Home > Uncategorized > Trump’s fixation on intellectual property rights serves the rich

Trump’s fixation on intellectual property rights serves the rich

from Dean Baker

Between making threats of actual war with North Korea and Iran, Donald Trump has also gotten us into a trade war with China. Trump’s ostensible reason for this trade war — the large US trade deficit with China — actually did have some basis in reality, but in practice the trade war is straying into turf that is likely to offer few gains for US workers and could actually lead to sizable losses.

A major theme in Trump’s campaign was that China is a world-class currency manipulator that deliberately keeps down the value of its currency to give its products an advantage in international trade. The basic story is true; China did intervene heavily in currency markets to keep the value of its currency from rising against the dollar.

However, it would probably be more appropriate to say that China managed its currency rather than manipulated it. There was nothing hidden or sneaky about China’s intervention; it has an official exchange rate that it acts to maintain.

Most economists acknowledge, in retrospect, that China managed its currency in the last decade (they didn’t at the time), but now say that China has stopped buying large amounts of reserves of foreign currencies, the tool used to suppress the value of the yuan. What these economists ignore is that China continues to hold massive amounts of reserves, which lowers the value of the yuan relative to its value if China held more normal amounts in reserve.

China’s reserve holdings have the same effect on the value of its currency as the Fed’s asset holdings do in keeping down long-term interest rates. While most economists acknowledge the impact of the Fed’s asset holdings, for some reason they ignore the impact of China’s reserve holdings. No one ever said economists were consistent.

By keeping its currency below market levels, China makes its products more competitive internationally. This allows it to continue to run large trade surpluses, even though a fast-growing country like China would typically be expected to run large trade deficits.

If Trump focused on currency, he would likely be able to reach an agreement with China, which would reduce its trade surplus with the United States. This would create more jobs for US manufacturing workers, which would likely be a boost to the large segment of the work force without college degrees (roughly two-thirds).

But currency seems to have largely slipped off Trump’s trade war agenda. Instead, he is pushing for policies like requiring China to show more respect for the intellectual property claims of US corporations. That may be good for Boeing, Pfizer, Merck and other companies that are heavily dependent on intellectual property for their profits, but it is bad news for most American workers.

There are three reasons that most workers should not want to see Trump win his battles on intellectual property. The first is obvious. If major US companies know that they can offshore operations to China without having to worry about transferring technology to China (a frequent complaint), they will be more likely to offshore operations to China.

The second reason is a tiny bit more complicated. If China has to pay Merck and Microsoft more money for their patents and copyrights, it will have less money to spend on other US goods and services.

The way this works out practically is that, other things being equal, the money China needs to pay Merck and Microsoft, will increase their demand for dollars. That will raise the value of the dollar against the yuan, making other US goods and services less competitive than if China was not paying Merck and Microsoft for their intellectual property.

The third point is that by increasing the enforcement of intellectual property claims, both in the US and overseas, our government is redistributing even more income to those at the top. If you need a visual aid to understand this point, think of Bill Gates, one of the world’s richest people. If the government did not threaten to imprison anyone who made copies of Microsoft software without Gates’s permission, it is likely that he would still be working for a living.

Economists often talk about how technology is rewarding people with technical skills in areas like computer science and biotech. That’s a lie. It is our intellectual property policy on technology that has explicitly structured the market to give more money to the Bill Gates crowd. Trump’s China policy seems to be a further step in this direction.

An agreement crafted to help workers would instead focus on sharing knowledge and technology. China, along with India, Brazil and many other developing countries, has actually been pushing in this direction in the case of pharmaceuticals. If we had some mechanism for sharing research costs across countries, then new drugs could sell for a few dollars per prescription, instead of a few thousand.

There is a similar story with clean technology. China has more installed wind and solar power than the rest of the world combined. It also sells more electric cars. A forward-looking administration would be negotiating ways that we could share these technologies as quickly as possible.

But that will not happen with Trump. Instead, he is likely to construct a deal that will be great for a small number of rich people and pretty awful for everyone else. And, he will tell us that it is “terrific.”

See article on original site

  1. rjw
    July 16, 2019 at 12:33 am

    Sorry, simply do not buy this on China’s macroeconomics.

    China’s trade surplus has fallen as a percentage of gdp for several years. It is not too far from zero. Moreover, China actively intervened to hold the currency up against large scale capital outflows from 2014. China dropped a trillion dollar of reserves in two years. So the argument they artificially keep the currency undervalued to run large deficits just does not hold water anymore, and has not for many years.

    You are left with the argument that an “excessive” stock of reserves is in itself a sign of an undervalued currency. Really? I think one could question that claim on many grounds. I for one am deeply suspicious of such portfolio driven equilibrium arguments in macroeconomics. But in this case they seem very off indeed, not least because China maintains capital controls and outflows are particularly sharply restricted.

  2. Jan Milch
    July 16, 2019 at 8:27 am

    I think,what Dean describe is just about the same as Guy Standing,professor at SOAS-London University, claim in his new book,and here in this interview: https://www.youtube.com/watch?time_continue=159&v=03gYq2o-acM&fbclid=IwAR323srgfhGmY_BxS2Ju_0LtjQbluHQl36bozjjpgUnX6aPIUZz0bmKxfc8

  3. Yok
    July 17, 2019 at 4:16 am

    rjw. Question. If China maintains strict capital controls and outflows are particularly restricted, why did they need to intervene heavily to hold the Yuan up against the dollar? Could it not be that the illicit flow of capital is enough to accomplish China’s goals? After all, they have the currency relationship they desire. They only need to intervene if their position threatens to become more extreme. Ah yes, the excessive stock of reserves. What does it mean? It means they expended enormous effort to achieve the currency relationship they want. Just because intervention doesn’t appear obvious, doesn’t mean it isn’t taking place.

