Monday, September 9, 2019

Intellectual property and the trade deficit

"The IP Commission estimates that between $200 billion and $500 billion a year of intellectual property is stolen from the U.S." I found this interesting tidbit in The Atlantic interview of Kevin Hassett, ex CEA chair. (HT Marginal Revolution)

Well, suppose China were to pay up, and pay the $200 to $500 billion a year in royalty payments. Where would it get the money from? Hmm. It would have to sell us an additional $200 to $500 billion worth of exports, that's how.  The trade deficit would have to increase.

China could sell us $200 to $500 billion a year of assets instead. Maybe we would like to hold lots of Chinese stocks, bonds, or government bonds rather than buy more boatloads of goods? But if we bought worthwhile Chinese assets, those are only claims on future Chinese profits. And the only use we have for lots and lots of Chinese currency profits is to... buy things in China and send them here. If we bought worthless assets, bonds that default, or stocks whose legal rights evaporate,  then, well, we're back where we started.

Or maybe we don't want to license IP, we just think US owned firms operating in China could make an additional $200 to $500 billion per year profits operating in China without Chinese competition. And what do US owners want to do with $200 to $500 billion of Chinese profits per year? Go on a shopping trip, and put it on boats, sooner or later.

One way or another, the only way that China can properly pay for intellectual property, is to put more stuff on boats and send it to us. Paying for intellectual property must increase the trade deficit.

Being a free trader, I think this is great. The point of trade is to get the imports. The point of intellectual property is to force China to send us boatloads of stuff.

Somehow I don't think the Administration sees it that way. But you can't escape addition.  


  1. Counter-intuitively, the trade deficit has nothing to do with trade. We spend more than we produce, we get a deficit. We produce more than we spend, we get a surplus.

    If we get more revenue from intellectual property, that's like an additional export. This will get us an additional import. No change in deficit.

    This is the iron law of budgets. :-)

  2. Well, yes and no,

    Endowed with $200 billion to $500 billion annually, Americans could go on luxurious vacations in China and be treated like kings and queens.

    Acquiring Chinese assets that pay regular interest, dividends or rent would allow Americans to work less and import goods from China,financed by the proceeds on Chinese assets. One might even assume that buying Chinese property results in a permanently lien on Sino output, and a permanently higher US living standard. Merely collect the rent on Shanghai apartments, and finance imports from China. In perpetuity.

    Well, except all the land in China is owned by the state.

  3. To increase wages and saving in the U.S., we need to reduce the trade deficit and IP theft. Simple as that.

  4. They could pay you with the lots of US Treasury notes and bonds they hold

  5. Right now China is a net purchaser of US assets. They could remit more cash back to us as IP royalties in place of lending the dollars to us by buying Treasuries, couldn't they?

  6. I think I'm missing something obvious... wouldn't the trade deficit remain unchanged? Today the U.S. exports $0 of IP (because that IP is stolen), and receives $0 of Chinese imports. Tomorrow the U.S. exports $200B - $500B of IP (because now China pays for the IP), and buys $200B - $500B of Chinese imports. Seems like a wash from a trade deficit perspective?

  7. Hi,

    Wouldn’t the royalties paid by China for US intellectual property count as US exports to China?


  8. "Where would it get the money from? Hmm. It would have to sell us an additional $200 to $500 billion worth of exports, that's how."

    That's clearly wrong. Really... they have plenty of US money, in the form of government backed securities--on the order of $1.1 trillion. They sell some for dollars and pay for the IP. The result is a decrease in the US trade deficit with China, not an increase.

    1. So, it's been 6 days and Mr. Cochrane has yet to reply to this (or any other) clear demonstration that he is 100% incorrect. Where is his defense of his assertion? And if he makes none, what's the point of blogging?

    2. Occasionally I wait to see if people figure out mistakes on their own. This is a good exercise for the reader. But if you must... Yes, China could pay for some IP with the dollars they accumulated from past reserves. But then, they have to earn more reserves if they want to continue paying IP royalites. And they have reserves for a reason. So, if they want to build up reserves back to where they are, then they have to run surpluses again. Whether past exports or future exports, money is a veil and the only way to "pay" for anything is to put things on boats and send them.

