Disagreeing with Krugman: Is China stealing knowledge?
from Dean Baker
I would agree with pretty much all of Paul Krugman’s criticisms of Donald Trump’s trade war with China, but I would strongly disagree with one of his criticisms of China. He tells readers:
“In some ways, China really is a bad actor in the global economy. In particular, it has pretty much thumbed its nose at international rules on intellectual property rights, grabbing foreign technology without proper payment.”
The issue here is who set the rules and what is proper payment.
The problem is that it was largely the United States that has set the rules in this story and it is demanding ever more money for items protected by its patent and copyright monopolies. We do this through our control of trade arrangements, most importantly the WTO where we had the TRIPS provisions inserted as a late entry to the Uruguay Round that was concluded in 1994. These rules were about forcing developing countries to pay more money to companies like Pfizer and Microsoft for everything from drugs and medical equipment to seeds and software. It shouldn’t be surprising that developing countries like China might not like these rules.
The idea that developing countries would seek to get around rules established by their richer counterparts should not be alien to people in the United States. The United Kingdom had made it illegal to transfer blueprints for steam engines out of the country in order to preserve its competitive advantage. Francis Lowell famously memorized plans on a trip there in order to build the first steam-powered factory in the United States. The United States refused to recognize UK copyrights for much of the 19th century. So if China is not following the rules today, it has an important role model it can point to.
There is certainly a valid point that the cost of innovation must in some way be shared internationally. Certainly, the US shouldn’t be expected to foot the bill for the whole world. But does Krugman really want to argue that patent and copyright monopolies are the most efficient mechanisms available? We should be looking for more modern mechanisms that focus on sharing rather than bottling up knowledge, with China and other developing countries having a serious voice in their construction.
On this topic, it is important to note that China may have fired a serious shot over the bow this week. It announced a major initiative to promote the manufacture and use of generic drugs. I have no idea if this has anything to do with Donald Trump’s trade war, but this could be a very big deal if China is going to be aggressively pushing generic drugs both in its domestic market and internationally. The fact is, the “rules” in many areas are not very clear (it is much harder to get a patent on a drug in India than the United States) and if China is going to press the boundaries, look for a really big hit to Pfizer and Merck’s stock prices.
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Oh, dear these countries and companies don’t seem to have a lot of respect for the ‘rules’ of competition and free markets!
Right on, Dean. Apple’s assembly of most of its products in China involves paying smallish copyright user fees for components. That is, if the use is of a patented item. So, US, show us your patented item & then a quasi-legal group of experts can decide if there is a case for user fees. With Trump, one’s first response is “show me”. He was the kid in class with the loudest mouth, but close to worst performance on the factual side of education, I expect. As an American with a public education up until college when I went to the private side, his type of performance is indelibly marked in my memory.
As for life-saving pharma, a nation should have the sovereign right to demand a lowering of the cost to actual out-of-pocket costs + some fair rate of return, it seems to me.
Martin Luther King has told us that the US is failing from moral bankruptcy in a land of socialism for the rich and capitalism for the poor.
Benjamin Franklin argued against patents by accurately pointing out the individual person alone in a forest is busy struggling to live and does not have time for the new ideas that come through the breezes of conversation wafting in the socialism and communism bubbling through the streets and libraries of an exciting society.
Handing over IP to a former enemy, and expecting that former enemy to play by our notional rules, that just seems delusional. It is one thing to entice China or some other country with all those economic ties to create a web of detente and interchange. It is quite another if one side doesn’t play by the same rules. That has the makings of a footrace of epic ramifications.
Opening up China was a great risk, and the elements of that risk are playing out. Ask US manufacturers about required technology transfers (you give us your stuff, we learn how to make it and soon we won’t need you) and industrial espionage (and we’re going to take it anyway, as we have more than a billion mouths to feed). Then ask the residents of small towns all across the US who saw their jobs move offshore for those so-called opportunities. Nixon engaged, Clinton handed over the keys (and thanks Wal-Mart, keep those checks coming to former board member Hillary) and now late attempts to bargain by Trump will prove largely fruitless.
