Undoing Obamacare

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There’s a reason why Marxism in practice is often called creeping socialism. It’s built one entitlement—or entitlement enhancement—at a time. Once in place, entitlements are difficult to undo because reformers must survive a siege of charges that they are taking something away from someone. The “something” can be food on the table, unemployment benefits, social security, or just about anything the left has decided should be provided by government. In this instance, it’s healthcare.

The left’s narrative on repealing Obamacare is that Republicans must figure out how to improve the system while not affecting those who are currently covered, including millions who received heavily subsidized plans through the so-called Affordable Care Act. The average monthly subsidy for new enrollees was almost $300 for a plan with an average premium of less than $400. In effect, this means that newly covered Americans are paying about $100 per month for a $400 plan. The upper limit for subsidy eligibility is 4 times the poverty level, or about $100,000 a year for a family of 4. Obamacare proponents consider existing subsidies to be cemented, so any rollback would just be heartless.

The Republicans I’ve heard are playing along. Nobody will lose their plan because of reform, they say. To be frank, real reform isn’t possible if healthcare—including routine trips to the doctor—is considered an entitlement. Quality care costs money, and it’s time that Americans who can afford iPhones, Netflix, Body art, and lottery tickets accept responsibility for paying the piper.

I don’t want to be an early Grinch, but we must face facts. When government pays for something, we all pay for it indirectly. It’s direct payments that give us control over the grocery stores, gas stations, auto repair facilities, and restaurants we deal with every day. If they don’t meet our needs, we find another provider who can. But with healthcare, government and insurance companies pay most of the bills, so they call most of the shots. It’s no surprise that doctors and hospitals don’t post prices for their services and most people involved in their delivery have no clue what they actually cost. The only way to regain control is to limit subsidies to catastrophic care for the truly poor, while unleashing the market and demanding control of our own healthcare expenses.

A predominantly market-based healthcare system would be a paradigm shift for most. If you get the flu, you should decide if a trip to the doctor is worth $100. Instead, if you have coverage with a modest copay, you are more likely to go and pass the additional cost along to others in the pool, who are, of course, doing the same. Economists refer to this as perverse incentives and it drives up costs for everyone.

I’m saying what Trump, Ryan, and other Republicans are hesitant to say. Yes, some Americans should lose their subsidies. Some assistance for those in poverty makes sense, but the rest of use need to regain control of our choices. That means no mandated plans, the ability to purchase coverage across state lines, and no expectation that insurance companies will accept us as new customers after we get sick.

Here’s to a complete overhaul of the system. Unfortunately, I doubt the Republicans have the fortitude to go as far as we need to go.

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Trump & Mexico

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On Monday I addressed a group of business leaders in Mexico City. We covered a lot, including global trade. I wasn’t surprised that Trump, NAFTA, and the wall were hot topics in the Q&A. Essentially, I was asked to explain the Trump-trade phenomenon by Mexican managers who have benefitted over the years from the growth in US-Mexico trade.

For the record, I’ve been to Mexico dozens of times to lecture, conduct research, and speak to business groups. Their managers are talented and engaging, and they always express frustration with government corruption and infrastructure problems. My address on Monday was scheduled before the election when most Mexicans expected Hillary Clinton to win. The focal point changed when she was defeated. There is some uneasiness there about Trump, but they seem to understand the issues pretty well.

If you a regular on this blog, then you know my position on trade. Free trade is undeniably positive, but it’s really just an academic concept. In practice, there are lots of issues to negotiate, including currency manipulation, intellectual property protections, differences in tax policies and regulatory environments, state-owned enterprises (SOEs) and “catch up” provisions that allow one country to protect “infant” industries. In practice, negotiators from each country must hammer out their differences before trade can occur. President-elect Trump widely criticized NAFTA and other trade deals during the campaign, threatening tariffs as a means of addressing inequities. The US is a huge market for Mexico, and this is what makes Mexican business leaders nervous.

