Fake MAGA, Fake Markets (Part 2)

In Part 1 we pointed out that tearing down competitors’ products, reverse engineering and patent-compliant product modification is what good R&D departments do everywhere. That’s business, not theft.

If they don’t tread hard upon competitor products and patents, they are a complete waste of the company’s resources; and if they cross the line and violate the competitor’s patent, it’s evidence of excess zeal that will result in court-ordered damages and, possibly, of the need for better targeted work practices and managerial supervision.

We return to this intellectual property theft canard, however, because the Wall Street Journal in its zeal to provide stenography services to the Deep State and the FBI in particular, published a breathless story this AM entitled “U.S. Prosecutors Probe Huawei on New Allegations of Technology Theft” that shows just how ludicrous the whole matter actually is.

One example concerns a former contract engineer in Sweden for Huawei, Robert Read, who way back in 2002-2003 helped Huawei recruit laid-off workers from nearby offices of Ericsson AB during those years. The FBI actually got on to this alleged skullduggery owing to an earlier WSJ story in which Mr. Read had been quoted:

Mr. Read described how Huawei at its Sweden office stashed foreign-made equipment in a secure basement to be dissected by Huawei engineers. The chamber had counterparts in other Huawei facilities, according to current and former U.S. officials. Mr. Read confirmed he was approached by investigators after the article’s publication.

Oh, Puleese!

What aggressive competitor worth his salt would not send recruiters to an area where another company had gotten in over its skis and had been forced to cause experienced, skilled engineers to hit the pavement? That’s actually called the free market at work, recycling labor and skills to places where they can be put to the best and highest use.

And as for these sinister teardown “chambers” where competitor products were being “dissected” what profitable advanced or even standard technology company in America doesn’t have one?

This example is not only ridiculous and betrays an utter ignorance about how business manage their product development and employee skill acquisition process, but raises an even more crucial question.

To wit, what in the hell is the FBI doing in the patent enforcement process to begin with?

This is absolutely not a legitimate function of the state. That’s because when companies are given the privilege of patent protection, they often reap lucrative profits during the monopoly period; and if they wish to maximize the harvest of such supra-normal profits, they need to spend litigation money to enforce their state-conferred monopolies.

Besides, since patent violation more often than not involves technically complex gray areas of dispute, why in the world should it be criminalized?

Patents are at best a debatable economic equity to be adjudicated in civil courts and prosecuted by the aggrieved party, not the Federales looking for new arenas of mission creep.

In fact, the FBI and US prosecutors are in this business because they have been drafted into the service of the Warfare State. The latter is the true Vampire Squid of the Imperial City, thrusting its blood funnels deep into every department of government and reallocating resources to the work of foreign threat inflation—the better to keep the entire Warfare State operation in clover.

In the present instance, the re-allocation of tens of millions of FBI resources to prosecuting alleged Chinese intellectual property theft is the ultimate red herring. During their earlier economic development stages, Japanese, South Korean, and Taiwanese companies also recruited talent from established US or European companies and aggressively tore-down their products in order to replicate them.

But since their home countries were allegedly “allies” of  Imperial Washington, no one started an all-out Trade War with them or attempted to demonize them as nefarious threats to national security.

Indeed, in the present instance, the blatant, clumsy and often ludicrous attempts at threat inflation against the Red Ponzi by US law enforcement tells you all you need to know. For instance, in the aforementioned WSJ story there is also made mention of alleged 2012-2013 theft of a T-Mobile robotic testing device by Huawei engineers.

But the case actually reads like the script of a slapstick movie. It seems that T-Mobile had a nifty robot named “Tappy” which could efficiently test the screens of smartphones by touching its sensor-laden arm to the glass and getting a read-out on all functions of the device being tested.

As it happened, Huawei was attempting to sell smartphones to T-Mobile, but”Tappy” was ixnaying the Chinese company’s devices at very high, unacceptable rates.

