How costly is Chinese IP theft?

Christian List directed me to some studies of the costs of IP theft.  The first link was to an AEI report on the subject, which criticized the US definition of IP theft:

The leaders of the IP commission, Admiral Dennis Blair and General Keith Alexander, penned an opinion piece last year that not only points the finger directly at China but also illustrates confusion as to just what the US should target. They stated: “Chinese companies, with the encouragement of official Chinese policy . . . have been pillaging the intellectual property of American companies.” They listed a large array of US economic sectors as examples, including automobiles, chemicals, aviation, pharmaceuticals, consumer electronics, and software, among others.

But even these two highly knowledgeable leaders then went on to confuse the US case against Beijing’s “pillaging” by adding a list of military IP thefts, including plans and designs related to the F35 fighter, the Patriot missile system, the Aegis Combat System, thermal imaging cameras, and unmanned underwater vehicles, among others, as examples of Chinese spying operations. The problem and confusion to the reader here is that such military espionage is considered fair game by all nations, including the US. And one hopes that US intelligence agencies have been equally diligent in ferreting out Chinese (and other nations’) advanced military designs and equipment.

Chinese theft of US military secrets is certainly something that the US should be concerned about, and try to prevent.  But perhaps the moralistic tone one sees is a bit inappropriate, given that the US government does the same thing.  I’m all for trying to prevent this sort of espionage, but here I’ll focus on commercial theft, which seems to be the bigger issue.  The AEI piece linked to a 2017 US government report on IP theft.  Indeed the term ‘theft’ is used right in the subtitle of the report:

THE THEFT OF AMERICAN INTELLECTUAL PROPERTY: REASSESSMENTS OF THE CHALLENGE AND UNITED STATES POLICY

I was thus surprised to see the report discuss activities that cannot possibly be regarded as “theft”:

China continues to obtain American IP from U.S. companies operating inside China, from entities elsewhere in the world, and of course from the United States directly through conventional as well as cyber means. These include coercive activities by the state designed to force outright IP transfer or give Chinese entities a better position from which to acquire or steal American IP.

I.e., we’ll let you invest in China if you share technology.  In fairness, most of the report does focus on three types of outright IP theft:

We estimate that the annual cost to the U.S. economy continues to exceed $225 billion in counterfeit goods, pirated software, and theft of trade secrets and could be as high as $600 billion.

Wait until you see where they got these numbers:

Counterfeit and pirated tangible goods.

In 2016, the OECD and EUIPO used worldwide seizure statistics from 2013 to calculate that up to 2.5%, or $461 billion, of world trade was in counterfeit or pirated products.23 By applying this percentage to U.S. trade, we estimate that in 2015 the value of these goods entering the U.S. market was at least $58 billion.

The United States, however, is a much larger market for imports than the average market. It is nearly equivalent in size to the European Union, where the OECD/EUIPO study determined that approximately 5% of imports are counterfeit or pirated tangible goods. By using 5% as a proxy for the proportion of counterfeit and pirated tangible goods in U.S. imports ($2.273 trillion),25 we estimate that the United States may have imported up to $118 billion of these goods in 2015. Thus, anywhere from $58 billion to $118 billion of counterfeit and pirated tangible goods may have entered the United States in 2015. This represents the approximate value of counterfeit and pirated tangible goods (not services) entering the country.

With respect to counterfeit and pirated tangible U.S. goods sold in foreign markets, the OECD/EUIPO study found that they accounted for nearly 20% of the value of reported worldwide seizures. In 2015, estimated worldwide seizures of counterfeit goods totaled $425 billion, meaning that as much as $85 billion of counterfeit U.S. goods (20% of worldwide seizures) entered the world market (including the U.S. market).

Certainly, in the absence of counterfeit goods some sales would never take place, and thus the value of illegal sales is not the same as the sales lost to U.S. firms. The true cost to law-abiding U.S. firms in sales displaced due to counterfeiting and pirating of tangible goods is unknowable, but it is almost certain to be a significant proportion of total counterfeit sales. For purposes of aggregating the total cost to the U.S. economy of IP theft, we have estimated that 20% of counterfeits might have displaced actual sales of goods. When applied to the low-end estimate ($143 billion) of the total value of counterfeit and pirated tangible goods imported into the United States and counterfeit and pirated tangible U.S. goods sold abroad, the conservative estimate of the cost to the U.S. economy is $29 billion. When applied to the high-end estimate ($203 billion), the cost to the U.S. economy is estimated at $41 billion.

