Trump's Impossible Fight to Stop Theft of Ideas

-edited

Trump is on a mission to stop China from stealing US IP. It's not possible, but what if it was?

Assume we could stop 100% of IP theft by "free riders" who improve the product and pass it off as their own.

Would we want to?

Nicholas Gruen, CEO of Lateral Economics, says We’re All Free Riders. Get over It!

The free rider problem is real enough. If it costs vast sums to test a new drug, we can’t expect the market to do so if all that investment can be undercut by imitators. But here’s the thing. In addition to the free rider problem, which we should solve as best we can, there’s a free rider opportunity.

The American economist Robert Solow demonstrated in the 1950s that nearly all of the productivity growth in history – particularly our rise from subsistence to affluence since the industrial revolution – was a result not of increasing capital investment, but of people finding better ways of working and playing, and then being copied.

If, as a society today, we had to choose between addressing the free rider problem and seizing the free rider opportunity, taking the latter option wins hands down.

Free Rider Problem

Gruen quotes Thomas Jefferson: "Ideas should freely spread from one to another over the globe, for the moral and mutual instruction of man, and improvement of his condition."

One can solve the free rider "problem" with paywalls and tight controls but tight controls also limits the number of buyers.

Gruen notes that Google generates many hundreds of billions of dollars every year but monetizes only a small fraction of that value. But $60 billion per annum is enough to make its founders rich beyond their wildest dreams.

German Firms Abandon China, US Firms Should Do the Same

A few days ago, I penned German Firms Abandon China, US Firms Should Do the Same.

The headline does not precisely match the sentiment I expressed inside. Here is my key point:

Tariffs Will Not Fix the Problem

If anything, tariffs made matters worse. And don't expect a trade deal in pieces to do anything about IP theft either.

What to Do?

For well over a year, a friend kept asking, what would you do about it?

My answer was then and remains now "nothing". This is not a matter for Trump to solve. Businesses need to decide for themselves whether or not it is worth it to do business in China.

That's the key. This is not a problem Trump can solve. If businesses feel they are losing money doing business in China, they have a choice: They can decide they are making enough money anyway and it's all worth it, or they can leave.

My headline title "German Firms Abandon China, US Firms Should Do the Same" caters to those who believe they are not making enough money or the risk isn't worth it.

If enough companies leave, China will change its ways.

Here's another view.

Chinese IP ‘Theft’ Doesn’t Justify Trump’s Tariffs

Donald Boudreaux, professor of economics and Getchell Chair at George Mason University in Fairfax, Va. makes the case Chinese IP ‘Theft’ Doesn’t Justify Trump’s Tariffs

Much of this “theft” is in fact in-kind taxation. Beijing requires that certain foreign companies seeking to do business in China share their intellectual property with the Chinese. Companies that attach a high value to the opportunity to do business in that large country often agree to these terms. But IP belonging to companies that are willing to forego the opportunity to operate in China is not stolen or otherwise acquired by the Chinese.

This in-kind tax is unfortunate. But IP acquired through it no more counts as stolen property than does cash paid in taxes to Beijing (or, for that matter, to Uncle Sam) count as stolen property.

Like all taxes, Beijing’s requirement of IP sharing discourages foreign companies from doing business in China. And so by making China a less-attractive place to invest, this in-kind tax reduces China’s rate of capital accumulation. In turn, worker productivity there grows more slowly, as does the Chinese economy as a whole.

In short, the chief victims of this tax are the people of China.

Second, Uncle Sam’s taxes imposed on Americans who buy imports from China is a poor remedy for China’s IP violations. The direct harm that these tariffs inflict on us Americans might be a price worth paying if they offered the best hope of persuading the Chinese to treat our IP with greater respect. But they don’t.

Fight to Halt the Theft of Ideas is Hopeless

Martin Wolf at the Financial Times writes the Fight to Halt the Theft of Ideas is Hopeless

I believe this is the first time in history I have ever agreed with a major point of Wolf.

His opening gambit is perfect "China will not accept inferiority and the west should not want it to."

That is the correct answer to the question I posed at the top of this article.

Wolf provides a history lesson on "free riders" noting that in the 18th century England criminalised the export of textile machinery to the US. Technology managed to make it to the US anyway.

Technology transfer was unstoppable then and it is unstoppable now. And then it was the US "stealing" technology.

Here is Wolf's key point in one short paragraph:

"China will not accept permanent inferiority. We should not want it to be permanently inferior either. We should instead want the energies of the Chinese people to build on our ideas. That is how progress occurs."

