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2011 November 06 Sunday
Foreign Computer Espionage Costing Billions

We would have higher living standards of US companies could earn returns on technology for as long as legally allowed. But China especially is sucking billions of dollars of trade secrets and technology out of US corporations every year.

Tens of billions of dollars of trade secrets, technology and intellectual property are being siphoned each year from the computer systems of U.S. government agencies, corporations and research institutions, said the Office of the National Counterintelligence Executive, which focuses on espionage against the United States.

The Russians, French, Israelis (yes, supposed allies), and other countries are stealing US technology as well.

Individual incidents are expensive.

A senior intelligence official, briefing reporters on the condition of anonymity, noted a few cases in which estimates were given in economic espionage prosecutions over the past six years: $100 million worth of insecticide research from Dow Chemical, $400 million worth of chemical formulas from DuPont, $600 million of proprietary data from Motorola, $20 million worth of paint formulas from Valspar.

What's the long run cost when a company gets beat in the market by a lower cost Chinese competitor that got the company's stolen secrets? Well, the Americans who developed the technology might end up getting laid off.

The shorter the period during which a company can earn returns on intellectual property the less incentive to develop intellectual property and the lower living standards will be. But my guess is companies focused on next quarter's earnings tend to put far too little effort into protecting intellectual property.

The US now runs a trade deficit even in many high tech goods. We need a national strategy to reduce the rate at which American technological secrets get stolen.

By Randall Parker    2011 November 06 09:23 PM Entry Permalink | Comments (4)
2011 October 09 Sunday
Free Trade Versus Mercantilism

The Washington Post editorial board strikes a morally superior pose for free trade. This is called fighting the last war.

THE AMERICAN Recovery and Reinvestment Act of 2009, a.k.a. “the stimulus,” had its pluses and minuses. But few would dispute that some of the worst bureaucratic hassles and international disputes associated with that $825 billion measure stemmed from its protectionist “Buy America” provision, which prohibited the use of imported steel on tens of billions of dollars’ worth of infrastructure and building modernization projects.

Yet President Obama proposes to do it all over again.

And this upsets the WPost editorial board. But why spend several hundred billion in economic stimulus spending just to have a substantial part of the money go to buying goods from China? We are running up debts (payable by our future selves) in order to stimulate China's economy.

What I'd like to hear from the WPost editorial board: a realistic plan for closing the US trade deficit. The trade deficit, and not an excess of US trade barriers, is the biggest trade problem facing the US economy by far. In fact, the trade deficit is one of the biggest problems facing the US economy, though not its biggest one.

Also in the WPost read Robert J. Samuelson's "Our one-sided trade war with China".

Just how many American jobs have been lost to subsidized Chinese exports is unclear. Economist Robert Scott of the Economic Policy Institute, a liberal think tank, estimates the number at 2.8 million from 2001 to 2010. A study by three academic economists concludes that imports from China account for about a quarter of lost U.S. manufacturing jobs from 1990 to 2007; that’s almost 1 million jobs. These are both large declines, but they are only a modest fraction of America’s present jobs shortfall. The recession cost 8.8 million payroll jobs.

The Chinese government keeps its currency weak in order to encourage multinational corps to shift more of their manufacturing to China (in addition to helping local champions steal tech from the multinationals). Those manufacturing jobs take engineering and research jobs with them.

The intractable trade deficit is attributable in part to manufacturing’s shaken status. And in many areas, craftsmanship in America has been eroding. Forty percent of the nation’s engineers work in manufacturing, for example, and that profession’s numbers have been declining. That is a particular problem because innovation often originates in manufacturing, frequently in research centers near factories, which aid in the creation of products and the tweaking of them on assembly lines.


As multinationals place factories abroad, they are putting research centers near them, with as-yet-undetermined consequences. At the very least, this trend challenges the view that the United States has the best scientists and research centers and is thus the research-and-development pacesetter.

We need to make more stuff in order to afford our energy imports. We need factories in order to keep research centers. We also need basic research spending that translates into jobs in the US rather than jobs in China.

A look at median earnings of men over the last few decades shows how far we've fallen. Women entering the work force for a while masked the decline in buying power per worker. I expect this decline to continue for a whole host of reasons. At best better policies could slow the rate of decline. But the Tea Party and "Occupy Wall Street" movement haven't yet shown a clue as to root causes for declining living standards. So there's no push from either side of the political spectrum for policies that will attempt to attack the problem.

By Randall Parker    2011 October 09 10:32 AM Entry Permalink | Comments (13)
2011 September 02 Friday
China Coerces Technology Transfers

The purpose of Western free trade agreements with China: to allow the Chinese government to force technology transfers to China as part of the price of doing business in China.

