The Dawn of Innovation (47 page)

The Chinese patent regime, according to the Chamber, has been perverted to facilitate technology theft from outsiders. Authorities expressly encourage—and even underwrite the cost of—filing “utility” patents claiming intellectual property in the application of someone else's technology to a particular narrow use. It has become a pointed tactic for punishing Western patent holders who file suits against Chinese infringers in Western courts.

Schneider Electric is a mid-size French company with a global business in high-tech power management products and a rich patent portfolio. In the late 1990s, Chint, a small Chinese company that supplied the Chinese market with products similar to Schneider's, opened shop in Europe and was sued by Schneider for a number of infringements. (Schneider won a number of cases but not all of them.) Chint had filed a utility patent on a product in Schneider's portfolio and retaliated with an infringement suit in a Chinese court. The court found for Chint, imposing a $54 million fine. Schneider was eventually forced to merge with another local company, founded by two of the original partners in Chint. Such are the devices that go under the name of “re-innovation.”
⁹

In nineteenth-century America, the Southern secession allowed the newly dominant Republican party to push through a highly protective tariff
scheme, covering iron, steel, textiles, and most manufactured products, as well as a host of commodities, including wool, sugar, flax, and others to benefit the agrarian Western interests. Such tariffs were maintained long after there was any validity to “infant industry” arguments, although the effect of the tariffs were mitigated, at least in steel, by competition between American vendors.

China joined the World Trade Organization in 2001, with the support of the United States, and does not maintain unusually onerous tariff schedules. But as Japan did during the period of its rise, China maintains a host of nontariff trade barriers and subsidies. State-owned industries typically benefit from highly subsidized electricity and fuel prices and can acquire land at far less than free-market prices. Customs barriers are intentionally Kafkaesque. Even minor changes in a product currently sold in China—like a new shade in a line of lipsticks—can be held up for months awaiting inspection and certification. Or customs rules are turned into a tool for intellectual property theft. High-technology products like firewall and smart-card software cannot be sold unless officials first examine and certify the source code, which most Western companies will not permit.

There have been a number of cases in which the government has attempted to impose Chinese-specific software solutions or standards on foreign products, so far without much success. Advanced technology vendors have frequently refused to depart from established international standards. In the few instances in which they have agreed to include the Chinese standard as an option, customers typically don't use it, or it doesn't work acceptably. China, however, is far from an incompetent country in high technology. One database of peer-reviewed, high-quality scientific journals shows the Chinese paper count to be in third place, behind the United States and the United Kingdom. It is abundantly clear that the government understands the importance of controlling basic architectures in most high-tech products and is resolved to move beyond the role of passive acceptor of Western paradigms. In the 1980s Japan had similar aspirations, which it has largely failed to fulfill. China, however, may be a much more entrepreneurial country than Japan, with a potential home market big enough to establish standards with global impact.

In broad strokes at least, China has been following much the same catch-up tactics as nineteenth-century America, although adapted to today's utterly different technology environment. But Americans still had an advantage that China cannot replicate. The United States was founded in an immense, richly endowed, and barely populated new country. In effect, a select group of ambitious and adventurous people, informed by centuries of the European experience, got the chance to start over. China is in an entirely different position. Despite the talents of its people and its outstanding economic successes, the speed of its growth is beginning to throw up what may be fundamental obstacles of place and time.

America's fast-track development in the nineteenth century was based on prodigal consumption of resources. Much of the westward settler movement was an exercise in land spoliation. Farmers would clear land, wear it out in just a few years, pull up stakes, and move on. Forests were decimated to feed blast furnaces and steam engines. Industrial cities like Cincinnati dumped all their wastes—human, animal carcasses, iron filings, chemicals—directly into local rivers and lakes. Disease epidemics forced better sanitation toward the end of the century, but serious attempts to mitigate environmental damage got underway only in the 1950s and 1960s. The air in mid-twentieth-century Pittsburgh was much like that in most Chinese cities today: on a clear day you could see to the next corner.

Nineteenth-century Americans might be forgiven for believing that the country's resources were inexhaustible. As the populace pushed across the Appalachians into Ohio and beyond, one of the most dangerous maladies, as Frances Trollope acutely observed, was sheer loneliness. Whatever damage early settlers inflicted on the environment seemed like mere pinpricks amid the primeval vastness.

China, by contrast, had a billion people before it began to industrialize. It is not a resource-poor country. It has ample coal and has recently virtually
cornered the market on rare earths, a vital component in most semiconductor manufacturing. But it still must import vast amounts of commodities to feed its industrial machine. China now accounts for approximately one-fourth of world demand for zinc, iron and steel, lead, copper, and aluminum, and is the world's second largest importer of oil after the United States. With its current history of trade surpluses, however, it can easily afford the external commodities required to feed its industry.

