How Trade with China Threatens Western Institutions: The Economic Roots of a Political Crisis

Description

This book evaluates the institutional environments of China and the United States, and the West more broadly, and how they affect their trading relationship, with specific emphasis on intellectual property theft and other allegations of unfair competition. The economic and political characteristics of the two countries affect the balance of power in their trading relationship, with ramifications far beyond jobs and output. The major theme is China’s ability to free ride on Western institutions through intellectual property theft and extortion. This free riding is far more than just infringing patents and reaping profits; it creates a combination of incentives for political pressures in the West that diminish the free market and liberal Western values. The result is the classic result of free riding – underprovision, or degeneration, of the Western institutions that made the West prosperous and free. At the same time, China’s economic might, military prowess, and global soft power increase, often with deleterious effects for freedom and free markets. This book is distinctive because it integrates public choice ideas about economic institutions, state action, and strategic behavior into international trade. It also takes account of the economic characteristics of China and the West and explains why they present a situation that is fundamentally different from other trade disputes. Institutions and political influence are central to this book’s analysis of trade, which can be more dangerous and more disguised than the welfare gains from trade. Providing a concise and lucid distillation of pressing issues, this book is critical reading for scholars studying trade with China and its effects on both global and Western innovation, economic output, soft power, and freedom more broadly. Preface Contents Abbreviations 1 Introduction References 2 China’s Economy and Success Without Freedom From Starvation to Superpower: Evolution of China’s Overall Economic Approach Decentralization of State Economic Control Economic Incentives and Outcomes under Decentralized Planning The Sino-Soviet Split: A Harbinger of China’s Intentions Illusory Reforms Under Deng Xiaoping Socialism Without Soviet Characteristics Rapprochement with the United States Freedom? Just Economic Incentives and Political Repression Incomplete Nature of Reforms The Tiananmen Square Massacre and a New Era of Repression Naivete of the West—Trade and Political Freedom The Current Economic Landscape of China State Planning—Still an Integral Part of China’s Economy What Do “Property Rights” Entail in China? Foreign Direct Investment—One Part of the Growth Strategy Currency and Banking Debt and Asset Bubbles Intellectual Property, Innovation, and Technological Advance Mercantilism with Chinese Characteristics The Chinese Approach to Intellectual Property A Traditionalist and Socialist Aversion to IPRs IPR Enforcement—A Persistent Challenge Development of IP Law in China The Belt and Road What Is Not to Like About China’s Economic Model? References 3 The American Economy and Institutions with Sino-US Trade Intellectual Property Rights and Other Economic Institutions Comparative Advantage Differences America—Still a Manufacturing Powerhouse The United States Is Still a Leading Manufacturer Output and Employment—A Major Divergence American Monetary Policy: Creating and Exacerbating Problems Asset Bubbles and Supply-Side Deflationary Pressures Monetary Expansion—A “Cure” That Becomes a Problem Currency Devaluation—Not Just a Chinese Issue China’s Currency Manipulation—A Response to America’s Direct Domestic Harm of Easy Money Macroeconomic Economic Accounts Whence the Capital Surplus? Imprudent Domestic Policies or Good Investment Climate A Net Debtor that Earns Net Income Chinese Investment in Foreign Assets The Avoidable Current Account Deficit—A Symptom, Not a Problem Bilateral Balance with China Trade Balance in Intellectual Property—A Declining Surplus American Vulnerabilities Institutions in Models of International Trade Economic Surplus from Many Different Institutions Spillovers of the Economic Value of Institutions Excludability of Institutional Value Institutional Interaction Between the United States and China Trade Policy and Macroeconomic Accounts The Structure of American Trade Policymaking The United States Trade Representative Committee on Foreign Investment in the United States Other Policymaking Entities The Structure of Chinese Trade Policymaking Comparison of US and Chinese Policymaking Structures References 4 Specific Problems in the US-China Trade Relationship Intellectual Property Intellectual Property Theft—Quantifying the Problem The Economics of Intellectual Property: Reasons for a Dispute Intellectual Property and Trade Specifics of IP Misappropriation—Theft, Infringement, and Extortion Disguising Extortion: Joint Venture Requirements Economic Espionage Civil-Military Integration Global Advance of China’s Domestic Repression Noncommercial Motives of Theft Exporting Surveillance and Repression Conclusion References 5 Institutional Free Riding The Source of Advantages for Countries and Firms Institutions: The Root of Economic Advantage “Unfair Competition” or Natural Comparative Advantage? Institutional Differences and Nonexcludability Institutional Free Riding Prior Research on Trade, Institutions, and Free Riding Overview of Institutional Free Riding Free Riding: What It Is and What It Is Not History and Examples Harmless and Beneficial Free Riding Multinationals: They Belong to No Single Country Opportunistic Institutions Feasibility of and Susceptibility to Institutional Free Riding Domestic Know-How Ability to Entice Acquiescence Why Do Firms Acquiesce to Foreign Free Riding? The Prisoner’s Dilemma Market Size and Desirability for Investment The Role of Trade Policy Institutional Free Riding and Innovation Innovation in the United States and the West Economic Incentives for Continued Innovation Chinese Acquisition of Innovative Firms Innovation in China Institutional Free Riding and Production Market Structure Effects on Output Institutional Degeneration References 6 Institutional Change in the West Institutional Change and Pressure from China Espionage Against Government and Business State and Local Governments The Chinese Diaspora Repressed Minorities Extraordinary Renditions Chinese Global Soft Power Political Influence in the West Military Power and Territorial Expansion Potential Claims to the West China’s Economic Threats Are not Idle Belt and Road Colonialism Chinese Censorship in Western Countries Censorship of Foreign Corporations Chinese Students in the West Censorship of Academia Censorship of Media Censorship of Western Governments Censorship of Religion Pollution and the Censorship of Information References 7 Confronting the Threat Domestic Policy Options A Coalition of Diverse Interests Monetary Policy Ease the Regulatory Burden Restrict Trade with China Security Reasons Other Export Controls Strategic Advantage Constrain the Subnational Governments Limits on Foreign Investment Boycotts and Embargoes Academia Internet Reform American Patent Law Protect Western Institutions at Home Conspiracy Against Rights Strengthen Poorer Communities Multilateral Approaches Hong Kong: A Lost Opportunity International Treaties and Organizations Pivot to the Asia-Pacific Region A NATO for the Asia-Pacific? Military Superiority and Alliances Trade Liberalization and the Trans-Pacific Partnership Alternatives to the Belt and Road Initiative Caution and Unintended Consequences References 8 Conclusion The Choice Confronting the West Why Did This Choice Come About? The Urgency of Decision Consequences Index