And then there is the wall. Nations have recognized the need to control borders for millennia. Hillary Clinton even voted for constructing a fence in 2006 while in the Senate. Regardless of one’s view on immigration, making sure individuals have permission to enter the country is a sound part of any policy. But the US does not have control of its southern border, a problem that has actually been a boon to our southern neighbors, as Mexicans working in the US send an estimated $25-50 billion home every year, accounting for 2-4% of Mexico’s GDP.  There is no doubt that simply enforcing laws currently on the books—along with a structure that eliminates most of the free passage between nations—would negatively hit the Mexican economy.

I understand the Mexican concerns given their strong ties to the US economy. Unfortunately, their press seems to follow the lead of the US mainstream media, stoking fears that the President-elect wants to completely abolish trade with Mexico. Overall, they were respectful of the election process and seemed to understand the concerns of workers who drove the results in the rust belt. None of them expressed the kind of disdain for Trump that numerous HRC supporters continue to do, although it would have been easy to do given I was the only American in the room. Their primary concern is trade, not the wall. In fact, several executives told me that they fully understand the need to secure the border, and they complimented Trumps economic plan to business prowess. They also noted the widespread frustration with President Peña Nieto, something that I did not hear reported when the media criticized Trump’s trip to the DF during the campaign.

Mexican business leaders see these issues from the Mexican perspective, but I was impressed with their ability to empathize with Trump’s concerns and work with him as our nation’s duly elected leader. I wish those American protesting and rioting could display the same class.

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No matter who wins…

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Today we will decide who will be our next president. The winner will have a lot to do with immigration, trade, and the Supreme Court. Don’t get me wrong, this is a huge election. But I’d like to point out some very important issues that will remain on the table no matter who wins.

This election will be close. I’m always amazed that we refer to 5-point wins as “decisive” or “landslides.” The winner will claim vindication and some sort of mandate, but our country will be as divided as ever on November 9. The best case (realistic) scenario for Clinton includes a Republican House and ongoing investigations. A President Trump would face opposition in his own party and constant Senate filibusters. We can expect our government to be as divided as the voters. If divided means that less gets done, this isn’t the worst outcome.

Clinton may have promised “debt-free college” and Trump better trade deals, but Congress will have a lot to say about these issues. The President can wield a lot of influence, but his or her views will be tempered by the will of legislature. If you’re worried that Clinton might by-pass Congress with “a pen and a phone,” my guess is that she might not hesitate to anger the Republicans while her investigations are ongoing, which could be a while.

Regardless of the victor, the national debt will continue to rise. While Clinton seeks to expand entitlements, Trump wants to hold steady and is counting on economic growth to save the day. Trump’s prospects would be better given his tax proposals and the leanings of a Republican House, but both candidates have kicked the entitlement issue can down the road.

Win or lose, the Republican Civil War will begin on Wednesday. If Trump loses, he and his followers will likely blame the establishment for a close defeat and many will call for a new party. The Trumpsters would have a point. While Trump has made some errors along the way, never before has a presidential nominee had to battle so many within his own party. A Trump victory would mean an entirely new look for the Republican party, but don’t expect Romney, Bush, Kasich, Ryan, McCain, and the rest of the usual suspects to go down easy. There’s a lot of political blood left to be shed either way, and it will probably be a good thing over the long haul. The Republican party has been feckless for years now and needs a major overhaul.

Win or lose, we will still have a massively biased “mainstream” media. WikiLeaks continues to expose CNN’s corrupt ties to the DNC. While past GOP nominees seemed easily intimidated, Trump (to his credit) has kept this issue front and center. Imperfect though it may be, Fox News will continue to lean right to counter the herd. Kudos to Fox for its investigative work with WikiLeaks and the FBI investigations while others conveniently swept these issues under the rug.

There’s a lot riding on this election, but it’s only part of the equation. If you read this on November 8 and haven’t voted yet, your vote can make a difference. But no matter who wins, the battle for our liberties won’t end on Wednesday morning.

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Revisiting the Tax Plans

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There’s a lot of confusion about taxes in this and every election cycle. Here’s what you should keep in mind as you dissect the plans proposed by the two major presidential candidates.

Before we start, taxes are essential to an economy. Even a limited constitutional government requires revenue to operate. A lower tax rate is almost always better than a higher one, but the details are important. Taxes should be spread among the beneficiaries of government services—not just the rich—and should be as low as possible to as to fund a constitutional government. Tax systems should be simple and transparent; our current code is neither.

