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March 22, 2018 3:13PM

How the World Trade Organization Can Curb China’s Intellectual Property Transgressions

Quite rightly, President Donald Trump and his Administration are targeting the transgressions of China against US intellectual property rights in their unfolding trade strategy. But why not use the WTO rules that offer a real remedy for the United States without resorting to illegal unilateral action outside the WTO?

Seventeen years after China joined the WTO, China still falls considerably short of fulfilling its WTO obligations to protect intellectual property. About 70 percent of the software in use in China, valued at nearly $8.7 billion, is pirated. The annual cost to the US economy worldwide from pirated software, counterfeit goods, and the theft of trade secrets could be as high as $600 billion, with China at the top of the IP infringement list. China is the source of 87 percent of the counterfeit goods seized upon entry into the United States.

One possible response by the United States is the one the Trump Administration seems to be taking: slapping billions of dollars of tariffs on imports of more than 100 Chinese products through unilateral trade action. Given its protectionist predilections, taking this approach is surely tempting to the Trump Administration. Doing so will, however, harm American workers, businesses, and consumers, and contribute to further turmoil in the global economy.

The results will likely include retaliation by China against the goods and services of American companies and workers; lawful economic sanctions imposed by China on American exports to China after the US lost to China in WTO cases; the hidden tax of higher prices for American consumers; less competitiveness in the US market and in other markets for American companies that depend on Chinese imports as intermediate goods in production; and doubtless still more American and global economic landmines from the downward spiral of tit-for-tat in international trade confrontations.

These tariffs are not only self-defeating and counter-productive; they are also illegal under international law. Where an international dispute falls within the scope of coverage of the WTO treaty, taking unilateral action without first going to WTO dispute settlement for a legal ruling on whether there is a WTO violation is, in and of itself, a violation of the treaty. The WTO treaty establishes mandatory jurisdiction for the WTO dispute settlement system for all treaty-related disputes between and among WTO Members. The WTO Appellate Body has explained, “Article 23.1 of the (WTO Dispute Settlement Understanding) imposes a general obligation to redress a violation of obligations or other nullification or impairment of benefits under the covered agreements only by recourse to the rules and procedures of the DSU, and not through unilateral action.”

Thus, the United States is not permitted by the international rules to which it has long since agreed to be the judge and the jury in its own case. Imposing tariffs on Chinese products without first obtaining a WTO ruling that Chinese actions are inconsistent with China’s WTO obligations is a clear violation by the United States of its WTO obligations to China – as WTO jurists will doubtless rule when China responds to the tariffs by challenging the tariffs in the WTO.

Such a legal loss by the United States, with all its unforeseeable economic and geopolitical consequences, can be avoided while still confronting Chinese IP violations effectively. Before resorting to unilateral action outside the WTO and in violation of international law, the United States should take a closer look at the substantial rights it enjoys under the WTO treaty for protecting US intellectual property against abuse.

Potential remedies in the WTO exist and should not be ignored. These remedies can be enforced through the pressure of WTO economic sanctions. WTO rules do not yet cover all the irritants that must be addressed in US-China trade relations. Even so, instead of just concluding that there are no adequate remedies under WTO rules to help stop IP infringement, the United States should first try to use the remedies in rules we have already negotiated that bind China along with all other WTO Members.

A number of these rules have not yet been tested against China or any other country – which is not proof they will not work. Generally, when tried for the first time, WTO rules have been found to work, and, generally, when China has been found to be acting inconsistently with its WTO obligations, it has complied with WTO rulings. The actual extent of Chinese compliance with WTO judgments can be questioned; in some instances it is seen by some as only “paper compliance.” But whether any one WTO rule can in fact be enforced cannot be known if no WTO Member bothers to try to enforce it.

The WTO rules in the WTO Agreement on the Trade-related Aspects of Intellectual Property Rights – the so-called TRIPS Agreement – are unique among WTO rules because they impose affirmative obligations. Yet, this affirmative aspect of WTO intellectual property rules has been largely unexplored in WTO dispute settlement. In particular, WTO Members have so far refrained from challenging other WTO Members for failing to enforce intellectual property rights.