Hi, Questa Nota, I was raised in Silicon Valley. There we look at the PATENTS involved. If there are no patents on a product in PLACES where I sell, forget it. If there are, then I must pay you licensing fees. This is how Apple, for example, uses patents, often directly by purchasing components OEM (original equipment manufacturer). Samsung & various China-headquartered firms are well represented. Incidentally, one must distinguish between where the patent-holder has legal domicile (SoKorea for Samsung) & where actual mfg is done–in China or elsewhere in Asia here.
I had typed a comment along similar lines to yours, Questa Nota, but somehow it “just disappeared” into the Ethernet.
And Professor Beckman, could you elaborate a bit more on your comment. In what I typed but “lost” I had said essentially that before our very eyes China has risen in just 20 years to become the next economic superpower and by the ambitions of its international infrastructure program the signal is that they are playing for keeps.
I have to forget what I learned just before the new Cold War with Russia really heated up in 2015-2016, that China had hacked most of our major governmental nodes, military and diplomatic, and had systematically done so to private corporations in all the areas of new technology that China was interested in. It was blown off by official commentary as just what all industrial powers do to one another, not nearly as important – “act of war” equivalent to the hacking and interventions Russia had carried out.
Without condoning anything about Putin or his nation’s actions, still, it seems to me that the US economic establishment, many of whom are too deeply entangled in Chinese economic/trade matters, have lost sight of the larger historical trajectory here.
I support the Russian investigations, did not and would never vote for a man like Trump, but it’s hard to remain silent when such a disproportionate assessment of what constitutes a threat to our national economic well being is carrying the day.
In these matters, I think Dean Baker lacks historical reasoning and precedents and is too wrapped up in the genuflections of the economics profession, still, despite Krugman’s late apologies, on free trade and the rise and fall of nations.
I don’t know what camp that places me in the eyes of others, but let me try to label myself: left-social democrat economic nationalist. And it is very late to try to pull off the hard-ball tactics Trump is using. Of all the legacies the Clintons have left us with, this may be the most damaging in the long run. China may have such an upper hand at this time that they can continue their long practice of verbal concessions, minute currency gestures, and continue still on the main trajectory that no one can afford to ignore to the size of the China market.
In all the history of the West I’ve never seen anything like the US almost giving away its standing, so quickly, so blindly, so carelessly. Because that’s what the most powerful private actors in our society wanted.
Gracchibros, you make a lot of sense. WWI was fought between European nations tied together by treaties & blood lines. Thus, a lot of spying went on “in the family”. Germany was spying upon the US during the 1930’s, once the imperial Hitler took over. My point is that spying is expected between nations, although sabotage is not.
The US stole machinery from the UK as it started a cloth production industry. Earlier the Brits & French were stealing similarly from each others. The Germans were fragmented in principalities until 1870, so they were outside the big country “borrowing” scheme. Marco Polo & others brought from China silk, block printing, paper, the saddle stirrup, etc. Don’t know the details of how the West acquired these. “Culture contact” says nothing new.
I am less interested in the past than the future. Therefore, putting China in the patent & rent model makes sense to me, as like Samsung with Apple, the Western firm can just buy the component made by/for the patent holder. The basic rule of international relations is not to use national laws, since Chinese laws are not like American for example, but to work by mutual interest: we want to sell to them; they want to sell to us. That includes both components & final goods. This needs to be monitored, of course. China will soon be sending lots of its tourists, entertainment & even more money to us–such services count just as much as hard goods in terms of benefits & cost.
Prof. Beckman, et al:
Thank you. Let me try to be more specific, because I agree that in the history of economic/technical inventions, every tactic known to humankind has been used to break, steal, bargain and compromise advantages and monopolies on inventions. Nastiness on matters like electricity comes to mind. But specifically China, as I understand the dynamics says to prospective manufacturers in their country, Western mostly, who want most of all access to markets above even the lure of the originally cheap labor system, China said you don’t get access legally to sell here unless you agree to the following sharing/teaching/transfer policies on the technologies you have that we are most interested in learning. I’ll leave it to legal scholars to tell us whether that violates existing laws of any sort. Whether it does or not I doubt that the companies chasing China access will blow, have blown, the whistle if they get at least some of what they want.