Clinton’s proposal is simple—tax the rich to pay for more government. Aside from the moral problem with such plunder, it doesn’t work. The rich don’t have enough to pay for our oversized government and soaking them hurts business investment. Clinton would counter this with more tax “incentives” to prod individuals and businesses into activity she thinks is best for them and the country. Add to this another “stimulus plan” to reward her supporters and you have a repeat of the last eight years. It’s classic progressivism.

Trump’s proposal is equally simple—cut taxes across the board and reduce regulation. The resulting growth would expand the tax base and increase tax revenues. Trump isn’t looking to reduce spending, although he could (arguably) hold the line if he has majorities in the House and Senate. His approach is a blend of supply side economics and populism.

If I were grading, Clinton’s plan would easily get an F. Without some good luck in the coming years—no wars, cheap energy, and the like—the best it can produce is a repeat of the Obama stagnation. With a bad break or two, it could be worse. The irony is that the social engineering (loopholes) inherent in her plan creates the very cronies she claims to despise. Wealthy individuals and corporations can reduce their taxable income by taking advantage of the “tax incentives” progressives inflict on the economy. It also increases complexity and reduces transparency, with more tax brackets and complications.

Trump’s plan would get a C. It’s decidedly better than Clinton’s, but it could be better. Trump and the Republicans had a huge opportunity to simplify the tax code with a single, low flat rate, or even two rates to win over the moderates. He could have addressed entitlements, capping the growth on Social Security and allowing younger Americans to choose another option. He could have proposed a universal basic income (UBI) to completely replace ALL government transfers. Any of these would have been game-changers. His election would be a wrecking ball for Washington, but his economic policies wouldn’t differ much from those of previous Republicans.

Of course, we shouldn’t assume that either candidate’s proposals would be implemented as proposed. The Republicans aren’t known for much opposition in the House, but if they maintain one or both majorities and a scandal-ridden Clinton is elected, major initiatives could be off the table. Likewise, Trump hasn’t made too many friends in the halls of Congress, so he would likely face some opposition as well. The only scenario that would likely result in major economic change would be a Democrat sweep. It’s not out of the realm of possibilities, but I’m not betting on it.

Overall, a C is not an A, but it’s better than an F.

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Lester Holt’s Opening Question

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Issues related to economics and business were front and center during the first presidential debate. There is a lot I could discuss, but Lester Holt’s opening question is enough for this post:

There are two economic realities in America today. There’s been a record six straight years of job growth, and new census numbers show incomes have increased at a record rate after years of stagnation. However, income inequality remains significant, and nearly half of Americans are living paycheck to paycheck. Beginning with you, Secretary Clinton, why are you a better choice than your opponent to create the kinds of jobs that will put more money into the pockets of American workers?

First, Holt’s question is far too generous to President Obama’s record on the economy. The “job growth” he mentioned is expected in a lackluster economy, so “six straight years” is no accomplishment. The income increase he referenced only appeared in the most recent data and does not negate the rest of Obama’s tenure as president. Holt also overlooked the extremely low labor participation rates, especially among youth and minorities.

Second, Holt’s question legitimizes the 2004 “two Americas” argument by former Democrat presidential candidate John Edwards. Of course, versions of the haves and have-nots argument have been bantered around politically since the days of Marx and Engels.

Third, Holt assumes that it’s the role of the President and/or federal government to “put more money in the pockets of American workers.” It’s not. The government’s role is to protect liberty so we can achieve on our own. Instead of opening the discussion on how much government intervention is best, Holt framed the debate as one over which type of intervention is best.

Finally, Holt made Hillary Clinton’s most difficult argument for her. Secretary Clinton needs to stay close enough to Obama to leverage his strength with certain voter groups, but far enough away to combat Trump on trade and other vulnerable issues. By establishing the pretext that Obama has advanced the economy but more intervention is necessary, he set the stage for Clinton’s narrative.

Holt’s opening question introduced a subtle bias that was present throughout the evening and set the stage for the debate. Hillary Clinton was ready for the softball he tossed her, responding as if on cue with all of the predictable clichés—“trickle down economics,” the need to “help families,” and making the “wealthy pay their fair share.”