I agree 100%.

Michael Pettis Chimes In

I found that FT article reference in a series of Tweets by Michael Pettis.

US Dominates in Global IP

The US has the top four IP spots globally and 7 of the top 12. Germany is the lone EU entry at spot 12.

Why is that?

Because as Pettis notes, "The great strength of the US is its restless and at times uncomfortable creativity and innovation, driven by a complex set of legal, financial, political, cultural, educational and other institutions that few countries have been able to match, and which is why foreigners come to the US to create the billion-dollar companies that they cannot anywhere else. The US didn’t get rich by preventing the spread of technology but rather by staying ahead of it."

And as I have pointed out many times, the US has the largest, most open capital markets in the world. Google, Apple, and Microsoft could not exist in the EU because the EU would bust them up in the name of competition.

Google thrives because it allows people free use of its search engine. People use it because they like it. Those who don't like it are free to try something else. From its enormous search engine profits, Google started the entire new field of autonomous driving.

Autonomous driving competition is intense. That ensures further progress. Please note that Commercial Driverless Taxis Have Arrived.

Please Keep Elizabeth Warren Out

Elizabeth Warren would bust up all four of the leaders. So would the EU. For what?

Trump Seeks to Protect Companies From Themselves

Trump finds fault in all of this.

He wants to protect companies from themselves.

At one point he proposed not letting Apple do business in China. Sheeesh, if Apple thinks it can prosper in China, that should be Apple's business business, not Trump's.

Meanwhile, US farmers are suffering. Ironically, even US steel companies are suffering and steel companies were supposed to be the big beneficiary of his tariffs.

Industrial Production Dives and It's Not All Strike Related

We are in a manufacturing recession co-sponsored by Trump. Note that Industrial Production Dives and It's Not All Strike Related.

Also note that GDP Estimates Crash on Dismal Economic Reports

This isn't all Trump's fault, but some of it it.

Has Trump Inflicted Enough Pain Upon Himself Yet?

Trump's tariffs are so wrong that it prompted me to ask on October 26: Has Trump Inflicted Enough Pain Upon Himself Yet?

Since Trump is still dickering with China over "part 1" of a trade deal, the unfortunate answer is "no, not yet".

Mike "Mish" Shedlock

Comments (44)
No. 1-17
Casual_Observer
Casual_Observer

The theft of ideas is not the same as the theft of IP. In China's case they plant employees inside western corporations who steal IP and send information back to China. The last two companies I've been with had multiple incident of Chinese employees stealing IP and sending it back electronically to unknown network locations in China. There are likely employees in many US technology companies who are undercover spies for the Chinese government or Huawei who is majority held by the Chinese government.

LB412
LB412

"This is not a problem Trump can solve. If businesses feel they are losing money doing business in China, they have a choice: They can decide they are making enough money anyway and it's all worth it, or they can leave."

Most of these "businesses" are managed by short term (1-3 yrs) CEO's and BOD who are highly compensated with stock grants or options... They are planning for next quarter not 5 or 10 years out. Simply put under the current model you can't trust these folks to do what is right for the long or for that matter even the medium term.

Captain Ahab
Captain Ahab

Intellectual property includes a great many things, not the least being patents. Trademarks would also be fair game under this argument, and anything copyrighted, including movies, books, and music. I've even seen Chinese 'visitors' go to industrial design student exhibits/thesis shows in the US, and photograph everything.

njbr
njbr

Try to square all of this blather about principles with the continued approval Huawei. If "national security" can be given away, how seriously to take the bitching about China "unfairly" copying the things that they were hired to make or sell?

It's all negotiating chips, not beliefs.

If nothing changed except Xi saying that Trump was the "bestest big-handed negotiator in the world, ever", then the trade war would end.

It's about image, not results.

Carl_R
Carl_R

It is true, of course, that productivity and standards of living grow because of the advancement and spread of intellectual property. It is equally true that there is little reason to "invent" if you don't get any benefit from it. Thus, the ideal system will both encourage "invention" by protecting the inventory for a period of time, but also encourage the spread of the invention, by limiting the time of protection. That is what the US Patent system was designed to do.

I would argue that the rules we have in the Patent system were developed in a time when the economy and technology advanced slowly, so a long period of protection was appropriate. As the economy moves faster, and the rate of advancement advances, a shorter period becomes more appropriate. Patents today last about 15 years, but perhaps that should be cut in half?

