Relevant and even prescient commentary on news, politics and the economy.

Patents, innovation, asset class, and weapon

While the issues involved are complex and also involve the use of government force to make it stick, and drug patents have a long and debated history, New asset class and much more at Dealbook points to a growing phenomenon for the global economy as well. Patents and innovation deserve a separate post, but the weapons of choice is heating up and involves much more than ‘competition’:

“Patents are a volatile, spot market,” he said. “This is a market, but a market that is more like art than stocks or oil.”
Ron Epstein, chief executive of Epicenter IP Group, agreed that pricing patents, especially large portfolios, was difficult. But he said he thought corporate trading in patents would become more commonplace, and pricing more routine. Someday, he predicted, patent acquisition costs may be a standard line item in corporate earnings statements.
“By fits and starts, we are moving to a more efficient marketplace for innovation,” Mr. Epstein said.
Calling patents an asset class is shortsighted, said Kevin Rivette, a founder of 3LP Advisors. The larger value of a portfolio, he said, can be as a strategic tool to negotiate lower costs from a supplier or to alter a rival’s product plans.
“You can use patents to change the competitive landscape,” he said.

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Courts and intellectual property rights

Caught from the Washington Post…and also interesting knowing theTrans Pacific agreements allowing multinational CEOs and firms to sue in domestic courts:

Apple patents were violated by Samsung, jury rules
Apple won a sweeping victory in its landmark patent dispute against Samsung when a Silicon Valley jury ruled Friday that a series of popular smartphone and tablet features — from the rounded rectangle shape to the way screens slide and bounce to the touch — are proprietary Apple innovations.

Tokyo court finds no Samsung infringement on Apple patent in latest in global battle
A Japanese court on Friday dismissed Apple’s patent infringement claim against Samsung, a significant legal bounceback for the South Korean tech giant as the rivals wage a global battle over intellectual property. A Tokyo District Court ruled in a preliminary session that Samsung didn’t violate patents with its technology for synchronizing music and video between computers and smartphones or tablets. The ruling, the latest in a series of lawsuits and counter-lawsuits spanning at least nine countries and four continents, comes one week after a U.S. court dealt Samsung a costly defeat that could lead to an injunction against some of its devices. Samsung shares rose after the Friday verdict, helping the company recover from sharp losses earlier in the week, reports Chico Harlan:

Chinese firms put intellectual property lawsuits to work
U.S. companies have long accused the Chinese of stealing their intellectual property. But now some in China are pointing the finger back. In recent months, Apple has been slapped with lawsuits in China alleging that the most valuable company in U.S. history is infringing on patents and trademarks with a range of its products, from the iPhone voice assistant Siri to the Snow Leopard operating system. Many U.S. firms are used to accusing the Chinese of mimicking their products. But the lawsuits being filed in Chinese courts are evidence of a growing awareness in this country that intellectual property can be a valuable tool — for protecting your ideas and for squeezing money out of other companies, too, reports Jia Lynn Yang:

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WTO ruling: ‘free trade’ and ‘state capitalism’ needs broader discussion

A recent ruling on countervailing duties and anti-dumping duties by the World Trade Organization:
(bolding is mine)

Senior Economist Ian Fletcher for the Coalition for a Prosperous America offers one point of view:

The American position is that we are entitled to apply what are called “countervailing duties” against products that are subsidized by foreign governments. And on top of that, we are also entitled to apply duties designed to counteract the practice of dumping, or selling a product below cost in order to destroy foreign competitors.
Both these responses on our part have long histories of being accepted as legitimate, both under international trade law and in economics. (This is why the WTO had originally accepted our position; the new ruling is actually the result of an appeal by China.)

