Archive for the ‘IPR’ category

Role of the Government

May 20, 2009

I have previously opined in this blog that issues such as the exchange rate of the RMB and the size of the bilateral trade deficit are matters upon which have been lavished far too much attention by the US Congress and others (and if I have not made this explicit before, I should have).  In terms of the US-China economic relationship and the future of China’s economy itself, a much more important question is the scope and nature of the role of the Chinese government in its domestic economy and international trade and investment. 

A central issue facing China’s leaders in this regard revolves around questions of industrial policies and how best to promote innovation in China.  I have previously in this blog noted my view that while the US needs to “re-regulate” our financial services industry, China needs to continue to deregulate in virtually all areas.  The recent tendency of the Chinese government to continue, or increase, the use of industrial policies in certain industries runs in the opposite direction.

I have also noted that over the long run I believe a greater use of competition, transparency of regulations, strong IPR protection, freer flow of capital, etc. will help China best achieve its goal of promoting innovation.  An approach that has government bureaucrats picking winners from the vast array of emerging technologies and companies and nurturing them with government supports and protective policies is a sure loser in my view.  Yes, increased competition, etc. will improve the access for foreign companies in the China market, but I happen to believe this is ultimately to the benefit of China.

Having stated these views previously, some friends (and some not-friends) have cited the example of Japan to argue that industrial policies can be successful in propelling a country to the front ranks of technology.  In response, I have noted that I think China wants to develop an economy as dynamic and innovative as the US, not Japan, and anyway, outside of autos, how many successes has Japan had in becoming a global leader in industries due to its industrial policies?

With all of this background in mind, I direct readers to a fascinating article in the NYT today (http://www.nytimes.com/2009/05/20/business/20policy.html?_r=1) that examines issues related to industrial policies (in the US and Japan) and assesses its benefits and (substantial) limitations.  (Note:  When I say “fascinating” I mean it supports my previously stated positions.

One of the very points made in the article is the following:

“…Problems [with industrial policies], [economists] say, are typically byproducts of what economists call “political capture.” That is, an industrial sector earmarked for special government attention builds up its own political constituency, lobbyists and government bureaucrats to serve that industry. They slow the pace of change, and an economy becomes less nimble and efficient as a result.

Economists say the phenomenon is scarcely confined to nations with explicit industrial policies and cite the history of agricultural subsidies in America or military procurement practices.”

I agree with the analysis of US agricultural subsidies and military procurement practices.  However, I would note the scope of “industrial policies” in the US (until very recently, as discussed in the article) has been exceptionally limited, even when compared with Western European economies, not to mention China.

To me, continued broad government involvement in the economy and use of industrial policies by China will undermine China’s efforts to develop the dynamic, innovative economy it wants.  It will also lead to increasingly sharp trade frictions with the US and other trading partners.

I believe China’s leaders broadly recognize that in a country where the government’s role in the economy is huge the opportunities for “political capture” are also huge (just substitute “corruption” for “political capture” in this sentence).   The question is:  can those who specifically understand the damaging role industrial policies play in this equation overcome the substantial pressure that well-connected Chinese special interests are already bringing to bear?  For the sake of China’s continued economic development and the smooth development of bilateral economic relations, I hope the answer is yes.

Progress

May 13, 2009

I have argued in this blog that the big and complex issues we face with China won’t be solved overnight, no matter what we do. At the same time I have noted that we can/should expect continued steps forward on these issues. I used IPR as a poster child for such efforts (“Solving the IPR Problem”).

While in the government I was often pressed to show large, quick results on IPR. In response I’d argue that we were making progress in getting the Chinese government more focused on the problem and applying more resources to it. I’d argue that this trend over time would lead to more concrete measures of progress.

The Business Software Alliance (representing many of the major US software companies) has just released their latest “BSA-IDC Global Software Piracy Study” (press release with summary of report is here: http://global.bsa.org/globalpiracy2008/pr/pr_asia.pdf

Among other findings, the report states: “The average PC software piracy rate in Asia Pacific increased to 61 percent, up from 59 percent the previous year, with losses reaching over $15 billion.” However, when looking country-by-country it notes:

“China’s piracy rate has dropped 10 points in the last five years [from 90% to 80%], a result of more vigorous enforcement and education, as well as vendor legalization programs and agreements with original equipment manufacturers (OEMs) and resellers. The government, for instance, has mandated that PC manufacturers in China only ship PCs with legitimate operating systems.”

I’m not saying it’s time to declare victory re IPR in China. Software is just one aspect of an issue that spans other copyright problems, trademark, and patent issues. And anyway, 80% level of piracy is still pretty high. The US government and business groups need to continue their maximum efforts to help support those in the Chinese government who are working very hard to strengthen IPR protection. And the Chinese government needs to continue to press on this problem very hard. This is a time to redouble efforts, not slack off.

That said, there are lots of folks quick to criticize China for any (real or perceived) backsliding on issues. Let’s also give credit where it is due. The strenuous efforts the Chinese government has been making to strengthen IPR protection are showing results.

