Monday, August 13, 2018

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!

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
... 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.

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.


  1. A complete lack of strategic thinking. Wait until China uses all of the routers and modems built with technology stolen from American Companies and the Defense Department to launch a cyber attack to paralyze the US when they mount Operation Recover Taiwan.

    Libertarians seem to be unable to factor national security and foreign policy into their thinking. Boudreaux has an excellent point and it would be worthwhile if the world did not have hostile nation states in it.

    1. If this is a concern, then we should be buying network infrastructure with the military budget. I suspect this is mostly a smoke bomb of an argument, which you throw and then accuse people of being unable to see the fire.

    2. Wrong... it is a an absolute truth grenade, and you are sitting on it.

    3. I think twenty years ago the hope was that a rich China would be a peaceful China. That assumed a democratic china. Today China is not so peaceful. There actually are dragons out there. That's not the reason to stop trading but it is the reason to trade more with our friends and be careful we don't give away things that make us more vulnerable to our adversaries.

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

    In 1910 optimists said that a rich Germany is also likely to be a more peaceful Germany.

    1. Like I said, I don't want to enter that debate here. First, go read scott, and respond to his arguments. Second, if it is truly about national defense, then put it on the defense budget. Doing to ourselves what we do to iran, north korea, and turkey -- block imports -- is not a great way to win a geopolitical struggle.

    2. Like economics, the defense budget is only one element of grand strategy. The Chinese understand that. We should too.

    3. Without it your article is pure fantasy. Utopian. Unicorn saddles.

  3. "If Chinese access isn't worth it to you, don't do the deal."

    How is that different from saying that a high minimum wage is fine because if employers don't think workers are worth it, then they can just not hire them? Or, tariffs are fine because if consumers don't think the foreign products are worth the tariff, they can just not buy them? Just as the minimum wage hurts employment, doesn't Chinese "forced" intellectual property transfer hurt global trade and commerce? If one opposes tariffs, then shouldn't one oppose forced IP transfer as a non-tariff trade barrier?

    "But a wealthier China helps us"

    Wealthier Chinese *people* are good for us, but a wealthy, expansionist Chinese *government* is not. Scott does not address the national security issues well at all, conceding that a rich Chinese government poses a greater military threat to Taiwan (and actually all of the Indo-Pacific) but then trying to hand waive that away. China is like a neighborhood that has been taken over by an organized crime mob (Chinese government). We don't want to penalize the residents and want to engage commercially with them, but we also shouldn't be naive about the Mob taking some of those residents' earnings to buy guns with them. China's "guns" happen to be weapons targeted primarily at American soldiers, like missiles designed to sink aircraft carriers for instance.

  4. "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."

    Doesn't the minimum wage discourage firms from hiring low-productivity labor and encourage them to automate tasks that would otherwise be performed by such labor? If so, then wouldn't forced IP transfer discourage firms from developing "high-value" IP in favor of developing mainly "low-value" IP? Firms with only low-value IP won't mind giving it away to China to gain access. Firms with high-value IP will mind and, hence, will view their potential market to be smaller (world ex-China vs. whole world). Creating IP often involves high initial fixed costs. The potential market for profiting from that IP must be large enough to cover those fixed costs. The larger the Chinese market becomes, the more impact their IP laws will have even on technology outside of China.

    This seems like a special case of the more general principle that the larger the fraction of global GDP in China, the greater the (global) power of the Chinese government, which has regulatory and taxing power over that GDP. While Scott is correct that wealthier Chinese *people* are better for Americans, I would not view a more powerful and significant Chinese *government* to be good for Americans, nor for Chinese. The traditional case for free trade considers only firms and people; it doesn't seem to consider geopolitical impact.

  5. "Some period of monopoly profits is the incentive people have to discover new ideas."

    That's only a good argument for IP enforcement if the benefits exceed the costs Those costs include reduced output, costs of enforcement, people with engineering degrees getting hired by law firms where they will never produce new tech, resources devoted to rent seeking, etc.

    To be fair maybe the benefits of patent enforcement exceed all of these costs but most dicussions around IP enforcement just take it as a given that the benefits are worth the cost.

  6. China is a bully. It’s not just about economics or national defense. It’s also a moral issue. You don’t give in to bullies. America is built on higher principles than economic profits. If it weren’t for such principles, the South would still have slavery.