On enforcement, Article 41.1 of the TRIPS Agreement imposes an affirmative obligation on all WTO Members: “Members shall ensure that enforcement procedures… are available under their law so as to permit effective action against any act of infringement of intellectual property rights covered by this Agreement, including expeditious remedies to prevent infringements and remedies which constitute a deterrent to further infringements. These procedures shall be applied in such a manner as to avoid the creation of barriers to legitimate trade and to provide for safeguards against their abuse.”

Note that this “shall” be done by all WTO Members; it is mandatory for compliance with their WTO obligations. And yet what does this obligation mean by requiring that effective actions against infringements must be “available”? Is this obligation fulfilled by having sound laws on the books, as is generally the case with China? Or must those laws also be enforced effectively in practice, which is often not the case with China?

The Appellate Body has said that “making something available means making it ‘obtainable,’ putting it ‘within one’s reach’ and ‘at one’s disposal’ in a way that has sufficient form or efficacy.” Thus, simply having a law on the books is not enough. That law must have real force in the real world of commerce. This ruling by the Appellate Body related to the use of the word “available” in Article 42 of the TRIPS Agreement and to a legal claim seeking fair and equitable access to civil judicial procedures. Yet the same reasoning applies equally to the enforcement of substantive rights under Article 41.

In the past, the United States has challenged certain parts of the overall Chinese legal system for intellectual property protection – and successfully – in WTO dispute settlement. Despite its overall concerns about enforcement by China of US intellectual property rights, the United States has not, however, challenged the Chinese system as a whole in the WTO. Instead of indulging in the illegality of unilateral tariffs outside the legal framework of the WTO, the Trump Administration should initiate a comprehensive legal challenge in the WTO, not merely, as before, to the bits and pieces of particular Chinese IP enforcement, but rather to the entirety of the Chinese IP enforcement system.

To be sure, a systemic challenge by the United States to the application of all China’s inadequate measures relating to intellectual property protection would put the WTO dispute settlement system to a test. It would, what’s more, put both China and the United States to the test of their commitment to the WTO and, especially, to a rules-based world trading system.

As Trump’s trade lawyers will hasten to say, a systemic IP case against China in the WTO would also involve a perhaps unprecedented amount of fact-gathering. It would necessitate an outpouring of voluminous legal pleadings. It would, furthermore, force the WTO Members and the WTO jurists to face some fundamental questions about the rules-based trading system. Yet it could also provide the basis for fashioning a legal remedy that would in the end be mutually acceptable to both countries, and could therefore help prevent commercial conflict and reduce a significant obstacle to mutually beneficial US-China relations.

Going outside the WTO to try to resolve this trade dispute will undermine the WTO and thereby ultimately undermine US trade in goods and services – not to mention the protection of US intellectual property rights – throughout the world. Far better for the United States to play by the rules within the WTO – not least because it was the United States that insisted the most on having those rules when they were negotiated. Far better, too, for China to have its compliance with its WTO obligations judged by impartial and objective WTO jurists than by Donald Trump.

A positive solution should be sought by the Trump Administration through dispute resolution in the WTO over the systemic shortcomings of Chinese intellectual property protection before plunging into the commercial black hole of unilateral trade action.

March 22, 2018 11:50AM

Study: Medical Expenses Cause Close to 4% of Personal Bankruptcies – not 60%

A new study by economists Carlos Dobkin, Amy Finkelstein, Raymond Kluender, and Matthew J. Notowidigdo -- "Myth and Measurement — The Case of Medical Bankruptcies" [subscription required] -- challenges the conventional wisdom on the effect of medical bills on the rate of personal bankruptcy. From the study:

Policymakers' beliefs about the frequency of medical bankruptcies are based primarily on two high-profile articles that claim that medical events cause approximately 60 percent of all bankruptcies in the United States. In these studies, people who had gone bankrupt were asked whether they'd experienced health-related financial stress such as substantial medical bills or income loss due to illness. People were also asked whether they went bankrupt because of medical bills. People who reported any of these events were described as having experienced a medical bankruptcy...

[But] the existing, widely cited evidence on medical bankruptcy is built on the fallacy that when two things occur together there is necessarily a causal relationship between them.