In terms of international law, one can trace the legitimacy of our policies at least as far back as the founding of the General Agreement on Tariffs and Trade, the WTO’s predecessor, in 1947.
In terms of economics, their justifying logic is very simple.
In the case of subsidies, free trade only makes sense if it really is free, which means that a thumb on the scale at one end of the transaction justifies a tariff, or counter-subsidy, at the other end.
In the case of dumping, free trade is not justified if one side sells below cost in order to wipe out the other and thus eventually grab the market (or most of it) for itself. Even if the attempt fails, the damage done to our industries will be real, and by then it will be too late.
There’s no serious question about whether China engages in subsidies and dumping. That’s why, in this case, we imposed duties of up to 200 percent to offset their subsidies, plus up to 265 percent to counteract their dumping.
Enter state capitalism. The flashpoint of the current dispute centers on the vexed question of what price constitutes dumping in a non-free-market economy.
In a free-market economy like our own, dumping is considered to occur when a product is sold abroad for either less than its production cost, or less than what it is sold for domestically. Unfortunately, in an economy like China’s, which is so tightly controlled by the government that many prices are essentially whatever the government says they are, this logic doesn’t work. There are no normal prices to observe in order to figure out how big the subsidy is. So the U.S. Government has been using various statistical techniques to calculate the relevant prices.
The WTO has ruled that our techniques are not legit. Bottom line? We’re supposed to overlook the vast panoply of subsidies—ranging from free land to cheap loans and a million different tax credits—because state capitalism makes them tricky to calculate.

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Initial Claims for Unemployment Insurance and the Trade Deficit Both Increase

Mark Thoma at Maximum Utility has conclusions on the figures for creation of jobs and trend in trade deficits: (reposted with permission of the author)

Figures on the trade balance and new claims for unemployment insurance are out this morning, and the news isn’t as good as hoped. First, initial claims increased:

In the week ending March 5, the advance figure for seasonally adjusted initial claims was 397,000, an increase of 26,000 from the previous week’s revised figure of 371,000. The 4-week moving average was 392,250, an increase of 3,000 from the previous week’s revised average of 389,250.

This level of claims, around 400,000, is near the breakeven point between a job market that is creating jobs, and one where jobs are being lost. Thus, these figures, combined with the figures over the last several releases embedded in the four-week average show a job market that is struggling to provide enough jobs just to keep up with population growth, let alone recover the millions of jobs lost during the recession. The trend for claims is in the right direction, and more generally job markets do appear to be improving, but the improvement is frustratingly slow. We need the recovery to accelerate substantially if we are going to get back to full employment in a reasonable amount of time.

Second, the trade deficit increased to $46.3 billion in January, an increase of around $6 billion:

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total January exports of $167.7 billion and imports of $214.1 billion resulted in a goods and services deficit of $46.3 billion, up from $40.3 billion in December, revised. January exports were $4.4 billion more than December exports of $163.3 billion. January imports were $10.5 billion more than December imports of $203.6 billion.

The jump in the trade deficit exceeded expectations, and was partly due to higher energy prices. In addition, the trade deficit with China increased by 12.5% to a little over $23 billion.

Some have pointed to increased exports and a reduction in the trade balance as one of the keys to recovery. A reduction in the deficit at the end of the last year provided some hope that this was happening, but this report throws cold water on those hopes. And, to make it worse, if energy prices go up any further the foreign sector is likely to pose a drag on an already much too slow recovery.

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Trade policy agreements and capital flows

Yves Smith at Naked Capitalism offers wise words regarding trade policy agreements and capital flows, in addition to pointing us toward a letter signed by several hundreds of economists regarding capital controls and government.:

This letter is at odds with a longstanding project of major financial firms: to allow them to move money across borders with no muss or fuss. This was the dream of Citibank’s Walter Wriston, who perversely was not deterred by the large losses his bank incurred in its sovereign lending misadventures of the late 1970s. It became a matter of policy in the Rubin/Summers Treasury Department.

Although the danger of destabilizing “hot money” inflows has been well recognized since the Asian crisis of 1997, the thrust of US policy has been to continue to push for more capital markets liberalization, particularly in emerging economies. Yet the evidence has continues to mount that a high level of international capital movements isn’t merely a potential threat to developing markets, but to economic stability. As we’ve pointed out repeatedly, the Carmen Reinhart/Kenneth Rogoff work on financial crises showed a strong correlation between high levels of international funds flows and banking crises.

