The U.S., China, and the New Cold Warriors

September 07, 2020

On the days when he is not celebrating his friendship and trade deals with China’s president Xi Jinping, Donald Trump has sought to hype China as the United States’ major enemy in the world. This has meant not only absurd allegations about the pandemic (top Trump economic adviser Peter Navarro has claimed that China deliberately sent infected people to the U.S. to spread the virus and damage the U.S. economy), but also sanctions, tariffs, and hints of military confrontations. While much of this silliness will go away if Donald Trump is defeated, the idea that the United States is involved in an intense global rivalry with China has gained serious credence among elite types. This is both wrong and dangerous.

First, just to clear the deck of some obvious points, China is not a democracy and it does not respect human rights. Critics of the government face serious risks of persecution and imprisonment. It has engaged in large-scale abuses against minority populations in Tibet and the Uygur population in Xinjiang. It also is reversing commitments it made to respect the autonomy of Hong Kong.

Saying that we should not be engaging in a Cold War with China does not imply approval of these actions. It is simply a recognition of two facts.

First, many of the people who are most vigorous in touting abuses in China seem just fine with serious abuses in U.S. allies. Saudi Arabia, a close U.S. ally, tolerates no open dissent and has an explicit policy of treating women as second-class citizens. It recently had a U.S. resident suffocated and torn to pieces in its Turkish embassy. The U.S. government gave open support to a coup in Bolivia and raised no objection to the repression that followed, most of which was directed against its indigenous population.

There is no shortage of places around the world where the United States has tolerated or even actively supported human rights abuses. It is simply not plausible that Donald Trump or most other politicians are genuinely concerned about human rights when they make complaints against China. They are pursuing an agenda of hostility against China for other reasons.

The other point is that it is not clear how those who push this agenda hope that their hostile actions will improve the human rights situation in China. If we assume, for the moment, that the human rights critics don’t intend to go to war to overthrow China’s current government, and then install a regime that will respect human rights, we should ask how we think a stance of growing hostility to China will improve the prospects for the people who we hope to help?

China is not some small country that is dependent on the economic and political support of the United States. It has almost 1.4 billion people. It also has an economy that is larger than ours. As a result of its extraordinary growth over the last four decades, its economy is almost one third larger than the U.S. economy.

While we can impose tariffs, investment bans, and other measures, the impact on China’s economy will be limited. In fact, the Trump tariffs have had relatively little impact on China to date, as almost all of their cost has been borne by people in the United States. (The link shows that the prices that China gets for the goods it sells to the United States have barely changed over the last year. If China was paying for tariff, the price of the goods they sell would fall by almost the amount of the tariff.) 

It is worth noting that it is possible that we could have done more to influence China’s political system back in 2000, when we made the decision to admit the country into the WTO. At that time, China’s economy was a bit more than one-third the size of the U.S. economy. However, back then the political leadership in the United States, including President Bill Clinton and most leading Republicans in Congress, was adamantly opposed to demanding any conditions on human or labor rights in exchange for China’s admission to the WTO.

Ironically, many of these same people are now pushing the line about needing to take a stand against China. Oh well, no one expects politicians or leading intellectual figures to be consistent.

 

The New Cold Warriors

There are many different groups that we are likely to see pushing the New Cold War against China. At the top of the list are the people who stand most directly to benefit from an arms race: the people who sell arms. The military contractors, their lobbyists, and the intellectuals they support in think tanks and universities can be expected to push the need to have ever greater levels of military spending to protect against China.

Some have already talked about spending China’s economy into the ground, as we ostensibly did in the first Cold War with the Soviet Union. There is a simple problem with this plan, apart from its enormous potential human and environmental costs. While the Soviet economy was roughly half the size of the U.S. economy at the peak of its power, the Chinese economy will be close to twice the size of the U.S. economy by the end of the decade. Spending China into the ground might be a rather difficult task.