“Displaced”?  So let me get this right. If my wife buys a Coach handbag for $100, and it’s a counterfeit from China, and she enjoys the handbag, then the “cost” to America is $100?  I’m guessing that no actual economists participated in the writing of this government report.

Update:  Bob Murphy pointed out that my wording was wrong.  I should have said; “So let me get this right. If my wife buys a Coach handbag for $100, and it’s a counterfeit from China that displaces the sale of an American handbag, and she enjoys the handbag, then the “cost” to America is $100?”

Otherwise, my point is the same.

You might argue that my handbag example trivializes the problem, and that the real problem is patent infringement, which slows innovation.  I agree.  But how big a problem is patent infringement?  Again, the US government:

The same OECD/EUIPO study found that while 95% of counterfeit goods seized by customs officials were protected by trademarks, only 2% were counterfeits of patent-protected goods.

Here is the summary data for all three types of IP theft:

Totaling It All Up

In summary, we estimate that the total low-end value of the annual cost of IP theft in three major categories exceeds $225 billion, or 1.25% of the U.S. economy, and may be as high as $600 billion, based on the following components:

• The estimated low-end value of counterfeit and pirated tangible goods imported and exported, based on a conservative estimate that 20% of the cost of these goods detracts from legitimate sales, is $29 billion. The high-end estimate for counterfeit and pirated tangible goods imported and exported is $41 billion.

• The estimated value of pirated U.S. software is $18 billion.

• The estimated low-end cost of trade secret theft to U.S. firms is $180 billion, or 1% of U.S. GDP. The high-end estimate is $540 billion, amounting to 3% of GDP.

The software estimates are flawed in much the same way as the pirated goods estimates.  But it really doesn’t matter, because the total estimated cost of IP theft is almost entirely driven by the third category (trade secret theft), especially when you consider that the first two categories use methods that exaggerate the costs by at least an order of magnitude—indeed it’s not obvious that there are any net costs at all.  So where does the trade secret data come from?  The report doesn’t provide any methodology, merely citing a PriceWaterhouseCoopers study.  The following graph summarizes the methods employed by PWC:

Screen Shot 2018-12-08 at 2.20.54 PMPWC have done the following.  They start with the admission that they have no idea how to directly estimate the losses from trade secret theft.  Instead, they look at 8 other types of (mostly) illegal activities, which are also extremely difficult to measure.  Then they notice that 4 of these 8 activities involve between 1% and 3% of GDP.

Where to begin?

1.  Why assume that the estimates for other activities are accurate?

2. Why assume that the loss from trade secret theft is typical of other activities?

3.  If this is indeed the right method, then why not include other illegal sectors, such as the smuggling of tropical birds into the US?  Why just pick the large activities?

4.  Why assume that the size of an illegal activity like drug smuggling is a proxy for the cost of that activity to society?

5.  Why include R&D, which is 2.7% of GDP?  It’s not an illegal activity.  And does it seem plausible that the losses from trade secret theft exceed the total amount spent on R&D? But the high end of their range is 3% of GDP. As an analogy, is it plausible that losses from shoplifting exceed total revenue for retail sales?

6.  Notice that the most similar activity (software piracy) has a far smaller cost than the other 7.

The bottom line is that there is no there there.  No matter where you look, there is no reliable estimate of the cost of IP theft to the US (much less the cost in foregone utility to the entire world.)

In fairness, it’s quite plausible that the losses in this area are pretty large in dollar terms, certainly in the billions, or even tens of billions.  But that view is not based on any of these near worthless studies; rather it’s my intuition given two facts:

1. Information is a more and more central part of the global economy.  Commodities are an increasingly small share of the economy.

2. Information is easy to steal, and can be almost costlessly replicated.

Given these facts, IP theft will almost inevitably be an increasing problem.  Not just with China, but with India and many other countries as well. (Recall the slogan, “information wants to be free”) For fans of IP protection, this theft is a valid concern.

