China fired a warning shot at President Trump on Monday.
Pushing back against Trump's desire to impose tariffs on roughly $50 billion of Chinese exports, China placed tariffs of its own on roughly $3 billion of American imports. Stock markets plummeted in part on the news, with the Dow Jones Industrial Average falling over 450 points, or 1.9 percent, and the S&P 500 falling over 58 points, or 2.2 percent. China's move seemed to rekindle fears of a trade war.
Now, China's tariffs were wide ranging, hitting some 128 different American products, from pork to pipes. But Trump's China tariffs are actually about something pretty specific: China's dismissive treatment of intellectual property rules.
And that raises the question: Are intellectual property rules even worth defending?
For years now, America has been pushing to establish global rules for the length of patents and copyrights, and how to enforce them. These sorts of intellectual property (IP) laws insure that the creators of new technologies, drugs, songs, software, media, works of art, and more are rewarded for their innovations. As long as the patent or copyright lasts, everyone has to pay the creators a licensing fee to use their work. The concern is that, without this structure, no one would innovate anything, because creators would never receive the fruits of their labor.
In a modern, globalized, digital world, these concerns are now international in scope. Which is why America wants to establish IP laws, and encourage everyone else to do the same.
Of course, these days a lot of IP rights are held by big American corporations with a global reach. And they want to keep their revenues.
This is where the trouble starts.
The need for consistent rules tells us nothing about what the content of the rules should be. And since the early 1990s, World Trade Organization (WTO) rules for intellectual property (IP) have been pretty extreme: Copyrights must last the life of the author plus 50 years, for instance. Patents must last 20 years.
On the one hand, IP laws are supposed to incentivize innovation by making sure creators are rewarded for their creativity. On the other, all IP rights are government-enforced monopolies: In exchange for inventing something, the inventor is granted a license that says they're the only person allowed to sell it. But competition is supposed to be capitalism's mechanism for spreading innovations, perfecting them, and ultimately making them affordable. Paradoxically, IP laws promote innovation by creating monopolies that threaten competition.
For example, remember when EpiPens jumped in price from $50 to $300? That was because a new company bought the patent, which lasts until 2025, and decided to make full use of its monopoly powers. This problem extends across the drug market: Americans spend around $450 billion annually on prescription drugs. If patents weren't an issue, that number would likely fall to $80 billion. Obviously, the burden is even worse for people in poorer countries around the world.
So, at a minimum, you'd think the sweet spot for IP laws would be less severe. But the American government, acting at the behest of big international corporations, thinks the WTO approach doesn't go far enough. For instance, the ill-fated Trans-Pacific Partnership (TPP) would've extended copyrights to life of the author plus 70 years for all its signatories. It would've made it significantly more difficult for drug competitors to bring cheap generics to market. Criminal and civil penalties for violating IP law would also have become much more punishing.
This is where President Trump re-enters the picture. He made opposition to the TPP a centerpiece of his campaign. And he pulled the U.S. out of the deal once he entered office.
Yet at the same time, Trump wants to punish China for not respecting these sorts of stiff international IP laws. Of course, China is running afoul of the WTO's intellectual property rules, not the defunct TPP's. But the former are quite bad enough. Furthermore, the point of the TPP was to lock in America's preferred trade regime (including IP laws) in the Pacific region first, before China could. And then China would eventually be forced to play along.
As it stands, China's enforcement of IP laws within its borders is rather lax. And China uses its industrial policy to essentially force foreign companies to share their technological secrets with Chinese companies, as the price for doing business in its massive market.
That doesn't make China the IP-equivalent of Robin Hood, though. It's a highly unequal country, and the benefits of its IP-flouting industrial policy mostly flow to the country's business elites, who also double as its political elites. To the extent the Chinese government is concerned with spreading prosperity to its citizens, it's as a real politik strategy for preventing revolt against one-party Communist rule. This isn't a stand on principle; it's gamesmanship by Chinese elites to increase the country's geopolitical advantages.
This gets at one of the problems with Trump's nationalism: By treating China and America as two teams in competition, Trump misses the way elites in both countries can use malformed trade policy to undercut workers in both countries. Trump opposed the TPP because it harmed America's "forgotten men and women." But by treating IP laws as just another football in the America vs. China rivalry, Trump is effectively defending one of the TPP's more pernicious legacies.
Efforts to squeeze more IP payments out of other countries are also problematic for Trump's efforts to rebalance trade.
The point of increasing American exports is to create more American jobs. And when foreign companies pay American companies IP fees, that gets counted as a "service export." These fees accounted for almost $128 billion in service exports, or over 16 percent of all American service exports, in 2017.
But not all exports are created equal. And bringing in more IP fees is a pretty poor way to create jobs. If you want to expand car exports, you have to hire all the people to build the cars. But if you want to increase IP payments, you just need a few lawyers and lobbyists to convince Congress to ratchet up the IP laws. It's not an especially "job-intensive" export, in other words. It does do wonders for corporate profit margins, but that's about it.
So it's deeply foolish to act as if we just need to get China to adhere to current IP rules and then everything will be fine. The rules need reform.
Until that happens the forgotten men and women — both in American and abroad — will remain ignored.