The odd, and telling bit in the debate is the unwitting concession to financiers embedded in the existing terminology: capital controls. It incorrectly implies that money is every and always stateless, and any effort to restrict it is unnatural. But truly stateless commodities are highly transportable, high density stores of value whose content can be readily verified: think diamonds (at least pre the era of synthetic diamonds), gold, platinum. But despite their obvious value, what someone receives in exchange if one transports them across borders is very much in doubt, not just due to price fluctuations but also to the difficulties of finding a trustworthy party who would convert the commodity into local currency at a fair rate.

In other words, we’ve all gotten so used to being able to change money, use credit cards, and suck local currency out of ATMs when traveling abroad that we’ve forgotten that this has been put in place with government support. And it has come more recently in some countries than others. I recall running into a McKinsey colleague in the Hong Kong airport in 1985. He was astonished to see that the foreign exchange booths would exchange Indian rupees. The rupee then was a controlled currency; that sort of operation was in theory impermissible. But Hong Kong was always a bit lawless, and this was probably a small scale enough operation so as to fly under any official radar.

But so far, we have been talking about money, and the conversion of currency in a personal/retail context. By contrast, “capital” carries with it the idea of investment. Money is not being moved simply to get it into another country (well it might be if you are a drug dealer or the leader of a banana republic planning your exit strategy) but to put it to work. That in turn means you expect some sort of legal protection in the recipient country, ideally as good as the natives get (again note we accept the idea of equal protection under the law in some contexts and not others, so this is not a given).

But what about movement of funds between countries? How exactly is this a matter of rights? For individuals, as with our drug lord example, the reason for trying to move it abroad is almost certainly not legitimate; it’s to escape prosecution and taxation. The US takes the view that the income of its citizens, no matter where earned, is subject to US taxation. Governments lose significant amounts of money due to corporate gaming of tax regimes. Nicholas Shaxson, in his new book Treasure Islands, argues that poor African nations are actually capital exporters. They lose more in tax revenues via arranging their affairs so as to show income in low tax jurisdictions (often with little in the way of real operations there) than they gain in foreign aid.

Now as the letter above acknowledges, international treaties have effectively given investors the right to move funds without restriction into certain types of instruments. But look at the implicit logic, and it’s one that actually goes back to discussions early in the history of the US over whether Congress should charter a bank (yes, Virginia, pre-revolutionary America thrived without banks). The debate centered around differing ideas of what “freedom” meant.

The opponents of the bank charter were concerned about potential abuses that could result from concentrated power. To them, “freedom” meant the right of citizens to take action and use democratic processes to move their government and society in directions that they could hopefully agree on and would produce better outcomes.

The bank advocates, most notably Robert Morris, took a very revealing position: they argued that the government had the right to grant privileges, but not to take them back. It amounted to arguing that economic interests extended to private actors somehow became their property, and that any reversal of these grants was not simply an act of bad faith, but was despotic theft.

Yet we routinely accept the rescinding of government privileges of various sorts; consider the 1990s “end of welfare as we know it” or the expected reductions in pensions of state employees. But when large commercial interests obtain valuable economic rights, reining them back when they are found to impose undue costs on others is depicted in a completely different light. Restricting them isn’t framed neutrally, as, say, a revision, but as a “control” when the prevailing ideology treats that as a “c” word.

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WTO upholds tire tariff

The Washingtington Post notes:

The World Trade Organization has upheld the stiff duties that President Obama imposed on car tires imported from China last year, an important victory released on the eve of trade talks between the two countries.

A panel at the Geneva-based trade group on Monday said it agreed that the United States was justified in slapping a 35 percent tax on Chinese tires under WTO provisions that let countries protect local industries and workers from sharp increases in Chinese imports.

The provision was part of the agreement under which China joined the WTO a decade ago. Chinese tire imports to the United States tripled between 2004 and 2008, to 46 million tires worth an estimated $1.7 billion.

Update: Ken Houghton reminds me of Tom Bozzo’s September, 2009 post Travels of a cheap tire in global economy covering part of the issue.

Update two: WTO panel report on the tires dispute linked.