So in order to improve their smartphone offerings, Huawei sought repeatedly to license Tappy for quality control uses in their own factories back in China. This request was repeatedly refused by T-Mobile, however, because the testing technology embedded in Tappy’s arm was very proprietary and a tremendous cost-saver relative to human limbs, digits and brains.

At length, a zealous engineer from Huawei’s home office named “A.X.” was sent to the US to investigate Tappy’s technology, and literally took matters in his own hands:

Then, in May 2013, A.X. allegedly made a very bold move, removing Tappy’s arm and putting it in his laptop bag. T-Mobile employees confronted him about the missing arm. He denied having it, and that night he and F.W. measured and photographed the arm. The next day, A.X. said he had “found” Tappy’s arm in his bag. It was then that T-Mobile finally revoked A.X.’s credential to the lab.

Perhaps we should call this episode rampant stupidity by the T-Mobile lab personnel and be done with it. Yet, as it turned out, T-Mobile took Huawei to court and won a de minimis $4.8 million civil settlement for damages, suggesting whatever the Chinese learned overnight from Tappy’s borrowed arm really didn’t amount to a hill of beans.

Yet this purely commercial contretemps was latched onto by the FBI and has resulted in a ten-count criminal indictment including conspiracy to steal trade secrets, attempted theft of trade secrets, seven counts of wire fraud, and obstruction of justice.

Moreover, scratch any Washington pol ragging about China’s nefarious intellectual property theft and they will cite the T-Mobile case, as if Tappy’s borrowed arm represented some kind of act of war.

In short, the intellectual property theft, Red Rules for companies operating in China and cyber intrusion memes are utterly  bogus reasons for the Donald’s Trade War against China.

The first two are K-Street specials promoted by business lobbies and lifetime Swamp Creatures like Robert Lighthizer, who have made a lucrative living inducing Washington to function as a Trade Nanny in behalf of US companies.

Taken together, they amount to Warfare State misdirection designed to inflate the China “threat” and thereby keep the Warfare State in business and luxuriating in overflowing budgets.

So what the Donald’s Trade War really boils down to in terms of actual commerce and economics is the hideously unbalanced bilateral trade accounts, which last year resulted in a $443 deficit with China.

As we have frequently noted, however, this freakish imbalance is not due to bad trade deals, the WTO or nefarious Chinese government subsidies to exporters, as the Donald constantly declaims.

Instead, it’s a function of the global bad money regime under which the Fed has inflated US domestic wages, prices and costs at 2.00% per year, when global competitive circumstances called for zero inflation or even deflation; and the Chinese central bank has reciprocated over the last 25 years by keeping its FX rate artificially low via buying up unwanted dollars on its FX markets—a bald-faced “dirty float” that resulted in the freakish accumulation of $4 trillion of FX reserves at the recent peak.

The outcome, of course, was $30 per hour fully loaded manufacturing wages in the US and $5 per hour equivalent wages in China. In turn, the resulting massive cost arbitrage caused supply chains to literally migrate from the US to China and its mostly East Asian suppliers.

So after several decades of this bad money induced industrial migration, the now massive US trade deficit with China is rooted in a deep economic cost gap that would never have developed in a world of honest money.

That is, under the old gold standard, the US would have experienced a self-correcting outflow of monetary assets (gold) in the face of yawning trade and current account deficits. In turn, that loss of banking system reserves would have caused domestic credit to shrink and domestic costs and wages to deflate, thereby curtailing imports and boosting exports.

In the alternative, under a true Milton Friedmanesque free market float, China’s exchange rate would have soared in the face of massive trade surpluses with the US, thereby making its exports less attractive in US end markets and US exports more competitive in China.

Needless to say, what we actually have is neither—meaning that under the central bank managed “dirty floats” and massive, persistent monetary inflation, trade accounts are never cleared.