But this perspective also suggests that as with drug smuggling, the problem will be almost impossible to stop.  Consider the 2017 US government report’s discussion of China’s new communication satellite technology:

Perhaps the most recent case is China’s development of the Micius satellite, considered the world’s first quantum communications satellite, which China launched into orbit in 2016. Scientists at national laboratories and academic institutions around the world have been working on developing technology based on quantum mechanics to create a communications system that is considered to be completely secure from penetration. China is eager to develop this technology to protect its own communications from potential adversaries like the United States. However, perhaps ironically, China was able to develop quantum communications technology ahead of its rivals by incorporating their research findings. In an interview with the Wall Street Journal, Pan Jianwei, the physicist leading the project, was quoted saying, “We’ve taken all the good technology from labs around the world, absorbed it and brought it back.” This may be just an innocent quip about how scientists share their basic research findings with one another across borders. However, it has been demonstrated that the Chinese government systematically collects information and secrets from abroad to further its technology development goals, as illustrated by the cases discussed above.

This anecdote reveals more than the US government might have intended.  It suggests that it will be almost impossible to prevent scientific and technical information from rapidly spreading around the world.  The US should still crack down on IP thieves on a case-by-case basis, when they are caught, but we should not assume that this “war” is any more winnable than the drug war. Our pharma companies have basically accepted the fact that they are innovating for the high price American market, and the Europeans and Canadians will (legally) free ride.  Our other companies need to accept that there will be a lot of (illegal) free riding in IP intensive products, and there’s only so much we can do about it when it occurs in other countries.  Starting a trade war is a particularly inappropriate response.

I’m going to end with a comment left by Dallas Weaver after an earlier post on this topic:

You can divide IP into “real deep knowledge based IP” such as detailed scientific inventions and “fluff stuff” like “mickey mouse” or the business methods or “single click” IP.   The latter is obvious and easy to “borrow” and the owner could and do object.  I don’t care that much as the outcome is usually just rent-seeking with little contribution to humanity.

However, in the case of “real IP”, if you don’t have the knowledge base you can’t even steal it.   You could give the detailed IP for the F-35 to all the countries in the world and only a very few could, even, in theory, make the plane.    You can’t steal what you don’t understand.

If you have the ability to steal and utilize “real IP”, you also have the ability to create your own inventions.   Why copy the obsolete designs of others rather than creating improvements.   If you copy, you are always behind the curve.

Modern technology is so complex that the associated IP is all about people who understand the technology and China produces more STEM graduates in two weeks than we do in a year.  Guess who will win the real IP game?   Meanwhile, we demand that the new Ph.D. STEM graduates from our universities who are from China go home after graduation.

Most of the discussions about IP theft are by people who don’t have a strong enough STEM background to really understand what they are talking about.  Even Tyler with his deep understanding of economics doesn’t understand that the “tree of knowledge” is producing more fruit than ever in history, but to reach it requires “standing on the shoulders of giants”.

To even be able to stand on the shoulder of giants requires being able to read primary references in the area and I would like to drop the challenge to the readers to pick up the Reports section of Science Magazine (AAAS Journal) and see how many refereed articles they could read and understand.   When you stand on these shoulders you can see tons of what appears from your lofty perspective “low hanging fruit” for the picking.

PS.  I’m pretty sure that Tyler does understand the amazing fruits produced by the “tree of knowledge”, but I thought his comment made some interesting points.

PPS. I have a related post at Econlog.


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36 Responses to “How costly is Chinese IP theft?”

  1. Gravatar of Benjamin Cole Benjamin Cole
    9. December 2018 at 17:01

    I suspect Scott Sumner is correct in his views on IP theft, although I also suspect the topic is too large to really understand.

    But from the 30,000 foot level, there is an unsettling alliance between amoral multinationals and the Communist Party of China—-a powerful entity that exhibits overt hostility to intellectual property rights (well, and any other kind of rights), moral hazard and the price signal.

    The Communist Party of China offers manufacturers free land, free capital, industrial parks and infrastructural build outs, stolen UP and represssed labor.

    Multinationals by charter, and properly so, are amoral organizations. They seize the opportunity to operate in China.

    Multinationals can also pour unlimited funds into US media, academia, trade groups, lobbyists, think tanks and foundations, and even political campaigns.

    How times have changed.

    President Richard Nixon established a 10% across-the-board tariffs on nearly all imports. President Reagan put a quota on Japanese automobiles imported, and also arranged for the dollar to decline in value against the German market by 50%, at the Plaza Accords.

    Back then, the response was rather muted to Nixon’s and Reagan’s involvement in international trade.

    Today it appears the public narrative on free trade is largely framed by multinationals, who have emerged as behemoths on the commercial and international scene. Skepticism is warranted.