The study's authors looked instead at people who had a hospitalization to see whether that expensive episode of care increased the probability of filing for bankruptcy. They write, "we estimate that hospitalizations cause only 4 percent of personal bankruptcies among nonelderly U.S. adults." Even among uninsured adults, "hospitalizations are responsible for only 6 percent of personal bankruptcies." While medical bills can still drive someone to bankruptcy even if they don't experience a hospitalization, the authors conclude, "focusing on hospitalized people probably does not lead to vast underestimation of the effect of all illness and injury on bankruptcy rates."

Takeaways:

  1. Always be skeptical of everything you read. (Up to and including this blog!)
  2. Keep in mind this study does not show the overall personal bankruptcy rate is lower than believed. It shows only that the share attributable to medical expenses is lower than believed. It therefore follows that, to the extent your support for single-payer springs from a desire to reduce bankruptcies, you should shift your energies toward combating whatever is actually causing the 56 percent of bankruptcies you incorrectly believed to be attributable to medical expenses.
  3. Health care reform should be able to get the medical-bankruptcy rate down even more.
March 22, 2018 11:30AM

States & HHS Can Provide Relief from ObamaCare while Congress Dithers

Congress appears unwilling to provide any sort of ObamaCare relief. 

But did you know states can exempt their residents from ObamaCare’s costliest regulations simply by letting them purchase insurance licensed by U.S. territories—i.e., across state lines? 

Or that the Trump administration has the authority to provide even more relief from ObamaCare than last year’s Cruz Compromise would have, just by reversing HHS’ administrative ban on renewal guarantees in short-term plans? 

Well, now you do. From my latest oped in The Hill:

States and the Trump administration each have the power to deliver relief from ObamaCare while Congress dithers.

In 2014, the Obama administration reversed its interpretation of ObamaCare and found the law’s costliest regulations do not apply in U.S. territories. As a result, states can provide relief from ObamaCare by freeing individuals and employers to purchase health insurance licensed by American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, or the U.S. Virgin Islands.

The Obama administration’s reversal also provides a model for the Trump administration. HHS has the authority to and should reverse its administrative ban on short-term health plans offering “renewal guarantees.” Ending that ban would dramatically reduce premiums for the vast majority of consumers in the individual market, even as ObamaCare premiums continue to skyrocket. Conservative states and states with vulnerable GOP members like Florida, Illinois, and Pennsylvania would see the largest premium reductions. 

Read the whole thing.

March 22, 2018 10:57AM

Trump to Impose Restrictions on Imports and Investment from China

This afternoon, for the second time in the space of a month, President Trump is expected to invoke his authority under a rarely used statute to levy restrictions on a vast swath of imports and investment from China. The cause for today’s measures is behavior that the U.S. Trade Representative has characterized as rampant, sustained theft of U.S. intellectual property by Chinese entities and the Chinese government.

Although allegations—and the evidence supporting those allegations—that China routinely transgresses in the realm of intellectual property have been accumulating for many years, it does not follow that the appropriate response is to restrict trade and investment. In fact, the collateral damage inflicted by those restrictions will be widespread.

President Trump’s “remedies” are likely to raise production costs for U.S. businesses, diminish U.S. productivity, squeeze real household incomes, reduce the revenues of U.S. farmers and other export-dependent industries targeted by Chinese retaliation, exacerbate tensions with China and other countries adversely affected by the restrictions, and hasten the demise of the rules-based trading system.

Among the imports expected to be targeted by punitive tariffs are information and communication technology (ICT) products, which are presumed to have benefited from IP theft. As a preliminary matter, it’s important to note that most exports of ICT products from China contain more non-Chinese value than Chinese value. On an aggregate basis, non-Chinese inputs (material, labor, overhead, R&D, etc.) account for nearly 50 percent of the value of all U.S. imports from China.  For ICT products, the percentage of non-Chinese value is much greater than half. 

Remember the inscription on the back of the Apple iPhone? It reads “Designed by Apple in California; Assembled in China.” In 2013, it cost $178.96 to produce an iPhone, but only $6.44 or 3.6% was Chinese value added. Yet, the entire $178.96 is chalked up as imported from China, exaggerating the U.S. bilateral trade deficit, which is the main reason Trump wants to impose tariffs in the first place! It’s important to note that Japanese, Korean, Singaporean, German, and many other (including American) companies will be hurt by U.S. tariffs on Chinese ICTs.

