What’s The Real Problem With China

David Leonhardt says it’s not the exchange rate of the renminbi:

For the United States, the No. 1 problem with China’s economy is probably intellectual property theft. Technology companies, for example, continue to notice Chinese government agencies downloading software updates for programs they have never bought, at least not legally.

No wonder China has become the world’s second-largest market for computer hardware sales — but is only the eighth-largest for software sales.

Next on the list, say people who work in China or do business there, is the myriad protectionist barriers China has put up. These barriers make this country’s recent efforts at “buy American” protectionism look minor league. In some cases, Beijing has insisted that products sold in China must not only be made there but be conceived and designed there. The policy goes by the name “indigenous innovation.”

This gives me a rare opportunity to disagree with David Leonhardt. The thing that’s so problematic about undervaluation of the RMB is that not only are US import-competing firms disadvantaged by it, but so are the majority of Chinese people. It’s essentially a regressive sales tax levied in China with the revenue going to politically powerful Chinese exporters. But it’s bad for American firms and bad for Chinese prosperity which, in turn, is bad for firms all around the world. The intellectual property situation is, I think, the reverse. US intellectual property owners are politically influential and have imposed an IP regime that is contrary to the interests of most people. China’s IP regime is too lax, but it constitutes a useful tension with a US IP regime that’s too stringent. The cost to a small number of American firms is high, but this is an economically efficient outcome that’s good for the world. When the United States was a fast-growing developing country we had weak intellectual property laws too. That’s just how it goes.

Leonhardt and American firms are on much firmer ground with Chinese protectionist policies. These policies are bad for American businesses and also bad for most Chinese people. Like the undervalued currency, they impoverish the bulk of China’s citizens (and American companies) in order to enrich politically powerful Chinese firms. This is bad for China and bad for America. Like currency undervaluation, it’s something we should robustly fight. The intellectual property stuff, by contrast, most just reflects China refusing to get ripped off.