China Redux

For all the hardcore intellectual property watchers out there, here is the 2007 “Special 301″ Report of the US Trade Representative, the annual global review of intellectual property rights (IPR) protection and enforcement. This year’s report underscores growing concerns about China and Russia. No surpise there.

The report identifies several “Notorious Markets” for counterfeiting and piracy. Among these:

In the virtual realm, the 301 report cites Baidu.com as “the largest of an estimated seven or more China-based ‘MP3 search engines’ offering deep links to song files for downloads or streaming.” Famed Russian site allofmp3.com also makes the list of notorious virtual markets.

As for physical markets, the report identifies the Beijing’s Silk Street Market and the China Small Commodities Market in Yiwu as prominent symbols of China’s enforcement problem.

The report also includes a special provincial reviw of China’s IPR protection and enforcement at the local level, which provides a far more nuanced look at China’s progress and challenges on these matters.

“Leadership at the provincial and local levels is critical to improving China’s IPR climate,” US Trade Representative Susan Schwab said. “By highlighting local problems and also giving credit where it is due, we encourage local leadership.”

Seems like a sensible enough strategy. But given political constraints in Washington, will there be enough time to execute subtly, with patience and wisdom?

Hard-hitting op-ed from Steven Pearlstein of the Washington Post on how and why the US is losing out in the bilateral trade relationship with China.

I disagree with many, if not all, of Pearlstein’s points. His evidence is one-sided, and many of the points against trade are shaky. Nonetheless, this piece succeeded in forcing me to rethink my assumptions.

Money quote:

There is a reason that, when it comes to trade and globalization, more Americans believe Lou Dobbs than Hank Paulson and Ben Bernanke — and it’s not because they’ve been bamboozled. The reason is that Americans perceive, correctly, that in recent years liberalized trade has not delivered as promised, that education alone is not the answer, and that neither party has come up with economic policies as tough and effective as China’s.

What do you think? Dobbs or Paulson? Is the US getting the short end on trade with China?

On March 11, Halliburton, the giant oilfield-services provider, announced that it was moving its corporate headquarters to Dubai, from Houston, Texas, in an effort to expand its business in the Middle East and Asia. Halliburton CEO David Lesar explained the move thusly (via Bloomberg): “Growing our business [in Dubai] will bring more balance to Halliburton’s overall portfolio…This is a market that is more heavily weighted toward oil exploration and production opportunities.”

Around the time of this announcement, I had the opportunity to listen to a seasoned US business executive and policymaker, who also happens to serve on the Board of Directors of a Fortune 50 technology company, speak about China’s growth and the future of American entrepreneurship. One of the things this executive talked about was what I call the 70/30 principle: for decades, large US corporations earned 70 percent of revenues from North America and Europe, while just 30 percent came from Asia and the rest of the world. In the future, this ratio could very well be turned upside down: North America and Europe might provide companies like Microsoft and Cisco with just 30 percent of revenues, while Asia would account for 70 percent.

These are merely projections. But they are projections that American companies are using to plan for the future of their businesses.

And what is clear is that as the global economy continues to grow, markets become less concentrated, which means that multinational corporations are less reliant on earnings from more advanced markets such as the US and Europe.

Example: on April 26, General Electric Chairman Jeffrey Immelt announced that for the first time, more than half of GE’s revenue is expected to come from outside the US this year.

There is nothing inherently bad about this economic trend. Jobs are still going to be created in the United States, although there may be more competition for them. And if moving to Dubai is going to help a company such as Halliburton compete more successfully, then the relocation should benefit shareholders (including many Americans).

But it’s not altogether good for US taxpayers. Since income earned abroad and paid to a company based abroad is not subject to US taxes, Halliburton may escape significant annual tax payments to the US Treasury — and all the public goods these taxes help create. Some members of Congress are in a huff over the move (via the Post); Senator Byron Dorgan wondered whether Halliburton is seeking to escape bad publicity from its recent contract troubles in Iraq, avoiding US tax obligations, or evading restrictions on doing business with certain countries (could it be all of the above?).

And then there are real concerns about American jobs, innovation, and more.

The question is, how important is keeping corporations in the US for the American economy? And assuming the US wants to keep corporations at home, how can do it so?

If the 70/30 principle holds true, China could begin to look like an attractive home for prominent US corporations.