  2. Gravatar of Christian List Christian List
    9. December 2018 at 17:23

    Scott,

    thank you very much for your analysis.

    It puts things into perspective.

  3. Gravatar of mbka mbka
    9. December 2018 at 20:26

    Scott,

    about that PWC study. There is an important distinction between patents and trade secrets. By definition, patents provide the privilege of legal protection from copying, under the condition that the invention be fully described in the patent (!). This is the trade-off of patents – once their protection period is over, the fully described invention can now be legally copied under the best conditions. This trade off is also the utilitarian “benefit-to-society” justification for providing the privilege of granting a patent to begin with.

    Trade Secrets however, benefit of no legal protection, at least not by government privilege. They are simply corporate secrets, such as, manufacturing methods, or key details of a product obtained through R&D but NOT documented anywhere (hence the name “secrets”). Why would companies not apply for patents for key technology? Because if they keep it secret, they don’t have to describe it in a patent application and therefore it is much harder to copy or back-engineer. But if it does end up “stolen” or copied, there is no protection – that’s the trade-off of trade secrets.

    Companies may try to prevent the spread of such trade secrets by making employees sign NDAs or non-competes – but in case of illegal circumvention of such a contract, there is just a breach of NDA, and that’s that. And spreading secrets after a non-compete has expired is the rule, not the exception.

    In other words, obtaining a trade secret is not generically a crime.

  4. Gravatar of ssumner ssumner
    9. December 2018 at 22:20

    mbka, Thanks for clarifying that point. I’d add that Americans might still be concerned about the practice, but in my view there’s really not much that can be done about it.

    I recall reading that 200 years ago the British were worried that Americans would steal their manufacturing techniques and bring them to America.

  5. Gravatar of mbka mbka
    9. December 2018 at 22:40

    Scott,

    “I’d add that Americans might still be concerned about the practice, but in my view there’s really not much that can be done about it.”

    It’s common practice within and between countries. Example, ten years back or so I once talked to a German engineer / businessman who was in Asia trying to sell knowledge of the exact proportions for mixing the components of epoxy in the production of fiberglass hulls. Apparently that’s still a kind of an art, even when the basic component chemistry is known for many decades. I was taken aback, it’s clearly a morally ambiguous thing to try and sell out hard-won experience from his current or former company, but very likely, not even a patentable thing to begin with.

    “I recall reading that 200 years ago the British were worried that Americans would steal their manufacturing techniques and bring them to America.”

    De Tocqueville at the time commented how American industry practices were fast and loose as compared to the European stalwarts, how the quality was low and ships sank more often in the quest for a quick buck. Anyhow, the reputation of Japan, then Taiwan, then Korea, and now China, goes through the same cycle, from “low quality copycat” to “unfair price undercutting” to “we can’t match their quality”. Come to think of, that’s half the theory of Jane Jacobs’ “The economy of cities”, https://www.amazon.com/Economy-Cities-Jane-Jacobs/dp/039470584X .

  6. Gravatar of P Burgos P Burgos
    10. December 2018 at 05:46

    “But from the 30,000 foot level, there is an unsettling alliance between amoral multinationals and the Communist Party of China—-a powerful entity that exhibits overt hostility to intellectual property rights (well, and any other kind of rights), moral hazard and the price signal.

    The Communist Party of China offers manufacturers free land, free capital, industrial parks and infrastructural build outs, stolen UP and represssed labor.”

    I think that these are all very good points made by Benjamin Cole. What I have so far been unable to figure out is how to square those kind of practices, which China seems to wish to continue, and its stated aim of being a high tech economic power. Subsidized manufacturing and stealing IP doesn’t seem like an effective way to build an ecosystem of researchers, venture capitalists, entrepreneurs, managers and marketers that consistently produce innovative research and then turn that research into viable commercial products and services. In other words, China’s current strategy seems to still leave the really valuable stuff to the West, which is a bit baffling to me. Do they just not understand how an advanced economy works? Do they think that they can do things differently and still achieve the same, or better results? Or is the cynical interpretation of “Made in China 2025” the correct one, that it is putting a nationalistic veneer over Xi’s consolidation of power over the private sector and a way to use cronyism to further entrench the party’s control of the country?

