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Intellectual property

Summary:
The China trade argument has boiled down to intellectual property and trade. Roughly it has gone like this:"We need to stop China from selling us all this stuff. Bring the jobs home!" "Uh, right now the jobs problem is that employers can't find workers. Cheap stuff from China is a boon to American consumers. Tariffs like ...

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The China trade argument has boiled down to intellectual property and trade. Roughly it has gone like this:
"We need to stop China from selling us all this stuff. Bring the jobs home!" 
"Uh, right now the jobs problem is that employers can't find workers. Cheap stuff from China is a boon to American consumers. Tariffs like that on steel cost more steel-using jobs than they save."  
"Hm. Ok, but we have to threaten with tariffs to get China to stop requiring our companies to share intellectual property!" 
I'm still skeptical about the intellectual property and trade argument. OK, suppose China says that in order for a US company to produce there, it must share intellectual property with a Chinese partner. Just how terrible is this? Just how terrible for the US economy, and society as a whole, justifying a robust policy response -- obviously the company would rather make more profits, but that's not a basis for economic policy.

Intellectual property is different from real property, in that it is nonrival. If you live in my house, I can't live in it. But if you use my equation, my blueprints, my recipe for nanoscale lubricants,  or my designs for specialty oilfield equipment, that does not hamper my use of the same ideas.

Because of this feature, intellectual property is quite different in law, and in economics, than other kinds of property. Ideally, once an idea is produced, it should be distributed freely to everybody. The marginal cost is zero, it is nonrival, so society is best off if everyone gets to use new ideas immediately. Economic growth is the spread of better ideas, and the faster the better. Period.


Except... it costs money to produce new ideas. So if we have no intellectual property rights, nobody produces intellectual property to begin with.

Our patent, copyright, and intellectual property system is, ideally, a response to this conundrum. We grant innovators a monopoly right to new ideas. They can then recoup the cost of developing the idea. But a patent requires disclosure of the idea, and only lasts a finite amount of time. After the inventor is rewarded, the idea becomes public property and everyone can use it. In this way patent rights are not universal, nor eternal, unlike say physical property rights (ideally).

We have a lot of other institutions designed to address this problem. Research universities receive nonprofit status in return for producing and disseminating nonrival ideas. The government funds a lot of research for the same purpose.

"Technology transfer" is one of the main tools of external development efforts. People go to less developed countries and try hard to help them to use US-developed ideas. For free. It is part of many contracts in our world of politicized international business, such as airplane construction.

Medicines are a good example. They are developed at great cost. The US consumer gets them first and pays through the nose. Eventually it goes generic, and spreads to other countries. Soon, we're subsidizing its use in the third world.

China's rise has been amazing. But their GDP per capita is still only $8,000. US GDP per capita is $58,000. They desperately need to learn how to do things as we do.

Now, yes, stealing intellectual property is not good, and the world is right to complain. Though remember, at a similar stage of development, the US stole a lot of IP from the UK. We only started a manufacturing industry because some clever spies stole the designs to power looms. And our publishing industry routinely republished UK books, like Dickens novels, without paying a cent of IP.  It's not clear that US growth came at the expense of the UK in the 19th century, and by 1917 they were kinda glad to have us around.

But the question at hand is, just how much is the US, and the world as a whole, damaged by China's demand that companies who want to set up shop there share intellectual property with Chinese partners, i.e. teach them how to do things?

The companies can always say no. If you're going to lose more by losing some of the monopoly power of your idea to a Chinese partner than you gain by being able to produce in China or sell there, don't do it! Or demand a better price. It sounds like companies want just to increase their monopoly profits. Well, I understand completely why the companies want that -- having your cake and eating it too is nice. And if the White House can get it for you, go ask for it. But a desire to increase monopoly profits is not a social or economic problem. Companies could also increase profits if the US lengthened patents to 50 years. But we don't do that -- we understand the importance of "forced technology transfer" for ideas.

In fact, this IP debate is quite a contradiction with the other argument going on right now. The Economic Problem of the Minute, (we seem to have a new one every 20 minutes) is too much "monopoly" power. Profits are up, labor's share is down, investment is down. It looks like companies are sitting on "rents," i.e. the monopoly power they have from unshared intellectual property.

And so...we want to strengthen the rents, the monopoly power of intellectual property?

There is a parallel strain of economic thought that says we have too much intellectual property protection. The point of trade agreements should not be to preserve the Mickey Mouse copyright for another 100 years, and all over the world. Walt made his money. Tech is wasting a lot of time and money on patent wars.

It is possible that R&D is not happening that could happen, but it is so costly that only joint US and Chinese monopoly rents could justify. New ideas not produced are the clearest argument for social cost of technology transfer.  But I don't hear that argument. I hear only, US firms developed great stuff, they're making money on it, they want to produce with cheaper labor in China. They still make money if they share the technology. But they want to make more money yet, and they're not willing or able to demand a better price for their technology or walk away from the table.

To be clear, I don't think government-imposed forced partnerships are a good thing, nor is forced technology transfer as a condition of doing business in a country a good thing. I would rather, and we would all be better off, if China allowed businesses to operate freely, or at least as freely as they do in the US. (We're no saints here on allowing foreign businesses to do what they want.) But like tariffs, which mostly hurt the country that imposes them, it does not seem like an obvious social problem over which to start a trade war.

But, to continue my little dialog, it seems the Administration now wants to rejoin the TPP. Cheer up, they're learning fast!


John H. Cochrane
In real life I'm a Senior Fellow of the Hoover Institution at Stanford. I was formerly a professor at the University of Chicago Booth School of Business. I'm also an adjunct scholar of the Cato Institute. I'm not really grumpy by the way!

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