Obama: 'Russia doesn't make anything,' West must be firm with China

[Edison Chen]

Obama said he believes trade tensions will ease when China shifts "from simply being the low-cost manufacturer of the world" and its companies begin making higher-value items that need intellectual property protections.

This is true. @LeveragedBuyout what do you think?

 

[airmarshal]

Russia does not make anything anything!!! Really?? But Russia is making a total fool out of Obama.

Didn't realize Obama had to stoop so low to gain geopolitical objectives. It only means there is emptiness in rhetoric and there is not much to say against Russia.

 

[Chronos]

stupid Kenyan monkey

kind of surprised that people let this racist comment go and even thanked it.

Maybe I am missing the sarcasm.

 

[LeveragedBuyout]

This is true. @LeveragedBuyout what do you think?

Edison, I broadly agree, but let me explain a bit. I believe the Chinese government is already aware of these tensions, but it is as of yet unclear what, if anything, will be done to correct the imbalance. I hope China doesn't overplay its hand by ignoring the issue until it is forced to. I thought China was starting to move in the right direction until these anti-monopoly moves against Qualcomm and Microsoft came up, which are tremendously aggravating the situation. Americans are driven by a strong sense of fair play--we don't need to be guaranteed a win, but we need to be guaranteed a level playing field, and right now, we don't have one.

---

It's a complicated situation. The basic relationship works because the US focuses on high-value activities (specialized high end manufacturing and R&D, software, biotech, etc.), and China focuses on lower-value activities like manufacturing. The US puts such emphasis on IP rights because besides the unethical nature of stealing, IP is our competitive advantage. Here is an abstract from a 2012 US Trade Representative report:

"Intellectual Property and the U.S. Economy: Industries in Focus" | Office of the United States Trade Representative

"The findings of this report underscore a key point included in the President’s Trade Agenda: “promoting [a] trade policy that keeps pace with 21st century innovation can support the growth of well-paying IP trade-related job in the United States.” Specifically, the report found that intellectual property is critical to our balance of trade, since goods from the IP-intensive industries account for 60% of all US merchandise exports, and 19% of our services exports. The study also shows that intellectual property is a key driver of our economy: IP-intensive industries create 27.1 million jobs and indirectly support another 12.9 million jobs. All told, nearly 30 percent of all U.S. jobs are directly or indirectly attributable to the IP-intensive industries. And these are jobs that pay well. The average weekly wage in the IP-intensive industries overall is 42% higher by 2010 and its 73% for patent industry jobs and 77% for copyright industry jobs."

In short, intellectual property protection supports one of the key pillars of our economy, so it's easy to see why the US is so agitated about intellectual property rights (or in this case, China's relative lack of enforcement of IP rights).

The trade relationship today is what I will call a new iron hexagon between US multinational corporations, American consumers, Chinese manufacturers, Chinese workers, the Chinese government, and the US government:

-US MNCs outsource production to China, but keep high value-added activity like R&D, which means they own the vast majority of the value produced in the value chain

-This means that US workers lose out, but US investors win, as profit margins are near all-time highs, and earnings growth has remained impressive even as revenue growth has faltered (i.e. US companies replace high cost American workers with low cost Asian workers, or automation)

-American citizens win, as prices are driven down to compensate for the lower wages, and polluting manufacturing activity is moved overseas

-Chinese manufacturers are assured of high factory utilization due to Western demand

-Chinese workers are assured of high labor demand, and thus gradually rising wages

-The Chinese government enjoys impressive fiscal and trade surpluses, which enable easy investment in infrastructure, and less concern about welfare and pensions as living standards continually rise; this also means less civil discontent

-The US government benefits as China is forced to invest in US Treasuries to keep the RMB at an artificially low value, and thus US interest rates are kept low, interest payments on the debt are kept low, and a sovereign debt crisis is kept at bay

Who loses?
-US citizens, who are too expensive and have too many labor protections
-US domestic manufacturers, who are not competitive

-Chinese citizens, as their purchasing power is artificially suppressed, and they suffer under financial repression (they do not get enough interest on their deposits to compensate for inflation, and thus must invest in risky trust products)
-Chinese citizens, who must now deal with all of the heavily polluting industry that has been concentrated in China

It's pretty clear that there are winners and losers on both sides (and sometimes, the same party both wins and loses, as in the case of American and Chinese consumers/workers), but the balance of benefits goes to China.