    Also, related question, with how much spying China does on its own citizens, will it (does it) use that spying capacity to steal IP from unfavored Chinese firms and to give it to politically favored firms? What about trade secrets?

  7. Gravatar of ssumner ssumner
    10. December 2018 at 09:15

    mbka, Good example. I may use that in a post.

    Burgos, The simplest way to resolve your confusion is to not assume that what Ben says is accurate. That’s been my approach, and it works for me.

  8. Gravatar of Monday assorted links – Marginal REVOLUTION Monday assorted links - Marginal REVOLUTION
    10. December 2018 at 09:57

    […] 4. Scott Sumner on Chinese IP theft. […]

  9. Gravatar of Dustin Dustin
    10. December 2018 at 10:12

    Your continued analysis of the cost of IP theft and trade wars is incomplete in my view.

    What matters is the cost of a trade war vs. the benefit. Irrespective of our intuition, your analysis seems to sort of hand wave that “of course the costs are more than the benefits” without providing much to support it. Yet at the same time you are quite critical of OECD and PwC reports for not having defensible analysis.

  10. Gravatar of ssumner ssumner
    10. December 2018 at 10:26

    mbka, I’ll do a post at Econlog later today or tomorrow, with your comment.

  11. Gravatar of ssumner ssumner
    10. December 2018 at 10:29

    Dustin, I’m not certain the costs will outweigh the benefits. It’s not impossible that we’ll pressure China to adopt a much more market oriented policy. But if you are going to launch a trade war (or any war) the burden of proof is on the initiator to have good evidence. We know there are big costs.

    I’m not seeing persuasive evidence. Do you? If so, can you give me a link?

  12. Gravatar of mak mak
    10. December 2018 at 11:58

    I’ve often heard that companies in the Silicon Valley were especially productive because California laws didn’t allow non-compete agreements. So maybe we should also wonder about the broad *benefits* of IP theft. A Chinese company steals some trade secret. Their engineers make improvements. Those improvements diffuse to other companies and eventually back to the US. The original company suffers an economic harm, but the rest of us benefit (not to mention the plain consumer benefit of cheaper prices and more consumers having access to the products). Maybe this ultimately harms the world by depressing the potential economic gains of research (and so the amount of research). But I’d guess that some leakiness of IP is actually beneficial on net.

  13. Gravatar of P Burgos P Burgos
    10. December 2018 at 12:05

    I think that China’s “made in 2025” plan makes sense, but only really if China further liberalizes its economy. Right now it isn’t clear that they really intend to do so. There isn’t any talk about China becoming one of the best places in the world for entrepreneurs. The silence could be interpreted as the party either thinking that isn’t necessary to become a leading high tech economy or that so loudly announcing the end of cronyism as China’s operating model is politically too risky. Neither seems to bode well for China to fulfill its ambitions.

  14. Gravatar of P Burgos P Burgos
    10. December 2018 at 12:14

    @ ssumner @ Dustin

    The whole trade war with China seems like a risk with a high variance in expected outcomes. The trade war may be very costly. However, the last time China substantially liberalized its economic policy (and politically as well) it experienced three decades of very high GDP growth. So if China further liberalizes in response to the trade war, the benefits could be enormous (mostly for China, but some for the rest of the world as well). I doubt that’s what Trump and Navarro are thinking, but it would not surprise me if Mnuchin and Cohn and others see it that way.

  15. Gravatar of Subhash Garg Subhash Garg
    10. December 2018 at 13:48

    Whoever wrote “If you have the ability to steal and utilize “real IP”, you also have the ability to create your own inventions.” has never conceived of an original technical idea him/herself. I have. An external spark matters infinitely more than volume of STEM degrees.

    Ideas that have already proven their worth in working products are critical enablers of China’s unimaginable and unprecedented takeover of the world’s consumer markets. Without what you derisively club together in “IP theft”, China could not rule the world as she does. Think not like an American obsessed with America: China is taking away the global market, and that’s worth trillions!

    Economists do almost no innovation in their profession. Engineers in the US innovate constantly. Try talking to them.

  16. Gravatar of Subhash Garg Subhash Garg
    10. December 2018 at 14:04

    To P. Burgos: The Party (in China) doesn’t want entrepreneurs for two reasons. One, if you wait for your own ideas to germinate, you will miss the boat in the market; stealing is the ONLY way for China to be a market force. Two, creating a culture of free thinking and innovation can be suicidal for a totalitarian dictatorship.

