I shall leave aside for now the strategic question of whether America should stiff China, i.e. repudiate our $3 trillion in obligations to them. Strategically, repudiation of debt and other instruments on this scale is obviously something analogous to the atomic bomb in warfare: a very extreme option, with serious negative side effects, and not something to be taken lightly.
My question in this article is, rather, the ethical question: does America have the right to stiff China? Frankly, we quite arguably do.
Any serious ethical argument on this question turns upon the fact that China has not honored obligations it has assumed towards us, so therefore we are not obliged to honor our obligations towards it. This sounds like a technicality, but in fact, China’s failures to honor its obligations run into the trillions of dollars.
Let’s start with currency manipulation. China engages in this practice to a massive degree, spending roughly a billion dollars a day to drive down the renminbi-dollar exchange rate. And yet China has agreed, by becoming a signatory to the Articles of Agreement of the IMF, not to do so. Article IV, section 1 of this document – which China voluntarily signed – reads:
Each member undertakes to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates. In particular, each member shall:… (iii) avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.
The next big area of unethical Chinese behavior is the theft of American intellectual property. The most obvious and superficial case of this is rampant Chinese copying of American DVDs and other entertainment materiel, together with fake designer handbags, watches and the like. But the more serious kind of intellectual property theft concerns industrial know-how.
Although China committed, when it joined the World Trade Organization in 2001, to crack down on such theft and start to uphold the standards on the issue that developed nations uphold, it has not done so. Instead, with government acquiescence at best and proactive help (sometimes with the aid of Chinese intelligence agencies) at worst, it has continued to steal. As reported by the Irish journalist Eamonn Fingleton in his book “Jaws of the Dragon:”
The story began as long ago as 1980 when Beijing agreed to join the World Intellectual Property Organization. Various laws were duly promulgated that ostensibly provided Western owners of trademarks, patents, and copyrights with extensive protection against theft.
After American corporations complained that these laws were mere window dressing, Beijing assured first Washington and then the World Trade Organization that it would tighten enforcement. Yet all the evidence is that the problem has just kept getting worse – so much so that China was recently reckoned to account for fully two-thirds of all the world’s output of pirated and counterfeit products.
Moreover, China’s counterfeiting style has in recent years developed in a way that poses a qualitatively different, much more devastating, threat than previously. Whereas in the 1990s China confined itself largely to producing rather obvious knockoffs of luxury items such as Rolex watches and Louis Vuitton handbags, these days it is heavily involved in producing fake versions of everything from General Motors spare parts to Otis elevators.
China also exports vast quantities of counterfeit pharmaceuticals, most notably drugs like Prozac [and] Viagra, which sell particularly well on the Internet. Not only does such counterfeiting damage American corporate interests but it raises major questions of consumer safety. In recent years there have been many reports of deaths caused by Chinese counterfeiting activities. In Panama in 2006, more than 100 people died after taking cough medicine laced with a toxic Chinese-made ingredient.
As documented by the author Tim Phillips in 2005, whole cities in China are devoted to various counterfeiting specialties. The city of Yiwu in eastern China even functions as a sort of “Wall Street” for the industry, providing a vast marketplace where, Phillips states, 100,000 counterfeit products are openly traded and 2,000 metric tons of fakes change hands daily. Meanwhile, as Edmund Andrews of the New York Times has reported, in big cities like Shanghai, vendors still openly sell pirated goods even along major thoroughfares.
Not only has the Chinese government turned a blind eye to all of this, but large sections of the Chinese establishment, not least many sons and daughters of top leaders (know to China watchers as “princelings”), are heavily implicated in the racket.
The value of this stolen property must be accounted for in any calculation of what America owes China on net. This is not a minor issue in a modern technology-based economy – which must, by definition, be a know-how based economy. (According to a 2006 study by the Federal Reserve Board, America’s investment in this and related intangible assets like research and development, computer software, workforce training, and spending to build brands exceeds its investment in tangible assets.)
The cost to American industry is not only the licensing and other fees that should have been paid and were not. The cost includes also the long-term contracting of America’s industrial base due to counterfeit competition and the destruction of our capacity to innovate and invent due to depriving inventors of their just reward.
Finally we come to the most fundamental Chinese violation of its obligations to the U.S. Despite having committed on paper to engage in free trade with us – a commitment that we have honored to a fault – China in reality closes its own markets to its trading partners.
China’s protectionism doesn’t only mean obvious policies like tariffs and quotas; it also includes local content laws, import licensing requirements, and subtler measures (some of them covert, hard to detect, or infinitely disputable) such as deliberately quirky national technical standards and discriminatory tax practices. And it includes outright skullduggery such as deliberate port delays, inflated customs valuations, selective enforcement of safety standards, and systematic demands for bribes.
The quantitative size of these Chinese repudiations of assumed obligations? Well, if we take seriously the claim by neoclassical free-trade economists that trade naturally tends towards balance, then we must conclude that their size is equal to China’s gigantic accumulated trade surpluses with the United States.
Interestingly enough, the size of China’s accumulated American assets, because these derive from these accumulated trade surpluses, corresponds fairly closely to the size of China’s accumulated cheating. Which suggests – not proves, suggests – a certain poetic justice if America were to repudiate these obligations. Perhaps it’s not the prudent thing to do (at least at the present time), but we shouldn’t feel guilty about considering it, especially as it’s one of our strongest forms of leverage for negotiating a better solution.
Ian Fletcher is Senior Economist of the Coalition for a Prosperous America, a nationwide grass-roots organization
dedicated to fixing America’s trade policies and comprising representatives from business, agriculture, and labor. He was previously Research Fellow at the U.S. Business and Industry Council, a Washington think tank
founded in 1933 and before that, an economist in private practice serving mainly hedge funds and private equity
firms. Educated at Columbia University and the University of Chicago, he lives in San Francisco. He is the
author of “Free Trade Doesn’t Work: What Should Replace It and Why.”.