Without taking anything away from Chinese capabilities at all, this could help explain their rapid climbs up the skill and technology ladders, which shows no sign of slackening. And my comments here do take into account Richard Smith’s fine article which just appeared in the World Economics Association’s Review in December with the cheery title “China’s Drivers and World Ecological Collapse.”
And Professor, perhaps you can further enlighten us on this topic because it is my understanding that Germany’s intense pursuit in matters of solar and wind energy led them to give scientific expertise (upon what terms?), the famous German engineering to the Chinese with the understanding it was at the same time going to save them a bundle to install the fruits in Germany.
Let the facts fall where they may upon my current understandings as well.
To be clear, America has chosen a strangely passive role in facilitating the rise of the nation which is going to eclipse it (and already has depending on the measurement used) in economic size and power. We could have decided decades ago to pursue our own industrial modernization in key industries, which, have no illusions, would have led to some job losses, perhaps many of those that were lost to the passive path we took, but the key idea would have been to carve areas of key national competence at the technological edge. Today, thanks to Mr. Smith’s fine reporting, it looks like China sees the opening, continued coal dependence or not, to sell cutting edge renewable products to the West.
On labor policy, certainly we in the West, West. Europe maybe even more than in the US, because of its explicit tradition of social democracy, could have taken the labor market interventions to prevent at least some of the non-immigrant driven contemporary backlash…yet it is the same market fundamentalisms which have guided “free trade” that, on ideological grounds, Neoliberal ones to be clear, prevent precisely such labor market interventions: “Rubicons” that Neoliberals simply will not cross. Just ask Yanis Varouvakis and James Galbraith with their ignored proposals – “Modest ones” – for easing the pain upon Greece.
So I do not intend to lay it all upon aggressive, driven China; we in the West have been too ensnared by our own ideological binders to have shaped a different course. To me, at this point, China looks like the new “Unbound Prometheus.”
The American people deserved a much better, and deeper debate on China’s rise and its implication than we got in the Presidential election. Most Democrats would rather stick to the Russian troubles.
Hi, Gracchibdros, you really lay out your case well! My feeling, after serving my mandatory six years of military service around the time of Vietnam, is that the US was ripe for economic growth under the Republicans after the Democrats were seen as the ones who got us into it, and also into the Civil Rights Movement which many Americans felt cost the government too much in public housing & other benefits. Milton Friedman made a lot of sense.
Interestingly, both Friedman & Adam Smith strongly believed in global trade–assuming that every nation would benefit, although not every individual. And that’s the rub, is it not: every period of rapid economic change produces losers, such as when the horse gave way to the auto, & whale oil went out with kerosene which went out with electricity. Etc. Etc.
Since I have lived much of my life outside the US (outside California, chiefly), I expect the receiving country to make demands on me. My doctoral research was based in Liberia, West Africa. I was allowed up to 15 months research time there IF I taught some courses at an upcountry university. Certainly there have been personal adjustments to be made in law & customs. Raised in Silicon Valley I was taught to anticipate constant tech & accompanying change. My travels have born that out.
The usual path of tech transfer in the West is by patents. I don’t know how much the Chinese participated in that over solar or wind developments. I have read nothing about the subject over here. However, massive numbers of Chinese study in Europe. They could learn interesting material in the process–yet many wish to practice their education outside China, as is the case with Chinese who study in the US. Today they are basically equal as a nation with perhaps 90% of what we know & already ahead in some areas like super fast computing. Both West & East are in a learning contest, if you wish. It will be a fascinating engagement to watch.