  17. Gravatar of ssumner ssumner
    10. December 2018 at 15:02

    mak, Good point.

    Subhash, It’s clear you know almost nothing about China. Might I suggest a visit to Shenzhen?

  18. Gravatar of P Burgos P Burgos
    10. December 2018 at 16:00

    @ Mark

    That “leakiness” of IP is coupled with a government that, so far as I know, doesn’t play favorites between companies. Lately I have been reading that an increasing number of economists are viewing the increasing market share of leading firms as leading to less competition among companies for customers and employees. The transfer of IP to Chinese companies isn’t in support of more competition and new startups trying to do things better, but rather seems to be about supporting large, politically well connected “champions”. So there are reasons for the Chinese to hope that the trade war prompts some changes in China.

  19. Gravatar of mbka mbka
    10. December 2018 at 17:56

    Scott,

    thanks, and I left a further comment over at Econlog. I agree with you and mak here – the societal benefits of knowledge sharing are large and obvious. Virtually all innovation occurs by recombining pre-existing building blocks. A good read on this is Brian Arthur’s “The Nature of Technology”, https://www.amazon.com/Nature-Technology-What-How-Evolves/dp/B00381B7YG/ref=sr_1_1?ie=UTF8&s=books&qid=1274942826&sr=8-1

  20. Gravatar of Ian Maitland Ian Maitland
    10. December 2018 at 18:00

    “In other words, obtaining a trade secret is not generically a crime.”

    Maybe not, but many of the methods by which trade secrets are acquired are crimes.

  21. Gravatar of Ian Maitland Ian Maitland
    10. December 2018 at 18:06

    “But if you are going to launch a trade war (or any war) the burden of proof is on the initiator to have good evidence. We know there are big costs.”

    So if someone punches you in the nose and you defend yourself, you have the burden of proof? It may be hard to quantify the theft of IP by China, but there is no doubt who started it.

  22. Gravatar of Ian Maitland Ian Maitland
    10. December 2018 at 18:14

    P. Burgos writes “China’s “made in 2025” plan makes sense, but only really if China further liberalizes its economy.” Excellent point, and China seems to be doing the opposite. But China has such a large market that it can liberalize its domestic market while running a mercantilist policy of favoring local firms and systematically looting IP from overseas.

  23. Gravatar of Morgan Warstler Morgan Warstler
    10. December 2018 at 18:30

    Arghh repost

    Scott’s family ruins him. Personal thing, but IMO it’s the only reason I have for how off logic he has gone with China and Trump. Makes him unwilling to think clearly or rationally.

    Nixon opened China, SO THAT Trump could bring them to heel.

    Correct Libertarian Mericratic thinking holds that this not from Scot is NOT ACCEPTABLE:

    “I.e., we’ll let you invest in China if you share technology. In fairness, most of the report does focus on three types of outright IP theft”

    This is bad for US companies. BAD FOR US. And bad for the Chinese people.

    US tech companies should OWN China’s car, airline, Uber, Airbnb, Amazon markets.

    China is, in the end, just 1B people with a SHITTIER CULTURE than Texas has and as

    Scott knows, “Culture matters.”

    If Scott

    IF Scott wants to those companies to not be “American” in the long run that’s “OK,” but as long as the shareholders and management are mostly US based, expect they will align to US interests. You don’t shit where you eat.

    And ALL COMPANIES RUN CORRECTLY will invade a culture and use their power to make them become like Texas.

    That’s WHY we like Free Trade – if Free trade doesn’t break eggs and make other cultures become like Texas, it may not be good.

    And GLOBALISM that is GOOD REQUIRES the world becomes like Texas, and this includes the “TEXAS IS BEST” attitude of right-thinking people in Texas and outside

    What’s HILARIOUS is how much Scott makes excuses for a second-rate culture vs. Texas.

    Trump is right, China 2025 is offensive to Texans, and the biggest mistake China made was pretending it was going to topple US as Earth’s greatest superpower.

    China CHEATS.

    And the real answer is this simple:

    ALL CHINESE STUDENTS WILL BE EXPELLED FROM US COLLEGE.

    This is their weakest link in short term.

    China’s one-child policy assures that the PRC members who matter (their one are the ones who study in US, means when we threated their bloodline, they will break PRC to make sure their kid stays in US school.

    This is the obvious gameplay outcome to anyone who understands information theory. brains are nodes. brains at top US colleges become supernodes.

