Resources and Publications

The Rise of the New Mercantilists: Unfair Trade Practices in the Innovation Economy

June 21, 2007
| Reports

The United States leads the world in the development, production, and use of information technology (IT). Because IT is not only the major driver of economic growth but also a key source of high-paying jobs in sectors like semiconductors, hardware, services, and software, most countries have adopted policies to win the international competition for IT jobs. While most have adopted legitimate policies such as research and development (R&D) tax credits, programs to build IT skills, and liberalizing domestic markets, the payoffs from this path to IT industry competitiveness are neither certain nor immediate. As a result, many nations have turned to an easier and faster path to winning the global competition for IT leadership: erecting a whole host of unfair and protectionist policies focused on systematically disadvantaging foreign, including U.S., companies in global competition. These policies include:

  • raising the relative price of foreign IT products and services by applying tariffs, taxes, subsidies, and excessive antitrust enforcement;
  • acquiring foreign IT products and services without paying for them through digital theft and forcing U.S. companies to give up their intellectual property; and/or
  • blocking or limiting access of foreign companies to markets through standards, government procurement, data privacy and other policies.

Perhaps most troubling is that nearly all of the nations engaging in these unfair and distorting trade practices targeting U.S. IT leadership are members of the World Trade Organization (WTO) and signatories of the Information Technology Agreement (ITA). These nations and regions-from Asia, Europe, and South America-have aggressively put in place strategies that violate the spirit, and often the letter, of international trade rules. These countries want it both ways. They desperately want access to the U.S. market (and as reflected by the fact that the United States is running a nearly $800 billion massive trade deficit they are getting it) but they don’t want to buy U.S.-produced IT goods and services. They want U.S. IT foreign direct investment, through offshoring, joint ventures, and R&D, but they also want to systematically weaken the competitive advantage of U.S. IT companies in favor of their domestic IT companies.

These aggressive and unfair foreign IT trade policies lead to fewer high-paying IT jobs in the United States and threaten our global IT leadership position. But these policies don’t just hurt the United States, they hurt the global economy. By raising the price of IT goods and services, forcing companies to produce IT in places other than where they would prefer, and reducing incentives to produce innovations and intellectual property, these mercantilist policies distort trade, leading to a lower standard of living for global citizens.

These protectionist policies are not just targeted at IT, although that is the focus of this report. It is likely that other studies focusing on biotechnology, financial services, or aviation-to name just a few-would uncover similar practices.

If we want to maintain America’s IT leadership position the federal government needs to take a number of crucial steps:

1) The administration should vigorously and unequivocally enforce other nations’ IT trade commitments under the WTO. In particular, the Office of the U.S. Trade Representative (USTR) needs to be more proactive in challenging nations that are violating WTO rules or engaging in other unfair practices.

2) Congress needs to increase USTR’s appropriation so that it will have more resources to focus on trade enforcement.

3) Congress should allow companies to take a 25 percent tax credit for expenditures related to bringing WTO cases.

4) The administration should include the elimination of IT-based trade distortions among several important priorities when negotiating new bilateral trade agreements.

5) Congress should significantly expand funding for initiatives to educate the rest of the world on the importance to prosperity of innovation, IT usage, intellectual property protection, and market-based trade.

6) Congress should conduct hearings into the many and systematic strategies countries are using to challenge America’s competitive advantage in IT (and other innovation-based industries).

The United States is in the midst of a new trade war. But this time the war is not between socialism and capitalism, it’s between two very different versions of capitalism: one that puts consumers, property rights, and market-based decisions at the center and one that puts producers, “fair use,” and government intervention at the center. It’s a battle about which framework more effectively drives innovation and prosperity: the U.S. framework that focuses on the impact of corporate actions on consumer welfare, protects intellectual property and drives innovation, or the European and Asian framework that restricts innovation by giving priority to public rights.