But China is running out of water, and without extraordinary action, the lack of water could jeopardize all of its economic ambitions. The country's per capita water supply is only a quarter of the world average, and most of it is in the wrong place. Northern China produces half of GDP, contains most of the arable land and 40 percent of the population, but gets only 12 percent of the rainfall. Despite persistent water shortages, Chinese industry is a profligate consumer of water, using four to ten times more water per unit of output than other industrial countries. The biggest water consumers are agriculture, mining, and hydropower; between them, they account for more than 80 percent of national consumption and are famously inefficient. Less than half the water used for crop irrigation, for instance, actually reaches the fields. The growth of cities has also greatly increased the rate of personal water use, including display uses like lawns and golf courses, in keeping with the aspirations of the country's nouveau riche. Hastily extended urban water systems leak away about a fifth of the supply. To make matters much worse, Chinese industry is notoriously polluting, so large portions of the available water supply is becoming unusable—a quarter of it is so polluted that it is unsuitable even for industrial purposes.

Official Chinese forecasts suggest that the country's available water will be at the World Bank's “scarcity” level within the foreseeable future. Already, only half the rural population has access to safe drinking water. Extreme levels of surface-water pollution has forced heavy exploitation of ground water, which is lowering water tables, causing land subsidence with collateral damage in built-up areas, and speeding the country's desertification. Forced-draft projects to reroute rivers to divert water to agricultural and industrial areas are only making the problems worse, even as
they raise tensions around the exploitation of transnational rivers and continue the destruction of the environment. One current mega-project, twice as expensive as the famous Three Gorges Dam, is diverting water from the Yangtze River in the south through three major new channels some eight hundred miles to Beijing. It has been compared to “channeling water from the Mississippi River to meet the drinking needs of Boston, New York and Washington.” It will involve forced relocations of hundreds of thousands of people, will work environmental havoc along most of its route, and will worsen already worrisome drought conditions in the south.

The Three Gorges experience does not instill confidence. Required relocations maybe four times higher than original estimates, seismic activity has risen sharply, and large areas of reservoir banks have been lost to landslides. At the same time, the Three Gorges reservoir water is becoming dangerously polluted. The government is far behind on wastewater treatment for the cities surrounding the reservoir, and tens of millions of tons of industrial and urban waste are dumped into the reservoir every year. Many of the same observations could be made with respect to China's astonishing levels of air pollution.
¹⁰

The Western press has recently highlighted a potential demographic crisis in China. The
Economist
magazine called it a “deadly point of unseen weakness.”
¹¹
The increased health and longevity of older Chinese, along with the long-standing national one-child policy, will inevitably create a sharp ramp-up in the aged “dependency ratio,” the number of people over age sixty-five per hundred workers. By 2050, the Chinese dependency ratio will nearly quadruple, from eleven to forty-two, while in the United States, despite the aging of the baby boomers, it will increase from the current twenty to only thirty-five.

In isolation, this indeed looks like a serious problem, but it exaggerates by using the United States as the comparison. Because of its relative receptivity to immigrants and relatively high fertility rate, America is in better shape than most advanced countries on issues of generational dependence.

As Chart 9.2 shows, the projected Chinese dependency ratio is not unusually high among advanced countries. Japan is the country facing a true demographic crisis, which is arriving now, while the Chinese transition is still some time off. While China has a much less developed social security system than the advanced countries, it has been rapidly expanding the population's access to government pensions, retirement savings plans, and health insurance, at a rate that Nicholas Lardy, a Chinese expert at the Peterson Institute, calls “impressive.” Coverage is still far narrower than it will need to be, but the current government seems determined to continue the programs' expansion. Pension amounts are quite small by advanced country standards, but China does not yet have the per capita GDP to live up to the norms of rich nations.
¹²

Changes that evolve over forty years rarely warrant the term “crisis.” Population projections are perilous, of course, but even assuming they are correct, China has ample time to prepare. If China manages to avoid a national breakdown, even if there is a marked slowdown for some time, the country should still achieve advanced-country level of per capita income by the 2030s or 2040 and should be well able to support decent lives for the aged. The Chinese will also have learned from watching how the Japanese and Germans deal with their elder booms. The Japanese in particular are seeking technological alternatives to intensive hands-on caretaking of the frail elderly. And if technology disappoints, all richer countries with large populations of dependent elderly will one way or the other increase their immigration rates.

 

The coming shift in the Chinese age structure, then, is likely to be a serious problem only if the country's economic progress is arrested to the extent that it fails to complete its transition to a wealthy country with a well-established, middle-income, working class. Unfortunately, China appears to be entering a dangerous stage of development fraught with risks to its continued economic success.

The Hu Jintao/ Wen Jiabao government,
^bv
at least since 2007, has warned that Chinese economic growth has been “unsteady, imbalanced, uncoordinated, and unsustainable,”
¹³
implicitly accepting Western criticisms along much the same lines. There appears to be substantial agreement in principle on the part of the government, and among most Western economists, that over the last decade or so, China has tilted inordinately toward its manufacturing export-driven sectors at the sacrifice of building up the consumer and services sectors characteristic of countries making the middle-income transition. It should be noted, however, that loose credit policies in the United States, especially related to home equity lending during the housing bubble, played a big role in enabling the Chinese
addiction to exports. (Between 2002 and 2007, America's current account deficit and volume of net home equity withdrawal each increased in parallel by more than $4 trillion.)