I think everybody agrees that innovation is the only strategy that will allow America to be competitive in the 21st Century. If this is true, then it would make sense to increase Federal spending on basic research that supports all of the R&D. But with today’s polarized politics, it does not appear that there is any Congressional support to increase the Federal Research budget for basic science.
Americans have invented but now do not manufacture the following products: fluorescent lights, LCDs (for monitors), TVs, mobile phones, lithium batteries, solar cells, desktop PCs, notebooks, servers, hard-disk drives, routers, robots, advanced composites, advanced ceramics, and integrated circuit packaging. Most of these inventions are now manufactured overseas, which gives our competitors a way to access U.S. innovation without doing the research.
So the challenge is: How can we get more out of our current R&D investments?
To do this, we must first take a hard look at what has been happening in the economy since China was allowed into the WTO. Among the many threats to our intellectual property and trade secrets, China, by far, is the biggest. Officials with the U.S. Immigration & Customs Enforcement (ICE) have labeled China’s “aggressive and wide ranging espionage the leading threat to U.S. technology.”
An article in IndustryWeek, Strong IP Protections Are Good for Workers, Good for the Economy, makes the case that many countries ignore IP protection rules. The IP Commission Report, published on behalf of The Commission on the Theft of American Intellectual Property by the National Bureau of Asian Research, found that stolen ideas, brands and inventions drain more than $300 billion from the U.S. economy. In fiscal year 2013, U.S. Customs and Border Protection seized counterfeit and pirated goods worth more than $1.74 billion at America’s borders.
What good does it do for the government to invest in a National Network of Manufacturing Innovation Centers if we are not committed to protecting our innovation?
Everyone knows that new inventions and technologies can keep America in the manufacturing game. This includes the Chinese who are committed to acquiring our technologies any way they can. This is a much bigger threat than most people know because it not only threatens American manufacturing, but it is also beginning to threaten our national security.
To protect our innovation and R&D we must carefully examine some of the mistakes we have made since allowing China into the WTO.
Advanced technological products: The balance of trade for “advanced technology products” was in a surplus from 1988 until 2002, when it turned negative. The following chart shows that we had a $4 billion surplus in 2001 and an $86 billion deficit by 2014.
Our biggest losses are in life sciences such as MRIs, optoelectronics (which includes optical scanners and solar cells), information technology (CPUs, disk drives and modems), and advanced materials (optical fiber cables and video disks), and nuclear technology (reactors and fuel cartridges).
The loss of advanced products begs an obvious question. What good does it do for the government to invest in a National Network of Manufacturing Innovation centers if we are not committed to protecting our innovation? In essence, we are doing the R&D for our competitors.
R&D exported to foreign countries: EY reports that about 11% of companies based in North America now spend more than a quarter of their R&D budget in emerging markets. But within five years, more than 23% expect to have surpassed that mark.
Denis Fred Simon, a professor of international affairs at Penn State University, “identifies 1,160 R&D centers in China that have been established by multinationals, an increase from 30 that existed in1999.”
This is another way that we give away our innovation and new technologies to countries like China, who works to acquire our innovation rather than conduct their own basic research. I understand that multinational companies need to do research in-country to adapt products to local needs. But how can we protect innovations coming from basic science research if countries like China are dedicated to accessing it illegally?
For the U.S. manufacturers that have invested in building plants in China, there is continuous pressure and a policy by the Chinese Government to force technology transfer in violation of international trade agreements. They do this by requiring the creation of joint-venture companies as a condition to gaining access to Chinese markets.
For example, China is implementing new rules that would force technology companies looking to sell into China’s banking industry to submit products to invasive security tests, provide sensitive source code and use local Chinese encryption algorithms. Other potential new rules mandate the storage of data produced by Chinese companies within China and the disclosure of encryption keys to the Chinese government.
A Tax Bribe
The only group that has the power to bring back technology, R&D and jobs from Asia are the multinational corporations, and the only thing that would interest them is money. They seem to have a never-ending need to lower taxes, so why not take advantage of this addiction and offer them conditional tax breaks? We could reduce corporate taxes for bringing back both R&D and jobs. They also have $2 trillion in offshore tax havens, and we could repatriate the money based on the same R&D and jobs formula. We should also make the R&D tax credit permanent and increase the Alternative Simplified Credit (ASC) from 14% to 17%. Yes, this is bribery, but it appeals to corporation's never-ending need for lower taxes.