Beginning in the 1990s there have been two dominant capitalist nations in the world – the state-capitalism of China and the corporate-capitalism of the US. Neither has much use for democracy. The first has clearly bamboozled and made a fool out of the second. The seeds of China’s rapid economic growth since the 1990s were first planted back in 1978 when the Communist Party started to introduce its version of capitalist market principles, initially in the agricultural sector. Economic expansion accelerated in the 1990s because of mass communist party supervised “privatizations,” and the opening of the country to foreign investment. Overseas firms rushed to build factories in China to take advantage of its low labor costs. All this was a trap for capitalists generally, and particularly the USA. China’s strategy leads to the USA impoverishing all its public goods and stagnating wages, while corporate profits and private wealth expanded exponentially, along with economic inequality. The USA is going down the path of many nations before it to economic ruin and international policy irrelevance. And China did it with our full cooperation. They use the “free” markets, economic competition, and economic trade touted by Republicans since Ronald Reagan to slowly strangle the USA. Republicans like Trump and Senator McCain today complain about China’s unfair trade and economic policies. To this day, none of them have even glimpsed the trap the USA fell into.
Hi, Ken, except for the folks in Silicon Valley & some other places who believe that we are better at innovation in virtually all areas. Asians & some Europeans realize this & are putting their feet to the pedal on innovations generally, and patentable items in particular. Look at how many Europeans & Americans are complaining about how much marketing information is on the capitalistic market or how Amazon is changing the sales’ process.
Chinese “shadow” firms like Alibaba, TenCent & many others are doing very well where they are allowed to compete. Their science is very close to ours in most areas, & is ahead of ours in some. Gee, this is called competitive Capitalism, or the modern equivalent. One of the things I do is bring Europe up-to-date in these tech matters: I hear the same thing as you indicate right here in Europe. My point: competition between Asia & North America is the geni out of the jar. Short of war destroying us all, the innovative race is on. My suggestion: fit your job skills to it & even consider relocation. I have done so in the past sixteen years.
Prof James Beckman, Germany, just two additional comments. First, the west was not first in science. Much of what began science in Europe was borrowed (imported) from China and the Islamic nations. The Chinese today do technology and science as well as the west. Plus, China has a score to settle with the west. 500 years ago, China was decimated and denigrated as a nation by the western colonial powers. It may sound impolite to say, but China wants revenge. Second, China’s and the west’s notions of trade and economic development (including what economics is) are very different. If we want to head off a trade war, and perhaps also a shooting war, we need to find ways to bridge these differences. I see only a few efforts in this direction today.
Leaving aside China, I am always a bit struck when reading Krugman that he is not all that good a macro-economist. I strongly disagree with one point he makes – though, to be fair to Krugman, it is a mistake that many people make. He says the following:
“Overall, the U.S. trade deficit is just the flip side of the fact that America attracts more inward investment from foreigners than the amount Americans invest abroad. Trade policy has nothing to do with it”
This is just plain wrong.
We can all agree that portfolio decisions affect asset prices, and these affect trade flows. No question. In past decades the effect of capital flows on trade flows may have become much stronger. If I decide to hold more US bonds, and less Japanese bonds, this affects their relative prices, may also affect the exchange rate and so on, and will have some effect on trade flows through those channels. But the precise impact of that portfolio shift on asset prices is an empirical issue. It may be big or small. Similarly, the subsequent effect of those shifts in asset prices on trade flows is also an empirical matter. I see absolutely no reason why my desire to hold (say) another 1 million USD worth of US dollar assets should necessarily lead to a US trade deficit of exactly the same magnitude. Yet that is what Krugman appears to claim.
The mistake is to see the counterpart of a current account deficit as a “capital inflow”. This suggests some kind of conscious portfolio shift. But it really is not. Let us suppose I buy an imported good with Euros. The foreigner selling it to me gets paid using euros, and they can either sell that asset on, or keep it. But in both cases, my net worth has fallen, and theirs has risen, whatever form they choose to hold those assets. To treat this as a foreigner making a conscious “inward investment” to the EU is nonsense. All that is happening, is that I own less assets and foreigners own more. They may subsequently choose to keep or hold the euros. That could lead to some shifts in ownership, and further asset price changes. But whatever they do, nothing will change the fact that in net terms I (or my country) has a bigger gap between assets and liabilities than before.