    Supernodes generate IP. (software)

    IP wins control of nodes.

    So the US will stop making Chinese nodes into supernodes unless they allow US software to control their 1B nodes.

    REREAD THAT.

    Sorry Scott, you are basically lost on this stuff.

  24. Gravatar of mbka mbka
    10. December 2018 at 19:31

    Morgan,

    “China is, in the end, just 1B people with a SHITTIER CULTURE than Texas has”

    Dude. If you know of a culture that’s more hard working and commercially oriented than the Chinese, then please let us know. If I believed in the importance of a population’s IQ, I would mention that too, but I don’t, so I won’t.

    What’s happening is that the US is being disrupted as a superpower – economically, and geopolitically. The US finds that process unpleasant, and I can feel their pain. But crying “unfair” has never stopped a disruption.

    Demographics may be a showstopper for China, or politics, or the ongoing viability of US innovation culture (though the US seems to be showing signs of sclerosis, e.g. in internal mobility etc). But not culture.

  25. Gravatar of Tom G Tom G
    11. December 2018 at 03:29

    “2. Information is easy to steal, and can be almost costlessly replicated.”

    Actually, info is so easy to copy, almost everybody with valuable info has 1 or more copies of that info.

    The reason “stealing” is morally wrong, like if I stole your car, is that after the theft, you no longer have your car.

    To steal info means, after the theft, the original info creator no longer has it, nor any backups. This is virtually never the case.

    Instead, what has happened is that the “IP” has been copied, and used to create products which would be illegal due to patent protection, if the gov’t enforced its patent/monopoly grant.

    Consumers benefit by lower costs of the products using copied, not quite stolen, IP.

    I’d claim that the huge progress in reducing poverty in the world over the last 40 years, especially in China, is significantly due to the Chinese acceptance of limited private property & markets & investment & IP copycat production.

    If IP is valuable, copying it is a very very cheap way of increasing the wealth in the world.

    “What about the producers of the IP???” Ya, having the gov’t grant a monopoly to the creators has been very effective at getting production of IP. As IP gets easier and easier to copy, it’s time to look for other ways to support IP.

    Maybe huge, limited, tradable tax credits for registered patents used in products, with various companies fighting in the courts for portions of such “patent credits”. And maybe more tax credit money for more innovation. Mostly money oriented.
    Scott is right:
    “there will be a lot of (illegal) free riding in IP intensive products,”
    yet likely also wrong:
    “Starting a trade war is a particularly inappropriate response.”
    Where “trade war” means higher tariffs.
    Putting a tax on copied IP seems far more appropriate than other gov’t force based responses, like arresting CEOs.

  26. Gravatar of ssumner ssumner
    11. December 2018 at 10:52

    Ian, You said:

    So if someone punches you in the nose and you defend yourself, you have the burden of proof?”

    Punch them back (prosecute criminals when caught), or shoot them with a gun (trade war)?

    I don’t think you shoot shoot someone with a gun just because they punch you. Especially given that you are likely to suffer from the trade war just as much as them.

    Morgan, I liked you better when you still believed in capitalism. Mercantilism is so 18th century.

  27. Gravatar of Bob Murphy Bob Murphy
    11. December 2018 at 12:50

    Scott, I generally like your posts on this stuff–especially over at EconLog where you keep asking people for numerical estimates–but in this one, you say (I’m paraphrasing), “So let me get this straight, if my wife buys a $100 Coach counterfeit we’ve displaced $100 in sales?!” but actually the study itself says:

    For purposes of aggregating the total cost to the U.S. economy of IP theft, we have estimated that 20% of counterfeits might have displaced actual sales of goods.

    So no, they would estimate you displaced $20 in sales, right?

  28. Gravatar of ssumner ssumner
    11. December 2018 at 14:31

    Bob, Yes, that was poorly worded, I corrected it now. Of course the basic point stands.

  29. Gravatar of Morgan Warstler Morgan Warstler
    12. December 2018 at 18:24

    Scott, STFU

    Your OWN WORDS Which I lifted and quoted was YOU making excuses for China’s Mercantilism.

    It’s your wife and daughter and family. Nothing more.