If you’re upset about the bias, get used to it.

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Dog Whistles & Donald Trump

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I recently reread Paul Krugman’s bestseller, Conscience of a Liberal. My respect for Krugman has waned over the years, but I still try to give him the benefit of the doubt when I can. There are some decent economists on the left, but most of them just can’t put the pieces of the puzzle in the right places. Otherwise smart people reach wrong conclusions and promote bad policy.

Nonetheless, Krugman’s book is an essential read for anyone seeking to understand the intellectual basis of the left. Most conservatives and liberals agree that the gap between the political left and right has widened considerably in the past several decades. Conservatives argue that socialists and other statists pulled the Democrat party to the far left. Liberals like Krugman tell a different story, maintaining that “movement conservatives” pulled the Republicans to the far right. Krugman’s argument is flawed in a number of ways, but I want to focus on one of his key themes.

Conservatives—which include most Republicans—have held their own at the ballot box by blowing “dog whistles” to ill-informed, racist southern voters who are unable to see that their interests are really represented by Democrats. This point is not merely a side comment in his book, but a major crux of Krugman’s political philosophy. When Hillary Clinton claimed that half of Trump’s supporters are deplorables of some kind—“racist, sexist, homophobic, xenophobic, Islamaphobic”—she wasn’t just getting caught up in a political speech. She was parroting the core argument of modern statists like Krugman.

The problem with the Krugman/Clinton argument is that it lacks a factual basis. Bigots vote too and are probably split between Clinton and Trump, but this does not make either candidate a bigot. The notion that a large percentage of Americans fall into one of Clinton’s hate categories is hard to support, but that is not what is so problematic about her statement. Clinton’s contention that Trump voters are either haters or confused suggests that she simply does not understand the intellectual arguments for liberty and limited government. Put another way, she argues for a more intrusive government because she does not see any alternative.

It’s impossible to have a meaningful conversation with someone who believes that their view is the only legitimate one. If you’re in this camp, please understand the following. There IS a rational argument for strong borders that is not based in racism, isolationism, or xenophobia. There IS a rational argument for traditional family values that does not condone mistreatment of the LGBT community. There IS a rational argument that Islamic thought is a key issue with ISIS and other terrorists. There IS a rational argument for “law and order” that respects individual liberty and seeks to treat all Americans fairly.

If you’re on the left, know that the dog whistle argument is a non-starter and offends thoughtful Americans who don’t see things your way. If you want to have a productive conversation, dispense with the allegations of hatred and political correctness. You might find more common ground than you think.

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The Value of Polls

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Polls get far too much attention in the press, especially several months before an election. Nonetheless, the misnomers about the polling process never cease to amaze me. I’ve addressed polling in the past, but I’m going to update my comments in this post.

Who you ask, what you ask, how you ask, and how you tabulate the results are critical. Polling is a science, but it’s also a social science. Instead of measuring chemical reactions in a lab, you are measuring attitudes. People are much more complicated than chemicals, they don’t always tell the truth, and election polls must factor in one’s likelihood to vote. For these reasons, even the best professional pollsters get different answers when they are polling on the same issue.

Of course, another reason poll results can vary widely is that some pollsters are biased and seek certain results as a means of influencing behavior. If polls show that most Americans support candidate A, then some supporters of candidate B might give up or blame the candidate, and undecided voters—wanting to get behind a winner—might tend to support candidate A as well. I think the actual behavior of most voters is not affected by polls, but this isn’t the point. Even if poll results only influence the activity of 2-3% of voters, they can easily swing an election.

Leading questions and poor wording are common problems. Consider the question, “Do you think Hillary Clinton should be held accountable for using a private email server during her tenure as Secretary of State? Even if respondents share a common understanding of the scandal, “held accountable” might mean a reprimand to some and jail time to others. The results from questions such as these are simply not valid.

Even when questions are clear and worded correctly, some errors are difficult to overcome. Election pollsters try to survey a small group of voters that precisely represents the population of actual voters. A common misconception is that you cannot produce a reliable poll with only several hundred respondents. Statistically, you can. The real problem is how you select the respondents. Phone polls are common, but they not include lots of voters who don’t have landlines, don’t answer calls from unknown callers, or do not respond in a truthful manner.  Pollsters try to account for this problem by adjusting results, but they are really guessing.