Why do research if you can steal it? China has shown a willingness to acquire our innovation and technology whether they have to copy it, steal it or use espionage to get access to it. They know that innovation is the secret to our competitiveness, and the more they can steal the less competitive we are.
Also, if they can get the technology, they can take market share, because they are a low-cost producer and will eventually dominate the market without investing in basic science research. We need to do everything in our power to stop them.
China signed the World Trade Organization agreement in 2001and agreed to stop explicitly requiring foreign companies to surrender their technology to China in return for market access. China employs an industrial policy that seeks to circumvent accepted intellectual property protections and to extort technology from U.S. companies. This is blatant extortion and totally ignores their WTO agreement.
Multilateral trade agreements: So far multilateral trade agreements have been bad for jobs and U.S. intellectual property. If we are not able to enforce the rules and protect our IP, signing more trade agreements will give multinational companies more business, but we will continue to lose the innovation and technology the U.S. tax payer invested in.
The Obama administration says that the new trans-Pacific Partnership agreement has language in it that will protect our intellectual property. But if the government is not willing to enforce the agreement, it is a bad deal that will accelerate our loss of innovation and R&D.
So why are we doing this?
I can see three obvious reasons. First, politically, the government wants desperately to have normalized relations with China and are trying very hard to not get into any disputes.
Second, multinational companies have invested in China to capture business from China’s growing middle class. Because they have made the investment, they do not want any American policies to put their investments in jeopardy. And they have tremendous lobbying influence with Congress to maintain the status quo.
And third, trade deficits cannot occur unless someone finances them. Japan and China manipulate their currencies to keep the American dollar overvalued in order to perpetuate our trade deficits with them. They do this by sending the excess dollars they earn back to us by buying U.S. government bonds, in effect lending us the money to buy their goods. The U.S. Secretary of the Treasury is worried that China will quit buying our bonds and so turns a blind eye toward currency manipulation and trade deficits.
If we are unable, unwilling, or politically against protecting our R&D by the laws that allow us to do so under the WTO, there is a better alternative...
Both the Obama and Bush administrations have avoided the truth about trade deficits—that they cause deindustrialization, including the loss of jobs and our technologies. They have been afraid of confronting China and making them play by the rules. Their approach to competing in this hyper-competitive worlds seems to be based on appeasement and the hope that mercantilist countries will somehow change and see the wisdom of fair trade.
But hope is not a plan, and it is time to start enforcing the rules that protect our investments in R&D and innovation. We are, in fact, losing the global competitive war and our investment in the research that created these products is eroding away.
If innovation is the key to American manufacturing and economic growth progress and we are unable to increase federal research, then our only alternative is to protect and get more out of what we have already invented. We simply can’t let countries like China, steal, copy and use our intellectual property.
If we are unable, unwilling, or politically against protecting our R&D by the laws that allow us to do so under the WTO, there is a better alternative—and it doesn’t require a new international regulatory system.
Under existing international law, Congress can balance trade simply by enacting the Scaled Tariff, a single-country variable tariff which is applied to each trade-surplus trading partner proportionately to the trade surplus it runs with the U.S.
This tariff can be applied under current international rules by trade-deficit countries upon the countries with which they have chronic trade deficits. The rate of the tariff with a particular country goes up as the trade deficit goes up, goes down as the trade deficit goes down, and goes to zero when trade reaches balance.
If the U.S. were to impose a scaled tariff, American manufacturers could produce in the U.S., where they could protect their trade secrets. It would go a long ways in terms of solving currency manipulation, IP protection, and losing manufacturing jobs. Other countries would have to buy our products in order to have access to our markets.
When are we going to get the message that China is dedicated to replacing the U.S. as the preeminent economy in the world and that getting our R&D and technologies is the key? The empty rhetoric from the government (be they Democratic or Republican), no matter how well meaning, will be the cause of our defeat. We are cruising towards innovation bankruptcy if we allow this to continue. But, yes there is a solution.