Trump's Fixation on Intellectual Property Rights Serves the Rich

Trump’s Fixation on Intellectual Property Rights Serves the Rich

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.”