There are also the Henry Kissinger wannabes. These are the people who want the United States to be the world’s big superpower so that they can play grand chess games with other countries around the world. Many of the people deciding U.S. foreign policy fit this bill.

But beyond those who directly benefit from a hostile rivalry with China, there are also many less obvious economic interests who will be cheering on the battle. At the top of this list are the people who benefit from stronger protections for “our” intellectual property that China is ostensibly trying to steal.

It is important to step back from the standard reporting on this issue to understand what is going on here. Unlike property in land or buildings, intellectual property is not inherently exclusive. While two people can’t sit in the same spot at the same time, an infinite number of people can listen to the same song, see the same movie, and use the same software at the same time. The ability to exclude people is created by the government as a way to allow creative workers and innovators to profit from their work.

While patent and copyright monopolies are one way to finance innovation and creative work, they are not the only way, and there are good reasons for thinking they are not the best way. I have written extensively on alternative mechanisms (see Rigged chapter 5 [it’s free] and here). Patent and copyright monopolies create enormous distortions in the market, they are equivalent to tariffs of many thousand percent. They are a recipe for dishonesty and corruption, such as drug companies lying about the addictiveness of the new generation of opioids.

Patents and copyrights also lead to an enormous amount of upward redistribution. People like Bill Gates can get incredibly rich from the patents and copyrights that the government gives them on software. We will spend over $500 billion this year on prescription drugs that would almost certainly cost us less than $100 billion. The difference of $400 billion is more than five times the annual food stamp budget.

When economists and other policy types say that technology is causing inequality, they actually mean that government-granted patents and copyrights are causing inequality. The people who are getting rich off various new technologies are doing so because the government designed the system so that they will get rich. We could design it differently. A different design can mean much less money going to the beneficiaries of patent and copyright monopolies and much more going to the rest of us.

As China’s economy surges past the U.S. economy, with many of its key sectors equal to, or even superior to, their U.S. counterparts, it would be a great time to redesign mechanisms for innovation. We can design systems that are based on open research and sharing of results rather than secreting off innovations to ensure that a small clique has large benefits. This would be a huge benefit to the vast majority of people in the United States, China, and the rest of the world. But the beneficiaries of the current system don’t want to see their incomes threatened. They prefer to have the rest of us fight for them, under the illusion that “our” intellectual property is at stake.

The development of a coronavirus vaccine provides a great example of the problem. If we approached the issue with the idea of helping people, both in the United States and the rest of the world, we would be making all findings fully public as quickly as possible. We would have any successful vaccines available to all as generics, as soon as they are developed. This means that any manufacturer anywhere in the world could produce as much as their facilities will allow, without paying a penny to the innovators. This would allow for the development of a vaccine as quickly as possible and for its quick distribution throughout the world. (It would still be necessary to have some assistance for the poorest countries, for whom the cost of even a generic vaccine would be a substantial burden.)

Of course, we do have to pay the innovators for their work and that is exactly what we are doing. Except we are both doing it upfront, with direct payments, and then doing it again at the back end with patent monopolies. Moderna will walk away with close to a billion government dollars in upfront payments for its efforts, even if it never produces a usable vaccine. It stands to make even more by taking advantage of its patent monopoly on the vaccine. Several of its top executives have already made tens of millions of dollars selling stock that has become hugely more valuable as a result of taxpayers’ largesse.

While the U.S. government pursued the profit-maximizing path for Moderna, it looks like it is coming at the expense of the health, and possibly lives, of hundreds of thousands of people in the United States. At the moment, it seems that China is ahead of the United States in the development process. This could mean that we will have access to a vaccine perhaps a month or two later, or even more, because we chose the path of competitive patent monopoly rather than cooperation.

If our infection rate remains at 40,000 a day and our death rate at 1,000 a day, a two-month delay means almost a quarter-million additional infection and more than 60,000 additional deaths. That’s a high price to pay for furthering the patent system. (People die in poor countries all the time because of patent monopolies, but it is unusual to see this sort of toll in the United States.)