Summary
This is only viable as long as China "follows the rules" and respects intellectual property. America needs a "win" from this relationship, and right now that "win" comes from US ownership of intellectual property at the high end of the value chain. The US is good at R&D and design, and also very good at finance. US companies are not allowed to freely compete in the financial industries in China, so that leaves only R&D as a competitive advantage for the US in this relationship. Remember, Chinese companies don't have anything like the restrictions on operations in the US that US companies have in China.

The iron hexagon breaks down when Chinese companies pirate intellectual property and set up cheap competition, or the Chinese government uses anti-monopoly laws as a form of protectionism for its domestic industry to get around IP rights. In such cases, China has the entire value chain under its control, and the US is relegated to pure importer in a one-way relationship (US spends money developing, China reaps all the profit). Now, how does the relationship look? Not so good for the US. In fact, it becomes relatively unclear how the US benefits from trade with China at that point, and it's not hard to see that calls for protectionism or retaliation would soon follow (see: the US and Japan in the 1980s). This is where we are now, and why tensions are rising. The US has outsourced its manufacturing to China in the understanding that the cost to our labor force would be compensated for by the profits to our IP holders.

Everyone steals IP at the developing stage, and the more advanced countries tolerate it through gritted teeth as one of the costs of doing business. But there comes a point where such violations are no longer tolerated, and it's up to the offender to reform before a trade war breaks out. Why would the US import from foreign companies that are stealing from its own companies? In addition, there will come a point where the R&D originators get tired of the knock-offs and pull their production from China, since it no longer makes sense to have such IP leaks from a cost-benefit analysis.

---

That was a long-winded overview, now I'll answer your question directly. If China strictly enforces intellectual property rights, then the iron hexagon is preserved, the system continues to work, and tension will dissipate. China benefits from the current trade system, so it's in China's interests to ensure that intellectual property rights are enforced; not simply for the benefit of the US, but also for the benefit of China's own burgeoning and globally-oriented MNCs, which would not be able to survive abroad against well-established competitors if those competitors were given free license to pirate Chinese IP in retaliation for China's violations, especially now that China's labor costs advantage is rapidly disappearing.

I'm optimistic that China will make the transition, and the Shanghai special economic zone is a very encouraging sign. But as we've discussed in other threads, China doesn't have unlimited time to do this. Xi's time in office is the right window to see this reform through, but if it doesn't happen, other developments like the TPP may force an economic realignment to China's detriment.

 

[Edison Chen]

Edison, I broadly agree, but let me explain a bit. I believe the Chinese government is already aware of these tensions, but it is as of yet unclear what, if anything, will be done to correct the imbalance. I hope China doesn't overplay its hand by ignoring the issue until it is forced to. I thought China was starting to move in the right direction until these anti-monopoly moves against Qualcomm and Microsoft came up, which are tremendously aggravating the situation. Americans are driven by a strong sense of fair play--we don't need to be guaranteed a win, but we need to be guaranteed a level playing field, and right now, we don't have one.

China reforms when China has to, because the time of lower labor force and manufacturings with low profit margin will be the past tense. When intellectual property really plays a big role and helps to contribute 60% of China's export like the US, everyone would do anything to protect it. The intellectual property has never been lifted to a high awareness among the public in China, of course some Chinese companies didn't respect the other companies' intangible assets, including US companies.

What you said is correct, a fair playground will create the opportunity for every one only if you seize it. I understand your concern. But many Chinese will feel painful when we remember the British knocked off China's door by forces and opium, I don't think they respect a fair trade at that time, opium is against the health of humankind, but they didn't care. In my opinion, opium did far more damage than fake or low quality products, at least Chinese product make poor people a better life at lower cost. It means, to pursue the interest, people can do anything, including the breach of law.

But in the long term, I believe to respect and perfect the intellectual related laws will benefit China more than what we have now, because the excessive high profit margin era has gone, the market is getting mature, some industries are full, when we explore the new industry, we need the protection of intellectual property.