Of course, after the initial transaction, foreigners hold more euros, so in a sense they are “lending” to the EU. But the process is not over. Suppose the importer subsequently sells the euros and buys Japanese yen. This would have some marginal (tiny) effect on the euro-yen FX rate. Now suppose a European investor sells sees this FX move, and makes a reverse purchase, buying some yen and buys euros. The net effect of all this is that my country holds less foreign assets (in yen). Foreigners hold more foreign assets (in yen). There has been no additional lending in euros here. There has been no lending to me to finance my purchase. Indeed, there is no additional “lending” to the EU in any meaningful sense. What is happening is that foreigners accept some financial asset as a means of payment and this changes balance sheets. End of story.
One way of making sense of Krugman’s position is to assume that people have a completely inelastic demand for euro denominated assets. That is, as soon as a foreigner gets some extra euros, they dump them, and no other foreigners (or anyone else) will buy them. In such a case, my import of goods would lead to downward pressure on the euro that would persist precisely until a falling euro improves exports and my import is offset by some export, and the fundamental demand for euros is brought back into balance. But that assumes that there is no scope at all for shifts in asset prices to alter optimal currency composition of asset portfolios. I fail to see how anyone could hold onto that assumption with a straight face. Particularly not nowadays.
It is, as always, good to have Ken Zimmerman participate in these trade discussions.
I see that Prof. Beckman has followed the advice of swashbuckling American investor Jim Rogers, who some time ago (decades) said Asia was on the rise, the West going down, and moved there – Singapore or Hong Kong, I forget which (Singapore I see) , and his young daughter was being taught Mandarin as confirmation of the wave of the future. I don’t share his politics, but I check in from time to time on his worldview because it seems to have had more realism about the great power shift than the rest of the American establishment, academic and Foggy Bottom, and most of the economic profession, salt and freshwater.
RJW: thanks for an impressive micro view of the transactions in currencies in contemporary trade; that’s not my forte so all I can do is take it in.
I have two additional comments. The West, and especially the US, underestimates the psychological motivation for China because of the way they were treated by the West (and Japan, later) – their being forced to trade on Western terms, with much ugliness. It’s a factor in their drive; a reasonable, “just want our fair share” China would not, in my opinion, be displaying the grandiose infrastructure dreams and realities that China is currently doing, nor the long term chess game angling for the control of vital natural resources. This is not the behavior of a nation just wanting a seat at the table and more invitations to the ruling structural forums, and into the basket of currencies. These are the moves of a nation which intends to be the next superpower…the question is whether and how much that want to share that. I don’t see this, for the US or the West, as “benign.”
And finally, into the matrix that has contributed to this sad development for the United States; what is bad for us as a nation in the long run was not so for the American multinationals who benefited the most by meeting the Chinese terms for technology transfer as the price of access to the long dreamed of “China” market. Please: tell me, show me, someone, that these companies were not handed the power to shape US foreign policy under the grand illusion that their corporate self interest was equivalent to the US national interest.
It is very late, but perhaps not all is lost. The US has an opportunity to seize the economic/environmental future in leading the way with green technologies in many needed areas, not just renewable energy. There is much at stake yet to be invented in managing an electric grid that can accommodate many sources, many very small, of various types of energy generation and bring them at the right time, and voltage, into the hands of homes and businesses. In many ways, it must be micro-gridded as well as being able to deliver wind and solar over long distances. To me, it seems that we could use a little more “state direction” in the way of research labs and the best and brightest working as much for nature as our nation state. If Exon’s talent had been in public labs, like the Ann Arbor auto testing lab run by EPA, I think we might be much further ahead in our struggle to control global warming.
As you can see, Richard Smith’s work has had an impact on me.