GRAND RAPIDS, Mich. — At a General Electric flight simulator here, the visibility has been set at near zero to mimic thick rain and clouds. But a video console near the pilot shows a vivid picture of nearby mountains precise enough to allow a plane to take off or land despite the conditions. The system is one of several highly valuable next-generation technologies that GE has developed — and that the company has passed along to China as part of a joint venture with the state-owned Aviation Industry Corporation of China (AVIC).

It is the price GE pays for getting business in China. What's the long term cost? Easy enough to see. Harder to guess the exact timeline. When does GE's business partner become a competitor? When does China's government pressure Chinese buyers to only buy from the pure domestic supplier?

Why didn't the US Chamber of Commerce tell US Congress this would be the ultimate outcome of "free trade" with China back when America's business elite was busy lobbying for Most Favored Nation status in a trade bill back when Bill Clinton was in office?

The naive view that we were going to design and make products to sell to China is a "colonial" model that is so passe.

The number of jobs to be created in China would be much higher. GE executives say it is difficult to imagine otherwise. The “colonial” model — of multinationals making products in the developed world and selling them to the developing world — is long outdated, they argue.

So not only do we have to give up hope of selling manufactured goods to China but we also have to give up hope of doing the design and engineering work in the United States and other Western countries. What's next?

The Chinese mercantilist policy has a few major components:

  • Local content requirements, both acknowledged and hidden.
  • Get technology by theft, purchase, coerced transfers, and from open sources.
  • Use a fixed currency exchange rate to get factories shifted to China.
  • Use the rest of the world as commodities sources. The US has a big future as a food supplier and a lumber supplier for China.

Update: Some of our elites are thrilled to help China's rise. The competition for natural resources is making industrial development into a zero sum game. But our economic elites have been trained to believe all trade and all economic development comes as a net win for everyone.

By Randall Parker    2011 September 02 08:10 AM Entry Permalink | Comments (6)
2011 August 07 Sunday
United States Still Provides China Development Aid

You might be shocked to learn the United States still provides development aid to China. Then again, you might already have adjusted your assessment of America's political elite low enough not to be shocked. (h/t Lou Pagnucco)

Washington, DC—Senators Jim Webb and James Inhofe, chair and ranking member of the East Asian and Pacific Affairs Subcommittee, today called for an end to U.S. development aid to China, now the world’s second-largest economy. Since 2001, the U.S. has provided more than $275 million in direct assistance to China for projects such as expanding internet access and improving public transportation. In addition, China receives billions from multilateral institutions like the United Nations, to which the U.S. is among the largest contributors.

“With more than $3 trillion in foreign exchange reserves and a double digit economic growth rate, China certainly has the financial resources to…care for its citizens without relying on U.S. assistance,” the Senators wrote to appropriators. “As the committee reviews current appropriations bills, we would request that in FY2012 you end all U.S. aid to China—other than programs that assist the people of Tibet or promote respect for human rights and democracy in China—and direct our representatives at international organizations to work to end multilateral aid to China.”

China currently owns $1.2 trillion of U.S. Treasury debt and has launched its own multi-billion dollar foreign assistance program to rival the U.S.

Both the United Kingdom and Australia announced this year that they will no longer provide direct assistance to China.

The bipartisan letter was also signed by Senators Kyl, Boozman, Levin, Reed, Manchin, Casey, Kohl, Rubio, Tester and Menendez.

To put that in perspective, in May alone the US ran a $25 billion trade deficit with China. Their leaders must be laughing at us. Our total trade deficit in May was $50 billion. We are in hock to the world and still giving out development aid.

China's not amused by our spendthrift ways. China's official news agency just sent out an editorial calling on the US to make substantial cuts.

In addition to recommending "substantial cuts" to "bloated social welfare costs" in America, the Xinhua editorial pointed to what it characterized as a "gigantic military expenditure."

Another quote from China's leaders:

China, the largest creditor of the world’s sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China’s dollar assets

Since Bill Gross says the latest deficit reduction deal will have very small impact I think we are letting down our bankers in Beijing.

By Randall Parker    2011 August 07 03:58 PM Entry Permalink | Comments (5)
2011 June 06 Monday
Microsoft Sales In China Chump Change

When the US opened the doors to goods made in China the US was (in theory) supposed to make money off of intellectual property. But why pay for something when you can get it for free?