Off topic: I've been in the US for 3 years, although a very short time, I can feel common Americans are more disciplined in many circumstances, especially on the road, drivers yield to each other, even when the red light broken, cars pass through one by one, no rush, this really impresses me. When a car meets pedestrians, the driver stopped soon at a very far distance from you. In China, it's different, I always get extremely angry when driving in China. I guess that in the US, the cost of breach of law and regulations is very high, it's too risky to obtain an immoral and illegal gain, the punishment is real. I am trying to say, the activities of people are regulated by conventionalized social consciousness, when it benefits all people, the law is formed and works. People are the same all over the world, what makes the difference is the rule. If China official highlights the importance of a fair play when doing business, the business environment would be much better, which makes Chinese companies of more reputation and goodwill. So I strongly agree the following:

it's in China's interests to ensure that intellectual property rights are enforced; not simply for the benefit of the US, but also for the benefit of China's own burgeoning and globally-oriented MNCs,

I think the first party who benefits from the enforcement of intellectual property right is always Chinese MNCs, if they don't respect other MNCs from other countries, they will certainly do not give a fk to other small Chinese companies, which helps to creates numerous job opportunities.

I have read the article that your provided in Chinese version weeks ago, very interesting facts.

 

[somsak]

Divide and Rule sentences from Obama. Smart Obama!! I will vote for you!.

 

[idune]

Here famous Clint Eastwood line is more appropriate to Oh- bum- aha, Putin must reply with

Go ahead. Make my day...You've got to ask yourself a question: 'do I feel lucky?' Well, do ya, punk?

 

[LeveragedBuyout]

Off topic: I've been in the US for 3 years, although a very short time, I can feel common Americans are more disciplined in many circumstances, especially on the road, drivers yield to each other, even when the red light broken, cars pass through one by one, no rush, this really impresses me. When a car meets pedestrians, the driver stopped soon at a very far distance from you. In China, it's different, I always get extremely angry when driving in China. I guess that in the US, the cost of breach of law and regulations is very high, it's too risky to obtain an immoral and illegal gain, the punishment is real. I am trying to say, the activities of people are regulated by conventionalized social consciousness, when it benefits all people, the law is formed and works. People are the same all over the world, what makes the difference is the rule. If China official highlights the importance of a fair play when doing business, the business environment would be much better, which makes Chinese companies of more reputation and goodwill. So I strongly agree the following:

This is why the US will remain a viable great power for years to come. We attract the best minds.

 

[Chinese-Dragon]

Americans are driven by a strong sense of fair play--we don't need to be guaranteed a win, but we need to be guaranteed a level playing field, and right now, we don't have one.

If you look at Chinese history, the idea of fair play is one that brings up a lot of bad memories.

Was it fair play for the colonialists to steal Chinese inventions, the foundations of modern warfare, such as guns/firearms, artillery, explosives, rockets, etc. and use them to butcher our own people, and force us to smoke opium?

Was it fair for them to use those same inventions to enslave half the world, and annihilate native populations across the globe during the colonial era, and then take their land?

Was it fair play when the Imperial Japanese Army used these same inventions to exterminate our people, and use human experimentation on us like we were animals?

It's easy to say "fair play" when you have been on the winning side for centuries, using methods that are not fair play at all.

And when you are already ahead, in the developed world, it's easy to ask for more pollution controls on developing countries, when the developed world has already polluted the world to become industrialized. But now, when we are trying to do the same thing, and we want to bring millions of our own people out of poverty, suddenly the game has changed and we need to cut down on pollution? Despite our pollution being created by manufacturing goods for the developed world (essentially outsourcing their pollution to us), and still having less then 1/5 the per capita pollution output of developed countries? Is that fair play?

See, when we think about fair play, we're thinking about it in a more holistic manner. That encompasses our current state as a developing country, and the fact that "fairness" means our people having a decent standard of living, not helping the developed world to enforce the superiority that they achieved through unfair play over the centuries, at the cost of the lost lives of millions of Chinese.

I do not support stealing or copying (despite all the previous powers having practiced the same), but even if it is true, then at least we are using these methods to feed our people, not to exterminate people from other countries.

 

[LeveragedBuyout]

If you look at Chinese history, the idea of fair play is one that brings up a lot of bad memories.

Was it fair play for the colonialists to steal Chinese inventions, the foundations of modern warfare, such as guns/firearms, artillery, explosives, rockets, etc. and use them to butcher our own people, and force us to smoke opium?

Was it fair for them to use those same inventions to enslave half the world, and annihilate native populations across the globe during the colonial era, and then take their land?

Was it fair play when the Imperial Japanese Army used these same inventions to exterminate our people, and use human experimentation on us like we were animals?

