The intellectual property trade war is here to stay. When we first heard about the US leveling tariffs on China due to our large trade imbalance, I thought it would be cleared up quickly. When China offered to buy $50 billion of US ag, energy, and manufacturing a year I thought a deal would be struck immediately. What a big win it would be for President Trump. When the US rejected that offer it was clear this is not about trade imbalance. This is not a tariff dispute or a trade deficit issue. At the heart of the Chinese-US negotiations will be Intellectual Property.
When a country like China transitions from a underdeveloped nation to a developed economy, they experience high rates of growth. This is due to their population becoming more educated while more money is put into the system for infrastructure and other modern day improvements. Once a nation “catches up” with the other modern economies, growth is sustained by gains in innovation and efficiency. Both are a big part of this intellectual property dispute.
For an economy to grow as a developed nation, they need a system in place to encourage and foster innovation and gains in efficiency. Without it economic growth stagnates. That is what happened in the former Soviet Union in the 70s and 80s and also he East Asian “Paper Tigers” in the 1990s. China is at risk of the same fate. They need to create an economic system to incentivize entrepreneurship. If they can’t then their days of high economic growth and dreams of being the #1 global economic power are over.
China has cleverly found a way to “import” intellectual property to use it for their own gain. For foreign companies to use come to China for their inexpensive and plentiful labor, they have to have joint ventures with Chinese companies that get access to intellectual property. Reverse engineering is also an issue in China.
From where I sit the big questions are:
- Can China create their own innovations and efficiencies. Do they have the economic system in place to do it themselves?
- If China does not have a system that encourages and allows for innovation and gains in efficiencies, can their political system change to accommodate a new economic order?
- How long can the US and specifically President Trump fight this battle until a large chunk of his Ag voter base turns on him? Midterms are not that far away and he has to think of his own election. Farmers are not going to forget $8 beans and $3.50 corn
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Craig Turner – Commodity Futures Broker
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