    CHINA IS A SHITTY SECOND RATE CULTURE VS. TEXAS and until you accept it, internalize it and accept that Chin’s political system will be brought to heel by :Free Trade”

    OR

    there will be no free trade, you are a faker bathing in estrogen, a man unable to stand for what men stand for… cowboy capitalism REQUIRES that the govt people BEND THE GOD DAMN KNEE or your political system LOSES in the “long run”

    NYT today goes long on Trump breaking Xi, it’s over. TRUMP WINS AGAIN.

    —-

    It’s OK Scott for you to mea culpa that your emotions got best of you…

    But in the end, Trump is more Texas than you get or understand… we never forget what type of people MUST BE IN CHARGE,

    And you did with China.

    We’ll forgive you.

  30. Gravatar of Morgan Warstler Morgan Warstler
    12. December 2018 at 18:32

    “I don’t think you shoot shoot someone with a gun just because they punch you. Especially given that you are likely to suffer from the trade war just as much as them”.

    YES YOU SHOOT THEM, if you are able to make a credible threat, you FOLLOW THROUGH.

    Trump was able to BREAK CHINA, I took the time to show you that IF it goes much longer, we WILL THROW ALL CHINESE STUDENTS OUT OF US… thats not my imagination, it’s a KNOWN THING in GOP circles.

    China is WEAK Scott, and you are emotionally tied up in not seeing China as weak.

    WEAK Scott.

    and push comes shove, weaker players bend knee to die.

    Scott, its easy for you to mea culpa!

    Just go on about how China has chased all their American expat cowboys out under Xi….

    But YOU WILL MEA CULPA bc we are going to watch you admit your error or torque your reality more and more until you are irrelevant.

    Don’t become Bill Kristol of Econoblogging Scott. let it go.

  31. Gravatar of Morgan Warstler Morgan Warstler
    12. December 2018 at 18:34

    https://www.nytimes.com/2018/12/12/business/china-trade-war.html

  32. Gravatar of Morgan Warstler Morgan Warstler
    12. December 2018 at 18:36

    In recent weeks, Mr. Xi, who in his tenure has challenged the United States’ global dominance more directly than any Chinese leader since Mao Zedong, has followed through on a series of deals that he struck with Mr. Trump in Buenos Aires this month. He has begun lifting recently imposed barriers to imports of American food, energy and cars — even as the United States maintains tariffs on $250 billion worth of Chinese goods.

    While the agreement was initially presented as a temporary truce in the trade war, both sides are pushing for a long-term deal that creates a framework for closer, more stable relations between the world’s two biggest economies. Vice Premier Liu He on Tuesday called the United States Trade Representative Robert E. Lighthizer and Treasury Secretary Steven Mnuchin to lay out an initial road map for negotiations, with the goal of face-to-face talks next month.

    “The Chinese government really wants to negotiate a deal with the United States to calm down the conflict, not only because of economic difficulties right now in China but also for the sake of long-term relations with the United States,” said Tu Xinquan, the executive dean of the China Institute for World Trade Organization Studies in Beijing.

  33. Gravatar of Morgan Warstler Morgan Warstler
    12. December 2018 at 20:28

    Scott, this is your best face-saving mea-culpa

    http://www.realclearlife.com/politics/what-donald-trumps-trade-war-with-china-is-really-about/

  34. Gravatar of Luca Luca
    14. December 2018 at 20:53

    Can someone please provide some further clarification on Figure 2.? How should I interpret the percent of GDP axes?

  35. Gravatar of ssumner ssumner
    15. December 2018 at 09:31

    Luca, I’m more confused by the vertical axis.

  36. Gravatar of Andao Andao
    15. December 2018 at 11:56

    I find it hard to believe the estimated figure for software piracy is that low. I worked in Shenzhen for over 5 years and not once did we see a legitimate copy of Microsoft tools or expensive engineering software. Any type of SaaS platform we had to use (due to Great Firewall constraints) was a less secure, buggier version of
    a product that was otherwise blocked in china. A friend at IBM also told me their contracts with Chinese financial services companies we’re cut off as soon as their software had been successfully replicated in a Chinese university lab.

    And then you have cases like Baidu and Weibo which are government protected rip-offs of Google and Twitter. If market forces and genuine innovation were at work, Baidu and Weibo would be popular globally, but of course that isn’t the case.

    Your example of the US stealing British manufacturing knowhow might be true, but this is infinitely easier now with most IP existing in digital form. Your F-35 example is valid, but ultra efficient stealth aircraft are a pretty miniscule part of the global economy.

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