As for the rest of the article, I find it ironic that much of the credit for the high standard of living in the US is credited to the "...complex set of legal, financial, political, cultural, educational, and other institutions that few countries have been able to match..", and to the fact that "...the US has the largest, most open capital markets in the world". I completely agree. Our free market system is the most efficient in the world, and while people love to hate "bankers", our efficient capital markets are an efficient wealth creation system, allowing novel, productive ideas to spread and thrive. Develop a new idea with a high potential for profit, and you can access the resources you need to make it thrive.

All that said, intellectual property theft is just that, theft. If a company wants to sign away their IP to do business in China, that is their right. If a Chinese company infiltrates and steals IP from companies that have not signed it away, it is theft, pure and simple. If China won't enforce the valid rights of people in other countries to IP, that is a problem that needs to be addressed. In today's market, let's say I invent a new kitchen widget that every cook would want. By the time I get it to market, I will find that someone has stolen the idea, and that there are cheap Chinese knockoffs that are in stores before mine ever gets there. That is the kind of situation that discourages invention and advancement, not encourages it.

Sechel
Sechel

Not big on simply referring to intellectual property as ideas. Makes it seem as if its a debate on forms of government. They are patents, trademarks, trade secrets and copyrights. They deserve protection. But I for one do not think a tariff war is the right tool.

I also think you are ignoring the methods of access which are quite nefarious including hacking and espionage as well as the wel documented technology transfers required as a condition of doing business

Sechel
Sechel

The U.S. started its trade war over IP theft using section 301 of the Trade Act of 1974. So far nothing has been accomplished except raising prices for U.S. consumers, souring relations between the U.S. and China and disrupting supply chains of U.S. businesses. And currently it appears phase 1, if we can call it that of the U.S. China trade negotiations is once again falling apart. We're back where we were in 2008 when this last came up and both sides laid down their arms.

As 2019 ends our trade deficit will be around 150 billion larger than it was at the end of 2016 when Trump assumed office. A lot of pain and nothing accomplished.

stillCJ
stillCJ

Editor

It would seem as though Mish's anti-tariff do-nothing solution is equivalent to Lenin's "we'll buy the rope from the capitalists to hang them with" except that with China Mish would just give them the rope or let them steal it. Because, it's nicer when everybody just shares everything. I don't think Mish understands the communist's objectives.

SMF
SMF

During the Cold War, countries could pick which superpower to align to. Nowadays, the same decision is made between the US and China. As many in South America have found out, the alignment with China is not all that is cracked up to be.

astroboy
astroboy

Oh bullshit. Welcome to the 19th century. Did Jefferson or the academics cited ever try to make a penny off an invention? I have a patent to predict whether brain surgery for a potentially fatal birth defect will do any good or not. Lawyers told me not to even try to patent it in China.

I am not independently wealthy and I have kids to feed. Patent required 2500 hours of work when I was working two jobs to put bread on the table. If I didn't think there was a chance it would make money I wouldn't have done it. If the corporation I sold it to didn't think they could make money they wouldn't have bought it. You can spout nonsense about how all the progress of the last couple hundred years is from ideas being copied but do you really think Thomas Edison would have invented the 20th century if he couldn't make a living at it? No, he'd have been one of the best telegraph operators who ever lived instead.

This is not about the West keeping China down, it's about theft, pure and simple. Look at all the copyright violations too.

In the last 20 years trade deficits with China have enabled it to become a major military power. No, they aren't going to bomb Pearl Harbor any time soon but they can grab the South China Sea without the US being able to do anything about it unless we're willing to see three or four carrier groups go to the bottom of the ocean. Is this shift in power good for the US or the West? Of course not.

For the erosion of American power what do we get? Alot of cheap crap sold in Walmart. Is that a deal?

Realpolitick trumps economics, if you want your nation to still exist on the map.

Pater_Tenebrarum
Pater_Tenebrarum

A very strong case can be made for abandoning IP and patent legislation altogether. An excellent summary of arguments in support of this approach can be found here (link to a free book download in PDF form, of Stephan Kinsella's "Against Intellectual Property". Note that Kinsella is actually a patent lawyer, in other words, he is not merely a theoretician on the subject, he is exposed to it professionally as well): https://cdn.mises.org/15_2_1.pdf
Obviously, his arguments are not beyond dispute and the ideas will strike many as quite radical. Nevertheless, they are an important and extremely interesting contribution to the debate - highly recommended for anyone interested in the subject, regardless of where one stands on it.

tz3
tz3

There is "you must share or you can't be in our market", but there is also industrial espionage and copyright, trademark, and patent violations on a large scale. But hey, the pirates can fence their merchandise cheaper than the people that produced it. The Jefferson quote was about philosophy, science, and math, he didn't object to Copyright and Patents being in THE CONSTITUTION. If China wants to get rich, it should just do ChinFlix with every movie ever made as soon as they can rip the BluRays to streams for $9.99/mo, of course not paying ANY royalties, as "ideas should be free".

