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American Workers Should Want to Transfer Technology to China

The US government is fighting with all it has to keep China behind in technology.  In his State of the Union Address, President Trump claimed this is to stop “the theft of American jobs.”  But in reality this war on technological advancement in China destroys American jobs and hurts American consumers and entrepreneurs.

The first indication that this is not a normal trade dispute was the criminal indictment of a Chinese corporation and three individuals for stealing technology from the “American”  Micron corporation.  Everything about this indictment is curious. The technology that was allegedly stolen was neither developed in the US nor ever put into production in the US.  Micron acquired the technology in 2012 when it acquired Elpida, a corporation that developed the technology in Japan and then produced it in Japan and Taiwan.  After Micron acquired Elpida, it did not move it to the US.  On the contrary.  Its strategy, its spokesman explained, was “to be a global leader…For this reason, Micron is establishing manufacturing, technology and business centers of excellence that will…optimize our global footprint”; to implement this strategy, it then fired hundreds of employees in Boise, Idaho, and opened an additional manufacturing plant in mainland China.

The technology that was allegedly stolen was developed and produced overseas and the workers who allegedly stole it were two of Micron’s former foreign workers who worked in one of those overseas plants–in Taiwan.   Under these circumstances the US government should not have intervened, and if it hadn’t Micron and other corporations might have had reason to rethink their strategy of producing overseas.  Instead, the indictment demonstrated to them that when the safety of moving jobs to foreign countries deteriorates, the US government will step in to restore it.  Doing so in the name of the American worker is a sham.

This indictment hurts American consumers too.   In 2002 Micron admitted to the Federal Trade Commission that it had colluded with its competitors, among them Elpida, to raise prices.   Because of this history, when ten years later Micron was preparing to buy Elpida, the Department of Justice should have blocked the merger.   But it didn’t, and between 2016 and 2017 the price of Micron’s chips more than doubled. A class action suit attributes this increase to an agreement among the old conspirators to curtail production levels.  The American consumer would benefit from an increase in the number of firms that produce those chips, and the US government should not intervene to prevent it. But the indictment enshrines Micron’s monopoly power.

The US government is accusing China also of “forced technology transfers,” but this condemns a practice that the US government also uses, if too infrequently.   China offers monopolies a deal:  share your technologies with Chinese firms or lose access to our market.  The  US government administered exactly this remedy for monopoly power in 1975, when the Federal Trade Commission forced Xerox to license all its 1,700 patents to any interested competitors.   Of course, any monopoly that does not want to take it is free to leave China.  But the vilification sticks.

The New York Times, with a nod to Lenin, wrote:  “American companies could be sowing the seeds of their own destruction.”  To illustrate this self-immolation the Times chose the “American” corporation Qualcomm. Just like Micron, Qualcomm is also a global corporation: “We are from many different countries and speak many different languages,” it boasts.  Indeed, all of Qualcomm’s newest chips are manufactured by contractors in Taiwan or Korea,  and its headquarters and research facilities are spread around the world.  Of its recent (12/21/18) 555 job openings for engineers, 352 were overseas.   In what way is the technology of Qualcomm, “American,” then?

Qualcomm is a bad actor wherever it operates.  In 2018 the European Commission fined Qualcomm €1 billion for monopolistic pricing and in 2017 the Taiwanese government fined it $.75billion for the same reason, (which Qualcomm traded for technology sharing; the Chinese government managed to collect both a $1 billion fine and the sharing). Most importantly, though, in 2017 the US Federal Trade Commission  also filed a lawsuit against Qualcomm, and this suit lays out what the consequences of the “destruction” of Qualcomm that The New York Times predicts, would mean to American workers, consumers and entrepreneurs.  According to the FTC nobody, not even a giant like Apple, could tame the monopoly power that unconditional patent protection has conferred upon Qualcomm: “Qualcomm’s exclusive supply arrangement with Apple denied other baseband processor suppliers the benefits of working with a particularly important cell phone manufacturer and hampered their development into effective competitors.”  Thus, American consumers end up paying monopolistic prices, American entrepreneurs find entry to markets that Qualcomm monopolizes closed, and both American engineers and American line workers lose job opportunities.

Qualcomm took the deal rather than leave China because technology sharing does not deter further innovation by existing innovators.  And as the FTC explains, it lets new innovators add their brains to the effort.

But China’s system of technology sharing is ad-hoc.  What might a structured system of technology sharing look like?  For one type of intellectual creation it already exists.  Music is protected by the copyright law, and the preamble of that law states its purpose, “[t]o afford the copyright [technology] owner a fair return for his or her creative work and the copyright [technology] user a fair income under existing economic conditions.”   To that end, the law requires songwriters to make their compositions available for performance and recording by any person who pays a royalty that is set periodically by the Copyright Royalty Board.  A songwriter cannot discriminate among performers or services that distribute her work.  She is, of course, free to perform and record and sell her own songs, but she cannot prevent others from doing the same, provided they pay her the established royalties; furthermore, these royalties are the same for all songs and all songwriters.

Currently streaming services must pay 12.5% of their revenues in royalties to music publishers who must distribute them between performers and songwriters according to a formula set by the Board.  A performer who sells downloads directly to listeners must pay the songwriter either 9.1 cents for a song that is less than 5 minutes long or 1.75 cents per minute of a longer song.  “Blowin’ in the Wind” commands the same royalty as any other song.  This means that the royalty rates are “statutory,” and the licensing is “compulsory.”

A glimpse of a world in which technology is more available in China is afforded to us by the phones of the Chinese corporation Huawei.  All we have is a glimpse, because the US government has banned these phones. It forced AT&T, T-Mobile USA and Sprint to cancel their plans to offer them, and it is pushing governments in Europe to cancel them too.

The justification of the ban is that China may use these phones for spying.  Suspicion is the ultimate weapon, and, of course, a ban the ultimate penalty. Had the ban not been imposed, American consumers would have benefitted just as they always do when there is competition.   Huawei’s Mate 10 and Mate 20 phones have features, including 5G capabilities, that Huawei’s engineers developed first, and these would have made them high quality alternatives to the existing phones, perhaps even offered at lower prices. The ban hurts American workers too.  Previous Chinese phones were all technologically backward, sold mainly in poor countries, and allowed their producers only minimal profits. The new Huawei’s phones broke this mold and could leave Huawei with a higher profit margin.   If Chinese companies were permitted to sell products for which they themselves own the technology, they could afford to pay their workers higher wages, and these workers would, in turn, be able to afford to buy high-end products themselves.  As the market for high-end goods in China develops, wages there would rise, lessening the downward pressure on wages in the US.

But Huawei is an exception.  In general. China does not have enough of the technology that modern production requires in order to provide its workers employment in Chinese-owned corporations.  Without a legal way to obtain technology China must rely on foreign corporations to employ its workers, and to entice them, it keeps its wages low.  If the latest technologies were made available at affordable prices anywhere in the world, governments of technologically backward countries could let the wages of their workers rise, and US wages would then rise with them.  The system of unrestricted technology protection should be replaced by a system that makes the latest technologies available at affordable prices anywhere in the world. This will close the technological gap, and this is precisely the outcome that American workers want.

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Moshe Adler teaches economics at Columbia University and at the Harry Van Arsdale Center for Labor Studies at Empire State College. He is the author of Economics for the Rest of Us: Debunking the Science That Makes Life Dismal (The New Press, 2010),  which is available in paperback and as an e-book and in Chinese (2013) and Korean (2015) editions.

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