Here Comes The Trade War – US To Investigate IP, China Won’t Sit By

U.S. President Donald Trump responds to a reporter's question after signing a memorandum directing the U.S. Trade Representative to complete a review of trade issues with China at the White House in Washington, U.S. August 14, 2017. REUTERS/Jonathan Ernst

Trade wars aren’t the sort of battles that can be won. We can only win at trade by actually doing it, it’s the very process itself which makes us richer. Thus a trade war, in which we deliberately restrict the amount of trade that we ourselves may do, is not something that can be won in any terms. Unfortunately that seems to be the way the Trump Administration wants to take things with China. Their argument is that China rips off US intellectual property–I have my doubts about the country but certainly people within it do–and that this is something which has to stop. No real complaints about that from me. However, tying that in with other trade deals and details has always been more than a little suspect.But that’s what is indeed going on:

The US fired the first shot in a trade war with China

That’s certainly one of the ways it can be seen, yes.

China has criticized the Section 301 provision for being a violation of the principles of multilateralism, in favor of a unilateral, aggressive approach.

The United States Trade Representative, Robert Lighthizer, initiated an “investigation” of China’s trade practices, having alleged that China is engaging in intellectual property violation. The move is expected to do significant harm to already strained U.S.-China relations and elicit a strong response from Chinese leadership.

That’s also reasonable enough:

After US Trade Representative (USTR) Robert Lighthizer formally initiated an investigation into China’s intellectual property practices under Section 301 of the Trade Act of 1974, Chinese Ministry of Commerce has warned United States, saying that “Beijing will take all appropriate measures to safeguard its legitimate rights and interests”.

For Lighthizer is, as with other Trump Admin actions, deliberately reaching back to pre-WTO laws and rulings, reactivating them even, in order to pursue these trade prejudices of theirs. Given that we’ve now got these newer WTO rules it would seem more sensible to use them, they are the foundation of the current world trade order.

In one way this is all a little perverse in fact. There’s a process called TRIPS, the point of which is to get these intellectual property matters into the general trade agreements. And it is, partly at least, in the WTO system at present. So, there are at least some rules about this.

As up above trade wars are the sort of combat that no one can actually win, even in theory, so it doesn’t seem all that sensible to be encouraging one as the Chinese have indeed said they won’t “sit by.”

But then, I hear the cry, Tim, if you don’t like this action about this problem them what would you recommend? My answer being as it has been for a long time now, just ignore it. There is actually some reasoning behind this though, it’s not just because I’m lazy.

A useful description of a poor society is one that doesn’t invent anything, one that doesn’t actually have any intellectual property. Equally, a useful description of a rich one is one that produces a lot of said IP, as that’s where the value add is, added value being the very definition of creating riches. I’ve many a time therefore said that we should just ignore IP rip off by very poor places on two different grounds. The first is that they’ve not got enough money to buy it so we’re not losing anything by their stealing it–if we demanded to be paid they wouldn’t use it and we’d still get no money. Secondly, we’d very much like very poor places to become richer places, their stealing IP is one of the things that will make them so.

On the other hand rich places should cough up and cough up in full. Germans can afford to pay for our IP and we can afford to pay for that German IP, the continued production of both sets of IP making us all collectively richer. That, of course, being why we insist upon creating those copyrights and patents which insist people do pay for IP, to encourage the production of further such.

Hmm, the flaw in this system being that we need to work out when should people start paying for it? What’s poor here, what’s rich? My answer being that there’s a simple market solution to this. As above, a useful definition of a rich place is one that creates substantial amounts of IP. The richer a place gets then the more they will want to have an IP protection system in place domestically. Further, the more they will want to have that domestic IP recognised internationally. Thus we all agree to recognise, possibly bilaterally but better multilaterally, the IP of any one national source according to how well they protect IP domestically, most especially how they protect international IP domestically.

If people desire to continue to rip off international IP they’re entirely at liberty to do so therefore–it’s just that any and every invention of their own is a free for all for everyone else. As the country gets richer, creating more IP–as above, these are synonyms to a great extent–then their own internal pressure to protect both their own and international IP rises.

By Tim Worstall


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