Gracchibros, China hates the west, in which China includes Japan and Russia. China isn’t planning to become the next superpower. In its view China is already the world’s next superpower. At the same time in the US the libertarian push of the last 50 years has led to multinationals abusing and undermining US national interests as well as both national and local governments, repeatedly. The results are massive economic inequality in the US and a series of efforts to undermine the lives of ordinary citizens. Add to this the pressures of globalization, American-styled casino capitalism, and right-wing isolationism. The US is committing suicide for 90% of its people, while the top 10% live a life of luxury and unfettered choices. This means in a few years most American citizens will be unable to take care of themselves or their families. Public services will collapse. Maybe the US will receive aid from China. In the struggle to continue what route will the US take? What routes are open to it? There are signs, many signs the Americans are becoming disillusioned with libertarianism and the no holds barred, winner take all capitalism that’s dominated for the last 50 years. That “working together” for common goals is once again longed for. That solving problems is once again more important for us than arguing about the “fine print” of dogmas. If this is correct, then one of those problems we’ll need to work on solving is US/China relations. Including both trade and shooting wars. We need caution and good sense. Thinks sorely lacking in the US for over half a century.
A clear sign of our difficult situation is the testimony of Facebook Chairman Mark Zuckerberg before the US Senate. Noam Cohen noted the following in his article on that testimony.
“In these extraordinary times, we are learning how society changes when it is in the hands of power-drunk engineers. Products and services are delivered much more reliably and efficiently. We are able to communicate quickly, directly, widely. But there are serious problems, too, and they are far more serious than even critics realized at first.
“To start, these Silicon Valley titans are in denial about history. They pride themselves on not bending to what has come before. Is there racism and sexism in the United States?” Based on Zuckerberg’s testimony and Facebook’s policies, you’d think the answer is no. Even recent hacking of the 2016 elections had no place in Zuckerberg’s testimony. “Despite the length of Mr. Zuckerberg’s Senate appearance, there was no serious reckoning with what happened in the 2016 election.”
“The problems with Facebook emerge from its lack of a human touch, but Mr. Zuckerberg doubles down on software.” When asked about opiates sales and other hurtful activities on Facebook, Cohen notes, “Mr. Zuckerberg’s response was to concede things were bad but to hold out the promise of the future. ‘We need to build more A.I. tools that can proactively
find that content.”
“As long as the discussion was about software — how it works, how it can be improved, how users interact with it — Mr. Zuckerberg holds the upper hand. When the discussion is about values, he is as confused as the rest of us, and takes refuge in the belief that society is nothing more than a series of market based online interactions, as captured, absorbed and understood by engineers. Government regulation, in this scheme, is a product of a corrupt, inefficient political system; self-regulation, on the other hand, is a product of people voting with their actions and brilliant engineers devising solutions to meet their needs. A smug interpretation that Mr. Zuckerberg outwitted dopey legislators only plays into the Silicon Valley view that being called before Congress to answer questions is a bug of our democracy, instead of a vital feature.”
See what 50 years of libertarianism has wrought.
Ken, Chomsky has never been in business, I expect, so that he can afford to discuss values, which are always different between various groups of customers. This is not to say that murder, mutilation or child pornography for example, are acceptable, but much farther and “consumer sovereignty”–a value–is violated, it seems to me. Another example is the sugared drinks, which do have their use for tired, depleted persons of all ages. Just because some people don’t move far from their desks doesn’t mean the rest of us don’t need an occasional carbonated lift. Of course, at an earlier stage of my adult life I was a prof of marketing….
What sets Cohen apart from other tech writers and reporters is his focus the movers and shakers behind the companies and technology of Silicon Valley. His latest column from which I quoted is one example of that focus. The point is a simple one with large implications. Tech companies and CEOs like Zuckerberg don’t deal well “with non-market” situations and people not because they don’t have the intelligence. They don’t deal well with these because they don’t consider non-market situations and people important or relevant. For Zuckerberg, and many other tech CEOs, CFOs, etc. society is nothing more than a series of market based online interactions, as captured, gripped, and understood by engineers. There is no moral basis for society. Society is just mechanical market behaviors. This completely contradicts not just Adam Smith but just about every classical economist. But more importantly, it makes society, in Zuckerberg’s version of it both meaningless and ungovernable. Society becomes just “free individuals” bouncing-off one another. Just like the particles and energy blindly interacting of 19th century physics.