If we had gone the alternative route, we would have had to try to enlist China’s government in a commitment to open-source research. We would also want other wealthy countries, like France and Germany, to share in the cost. Obviously, there would be issues that would be fought over in negotiations, but it is hard to believe that the U.S. government could not push through some sort of deal.

After all, this would benefit everyone. Also, in the face of the pandemic, no deal has to be perfect. We just need to establish some general principles. If the U.S. spent $200 million too much or too little, who cares? We almost certainly gave more money than that to well-connected companies in the pandemic bailouts.

It is also worth briefly ridiculing the idea that the U.S. lacks power in this sort of negotiation. We get other countries to go along with Donald Trump’s temper tantrums all the time, like his sanctions against Iran after he pulled out of the nuclear pact. Surely, we could get buy in from other countries on something that will actually benefit them.

This discussion of the development of a coronavirus vaccine is a bit of digression, but it should make the point that the people of the United States do not in general have an interest in pressing China or anyone else to respect the patent and copyright monopolies of U.S. corporations. We have an interest in negotiating the sharing of research costs and this may be done in a way that is far less costly to our economy and far less generous to the top one percent, or ten percent, than is currently the case.

 

Other Issues in Trade

 

If we recognize that the yelping over China not respecting patent and copyright monopolies is largely the concern of the wealthy, and not the typical person, there are still other trade issues that should be on the table. China has deliberately kept down the value of its currency, in order to make its goods and services more competitive internationally. It also directly subsidizes many industries to further their advantage.

This was a huge issue before the Great Recession, it is less so today. The reason it was a huge issue before the Great Recession is that back then, manufacturing provided a large number of good-paying jobs to people with less education. This is less of an issue today because many of these jobs have been lost to imports, largely from China.

We lost more than 3.5 million manufacturing jobs, more than 20 percent of the total, between December of 1999 and December of 2007, the start of the Great Recession. We lost another 2 million in the Great Recession. While roughly half of these Great Recession losses had come back before the pandemic hit, the jobs that came back paid much less than the jobs we lost. In 1999, the average hourly wage of a production worker in manufacturing was about 2 percent higher than for the private sector as a whole, by 2019 it was about 6.0 percent lower.

Higher benefits for manufacturing workers likely mean that total compensation is still higher but the gap in pay is not large. A new hire in an auto parts factory may be doing no better than a new hire in an Amazon fulfillment center.

This is largely attributable to the loss of union jobs in manufacturing. Even as we have added more than 1 million manufacturing jobs since 2010, the number of union members in the industry has fallen by almost 120,000, more than 8 percent. As a result, the jobs that we have been adding, for the most part, have not been good jobs.

The reason for this digression is to make the point that it does not matter as much as it used to that China is effectively subsidizing its exports. We no longer have many good-paying jobs at risk. We still should be pressing China not to prop up the dollar against its currency, and not to provide subsidies to favored industries, but the stakes for U.S. workers are far less than they were fifteen or twenty years ago.

 

The U.S. -China Confrontation: A Battle for Elites, not Ordinary People

To sum up, most of us have little at stake in the outcome of the big battle of the super-powers, except that it is taking place. It would be great if the human rights situation in China improved, but there is little reason to believe that many of the politicians complaining about abuses really care, or have any serious plan to bring them to an end.

The vast majority of workers have no stake in the battle to protect U.S. patents and copyrights. In fact, these policies are major factors in the increase in inequality over the last four decades. We certainly have an interest in agreements under which China, the U.S., and other countries share in the cost of open-source research, but our politicians and the interest groups they represent are not looking at all in this direction.

Finally, the labor market would be better off if China did not subsidize its exports with an under-valued currency and other mechanisms, but this matters much less today than it did two decades ago. Most of the good-paying jobs in manufacturing have been lost and there is little reason to believe they will come back in the absence of major structural changes, most importantly, higher unionization rates.

The U.S.-China confrontation is a game for the elites. The rest of us would be best served by sitting this one out.

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