

And it's the only argument. People who are getting all steamed about China asking for technology transfer need to make the case that it is hurting the incentive to create new technology in the US.

Dave and Scott make the opposite case. If you can invent something, start the company, and then sell it to the Chinese, or make a bundle in China for a while that provides a big incentive to invent!

Don:

If the prospect of access to a market as large as the Chinese market is sufficiently valuable to American firms, and if American firms believe that a cost-justified means of securing that access is to transfer intellectual property to the Chinese government, American firms will have stronger incentives to innovate in ways that result in new ideas protected as intellectual property

Scott:

... the US can then concentrate on what it does best—creating new ideas, and then earning profits from selling those ideas to China.  China concentrates on what it does best, which is manufacturing goods like batteries, and uses the revenue to buy more new ideas from the US

Last (in my little summary, but do read the posts), a rich China is very much in the US interest. I think this is a point much lost on trade-war advocates.

China is still a tremendously underdeveloped country. China's GDP per capita is $8,000. Ours is $57,000. Cutting off trade at best is a negative sum game -- make us better off by making them worse off. There is no case that tariffs make us all better off. The US whining that China is ripping us off is like the senior prom king and captain of the football team complaining that a 4th grader took his lunch money.

Scott:

Moving a country of 1.4 billion people from middle income to high income is a huge gain in welfare.  ... Some might ask why we should care about the welfare of the Chinese.  I’d ask people to first consider why we should care about the welfare of anyone outside our friends and family.  The answer is simple; it’s the right thing to do.

But a wealthier China helps us.

If you look at where American companies earn their biggest profits, it’s highly skewed toward high-income economies.  Thus the Netherlands provides a bigger market for US products than the much more populous Tanzania.  Per capita income is a huge factor in determining the size of the market for the products of companies such as Apple, Disney, GM and Coke.  

A market with 1.4 billion affluent Chinese would be a mind-boggling fertile playground for American companies to sell [IP] into.  We should welcome a rich China, even if we are evil people who don’t care about the welfare of 1.4 billion fellow human beings.

And indeed,

  A rich China is also likely to be a more peaceful China.

Read Scott. I won't get into a national security discussion here.

Inconsistency (a polite term for hypocrisy) abounds in trade discussions. The first thing the US and NGOs do when they want to help a country develop is ... transfer technology.  It's supposed to be good for the recipient, and for us. And we are now trying to hurt Turkey, North Korea and Iran ...  by not letting them import goods. Like steel.

On trade, I still don't have a good answer why the US imposes import taxes on raw steel but not steel products. As a commenter wrote, how long will it take to weld two rolls of steel together and call it a product? Or to import something like girders that qualifies as a product and then melt it down? If someone knows of some reason in law for this I'd like to know.