Friday, July 18, 2008

The Economic Rise of China

I would like to briefly respond to a comment on my post 'What is Going on in the World Economy'.

The comment was as follows:

'One thing I don't quite understand is that you imply that China's debut in the world economy was always bound to make the West poorer. This makes me wonder why it was in our interests to trade with them in the first place. From what you say, if we had simply made a decision to ignore China we could have carried on living in the way to which we had become accustomed. I suppose this is basically protectionism, and I am sure there are sound reasons why it wouldn't work, but it is a reasonable conclusion to draw from your piece..?'
My post is not intended as an argument for protectionism. It is merely pointing out that, if you give the capital, technology and wherewithal to nearly a billion new workers, then it is inevitable that, for a while at least, there will be an excess of labour in the marketplace.

The question here becomes one of ethics. Is it right, or fair, for a large percentage of the population of the world to remain impoverished? Does national interest trump such ethical consideration? It is not the purpose of this blog to look into such questions, but rather to consider what is happening, why it is happening, and what will happen next.

I pointed out in my post a 'what if..' scenario, in which the transition in the world economy could have been significantly easier. There is more that could have been said on this issue, and I did mention one element that would have had great potential for ameliorating the effects. This is the question of intellectual property.

One of the key elements in the rise of the Chinese economy has been their very lax attitude to Intellectual Property, which is stolen at a rate that is truly astounding. For example, it is nearly impossible in most Chinese cities to buy genuine computer software for individuals, excepting that which is preloaded on new computers. If we just took the example of Microsoft Windows, we can take a reasonable guess that, at least, 100 million computers are running on the software, and the majority of these are illegal copies. At something like $100 retail per unit for Windows, it is not difficult to grasp the scale of the theft. This is just one example. Multiply this across all of the software, and the numbers start to look truly shocking.

Software is, of course, just one visible example of intellectual property theft. It is actually far more widespread, even to the degree where fake motorbikes are being built, and where industrial designs are being stolen and so forth.

As such, whilst not a protectionist, I do believe that China has broken the law on a massive scale. The Chinese government just made tiny gestures towards cleaning up this problem. As such, trade sanctions should have been threatened and, if need be, put in place until China took the problem seriously. One of the elements in the mix of the rise of China is that it has not paid for the intellectual property that supported its economic rise. This was a serious mistake by the West, which should have pressured China into compliance with the law. We have effectively subsidised their rise.

Another problem has been the exchange rate in China. It has been fixed, then moved to a basket with a partial floating rate. In a free trade situation, this is unacceptable. However, the West congratulated China on holding firm on its exchange rate during the Asian financial crisis, thereby hobbling the ability to complain about the problem of the exchange rate later. Had the exchange rate been free, the RMB would have strengthened, making Chinese exports more expensive, and thereby avoided the degree of imbalance that has occurred.

What I am therefore saying is that there was always going to be some pain for the Western economies, but the foolishness/weakness of Western leaders contributed to the scale of the current problems. China always had the potential to grow, but the rise was boosted by two practices which might be described as 'unfair' trade practices. These have accelerated the growth and have contributed mightily to the degree of imbalance that we now see.

In summary, free trade could have seen a slower rise in China, and a more gentle transition in the world economy, had the Western leaders insisted upon fair trade.


  1. So, would it be loosely correct to summarise that we have two trading blocks: China and the rest of the world? On paper, the rest of the world is heavily-indebted to China, but can show that China has benefitted from stolen intellectual property.

    Does the rest of the world have to honour its debts to China?

    Things seem so bad that the only way out of it might be some sort of drastic 'resetting' of the world economy. Or must we work through the consequences of all the millions of individual failed deals and transactions in order to preserve the purity of 'capitalism' for an eventual return to better days?

    (Sorry to seem so naive!)

  2. [Sorry to sound so cynical....]

    ..but shouldn't Europe be grateful that the Chinese Government are not suing us for the defects in the last intellectual property they acquired: Marxism?

  3. I recently discovered your interesting and refreshing blog and agree with most of what you have to say. I do take issue with your use of the terms "intellectual property" and "intellectual property theft".

    Theft is an ancient, pre-legal category, with strong moral connotations, recognised (and often harshly punished) in virtually all societies throughout history. "Intellectual property" is a relatively very recent "invention", and encompasses copyrights, patents, trademarks and trade secrets. In essence, IP (copyrights and patents) is a state-granted monopoly. There is nothing "natural" (as in "natural law"), or "free market" about it. The reason why media constantly harp on about IP is so that e.g. copyright infringement (which as far as I know is not even a criminal offense in most sane countries) can be sold to the public as being akin to robbery, piracy or some other heinous and violent crime, and creates an atmosphere, where draconian legal measures can be imposed on those unlucky enough to be caught. Almost every developed country (the US, Germany, Japan built up their industrial might by "pirating" technologies developed elsewhere. The Chinese are just following that example.

    What has happened in the West, is that legislation designed to promote innovation has been hijacked by the big boys, and now has an effect which is opposite to that intended. Copyrights extend now to over 100 years (so that Mickey Mouse will never pass into the public domain). The patent system is so dysfunctional and insane, that as my patent attorney told me, "if you try to make something more complex than a doorstop, you are likely to infringe dozens of patents". "Intellectual property theft" does in fact happen every day - since standard employment contracts in large companies require engineers to sign away ownership rights to anything that they may come up with to the company (regardless of whether the innovation has anything to do with the work at hand). The costs of filing a patent (currently more than 50,000 USD) exclude the vast majority of individual innovators and small companies, and make it far more difficult to compete with inferior products of well-heeled competitors.

    So, the whole "Intellectual Property" shebang is a racket and it is hurting the one area (innovation) in which we could have an advantage over the new emerging powers.

    All the best


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