Moreover, ICT products are inputs to value added production in the United States. Raising the costs of computers, devices, and technology components will raise the cost of production or reduce productivity across the U.S. services and manufacturing sectors. Meanwhile, U.S. consumers will have to devote more of their income to ICT products, leaving fewer dollars to spend on other U.S. goods and services or to save and invest in other businesses. The tariffs will make scarce resources scarcer still.

Yet another significant economic cost of Trump’s tariffs is the loss of revenues U.S. farmers and other U.S. targets of retaliation will be forced to endure. China is reportedly preparing to impose restrictions on U.S. soy exports and, almost certainly, other agricultural products will be targeted as well.  Don’t be surprised to see U.S. technology companies hurt as well, as China considers justifying its intrusive forced technology transfer policies as a national security imperative. (With his steel and aluminum tariffs, Trump opened the door to abuse of that excuse.)

The appropriate response to China’s infractions would be to use the evidence collected as the basis for a formal complaint at the World Trade Organization. In fact, that should have been done several years ago, but apparently U.S. multinationals were reluctant to go on record with evidence of those infractions for fear of suffering retribution from Beijing. As the problem worsened and a tit-for-tat high tech trade war began to play out in the shadows, a narrative emerged (which has come to dominate the debate over economic relations with China) that the WTO rules are inadequate to restrain certain discriminatory, predatory Chinese industrial policies, and that even if they could be used to discipline those practices, China wouldn’t comply.

This is a false narrative—or, at least, an untested one. The United States has brought only 21 cases against China (but 116 overall), and China has a strong record of compliance when its practices have been found to violate the rules. By circumventing the WTO under the premise that its rules are inadequate to discipline China, and invoking a law that is incompatible with U.S. obligations under the WTO rules, President Trump has delivered a vote of no confidence in a system that has served U.S. interests well for 70 years.

Whether the system endures or something else emerges to fill the void remains an open question. But for the foreseeable future, an environment of higher consumer prices, higher production costs, unpredictable lawlessness, and tit for tat protectionism is likely to prevail.

March 22, 2018 10:09AM

Disciplining China at the WTO

By Simon Lester and Huan Zhu

The scope of the Trump administration's Section 232 "national security" tariffs is filled with uncertainty -- exemptions are being negotiated this week -- but we are already on to the next set of aggressive trade moves: reports suggest that the administration will announce tariffs on imports of Chinese products today, as punishment for China's alleged unfair trade practices. This would be a unilateral response to China's practices, with the U.S. Trade Representative acting as the judge, jury, and executioner. This approach may not be all that effective in getting China to change, and risks retaliation by China.

But there is another way: Bring complaints against China to the WTO, and get rulings from a neutral arbiter on these practices.

Unfortunately, the Trump administration does not seem to have much confidence in the ability of WTO dispute settlement to discipline China. Leading administration officials have referred to the WTO’s "abject failure to address emerging problems caused by unfair practices from countries like China" and its "inability to resolve disputes, limit subsidies or draw China into the market status that was envisioned when China joined the WTO”; and have declared that the WTO "is not equipped to deal with [the China] problem."

divIs this skepticism justified? We looked at all of the WTO complaints against China, and we see something quite different. In almost all complaints brought against China, whether litigated fully or resolved without litigation, the complainants have made at least some progress towards their goals of greater market access in China. Overall, it's a pretty good record of success, both on its own and in comparison to how other countries have reacted to WTO complaints.

A table of all the cases is here (this is a work in progress, part of a longer paper we are working on). Here is a brief narrative summary.

China joined the WTO in 2001. The first complaint against it was brought in 2004, with governments perhaps letting China gain some experience with the system before challenging it in dispute settlement. In the 14 years from 2004-2017, 39 complaints were brought against China, on 26 separate issues ("matters" in WTO-speak -- sometimes multiple countries complained about the same matter, so there are more complaints than matters). In that time, China was second only to the United States in the number of complaints it faced.

Of the 26 matters litigated against China, 4 are still pending. 12 have been litigated all the way through, and 10 were resolved through some kind of settlement, or not pursued after the measure was modified. These cases addressed a wide range of issues: Export restrictions, subsidies, intellectual property protection, discriminatory taxes, trading rights, specialized services, and trade remedies.

In all the completed cases, with one exception where a complaint was not pursued, China's response was to take some action to move towards greater access. This was done either through an autonomous action by China, a settlement agreement, or in response to a panel/appellate ruling.