    1. Many countries (rightly or wrongly) see America as a bully par excellence...

      Going down the 'moral issue' path is a dead end — everybody has their own views on what constitutes morality. A rational economic analysis of the kind John proposes may not be the only word on the topic, but it's certainly a necessary one.

  7. This gets pirated all across China. They don't buy it, they share copies for free.

  8. While not a protectionist overall, I do sympathize with the China IP concerns. The issue is not so much the CONCEPT of tech transfer requirements -- which exist in many countries, without generating drama -- but rather the SPECIFIC tech that China demands.

    To draw an over-simplified example: Country A demands that Apple hand over the critical tech behind the iPhone 4 as a condition of market participation. Country B demands that Apple hand over the critical tech behind the iPhone X as a condition of market participation. It would be fair to conclude that Country A's transfer requirement was legitimate, while Country B's was just a guise to ban Apple from its markets.

    And that's the deal with China... there's plenty of reason to believe their IP transfer requests are really just a thin veneer over what is, functionally, just a ban on foreign entry. So whatever the wisdom of tech transfer requirements generally is irrelevant here, because the transfer is just a pretense.

  9. Ever read a history of patent protection and how old it is in western civilization? Seems to have worked well for thousands of years.... Whereas China and its less integrous ways seems to have punished it with poor economic performance many times through history.

    We need to fight for what is right and has worked. Not give away every hard fought invention and method....because it is expeditious and convenient. Some people are playing this game to win.

  10. Some ideas are so foolish only an intellectual could believe them.

  11. Hi here is another typical example - Chinese government decided to become a 'world power' in soccer (futbol) so hired professional all star players to play and teach in creating a Chinese league - once the Chinese thought they had learned enough they fired all those foreign players. Same for companies that thought they would get great profits from retail in huge Chinese market even though they had to provide their knowledge IP- like HP for instance - once the Chinese had it they blocked the foreign retail access. But worst problem is not China demanding foreign companies provide IP - it is outright stealing of advanced tech knowledge - And Chinese government has published planned agenda on when it will dominate the world. -by 2050 I believe. China is still the Middle Kingdom".

  12. This article may be among the most naive opinion pieces in writing since Walter Duranty sucked up a Pulitzer Prize for the New York Times by ignoring the horrors inflicted on the Kulaks of Ukraine by Stalin and his hordes, while puffing up the evil man's Five Year Plans and "miracles of Marxism". Just like Imperial Japan attacking Pearl Harbor with Zeros equipped with AMERICAN Firestone tires and AMERICAN Bendix radios, the Chinese Communists are not your benign "trading partners". Try making any money after a nuclear WWIII. Globalist thinking bereft of respect for the goodness of America will get us all incinerated.

  13. There isn't any particular law that forbids them changing the tariffs on products manufactured with steel, it just would be too complicated to go through the Section 232 process and justify the national security implications of everything from washing machines to laptops. Besides, such a process could further upset all the delicate negotiations between different industries and retailers and co. embodied in the Harmonized Tariff Schedule.

    But of course importers have figured ways around this. To get around the "chicken tax" on imported trucks (a punishment against one-time European quotas on chicken back in 1964), Ford imports "passenger vans" and then removes the rear seats to make them cargo trucks. Customs officials will get you if it's not actually a different product, but they can't stop you if you intend to make it a different product once it arrives. See:

    The other alternative is to set up manufacturing in one of the "Foreign Trade Zones" that have proliferated in the U.S. since 1934. If you have a factory in one of those you can import the input (in this case steel or aluminium) free of charge, and then "export" the lower-cost manufactured good to the country. The Foreign Trade Zones Board (lord knows how many Americans realize that's a thing) decides where these are and what they can do, but they're not uncommon. I guess protectionists are happy that at least some bureaucracy is controlling entry here.

    So, there are ways around such tariffs, but they're expensive or bureaucratic. Most likely, input tariffs just lead manufactures to produce the finished product overseas. See what's happening to the US candy industry with sugar quotas. They just import sugar in the form of candy bars. C'est la vie.

  14. China can buy more US Treasury Bills! Ha. We can let them use (or steal based on one's position) IP, they make some money, and buy US debt. Ha. Everyone wins?

    How much foreign currency reserves did they burn through again? Something to the tune of 3T. Yeah. China has issues to deal with any they need all the IP they can get their hands on. Ha.


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