  9. If China recognized that it should account for ~$500 billion of services (IP) that is currently doesn't account for, the deficit would go down.

    If China recognized the increase in services but also increased exports to the US to pay for the previously "free" services (IP), the trade deficit would then be unchanged...

    US companies get to buy more exports from China AND sell more IP / service exports to China... Yielding no change in deficits.

  10. As it is safe to assume that the fact of obtaining more revenue from China will not have any effect on US residents' desire to hold more dollars, more yuan, or more US debt, it is immaterial how China finances the extra payments.

    An increase in revenues from abroad must lead to an equal increase in expenditure abroad, leaving the trade balance unchanged.

  11. As usual with Hassett, I just assumed he made up the number (notice the huge differential in his "estimate") so it doesn't seem logical to spend a lot of time theorizing about it.

  12. Mercy, mercy, BoP accounting says that the rental payments for property are part of the Capital Account and that trade is part of the Current Account. Thus, an increased Capital Account Surplus must be offset by an increased Current Account deficit, of which the trade balance is a majorly part. Alas, Prof. Cochrane is right in the sense that increased foreign revenue on Capital Account will increase the Current Account deficit. As for the net foreign balance, treating new revenues as export earnings is still correct.

    But this is just another example of the Trade Balance not meaning one iota. Speaking with David Hume: Methinks we worry too much about the trade balance. :-)

  13. They can also not use the IP? That would likely lower the trade deficit as Chinese exports became relatively less attractive to US consumers and US exports more attractive to Chinese consumers.

  14. Err, No.

    Royalties are part of the Balance of Services Income. So this is just part of U.S. exports China has not paid for. It's like if a Tourist comes to the U.S., stays in a Hotel, rents a car, and does not pay for anything and leaves. It's just theft.

    In either case, the US has a smaller trade deficit or a surplus once the transaction is recognized and paid for.

  15. Apologies for my messed up accounting. Jorge is right. Royalties are indeed part of service income, and hence, part of the Current Account, just like goods trade. My final attempt at clearing up my own confusion:

    It would seem that we would get a Current Account surplus, but that would be wrong, for we do not have an offsetting transaction in the Capital Account. What must adjust lies in the Current Account itself: We will import more goods! Thus, the [goods] trade deficit increases but the Current Account stays the same.

  16. This analysis does seem to suffer a bit from the age old issue of economists controlling for reality in a couple of ways:
    As noted previously, in the immediate term, China could simply pay for the IP with US debt they hold -- this is also not a sustainable, at some point the debt will be repaid (in 2-5 years, if the various numbers quoted above are accurate) and then China will need to pay for it by selling more stuff. Which brings us to the second point:
    They would need to sell more stuff -- but they wouldn't need to sell it to us. As pretty much everyone except the President understands, bilateral trade balances are basically irrelevant. China could also sell stuff to, let's say, Uzbekistan to get money to buy our IP (in this hypothetical, Uzbekistan has lots of dollars on hand from paranoid Americans buying Uzbeki gold), thus impacting the trade bi-lateral balance.

  17. My perspective: If China (companies) paid for IP, they would have to bundle this into their prices of things they export (on boats). This would make them slightly less competitive. This would create a more level playing field, globally which China should have to play fair and compete. Not by stealing. If it plays out, yes, they pay for IP with exports to the US, but would hit the Chinese companies margins and slow their GDP very slightly. This may have a logic flaw, but it's how I think about it. They need to pay and stop stealing.

  18. I'm a little unclear on the idea that you repay the value of stolen property by selling the equivalent value back. If I steal a bike and I'm sued for the value, the judge wouldn't order me to *sell* the bike back, that would be a two-way transfer of value, theft is a one-way transfer. Not that I buy what Hassett is selling, but the framework of the post seems wrong.

  19. Why don't the Chinese just stop stealing IP? Then they don't have to pay for it. This post is a straw man par excellence.

  20. How about the disincentive for American companies to invest in R&D? There must be some companies that just don't bother because they know they cannot make a decent return on their investment. In the end, we are deprived of new technology that could make our lives better. This isn't just about dollars and cents.


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