For the cases where there was a WTO ruling, there was sometimes a dispute about compliance with the ruling (as happens with other countries as well), and China's compliance came only after the follow-up complaint procedure provided for in WTO law (Article 21.5 of the WTO's Dispute Settlement Understanding). In other cases, the complainants have disputed whether China has complied, but have not brought an Article 21.5 complaint to push China to comply.

The overall picture of China's response to WTO complaints looks very much like the situation of other governments who face such challenges. China has made efforts to comply, although some issues are still contested. There are no cases where China has simply ignored rulings against it, as has happened with some other governments. For example, the United States has not complied in the cotton subsidies complaint brought by Brazil, and the EU still does not allow hormone treated meat to be sold there even after losing a complaint brought by Canada and the U.S.

Today's announcement is just the beginning. In the coming weeks and months, the Trump administration will have some decisions to make on how exactly it will implement this announcement so as to address Chinese protectionism and other trade practices. The administration's instinct seems to be that unilaterally imposed tariffs are the best option. But the WTO offers a better way, and the administration should consider joining with other governments to pursue more WTO complaints against China (and negotiating new rules -- e.g., on state-owned enterprises -- where WTO rules are lacking).

March 22, 2018 9:09AM

Maryland School Shooting Complicates the School Safety Movement

By Trevor Burrus and Matthew Larosiere

This week, a seventeen-year-old student at Great Mills High School in Maryland brought a Glock 17 handgun to the school and wounded two students before being stopped by Blaine Gaskill, the school resource officer. The event came weeks after the Valentine's Day massacre in Parkland, Florida, which set off a deluge of public outcry for “school safety” reform. The problem, though, is that nobody can agree on what “school safety” reform is. Before this week, activists have been pushing for stricter gun control, while others pushed various measures to enhance school security.

School shootings are a very unique and complicated problem, further frustrating the likelihood of any coherence coming out of this outcry. They are, in fact, very rare, and generally planned far ahead of time. This makes it difficult for any gun-control law to affect a school shooter. In general, gun-control laws tend to dissuade criminals on the margins--the guy who is vacillating about whether to kill his wife but who may decide to do it if given a gun. School shooters are not that type of criminal. Moreover, Maryland has some of the strictest gun-control laws in the nation. In addition to existing federal law—including the federal prohibition on handgun transfers to persons under 21—Maryland’s gun laws include:

  • A comprehensive “assault weapon” and “large capacity magazine” ban.
  • A universal 10-round magazine limit.
  • Background check requirement for all handgun transfers.
  • An exhaustive application process as a prerequisite to being permitted to purchase a handgun.
  • Mandatory registration of all handguns, and mandatory licensing of all handgun owners.
  • Prohibition on purchasing more than one firearm per month.
  • A seven-day waiting period for all handgun and “assault weapon” transfers.

In spite of all those laws, the shooter, who could not legally own the handgun under Maryland law (it was his father's), still shot two innocent students. When laws are being demanded to ensure school shootings never happen again, we must always ask whether a new law would have actually prevented the harm. The paradigm school shooting in the United States, Columbine, happened during the federal assault weapon ban, using compliant weapons.

While the Maryland shooting appears to have been a targeted attack rather than a massacre, we will never know what might have happened had Gaskill not promptly responded. Hopefully this tragic situation can promote a broader debate on school safety and lead to productive discussions that might actually reduce this type of crime.

While the trend line of violent crime continues to wane, and schools remain statistically safer than our streets and homes, school safety is a legitimate objective. Where, as with schools, the government has effectively forbidden people from defending themselves, the government takes on a duty to protect everyone in school zones. For this reason, demanding better protection in state schools is the most reasonable idea that has emerged from the calamity over the past two months.

When policies are proposed, it is important to remember that hundreds of thousands, and likely millions, of Americans use firearms for self-defense every year. Gun-control proposals have a tendency to forget or ignore the lives of those people. It should come as no surprise that tackling violence, especially on the part of motivated killers, is a complex game of chess. There are no obvious answers, only a series of sacrifices, some more grave than others.

School resource officers tend to worsen the school-to-prison pipeline, making criminal cases of juvenile indiscretion. Metal detectors and heightened security are less problematic, but expensive and slow. Arming teachers--whether selecting teachers to be armed, or simply allowing them to carry as they otherwise might when at home, the grocery store, or otherwise--poses a complex series of issues in the power dynamics of a classroom setting, in addition to the possibility of the guns going off in school.