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Beyond tax cuts and stimulus

Marty Hart-Landsberg in Monthly Review states the issue of trade policy has a larger context than national economies. Reader juan adds his commentary to Marty Hart-Landsberg quotes (lifted from comments and slightly editied for readability):

Most importantly, foreign capital now plays a leading role in the Chinese economy, especially in manufacturing.7 Its activity has transformed China into an export-driven economy: the ratio of exports to GDP climbed from 16 percent in 1990 to over 40 percent in 2006, with the share of foreign produced exports growing from 2 percent in 1985 to 58 percent in 2005 (and 88 percent for high-tech exports).8 Equally noteworthy, the share of total exports being produced by 100 percent foreign-owned firms has also soared.

This restructuring cannot be understood simply through a nation-state lens. Rather, as China’s reforms proceeded over the 1990s, Chinese accumulation dynamics became increasingly dependent on transnational corporate investment and export activity. As a consequence, the Chinese economy became more and more enmeshed in a broader process of East Asian restructuring—one that was driven by the establishment and intensification of transnational, corporate controlled, cross-border production networks, which linked and collectively reshaped all the economies involved. In other words, the Chinese experience, and in particular, its export drive, can only be understood in the context of broader capitalist dynamics.

Chinese exports are really Chinese only in the sense that they were assembled in China. This point is reinforced by the fact that China’s increased share of the U.S. deficit was matched by a decline in the share accounted for by the rest of East Asia.

Juan re-states: It is not so much a question of the US. v China but government that are in dependent partnerships with ‘no-longer-national’ capital — which ultimately boils down to labor v capital, and this capital must control or be the state.

Given decades of class war from above, it is at least slightly more obvious what must be done.

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What does the new GM have to say about trade??

There is a lot of fanfare today about the success of GM to date as it turns around the bankruptcy of a couple years ago. Let’s look at the nature of this success, which may offer voters an insight into patterns of successful competition as it stands today.

So, what does the new GM look like? A few nuggets from the registration statement:

  • 33 percent of its sales come from North America;
  • 44.5 percent come from Asia-Pacific, South America, Russia, Eastern Europe, Africa and the Middle East, including a market-leading position in China;
  • 43% of its vehicles are manufactured in regions of the world where the “all-in” labor cost is under $15 an hour;
  • Its U.S. pension plans remain underfunded by about $17.1 billion.

Here’s wishing the new GM success.

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Should we bemoan the fact that employment and earnings aren’t the key trickle-down mechanism?

Hat tip Economist’s View for Lane Kenworthy’s post on growing the GDP and distribution of the benefits. It is also related to concpts determining trade policies:

None of these countries significantly increased the share of GDP going to government transfers. What happened is that some nations did more than others to pass the fruits of economic growth on to the poor.

Trickle down via transfers occurs in various ways. In some countries pensions, unemployment compensation, and related benefits are indexed to average wages, so they tend to rise automatically as the economy grows. Increases in other transfers, such as social assistance, require periodic policy updates. The same is true of tax reductions for low-income households.

Should we bemoan the fact that employment and earnings aren’t the key trickle-down mechanism?

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Dual mandate of national trade policy

Purpose of trade policy in the summary Congressional Rsearch Service paper March 24 2010 caught my attention.

U.S. trade policy is at a cross-roads as the Obama Administration and the 111th Congress face a range of policy issues and challenges. The future direction of trade policy and how the issues will be addressed are unclear at this time and the subject of sharp debate within Congress, the Administration, and the trade policy community at large. While a number of issues are related to trade policy, the fundamental question that is the subject of this debate is which trade policy, if any, will maximize the benefits of trade and boost U.S. living standards.

(bolding mine)

In a simple statement of what has and can happen, the disconnect implied in the quote is striking. The benefits of trade are obvious to many, but the winners and losers in such trade is not at all obvious to many in the big picture.

If the ‘economy’ was the driver for this election, meaning I assume the perceptions each voter carried with him or her to the voting booth, then understanding our economy is better for us all.

One thing voters need to keep in mind is that trade is global in scope, and what is good for a trans-national monopoly is not the same as good for the voters. Maximixing benefits of trade may have little to do with maximizing US standards of living for most.

The idea of smaller government may be popular right now, but if you expect anyone else to protect overall voter interests, I see no other institution willing to do so other than the federal government if you can steer policy that way. Any other institution I am forgetting about??

In a second post to come involving Michael Pettis, Spencer England, and Paul Krugman, how this plays out is explored.

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