On Monday, December 13, the US International Trade Commission (ITC) issued the first of two reports that seek to quantify the economic losses to American industry as a result of China’s lax protection of intellectual property rights (IPR) and the combination of emerging policies that are collectively geared to promote the “Indigenous Innovation” of Chinese technology. Despite press accounts suggesting the report was strategically released just prior to this week’s meeting of the US-China Joint Commission on Commerce and Trade (JCCT) as a means of putting more pressure on China, the purpose of this report was to simply outline the problems that exist with regard to China’s IPR and Indigenous Innovation policies and sketch out the likely methods the commission will use in the months ahead to actually calculate the costs of these policies.
Although one could offer quibbles – don’t worry, I will – the report is quite careful and measured in its approach, and offers no mouth-dropping conclusions that “stick it” to the Chinese. The authors appropriately point to the widely recognized gap between China’s legal IPR framework and implementation, though they also note that there are aspects of China’s laws and regulations that need to be addressed. They provide a long list of policies geared to promote the development and commercialization of Chinese technologies, from government procurement to accreditation processes.
They conclude, though, that the costs of Indigenous Innovation have, in the main, yet to be felt because the policies are in their early stages. Hence, they write:
This conclusion differs substantially from that offered by a U.S. Chamber of Commerce report authored by James McGregor issued this past summer, calling Indigenous Innovation “a blueprint for technology theft on a scale the world has never seen before.” [“China’s Drive for ‘Indigenous Innovation’,” p. 4.] This week’s report takes the appropriate position that we ought to do some systematic data collection before reaching any conclusions. Hey, what an idea!
The last part of the report then suggests how they plan to go about collecting and analyzing data. They will use a combination of surveys of companies, econometric analysis using quantitative data, and simulations. The authors review previous efforts at quantification and seem quite aware of the daunting task that lies ahead.
I’d offer three modest suggestions as they move forward:
1. Use scenarios. Since most of the costs are really in the future, instead of identifying a single dollar amount, the authors should provide alternative estimates based on certain scenarios that would vary according to changes in Chinese policies, different IPR theft rates, and different US company business strategies. The costs of government procurement will vary depending on whether China becomes a signatory to the WTO’s Government Procurement Agreement; the costs of Chinese standards efforts depends on the extent to which Chinese companies participate in both domestic and international standards efforts and how effective they are in these settings.
Scenario 1 might be called, “Full-Out Mercantilism,” in which the Chinese aggressively use every lever identified in this report to privilege domestic companies at every chance they get regardless of the complaints of foreign industry, their governments or the World Trade Organization. Scenario 2 might be called, “Muddling Industrial Policy,” that is, a continuation of the fuzzy status quo in which some distorting policies are expanded and others are modified or withdrawn in reaction to both complaints and their own learning of what works best. And Scenario 3 might be called, “Liberal Enlightenment,” in which IPR rules are more intensively enforced and Indigenous Innovation policies are radically scaled back in favor of a focus on improving China’s education system and other components of the “innovation eco-system.”
2. Consider the potential benefits. Although the costs may appear most obvious, it is a certainty that some American companies will substantially benefit from IPR theft and Indigenous Innovation policies. That may seem counter-intuitive or immoral, but you can bet the farm it’s true. Some American companies have received contracts for 3G telecom equipment, contracts that wouldn’t exist without an aggressive state-led effort to move from 2G to 3G telephony. They did not win as much as they would have had it been a perfectly even playing field, but the more accurate metaphor is a pie: industrial policy led to a larger pie, even though foreign companies got a smaller piece than they should have. Some American companies benefit from cooperating with Chinese companies which use others’ IPR without having fully compensated them. All American computer hardware companies benefit from Chinese who use pirated versions of Windows yet still pay for their computer hardware. If the ITC assumes that stolen IPR and more active Indigenous Innovation policies are by definition harmful to foreign interests, their results will be biased in favor of a larger cost estimate than is justified.
3. Delineate between losses due to different reasons. It is possible that the ITC will conclude that to the extent the market share, sales and exports of American companies decline in China, that trend may entirely be the result of unfair Chinese policies. They will certainly play a role, but that is not all that will be at work. US firms may also lose out because Chinese firms and their employees genuinely improve their capabilities and the quality of their products and services. And US firms may lose out because they make mistakes in strategy, product design, government affairs, human resource management or some other aspect of their business. American companies have been known to fail before outside China, even in the United States. It would be wrong to blame everything on the Chinese. The more their report’s methodology can account for these different factors, the more persuasive and valuable it will be.
Scott Kennedy review of ITC on China II policy DE comments 12 17 10
Scott, this is terrific stuff. I agree with your main points: First, scenario-building is indeed a well-established tool to capture possible futures of rapidly evolving and highly complex social systems. It is time that economists learn from military strategists and use scenario-building as a heuristic device that helps to avoid extreme and useless statements like that of the U.S. Chamber of Commerce report that China’s Indigenous Innovation is “a blueprint for technology theft on a scale the world has never seen before.”
Second, Scott is right when he states that, given the intensity of global competition, “…some American companies … [ and I would add, European, Japanese, Taiwanese and Korean companies, DE]..will substantially benefit from IPR theft and Indigenous Innovation policies.”
Third, it is incredibly short-sighted of many Western analysts to neglect the possibility that, after all, companies in emerging economies like China, India, Brazil, may challenge the position of incumbent global market leaders for the simple reason that “… their employees genuinely improve their capabilities and the quality of their products and services.”
In short, Scott’s concise note lays out in the clearest terms possible an alternative agenda for research and policy debates on industrial and technology policies in countries that used to be called RoW (the Rest of the World). We need to acknowledge the simple fact that those countries now have accumulated sufficient resources, capabilities and economic power to participate actively in global technology-centered competition.
The next step of course would be to start a debate that goes one step further and asks: What adjustments are necessary in strategies and policies in the US and China to create more space for robust and effective cooperation on global challenges, like climate change and renewable energy, and the reconstruction of financial markets so that they serve industry, and not the other way round. Dieter Ernst, East-West Center, Honolulu
Posted by: Dieter ERNST | December 17, 2010 at 10:00 PM