Some errors are difficult to calculate from the outset. For example, should polls include candidates other than Clinton and Trump? The knee-jerk answer is yes because they will be on the ballot, but history—which can be wrong—tells us that most third party supporters end up voting for one of the two major candidates. Gary Johnson might poll at 10% in some states, but how many of his supporters will switch to Clinton or Trump in November? Nobody really knows. This issue alone is enough to weaken the results.

If you really like to follow polls, I suggest tracking averages at Real Clear Politics. By incorporating lots of polls into a composite, they probably average out some of the error on both sides. This is still just a best guess, but it’s better than relying on a single poll. At the end of the day, however, I suggest that you treat all polls with serious caution. They can and will be deceiving.

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Government Subsidies & Free/Fair Trade

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My last few blogs have addressed the free/fair trade debate. This one focuses on government subsidies.

The argument on subsidies goes like this: It’s not fair that US companies have to compete with firms that are subsidized in some way by other governments. In countries like China, many firms are partially- or wholly-owned by the government. These state-owned enterprises (SOEs) have an advantage because they receive support that private companies do not. As a result, American companies are at a disadvantage, and something needs to be done to level the playing field.

To understand this argument better, think about the US Postal Service. The USPS is owned by the federal government and loses billions annually. A recent analysis by Robert Shapiro estimates that taxpayers subsidize the agency by about $18 billion each year (http://www.sonecon.com/docs/studies/Study_of_USPS_Subsidies-Shapiro-Sonecon-March_25_2015.pdf) . Only part of this amount comes from direct payments; most comes from regulations that provide the USPS with unfair competitive advantages. For example, not only is the USPS exempt from state and federal taxes, but other delivery services are barred from leaving letters or packages in USPS mailboxes. In fact, federal law prohibits these carriers from delivering any letters or packages for less than $3, essentially keeping them out of the first class mail business. With a monopoly in this arena, the USPS is free to overcharge for letters and cut prices on package delivery where it faces competition from UPS, Fedex, and others.

SOEs are common in certain industries, such as airlines. Emirates, Etihad and Qatar are three examples from the Middle East. Delta, American, and United have long argued that competing with such airlines is unfair because these airlines receive billions from their respective governments each year.

SOEs are also common in certain countries. For example, China’s 12 largest firms are government-owned (http://fortune.com/2015/07/22/china-global-500-government-owned/). Like the USPS, these firms receive both direct and indirect government support that gives them unfair competitive advantages.

Two points should be made on the other side of the argument. First, just as we saw in the currency manipulation argument, Americans benefit form artificially low prices when they purchase subsidized products or services from global competitors. Second, it’s difficult to argue against SOEs in other countries when so many private companies in the US are receiving their own goodies from governments. Whether it’s an exemption from state taxes or a federal “green energy” subsidy, foreign companies can lodge the same complaint. How can a Chinese solar panel company compete globally if an American company receives a government subsidy to produce its own panels?

While it is true that cronies in the US often receive government support for their business ventures, they receive on average a lot less than their counterparts elsewhere. For this reason, the argument against subsidies—especially against SOEs—is valid. The Chinese, for example, have committed to addressing this problem by some degree of privatization, but there is still a long way to go. Trump and others have a leg to stand on here, but we need to be willing to practice what we preach.

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Regulations & Free/Fair Trade

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I’ve decided to post at least one more blog on the free/fair trade debate, this one on government regulations.

Free trade opponents in the US typically argue that Mexico, China, Viet Nam, and other less-developed trade partners do not have a similar regulatory infrastructure. Because “they don’t care about the environment or treating people fairly,” manufacturers there “get away with paying dollar-a-day” wages in sweatshops and dumping their waste directly into rivers and streams. This lack of common sense regulations, the argument goes, allows irresponsible companies—many with connections to US firms—to enjoy an unfair cost advantage. American companies that play by the rules just can’t compete.