It's easy to say "fair play" when you have been on the winning side for centuries, using methods that are not fair play at all.

And when you are already ahead, in the developed world, it's easy to ask for more pollution controls on developing countries, when the developed world has already polluted the world to become industrialized. But now, when we are trying to do the same thing, and we want to bring millions of our own people out of poverty, suddenly the game has changed and we need to cut down on pollution? Despite our pollution being created by manufacturing goods for the developed world (essentially outsourcing their pollution to us), and still having less then 1/5 the per capita pollution output of developed countries? Is that fair play?

See, when we think about fair play, we're thinking about it in a more holistic manner. That encompasses our current state as a developing country, and the fact that "fairness" means our people having a decent standard of living, not helping the developed world to enforce the superiority that they achieved through unfair play over the centuries, at the cost of the lost lives of millions of Chinese.

I do not support stealing or copying (despite all the previous powers having practiced the same), but even if it is true, then at least we are using these methods to feed our people, not to exterminate people from other countries.

Everything you have said is true, and I agree from a philosophical perspective. From a specific perspective, though, the US had essentially just been created when the Chinese century of humiliation was underway, and immediately after the Chinese Opium Wars, the US tore itself apart in its own Civil War. The US wasn't really involved in the century of humiliation, given our own inward focus at the time, so while I understand your anger at "the West" for past misdeeds, I am not sure the US should pay for those misdeeds.

We've also discussed the cultural differences in perspective of time, but it's worth reiterating that since the US is so young, it's hard to look at the world 100 years ago, or 150 years ago, and think about how it should affect relations today when so much has happened in the interim. There's a great apocryphal story of Kissinger asking Zhou Enlai what he thought the significance of the 1789 French Revolution was, and Zhou Enlai replied, "it's too early to say." (Incidentally, apparently due to a translation error, Zhou Enlai thought Kissinger was asking about the 1968 protests taking place in France). In any case, that incident has distilled in the American mind the image of the Chinese view of history across centuries, and it's intriguing to us simply because it's so different from our short-term thinking (think of our quarterly corporate reporting regimen compared to Europe's annual or semi-annual tradition).

I appreciate and understand the Chinese sense of exploitation, but none of the people responsible for that exploitation are alive today. Neither are their children, or grandchildren. Isn't there a point where history becomes a part of the past, and we look forward to creating a new path? I have acknowledged that essentially all countries steal IP in their development process, but all of those countries also eventually moved beyond such practices. I don't think our cultural differences are so vast that China will not also move beyond it, not just for our sake, but for China's. And not just in the realm of IP, but also areas like pollution, not just for our sake, but for China's.

On a side note, your comments have also helped me realize why my posts in the Chinese Economy thread are so often taken the wrong way by many Chinese users, so I've decided to pull back on posting about the Chinese economy for a while to try an allay the sense that I am attacking China.

 

[Chinese-Dragon]

I appreciate and understand the Chinese sense of exploitation, but none of the people responsible for that exploitation are alive today. Neither are their children, or grandchildren. Isn't there a point where history becomes a part of the past, and we look forward to creating a new path? I have acknowledged that essentially all countries steal IP in their development process, but all of those countries also eventually moved beyond such practices. I don't think our cultural differences are so vast that China will not also move beyond it, not just for our sake, but for China's. And not just in the realm of IP, but also areas like pollution, not just for our sake, but for China's.

On a side note, your comments have also helped me realize why my posts in the Chinese Economy thread are so often taken the wrong way by many Chinese users, so I've decided to pull back on posting about the Chinese economy for a while to try an allay the sense that I am attacking China.

You're right, none of those people are alive today. And you cannot blame the son for the sins of the father.

However, the place we are at today is a culmination of all those past generations. And where we are today, is a reality that we have to accept, which happened due to the sheer incompetence of our past ruling classes, which left us open to the unending exploitation by foreign powers.

The question is, what can we do about it today. Obviously, we cannot ask other countries not to use guns/firearms, artillery, explosives and rockets against us without first paying royalty for it, if they want to use bombs or bullets on us, they will do it just like they have done before.

And of course, not one single military power in the world will agree to give up those things, because they know about history too, and what happened to countries that did. No one who knows about history is going to compromise their national security like that anymore, and I don't particularly blame them for that.