    • rjw
      July 24, 2019 at 11:13 pm

      @yok

      The chinese capital controls are porous, and tightening the controls were one of the steps they took to shore up the RMB in 2014/15/16, to limit outflows. But given the increased complexity of the chinese financial system, this is not so easy to do. There are various hard to police ways of moving money offshore. But the tightening had some effect, and they stopped the market from continuing to push the Rmb down. They shifted expectations.

      My basic objection to Dean’s article is that the analysis looks years out of date. Yes, China still follows a policy of constructive ambiguity on the RMB. But if you look at the last 5 years, their FX reserves have fallen by a trillion dollars. I really struggle to square that with the idea that they continue to actively push the currency lower. Where is the evidence?

      In the end he resorts to saying the currency must be too cheap because the STOCK of reserves is too high. Simply do not buy that. The trade surplus is small as a percentage of gdp, has fallen consistently for years, and IMF and others no longer argue the RMB is significantly undervalued on fundamental grounds.

  4. Hepion
    July 17, 2019 at 4:18 pm

    ‘Most economists […] now say that China has stopped buying large amounts of reserves of foreign currencies’

    What evidence is there? If they were to buy other assets at the same pace as they buy FX, currency reserves would not go up even though they would still be doing it.

    And Trump is using wrong tools to try to solve this problem. In the currency markets, every trade has two sides and somebody is funding China’s current account surpluses. It is a monetary phenomenon, it is not about competitiveness or wages or tariffs and so on.

    • rjw
      July 24, 2019 at 11:20 pm

      Buying other assets through intervention would also show up on the balance sheets. FX reserves is a broad term. A central bank could buy gold, foreign bonds, foreign equity assets and so on. They are all a way of “stockpiling” FX reserves. In practice they mainly buy treasuries.

  5. Ken Zimmerman
    July 22, 2019 at 3:58 am

    Thirty-five years ago, China had many characteristics in common with the rest of developing Asia: large population, low per capita income, and resource scarcity on a per capita basis. But in the 15 years from 1990–2005, China averaged per capita growth of 8.7%.

    China’s policy changes that led to reductions in poverty and increases in national wealth are often referred to as the “open door policy.” The primary focus of open door is opening to foreign direct investment, but at the same time strictly controlling foreign portfolio investing. The open-door led to more foreign business investment in China and increased Chinese exports. Also, China reduced substantially its tariffs on imports.

    The open-door began initially with “special economic zones.” Some as large as urban areas of 20 million people or more. The positive impact of foreign investment in these locations led to a more general opening of the economy to foreign investment, with the result that China became the largest recipient of direct investment flows in the 1990s. At the same time China improved it overall investment climate. Particularly in the coastal areas. In cities here, the private sector accounts for 90% or more of manufacturing assets and production. As of 2005, average pretax rate of return for domestic private firms was the same as that for foreign-invested firms. Also, loss of output due to unreliable power supply in 2005 was just 1.0%, while customs clearance time for imports was just 3.3 days.

    China’s sustained growth created historically unprecedented poverty reduction. The World Bank uses a poverty line based on household real consumption (including consumption of own-produced crops and other goods), set at $1 per day measured at Purchasing Power Parity. In most low-income countries this amount is enough to guarantee each person about 1000 calories of nutrition per day, plus other necessities. In 2007, this line corresponds to about 2,836 RMB per year. Based on household surveys, the poverty rate in China in 1981 was 63%. In 2004 this rate declined to 10%, representing the removal of 500 million people from poverty during this period.

    This poverty reduction has occurred in waves. The shift to the household responsibility system propelled a large increase in agricultural output, and poverty was cut in half over the short period from 1981 to 1987. From 1987 to 1993 poverty reduction stagnated, then resumed. From 1996 to 2001 there was once more relatively little poverty reduction. Since China joined the WTO in 2001, however, poverty reduction resumed at a very rapid rate, and poverty was cut by a third in just three years.

    Taken from the Asian Development Bank, there was an estimated average annual population growth rate of 0.5% in China between 2010-2015. This brought the Chinese population to 1.37 billion in 2015. According to the bank 3.1% of this population live below the national poverty line.

    Freer trade, more exports, some relatively simply economic reforms, and rich western countries paid for it all. And just to complete the story, this move toward a limited form of market capitalism has created many of the negative consequences of such economics as exist in the west. Such as more economic inequality, increases in rural-urban tensions, increasing poverty and unemployment in large urban centers, still crushing rural poverty (and all that accompanies it), increases in unequal educational opportunities, and rises in xenophobia. All of this could have been accomplished more quickly and with none of the socio-cultural damaging consequences through the United Nations anti-poverty work with full political support and full funding. Market capitalism seems to make people stupider so that every path chosen to solve problems creates more problems that it solves.

  6. Ken Zimmerman
    July 22, 2019 at 4:03 am

    Apology. Last sentence should read, “Market capitalism seems to make people stupider so that every path chosen to solve problems creates more problems than it solves.”

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