Policy wonks and pundits have been nearly unanimous in their condemnations of Donald Trump’s trade war and his primary weapon of tariffs. Tariffs are a tax increase on US consumers, raising the price of imports and the domestically produced goods with which they compete.
Retaliation by other countries will reduce US exports, costing jobs in other sectors. This is not likely to lead to good outcomes, especially when the basis for Trump’s complaints is vague, constantly shifting and often at odds with reality.
The one exception is with patents and copyrights. There is widespread agreement with Trump that China, our largest competitor, is stealing “our” intellectual property. They agree that Trump should be prepared to take steps to stop this theft and crackdown on China’s practices.
The so-called theft takes two forms. On the one hand, the complaint is that China does not adequately protect patents and copyrights internally. As a result, massive amounts of software, recorded music and video material, and other copyright protected items are sold without authorization.
The other form of theft is through requirements that companies looking to set up operations in China partner with Chinese firms and thereby share their technology. For example, Boeing is required to partner with Chinese manufacturers in its operations there, which then gives the Chinese manufacturers the ability to be competitors in future years.
While the elites don’t like these practices by China, there is little reason for the rest of us to be troubled by them. Most of us don’t own lots of stock in Microsoft, Disney or Boeing, so why should we be bothered if China doesn’t respect these companies’ claims to patents, copyrights and other forms of intellectual property?
After all, these are forms of protectionism, and we know that protectionism raises prices and reduces economic growth. Patents and copyrights are in fact incredibly costly forms of protectionism. Instead of raising prices by 10 or 25 percent, like the tariffs currently on the table, patents and copyrights increase the price of the protected items by several thousand percent above the free market price.
If Chinese consumers don’t have to pay copyright protected prices for software and movies, this means they have more money to buy other goods and services from the United States. That should benefit US workers in industries that are not heavily dependent on intellectual property.
The same sort of story applies to Boeing and other US manufacturers that are forced to transfer technology as a condition of operating in China. If Chinese partners can then become lower cost producers and undersell Boeing and other US corporations, this should mean lower prices for a wide variety of products.
This is pretty much the economics textbook version of gains from trade. As the textbook says, trade has winners and losers. In this case, Boeing and other US corporate giants are losers, but the vast majority of the country ends up winning from lower prices.
Of course, this scenario reverses the winners-and-losers story we have seen for the last four decades. In this new scenario, major corporations and workers in the tech sector are likely to be the biggest losers.
For those concerned about inequality of income and wealth, the policy of allowing China free access to intellectual products should be a gold mine. This is true by all measures of inequality. As many have pointed out, there has been essentially no progress in reducing the racial wealth gap over the last four decades. Imagine taking a sledgehammer to the wealth of Bill Gates and other overwhelmingly white billionaires.
This should also be a hit to the relative pay of workers in the tech sector, a field that continues to be very hard for Black workers and women to enter. Sure, it would be great if tech employers increased diversity, but does anyone seriously believe the picture will look very different a decade from now than it does today?
In effect, allowing China free access to intellectual products will be a great way to increase growth while reducing inequality. We will eliminate vast amounts of waste, for example, by having patent-protected drugs that could sell for a hundred thousand dollars a year replaced by generics that might sell for a few hundred dollars.
We do need to find mechanisms for compensating innovation and creative work, and ensuring that the costs are shared internationally, but the patent system is an incredibly inefficient tool for this purpose. If this seems like a hopeless venture, a little arithmetic might be helpful.
In a decade, China’s economy will be twice the size of the US economy. At that point, China will have far more innovation to “steal” than the United States. This means the United States would actually benefit at that point if there are no rules that require a sharing of the cost of innovation and creative work.
The United States would then clearly benefit in a world where all knowledge and creative work was freely available, it is China that would be hurt. But it would be difficult to get this fact accepted in political debates. As we know, protectionists don’t have a very good understanding of economics, even elite protectionists.
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