Nowhere is today’s highly polarized political climate more visible than in the debate on trade, which has been dominated by two polar opposite viewpoints. The first sees trade as a white knight capable of fixing all our woes, no matter the circumstances, and the second sees it as an evil tyrant that strips people of their wealth. Championed by supply-side economists and fearmongering protectionists, respectively, these rigid articles of faith have crowded out more rational and nuanced analyses. This is unfortunate, because both extremes are wrong, albeit in different ways, and the focus on absolutes makes it almost impossible to seriously discuss or address loss of American manufacturing strength.
Consider, for example, the claims of commentators such as Scott Lincicome and Michael Hicks, who echo the unabashedly pro-free-trade logic of conservative economists like Milton Friedman when they argue that all of our job losses have been lost because of productivity. Hicks writes, “Had we kept 2000-levels of productivity and applied them to 2010-levels of production, we would have required 20.9 million manufacturing workers. Instead, we employed only 12.1 million.”
This assertion relies on a rigid, supply-side economic model that
Innovation Fact of the Week: Commercial Value of Illegally Installed PC Software Totaled Nearly $63B Globally in 2013
(Ed. Note: The “Innovation Fact of the Week” appears as a regular feature in each edition of ITIF’s weekly email newsletter. Sign up today.)
The global market for PC software is huge, but 43 percent of all PC programs that individuals and businesses installed in 2013 were not properly licensed, according to the BSA Global Software Survey. The commercial value of those illegal installations was $62.7 billion that year, up from $47.8 billion in 2007 when the illegal rate was 38 percent.
The United States has the world’s lowest rate of unlicensed software use (18 percent in 2013), but it is such a large market that the commercial value of those illegal installations is the world’s highest at $9.7 billion. In China, by contrast, 77 percent of all PC software installations were illegal in 2013, with a commercial value of $8.9 billion, the world’s second-highest total.
By region, the average rate of unlicensed software use was 59 percent or higher in Latin America, Central and Eastern Europe, the Middle East and Africa, and the Asia-Pacific region. That compared to 19 percent in North America and 29 percent
As ITIF has long argued, China pursues an autarkic, indigenous economic growth and innovation development strategy, particularly with regard to high-tech products. For example, in the semiconductor sector, China has launched a $100 billion National IC (integrated circuits) Industry Development plan designed to significantly increase domestic IC production and to reduce China’s imports of semiconductors—by half in 10 years and entirely in 20 years. To justify its mercantilist industrial development policies China claims hardship: we import too many semiconductors. This argument has been broached again recently given the potential merger between two semiconductor companies, one of which, Western Digital, has a major Chinese stockholder. This simplistic analysis needs to be called out for what it is—false—and a façade for a policy which breaches rules China agreed to when joining the WTO.
One reason China has tried to give for its aggressive and mercantilist IC industry development plan is that it runs a “large” trade deficit in semiconductors—$232 billion in 2013—which supposedly justifies efforts to replace foreign imports with domestic production, but this rationale is wrong on several levels. First, this simplistic narrative fails to account for the fact that
After almost 15 years in the World Trade Organization (WTO), China has still failed to follow through on many of the trade-liberalizing commitments it made in order to convince free trade-oriented nations to approve its membership in 2001. These broken promises have harmed the global trading system as well as both economic growth and the health of innovative industries across the United States and Europe. Here are nine commitments China made, but never lived up to:
- Refraining from requiring technology transfer as a condition of market access
Although its WTO accession agreement included rules forbidding China from tying foreign direct investment or market access to technology-transfer requirements, it remains commonplace for China to compel firms to hand over their technology in exchange for the privilege of investing, operating, or selling in China.
- Significantly reducing intellectual property (IP) theft and violations
Joining the WTO required China to recognize the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which provides protections for patents, copyrights, trademarks, service marks, industrial designs, digital content, and other intangible property. Unfortunately, Chinese IP theft grows unabated. The IP Commission Report on the Theft of U.S. Intellectual
One Hand Tied Behind Our Backs: Why America Must Do Much More to Curb China’s Dangerous Innovation Mercantilism
Ahead of Chinese President Xi Jinping’s visit to the United States this week, ITIF arranged an expert panel to discuss the ramifications and potential U.S. responses to China’s aggressive, mercantilist strategy of shutting American technology companies out of Chinese markets. Panelists referred to a number of the key points in ITIF’s latest report—“False Promises: The Yawning Gap Between China’s WTO Commitments and Practices”—which was released to coincide with the event.
Congressman Randy Forbes (R-VA), founder and chairman of the Congressional China Caucus, provided opening remarks explaining how China’s mercantilist strategy unfairly tilts the playing field against U.S. technology companies to such a degree that it threatens to undermine the U.S culture of innovation. The systemic nature of China’s mercantilist approach to stealing cutting-edge technology and intellectual property—through forced technology transfers and other means—has only grown more pervasive over the last decade. It is now critical that the U.S. government and others conduct a clear-eyed assessment and create accountability for China’s actions. Thus far, in the absence of real opposition, China has been using “controlled friction” to push as far as it can.