It’s Complicated

March 31, 2009

A news item in the Detroit Free Press today (http://www.freep.com/apps/pbcs.dll/article?AID=2009903310491)describes sale of a division of US auto parts supplier Delphi to a Chinese consortium that includes the Beijing City Government and at least one state-owned firm. The interesting part, as noted in the article is, “The deal gives Delphi, which is struggling to emerge from bankruptcy protection, much-needed capital and allows them to exit businesses they are no longer interested in keeping.” The part of Delphi being sold has “750 patents and employees in the United States, Mexico, Poland, India and China.”

So here’s the conundrum: is this a sad day for the US auto parts industry and a sign of the voracious, non-state sector of China gobbling up foreign intellectual property and market share? Or, a great success story that will allow Delphi to get out of bankruptcy and dump businesses it no longer wants to be in? To me it’s the latter, but in any event this development highlights how complex our economic relationship with China is and how hard it is to tell who is the “winner” or “loser” in such transactions.

Tackling the Tough Issues

March 23, 2009

According to press reports (which I take to be accurate at least in their broad outlines), tragedy continues in Tibet. No matter where one stands on the substance of the issues involved, I’d think everyone can agree we need to see a way forward that ends the violence and allows all the people living in Tibet to coexist peacefully, with their human rights protected. (I should note that I am someone who has no quarrel with the US government’s longstanding position that Tibet is a part of China.)

I don’t know enough about the issues to have recommendations for the parties involved. However, I do have thoughts on how the US government should approach issues such as Tibet and human rights with the  Chinese government. My thinking here was sparked by a comment that former Washington Post Beijing Bureau Chief John Pomfret made in his blog a few days ago. Here’s the link to the full post: http://newsweek.washingtonpost.com/postglobal/pomfretschina/2009/03/hillary_tibet_human_rigthts_china.html, and here is the quote that caught my eye [John was explaining why he thinks Hillary Clinton was wrong to publicly "downplay" human rights in Beijing]:

“First, her pronouncements could embolden the Chinese. China’s security services do pay attention to what the United States says publicly. Saying you’re going to down play human rights could be interpreted by China as a green light to break heads.

Second, announcing that a lot of other issues are more important than human rights (operative Clinton quote: Human rights “can’t interfere with the global economic crisis, the global climate change crisis and the security crises”) makes it harder to raise human rights as an issue when they do become important. You look silly. And your interlocutors won’t take you seriously.”

I like John (heck, I had him over to speak on “Media and Internet Freedom” at the course I run for the State Department), but will part ways with him on these points.

First, I think the power public US government comments hold over China’s security services is pretty minimal, especially on an issue such as Tibet, where Beijing believes it is in a struggle to keep the region from breaking away. It may be that lots of public (not just US) outrage over the case of an individual dissident can temper the treatment such a person gets in the Chinese system. However, even at that (see next paragraph) it is not clear to me that such public comments (especially from the US government) are the most effective way to encourage China to move away from practices we find objectionable.

And I’d particularly differ with John’s second point. The fact is (per my first entry in this blog), making cooperation on global threats the centerpiece of US-China relations first of all ensures we are focused on the issues that can most negatively affect the American (and Chinese) people. But in addition, it builds trust and credibility with China’s senior leaders. This positions US officials to have greater impact in China when (privately I hope) they pull their counterparts aside, note their commitment to cooperation, and express their profound concerns over violence in Tibet, release of a particular dissident, or other human rights issues.

I have felt for some time that the public airing of US government concerns about human rights in China did more to help reassure US domestic constituencies that an administration was concerned about these issues than anything else. Maybe it’s better instead to focus on those methods really help move the ball forward with China in the direction that I think most Americans want to see it go.

Note: I want to emphasize that my focus above is on how the US government should approach Tibet and human rights issues with China. I’m not suggesting that human rights groups, in the US or elsewhere, should close up shop or fall silent. Topic of what works most effectively for non-governmental groups is a subject for people with more NGO experience than I to explore.

Solving the IPR Problem

March 22, 2009

The recent announcement of the WTO decision on the US IPR case against China has spurred me to say a bit more about the IPR issue, with maybe some implications for other complex issues we pursue with China:

When you think of it, why the heck is it so hard to solve the IPR problem in China? We all know why it’s a problem (pick one please): a) the leaders of China just don’t get it; if we could just explain the importance of IPR protection to the top leaders we could get the problem fixed; or (b) they intentionally allow weak IPR enforcement so Chinese companies can rip off foreigners; if we force them to change their approach they could solve this issue in short order.

The problem is pretty clear. The folks who spent so much time on it in the Bush 41 Administration must have been incompetents. Same for the people who worked it for eight years in the Clinton Administration. Not to mention the gaggle of people engaged during the Bush 43 Administration. Clearly all were unimaginative, too soft, or not the sharpest knives in the drawer.