There is some truth to this argument. Dumping pollutants into rivers is not uncommon in the developing world. Here are two examples of many:

http://www.ibtimes.com/chinas-river-blood-jian-turns-red-after-chemical-dump-photos-709258

http://www.washingtonpost.com/wp-dyn/content/article/2006/10/24/AR2006102400987_pf.html

But the argument weakens when we consider how much “common sense” is really a part of most of these regulations. While workers in the developing world earn much less than those in the US, their wages are set by the market. They line up for jobs in the factory just as many Americans did a hundred years ago because production work is more attractive than the alternative. Agriculture is the best option for some, but others who cannot find work in factories simply live on the streets and beg, or even turn to prostitution. Economies differ and it’s not necessary to pay $15 an hour to a line worker in Bangladesh just because Hillary and Bernie think companies should be forced to pay that as a minimum wage.

It is also true that US firms are over-regulated and spend a lot on compliance. It’s not reasonable to expect developing nations to over-regulate their economies to be on a par with US firms. We can solve much of this problem by cutting and streamlining regulations in our own industries so that the “regulation gap” narrows.

I haven’t heard Trump cite the regulation argument for restricting trade, but I’ve heard Sanders and others on the left do so. While some of the basic environmental arguments might be valid—especially if the pollution directly affects the US as is the case with Mexican border cities—we should clean up our own house first. There are no objective standards when it comes to various forms of regulation, so insisting that other countries should meet ours doesn’t make sense.

When it comes to regulating business, we should focus on cutting at home instead of forcing other nations to match our inefficiencies. Trump appears to understand this facet of the trade debate and is calling for less regulation. Clinton wants more restrictions on business which will only increase costs and make us less competitive as a nation.

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Intellectual Property in China

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I’ve been discussing the free/fair trade debate in the last two blog posts. In this one I turn to the issue of intellectual property (IP) in China.

Microsoft in the classic example. Most computers run on Windows and use Office. In the US and most western nations you’ll pay to use this intellectual property. In countries like China, most do not. On paper, Chinese law protects intellectual property rights, but enforcement is spotty at best, and many Chinese simply don’t see it as a serious problem. Estimates of Microsoft losses in China are all over the board, with $60 billion as a good guess. These estimates might be inflated because they assume that all Chinese users of Microsoft products would have paid for them if pirated versions were not available. $20 billion is a conservative bottom line loss, and that’s a lot for one firm.

The Intellectual Property Commission Report estimates the total annual IP-related losses for US firms in Asia to be around $300 billion, about the same amount that US firms export to the continent. The report (http://www.ipcommission.org/report/ip_commission_report_052213.pdf) is worth reading if you have some time, as it chronicles the various problems, from patent and trademark violations to piracy and copyright infringement. The takeaway point is that IP is a very serious problem, especially in China.

There are two primary reasons why IP law is so difficult to enforce in China. First, the nation lacks the infrastructure and incentives to prosecute offenders. China has improved in this regard during the past two decades, but it’s got a long way to go.

Second, IP in China and the US is viewed very differently. Historically, Americans have championed creativity and individuality. But as a collective society, the Chinese tend to place less value on individual innovation; in their view, new ideas aren’t as important as production. Put another way, many Chinese see the value of an iPhone primarily in its production and distribution, not in its conception and original design. Hence, IP is largely a collective entity. It’s no secret that Chinese companies tend to focus on mimicking innovative global competitors, but with a lower cost structure.

I once discussed the IP problem with a group of undergraduates in Beijing and most of them just didn’t understand why I thought it was a serious issue. Why should you be concerned if millions of Chinese are using pirated copies of Windows and Word, they asked? These users wouldn’t be able to afford to pay for it anyway. Of course, if Microsoft pirates could be required to pay for the product in order to use it, many would find a way to do so, increasing the size of the market and driving down the price. I explained that innovation occurs because of property rights and incentives, but in the end most of the students were okay with Westerners sorting that out, leaving Chinese firms to use and reuse global technology as they wish.

While it’s unrealistic to eliminate IP theft in any country, but the Chinese government must develop the infrastructure necessary to enforce international standards. If they don’t, innovative Western firms must continue to overcharge for their new products to cover developmental costs while many Chinese firms and consumers get a free ride. Nobody in China has an incentive to do this without international pressure, which is why insisting on real action is so important.

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