Robert Atkinson, president and founder of
Policy-making relies on narratives, and narratives often come from data. Or claim that they do. One story often told by economists—by everyone from Dani Rodrik to Erik Brynjolfsson and Andrew McAfee to James Kynge to Laurence Summers—is that China’s manufacturing sector has been shedding workers since the mid-1990s. This story leads us to believe that something like this is happening:
This argument ends up as a morality tale with serious policy implications: if even China, manufacturing powerhouse with wages developed countries cannot hope to compete with, is losing manufacturing jobs, then surely manufacturing jobs are obsolete and the U.S. is foolish to try to maintain them—let alone get them back.
Unfortunately, this story is based on a gross misreading of inaccurate evidence. There are three major problems. First, even based on a simplistic look at the data, it’s flat out wrong. Take a look at this chart that shows the actual manufacturing employment in China. (You may note that this chart only goes back to 1998, and that the peak of employment underlying most claims was in 1996—more on that in a bit.)
Strangely enough this graph looks nothing
Free trade is only successful if all sides are operating on a relatively level, market-based playing field. Unfortunately, in the last few years many nations, particularly developing ones, have dramatically ramped up their mercantilist policies designed to unfairly gain advantages in global trade. The use of these mercantilist policies hurts not only the aggrieved nations, but also, in certain cases, the aggressor. One tool in the mercantilist tool box is “dumping”: the practice of selling exports below the cost of production, often by relying on steep government subsidies. However, to date the system of addressing dumping claims has not been as effective as it should be. All too often by the time cases are brought to and adjudicated by the World Trade Organization (WTO) the damage has been done and many domestic firms put out of business.
We see this with the current conflict between the European Union (EU) and the United States with China over unfair Chinese trade policies in the solar industry. The chief issue for U.S. and EU policymakers concerns China’s use of mercantilist practices, especially selling below cost through large government subsidies, to promote Chinese solar
Last month, the United States International Trade Commission voted to uphold tariffs on solar panels imported from China. The Commerce Department had imposed the tariffs earlier this year in response to China’s heavy subsidization of domestic solar PV manufacturers. However, while the move is welcome, it is important to recognize that is not a magic fix and the fight against Chinese green mercantilism continues.
To be sure, the tariffs are well-justified, as they can simultaneously help level the playing field, discourage China from employing unfair trade practices, and encourage clean energy innovation. But they may be too little, too late. Since the tariffs apply solely to panels made of Chinese-produced solar cells, Chinese companies can avoid them by assembling panels with cells produced elsewhere. ITIF Senior Analyst Matthew Stepp details the result at Forbes:
By shifting its way through loopholes in the tariff ruling, China is rerouting its manufacturing … Read the rest
LDK Solar, the world’s second-largest solar wafer maker, is now a Chinese state-owned enterprise. ITIF previously noted that the company had $80 million in debt paid back by Xinyu, a city in the eastern Jiangxi province which is also home to LDK’s main headquarters. But LDK Solar reached a new milestone last week with the news that it is selling a 20 percent stake in the company to the state-run Hen Rui Xin Energy for roughly $23 million. While the United States has raised tariffs on Chinese solar imports this year in an effort to discourage the country’s green mercantilism, the LDK Solar move suggests that China is doubling down on such policies.
The Xinyu-debt repayment and Hen Rui Xin Energy-equity acquisition are two recent instances in a string of notable government actions to shore up the struggling LDK Solar. Two months before the Xinyu announcement, MorningWhistle reported that the Jiangxi provincial government “pressur[ed] state-owned banks into approving a loan package worth 2 billion yuan” (more than $320 million USD) for the company, interest rate unknown. And just three days after the announcement of the Hen Rui Xin Energy news,
Yesterday, the New York Times described a “looming financial disaster” for China’s clean energy industry: “Though worldwide demand for solar panels and wind turbines has grown rapidly over the last five years, China’s manufacturing capacity has soared even faster, creating enormous oversupply and a ferocious price war.” This development offers three important lessons for U.S. clean energy advocates.
1. Green Mercantilism is not a long-term sustainable clean energy strategy. China’s clean energy policies can best be described as brute force – they “employ nearly all types of mercantilist policies to artificially drive down the price of clean energy technologies” through the use of illegal subsidies, content requirements, export dumping and the like. In other words, China wants to become global leaders in exporting today’s clean energy technologies by any means necessary. As ITIF discusses in two recent reports, Green Mercantilism: Threat to the Clean Energy Economy and Enough is Enough: Confronting Chinese Innovation Mercantilism, this strategy isn’t sustainable in the long-term. Clean energy is more expensive than fossil fuels, so the only way to increase exports in the near-term is by buying down the cost difference. But as the