With regards to modern IP, yes China is definitely going to have to improve in that area, for the sake of our own domestic artists/musicians for example. Stricter IP laws are something that we are inevitably going to have to move towards, for the sake of our own domestic industries.

The pollution issue is a very hard one. Developed countries have already had their opportunity to pollute the world during their industrialization process, and back then they did not have the green technologies that we have today either.

Regardless, China is going to have to move towards cleaner energy. And apart from having the world's largest reserves of Shale gas (enough to last over a thousand years), we also have tremendous amounts of potential renewable energy:

China could meet its energy needs by wind alone by 2030 | Harvard Gazette

A team of environmental scientists from Harvard and Tsinghua University has demonstrated the enormous potential for wind-generated electricity in China.

Using extensive meteorological data and incorporating the Chinese government’s energy-bidding and financial restrictions for delivering wind power, the researchers estimate that wind alone has the potential to meet the country’s electricity demands projected for 2030.

Since nuclear war is out of the question, these types of win-win solutions are the best idea in the long term. And is one area in which our interests can align.

 

[Jlaw]

Off topic: I've been in the US for 3 years, although a very short time, I can feel common Americans are more disciplined in many circumstances, especially on the road, drivers yield to each other, even when the red light broken, cars pass through one by one, no rush, this really impresses me. When a car meets pedestrians, the driver stopped soon at a very far distance from you. In China, it's different, I always get extremely angry when driving in China

I traveled to US frequently I can explain this to you to a point based on what people tell me. The reason for this type of driving in most cases are the highway patrols patrol the highways quite often. I was fined $300 for speeding 14 year ago in the US. I was watching both sides for police presence but the officer came from behind and caught me speeding. Didn't see him coming.

Two, lawsuits my man. If you seriously injure or kill a pedestrian by not yielding or involved in serious car accident and it's your fault, you are going to be very poor for the rest of your life, even if your car insurance pay a portion of damages, you can still face a civil lawsuit.

Third, guns man, guns! I was in Houston for two weeks and have not witnessed any road rage or anyone flipping the bird to another driver. Most have it so being a big man or little man, it doesn't matter too much.

In China, when a pedestrian is killed or injured, the compensation is very low correct? If say the compensation a minimum is $10,000,000 rmb, I think drivers will be more careful. And of course, rich cocky people can get away by paying a paltry sum to the victim's family. Once this is changed, drivers will be more obedient.

 

[Pakistanisage]

Russia makes what matters. Obama is a FOOL.

If pushed in a corner , Russia can make life very difficult for " Uncle SAM ".

 

[areal]

Actually, Obama president maybe is right, China is the one, the next one, USA should have a right focus, however, American wasted more than ten years to find the right enemy. 911 was a wrong distraction.

 

[Edison Chen]

I traveled to US frequently I can explain this to you to a point based on what people tell me. The reason for this type of driving in most cases are the highway patrols patrol the highways quite often. I was fined $300 for speeding 14 year ago in the US. I was watching both sides for police presence but the officer came from behind and caught me speeding. Didn't see him coming.

Two, lawsuits my man. If you seriously injure or kill a pedestrian by not yielding or involved in serious car accident and it's your fault, you are going to be very poor for the rest of your life, even if your car insurance pay a portion of damages, you can still face a civil lawsuit.

Third, guns man, guns! I was in Houston for two weeks and have not witnessed any road rage or anyone flipping the bird to another driver. Most have it so being a big man or little man, it doesn't matter too much.

In China, when a pedestrian is killed or injured, the compensation is very low correct? If say the compensation a minimum is $10,000,000 rmb, I think drivers will be more careful. And of course, rich cocky people can get away by paying a paltry sum to the victim's family. Once this is changed, drivers will be more obedient.

This is all true, what I meant is people are not born to behave politely, they were influenced or required by the strict regulations, and one of the most important reason is the penalty. $300 in 14 years ago is a huge amount of money I guess? Same to me, I always watch out for the police, because I like to over speed when there is fewer cars on the road, but you will never know when the police car show up, they just sit there and wait for you! I was once stopped by the police, because they say I didn't maintain the single line. They are rude, unlike Chinese police, who at least salute to me before they check my driver's licence.

The lawsuit is nightmare. I still remember a high school Chinese student in the US, who carelessly scared a pedestrian when driving (His car didn't touch that guy even a little bit, nor did any accident happened), but still the young student was sued. This is horrible!