While it's worthwhile to discuss gun control when addressing the problem of school shootings, focusing only on that issue alone could make us ignore more effective solutions to the problem at hand. And the problem at hand--school shootings--is specific and unique, and not necessarily directly related to the broader issue of gun control. After all, before 1968, there were very few federal laws regulating the sale and possession of guns. Guns were everywhere, and schools were easy targets. Why didn't school shootings happen then? Perhaps other factors are in play.

If anything good can come out of the tragic events in Maryland, it should be a renewed focus on protecting schools as a measured and reasonable response to the school-shooting problem.

March 21, 2018 5:15PM

Three Bad Arguments for Government Paid Leave

Government-provided paid leave is back in the headlines, and Ivanka and company are in the process of building a Republican coalition for it. The coalition includes Republican senators Mike Lee, Joni Ernst, and Marco Rubio.

As a result, bad arguments for government paid leave are increasingly pervasive on both sides of the aisle. Last week, Caleb O. Brown and I discussed three of the usual suspects, outlined below. 

1) All other industrialized countries have paid leave, so Americans should too.

This argument is used by almost every public proponent of government paid leave. It represents a logical fallacy, colloquially the “bandwagon fallacy.” After all, it doesn’t matter so much whether other countries have government paid leave, but how the policy worked out for them.

Unfortunately, there are many examples of unexpected and costly consequences of government paid leave. For example, in the Nordic countries, government paid leave has contributed to a glass ceiling for professional women. This issue was outlined in a recent Cato policy analysis paper, The Nordic Glass Ceiling

A paper circulated by the National Bureau of Economic Research finds women in the United States are more likely to have full-time jobs and work as managers as compared to other OECD countries because the United States lacks a paid family leave policy and other mother’s work entitlements. Throughout Western Europe, about 30 percent of legislators, senior officials, and managers are women. But in the United States, 43 percent of legislators, senior officials, and managers are female. Economists Francine Blau and Lawrence Kahn note than in other OECD countries, women are about half as likely as men to be managers, whereas women are approximately equally likely to be managers as men in the United States. 

The workplace is also less segregated in the United States than other OECD countries, and women are more likely to be professionals. Gender equal characteristics of the U.S. labor market would likely suffer if government paid leave is introduced.

2) Only 15% of workers have access to paid leave.

Advocates use a thoroughly misleading BLS statistic in order to create alarm. Rather than using a clear, straightforward figure, activists use a BLS statistic that does not count benefits that can be used as paid family leave. 

A majority of workers have access to functional paid family leave benefits, according to other federal data sources and national surveys. For example, the National Survey of Working Mothers found 63 percent of employed mothers said their employer provided paid maternity leave benefits. That is in line with Pew research which found that 63 percent of “Americans who took time off from work in the past two years for parental, family or medical reasons report that they received at least some pay during this time.”

These surveys estimate the number of workers recieving paid leave is almost 50 percentage points larger than the BLS figure. The BLS statistic is an extreme outlier, even among federal data sets like Census Bureau’s Survey of Income and Program Participation (SIPP), the Current Population Survey (CPS), and the Federal Medical Leave Act (FMLA) worksite survey. The BLS figure should be treated as an outlier, rather than relied upon to make a case for government paid leave.

3) Government paid leave is popular.

Polling on paid leave is used disingenuously. Americans often agree that working mothers and fathers should receive paid leave following birth or adoption of a child, but they disagree sharply about how it should be provided. And Americans do not think that paid family leave is a policy priority.

On a Pew list of 20 different policy topics, Americans ranked paid leave as last priority. A recent Pew poll found that only 12 percent of Americans thought the federal government should provide paid leave.

Of Americans that said employers should provide paid leave, about half said employers should not be required [by government] to provide it.

Of course, if pollsters reminded respondents that under a national program taxpayers would pay for paid leave, under a government mandate employees would pay for paid leave, and under either regime women would pay for paid leave in one way or another, Americans would look even less supportive.

With these government paid leave myths dispelled, the debate should be more honest and productive.

You can find the related Cato Daily Podcast on bad arguments for government paid leave below.