Stating it as I have above shows (I hope) just how silly it is when an outside observer rails about the fecklessness of an administration (whichever one that is at the time) in solving the IPR problem.

The fact is, no matter how tough, nice, or clever we are, we cannot achieve dramatic, short-term breakthroughs on the large complex issues in the bilateral relationship such as IPR. I don’t say this to excuse Chinese government behavior nor to say the US should give up and stop pushing China on key areas of difference. I say it because I believe sound policy can only come from an accurate understanding of the constraints we face in the real world (consider the counter example in another context: “This will be a cakewalk!” “They will welcome us with open arms!”)

In thinking about IPR (and similar problems) we need to distinguish between two kinds of issues we face in China. There are those issues that can be solved by relatively simple and easy-for-the-central-government-to-implement regulatory changes. A good example is tariff cuts promised as a part of China’s WTO commitment (accomplished completely, on time).

But IPR falls into the second category of issues, those which lie beyond the ability of the central government to address in the short term because they have broad economic impact and involve implementation across the country of a complex set of attitudinal, structural, and behavioral changes. To some degree we need to recognize that all politics is local, even in China.

Strengthened IPR protection is a key element of innovation and growth in China IN THE LONG RUN (and that’s why there are many in China who support stronger protection). But in the short run strict IPR enforcement causes job and revenue losses. So, there are large groups (local officials benefitting legally (via tax revenue) or illegally (via corruption)) from IPR violations; officials who don’t benefit from IPR violations but who are concerned about the impact of increased social instability if illegal factories are closed; owners, managers, and workers in the counterfeit industry, etc.) who have a strong incentive to ignore existing regulations and lobby against stronger enforcement. And in China, relationships trump rules, so add to the list of obstructionists all of the relatives and close friends of those who stand to benefit from lax IPR enforcement.

Q: Ok, but China is a dictatorship and the Communist Party can accomplish anything it wants, right? (Note: I appeared on a panel with a representative of one of the best known US human rights groups who actually made this point.) A: Nope.

Policymaking in China today (within both Party and government) has moved far from the single powerful figure (think: Mao Zedong) who could issue decrees from on high and have some hope they would be followed across the country. Policymaking and enforcement today is a highly decentralized mechanism that requires consensus among officials with diverse interests. Implementation of rules is further eroded by the fact that relationships trump rules and for sure in every locality there are officials who have relationships with those who benefit from flouting central government laws/directives.

Think IPR is a special case? That the Chinese government intentionally allows weak IPR enforcement as a way to facilitate theft of ideas by Chinese companies from foreigners? First consider the fact that Chinese companies steal more from each other than from foreign companies. But, also, look beyond IPR. Think about the failure of the government/party to enforce domestic food safety laws; mining safety laws; traffic laws! There is a systemic issue of governance in China that goes far beyond IPR enforcement. If enforcement of food safety laws, which threaten the health of Chinese children, is weak, think about the challenges of implementing a more controversial set of rules such as IPR.

I should note that one of the additional complicating factors limiting the implementation of IPR (and other rules) is lack of capacity, i.e., a shortage of highly professional, well trained government officials who can regulate the complex rules of a modern economic society. In IPR, how many police understand the nuances of investigating IPR cases? How many judges and prosecutors have this knowledge? To what extent do Chinese officials have the habit of cooperating across agency and geographic boundaries on complex cross-jurisdictional issues? (Very little as all China hands know.)

[Note: on the issue of enforcement of laws I recall reading some years back that China is a highly under-policed country, i.e., that the per capita number of police (Public Security plus People's Armed Police) was well below that of the US or other developed countries. Never could again locate that reference, but if a reader stumbles across this blog and can confirm (or correct) that data I'd be grateful. If my recollection of this is correct, certainly gives a different picture of the "this police state" than many observers have.]

Ok, so by now I sound like a whiner who is making excuses for China’s shortcomings. As I noted at the top of the post, my point is just that good policy has to be founded on an accurate understanding of the situation on the ground. In the case of IPR, good policy in my mind will try to accomplish two things:

1) in the short run: aggressive pursuit of specific issues where Chinese laws, regulations, or practices fall short and where we see an ability for China to implement a fix. The IPR case the USG brought in Geneva is a good example of trying to identify specific shortcomings that are addressable by the Chinese government. Negotiation under the JCCT mechanism is another good avenue for this effort.

2) over the long run: expand the number and scope of bilateral exchanges, conferences, seminars, and training programs that can provide the intellectual and skills-based support needed by those in China who themselves are pressing for strengthened IPR protection for the benefits it brings to China.

I’m someone willing to defend the proposition that the last three (or more) administrations have each made contributions to progress on IPR protection in China. It’s not as fast as most of us (and many officials in China) would like. However, we do ourselves no good by thinking that there continues to be a magic bullet that has eluded the idiots who have come before which could magically solve the IPR problem. This one will not be a cakewalk. We need to buckle down for a long-term effort.


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