In his address to employees at the company's new Beijing offices, Mr. Ballmer said Microsoft's revenue per personal computer sold in China is only about a sixth of the amount it gets in India. He noted that Microsoft's total revenue in China, population 1.3 billion, is less than what it gets in the Netherlands, a country of fewer than 17 million.

In a world with worsening natural resource limitations rising buying power of the Chinese, enabled in large part by massive technology transfers, pushes up the costs of natural resources (e.g. oil). China's gains are part of a zero sum game that makes others poorer. Intellectual property theft undermines our ability to buy the resources we need to support our own living standards.

By Randall Parker    2011 June 06 10:30 PM Entry Permalink | Comments (11)
2011 April 14 Thursday
China Winning On Cyber-Espionage

China? Winning. America? Losing. Check out this Reuters article. China is doing a better job of stealing American secrets than vice versa. But how could it be otherwise? The US has far more secrets worth stealing. Plus, China's lacking the sort of moral code that would tend to discourage massive theft of intellectual property.

Though it is difficult to ascertain the true extent of America's own capabilities and activities in this arena, a series of secret diplomatic cables as well as interviews with experts suggest that when it comes to cyber-espionage, China has leaped ahead of the United States.

According to U.S. investigators, China has stolen terabytes of sensitive data -- from usernames and passwords for State Department computers to designs for multi-billion dollar weapons systems.

The American people are really behind the curve in grasping how much China's industrial development combined with super cheap communication changes the nature of the game. China and the United States compete for the same natural resources. That natural resource competition is a zero sum game. Plus, the rapid diffusion of practical knowledge is reducing the return on investment from intellectual creations and therefore lowering living standards in the developed countries.

The Chinese military's systematic efforts to steal secrets just makes a bad (for the West) situation worse. Also, Western corporate efforts to utilize cheap mind workers in China, India, and other countries speeds up the knowledge flow. In the short term this boosts corporate profits. But in the long term corporations are training their future competitors.

Update: The Chinese have $3 trillion in foreign reserves.

By Randall Parker    2011 April 14 11:06 PM Entry Permalink | Comments (4)
2010 December 25 Saturday
US Industry Scared Into Silence By Chinese Mercantilism

If we want to know how much the Chinese government tilts the playing field in favor of its industry you won't hear about it from the cowed Western multi-nationals.

No American company would seem to have more to gain than General Electric from the Obama administration’s decision on Wednesday to accuse China, in a World Trade Organization case, of providing illegal subsidies to Chinese wind turbine makers.


But with so much to potentially gain from the administration’s W.T.O. case, what was G.E.’s reaction? Total silence. The company said it would have no comment on the matter.

G.E.’s silence is part of a broader Western corporate reluctance to criticize Chinese policies, particularly in public. So eager are multinationals for continued access to the world’s fastest-growing market that they are loath to cry foul even amid evidence that China may be flouting international trade laws.

Transfer your technology to your future competitors or you do not get to play.

But Gamesa has learned the hard way, as other foreign manufacturers have, that competing for China’s lucrative business means playing by strict house rules that are often stacked in Beijing’s favor.

Nearly all the components that Gamesa assembles into million-dollar turbines here, for example, are made by local suppliers — companies Gamesa trained to meet onerous local content requirements. And these same suppliers undermine Gamesa by selling parts to its Chinese competitors — wind turbine makers that barely existed in 2005, when Gamesa controlled more than a third of the Chinese market.

But in the five years since, the upstarts have grabbed more than 85 percent of the wind turbine market, aided by low-interest loans and cheap land from the government, as well as preferential contracts from the state-owned power companies that are the main buyers of the equipment. Gamesa’s market share now is only 3 percent.

A few months ago a ministry in the Chinese government floated a requirement for foreign car companies to transfer electric car technology to Chinese companies or else be locked out of the Chinese electric car market. Did that regulation take effect too?

The Chinese force technology transfers and then grow up companies that wipe out foreign competitors. China's wind turbine makers have nearly half the global market and now theya re building up their presence in the United States. So US tax credits for wind power, paid by US taxpayers, will subsidize Chinese wind turbine makers.

The United Steelworkers Union fight where multi-nations fear to tred. It is an argument for industrial unions.

The United Steelworkers, which had protested the Chinese wind power fund as part of a larger, 5,800-page trade complaint it filed with the American government on Sept. 9, said the administration’s decision was only a first step in addressing a “vast web of protectionist policies” by Beijing.

Also see my post Rapid Knowledge Spread Lowers Western Growth. The future has arrived. As a nation that thrives off the intellectual property we produce what are we going to do about it?

By Randall Parker    2010 December 25 07:36 PM Entry Permalink | Comments (4)
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