Yes, it matters if China is ripping off American tech

Over at the FT’s Alphaville blog, Jamie Powell expresses some impatience with criticism of Huawei and its new Flypod earphones, which look suspiciously like Apple’s EarPods. Powell: “Yet should we be concerned about flagrant copying? Looking back in history, stealing ideas from others has been crucial to economic development. Just ask America.”

Powell then recounts the story of how the new American nation swiped the blueprints of the Arkwright water-powered spinning frame and thus kick-started the American cotton boom via industrial espionage. So China, still a poor nation on a per capita basis despite its technological advances, is just following an old playbook for development. And besides, Powell adds, American concern about China’s continuing IP theft and forced tech transfer really “reflects wider concerns over America’s influence in the world.”

A woman stands at the booth of Huawei featuring 5G technology at the PT Expo in Beijing, China September 28, 2018. Reuters

In other words, as the post’s title asks, “Who cares if China rips off the US?” Indeed, Nobel laureate William Nordhaus has found that “only a miniscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.”

Focusing on the innovation generators where they are located ignores how the benefits get widely diffused and enjoyed. (And when Chinese researchers publish papers about AI, for instance, researchers in other nations benefit from that increase in the stock of shared knowledge.)

Now there is the issue that China also poses a military threat. And America being the world’s tech leader has national defense as well as economic implications. (Note stories like this one in The Washington Post: China’s application of AI should be a Sputnik moment for the US. But will it be?)

But when we worry about Chinese tech theft, it might really be more about how it undermines the broader political support for trade, rather than an issue of directly undermining domestic innovation or national security. Check out this snippet from a chat I had with my AEI colleague Derek Scissors:

Pethokoukis: Is that because [IP and tech theft] will really have that big of an economic impact, or is it because we’re worried about China suddenly having a breakthrough in some technology that changes the defense-economic equilibrium — or is it because if we don’t do anything, there’s just not the political support in the United States for free trade and openness?

Scissors: So I think it’s the second one, but I’m not a military expert. If you had somebody else from AEI on they might say they are really worried about a Chinese breakthrough in this technology or this technology and then we could get a war over Taiwan or whatever — that may be true, but I don’t know enough.

What I’m more worried about is your second point, which is it’s not just the US. There’s a lot of anti-trade rhetoric around the world. The WTO stop moving forward in the middle of the last decade. We tried the TPP (though I didn’t think it was a very good agreement and it had no chance of passing the Congress). President Trump is a populist. It’s not just him. Hillary Clinton reversed herself on the TPP. Senator Sanders is anti-trade. So we’ve seen a lot of weakening for trade support around the world and in the US. And if the second largest economy and arguably the largest trading country is still cheating and there’s no pushback, of course Americans are going to say, I’m not supporting this. I’ll support free trade with Canada even though the president’s mad at them, but I’m not supporting free trade with China. And if you push the second largest economy out of the world trading system, the system may fall apart. What will happen is some countries will go with the US, assuming that we treat them well, and some countries will go with China, and we’ll get a segmented world trading system instead of a global world trading system. So for me the problem is the Chinese are undermining global open trade by their behavior.