Anda
Anda

From a basic moral perspective, to copy someone else's work or ideas is not criminal, as long as those copying denote origin and do not try to claim that for themselves, nor try to misrepresent their copy as original.

There is a saying that goes something like "you only own what you can keep hold of". An idea, once shared, is free.

So there is this intangible line between being creative, and sharing that creativity, because you cannot guarantee advancement on profit from that creative idea without sharing it with investors, and later workers, and later media, and finally putting it in the hand of any purchaser of the finished product, and at each point the idea is set free for emulation. The moment an idea is shared with anyone, as it must be except if we are completely disassociated from society, then it is beyond the control of the originator. He may still claim being inventor, or original manufacturer and so on, and there may be laws designed to reward his innovation and investment, but there are no true guarantees.

These laws are designed to protect and reward domestic initiative by granting first market share, or by ensuring royalties on use of an idea are paid. It makes sense. It also makes sense for anyone to copy a good idea, for that idea to be available for free, because it benefits others in that case.

The crux of the matter is one of profit allocation. Internationally there are many pressures on resources, there are international tensions where competition is simply not friendly and where being "nice" without first reaching an understanding is most likely a big mistake. Domestically there is the above described process of reward, as well as the inventor who will simply not profit from his idea if he shares it without protection. You notice people in most countries don't always like each other, you give a good idea for free (by even just discussing it with a potential investor), and others will gain the profit, the inventor will find that the rest of society then has say more time at their disposal because of his idea, and yes they will also use that to compete with him, not to praise him, because they worship money and the power behind it, and it requires a fool to serve their wishes. So even though I present a slightly depressing account of human nature ( and I don't pretend it is all like that ), well you cannot avoid that these realities exist, nor that IP can be and is used to monopolise market activity. In fact the very money we use is only property because copying it is banned, and you see the result when it is obliged in use and only a few are granted say over its manufacture.

Where does that leave us though ?

Maximus_Minimus
Maximus_Minimus

Can the stock market cap be considered a true measure of technological leadership? I can happily live without ever using FB, Twitter, and other vaporware. If Europe closed itself off from US tech product, and rather enacted protective environment like China, it would also have an Alphabet, or Alibaba; it would be called maybe Nokia. US tech companies regularly go hunting for smaller European startups.

abend237-04
abend237-04

It depends. If your IP is mostly an iterative, predictable repackaging, and improvement of something else, you'll likely spend a lot more in time and IP lawyers than you'll ever earn in the marketplace, China's or elsewhere.

IF, however, you've spent, say, $200 million in R&D perfecting a true breakthrough technology, the way to protect it is not with patents, but via Trade Secrets. In the U.S., the rule of law will assist you in this effort, so long as you license at reasonable rates.
The problem with China today is: They have no IP, resulting in little societal interest in protecting someone else's. That's changing. Huawei alone is spending over $15 Billion per year on R&D now. The idea of keeping them caged with our laws is laughable. They're going to run us off the road if we don't get our act together.

A respected, global forum for arbitration is desperately needed. WTO is not it, as constituted.

GodfreeRoberts
GodfreeRoberts

If you check the court records at the WTO (TRIPS database), or San Jose, LA, NYC, Beijing or Shanghai you'll find three interesting facts:

  1. China has never even been charged with stealing significant IP
  2. Chinese IP thieves rank #3-4 behind other nationalities
  3. The FBI has brought 10x charges against Chinese for IP theft than they have successfully prosecuted, and dropped 10x more than bigger IP thief nationals.

See this review: http://cardozolawreview.com/wp-content/uploads/2019/01/Kim.40.2.6.newcharts.pdf

Anyway, that's fast becoming history. China already leads us in basic research in Math, Engineering, Computer Science and Chemistry and is contending for the lead in Physics. It also leads in most technologies.

Webej
Webej

How much did we ever pay in licenses to the people who invented the wheel or figured out out to bake bread, or the thousands of other bits of progress and creativity formed the basis of our own? Of course they forgot to patent all of it and monetize it to generate special rents from some individuals in later generations to others.