To the contrary, the US piles up cumulative current account deficits with China and much of the rest of the world, which in 2019 dollars of purchasing power amount to about $19 trillion since the late 1970s. At the same time, China runs massive surpluses with the US, from which is finances its massive imports of materials and components and accumulates foreign financial assets for the balance.

Even a cursory review of the huge imbalances in the China trade at the product level demonstrates that bad money based economics is the culprit, not nefarious trade practices which can be eliminated through a negotiated trade deal—-even if the blowhard in the Oval Office had the skill and patience to do it, which he does not.

Take the case of furniture and related products, where the US once had a thriving industry in the Southeast region, which has long since vanished.

That’s because in 2018 the US imported $13.7 billion of Chinese furniture goods, but only exported $93 million to China. That’s a 147X ratio of imports to exports, but it doesn’t stem from a ban on American furniture in China or massive subsidies to Chinese furniture exporters designed to provide Chinese foreign aid to the American middle class.

Nope, its just wage and cost arbitrage due to the cumulative effect of bad money inflation in the US and bad money deflation in China.

Likewise, during 2018 the US imported $12.5 billion from China in four-digit product code 9503, which includes toys, tricycles, scooters etc, while only exporting $43 million to China. That amounted to a 291X ratio of imports to exports, and most assuredly that, too, was grounded in a giant cost gap, not Chicom cheating.

If you add two related 4-digit product codes to the above two–including lamps and lighting and chairs and seats—the four product codes taken together encompassed $46.6 billion of imports from China in 2018 compared to a microscopic $136 million of exports.

That represents a 343X import/export ratio in these labor intensive product categories, and there is no conceivable trade deal which could close the gap. To paraphrase the infamous Clinton political advisor of the early 1990s, it’s the economics, stupid!

And the above four product codes are not aberrations. If we take the four main technology product codes (8471, 8473, 8517 and 8528) which represent computers, computer components and gear, smartphones and cellular devices and monitors, screens and projection equipment, respectively, the story is even more self evident.

During 2018, the US imported $155.0 billion of goods in these four categories from China, but exported only $3.1 billion to China.

That’s right. These four product codes alone generated a $152 billion bilateral trade deficit.

Indeed, the combined deficit in the eight product codes here enumerated totaled nearly $200 billion or 45% of the entire trade deficit with China. And there can be no doubt that the reason for this gigantic imbalance was the huge cost and wage differential between China and the US.

Stated differently, Foxcon now employs more than 1.1 million workers in dozens of Chinese factories, which source components globally and fabricate and assemble finished Apple iPhones, MacBooks etc. but not because Beijing functioned like the state government of Wisconsin and bribed Foxcon to locate in the Red Ponzi.

To the contrary, the Red Ponzi embodies a freakish communist state economy rooted in cheap debt, cheap labor and bad money. Accordingly, labor intensive products produced there will be inherently attractive to US retailers, importers and consumers.

Moreover, the attempt of Trump’s trade negotiators, led by beltway bandit Robert Lighthizer, to identify the specific Chinese practices and state policies which purportedly generated this lopsided outcome is as futile as the proverbial keen-eyed boy looking for his dropped bubble gum on the chicken coop floor!

That is, they will never find the offending practices because everything in the Red Ponzi is mispriced. If they want to eliminate the yawning bilateral trade deficits in these categories, they would actually have to go the old Cuba route and embargo Chinese goods entirely on the grounds that they are made by commies or some such purely political excuse.

Indeed, when you examine the other side of the equation—the $120 billion of US export to China last year—the products involved are capital or resource intensive commodities and materials, where the US is reasonably competitive on the world markets.

For example, 17 four-digit commodity-oriented codes accounted for $42 billion, or 35%, of US exports to China last year. These included petroleum, LNG, soybeans, lumber and wood, recovered waste paper, copper and aluminum scrap, cotton, pulp, frozen fish, hides and skins, corn, uncoated Kraft paper, petroleum coke and other miscellaneous commodities.

In the case of these items, however, China exported only $8.1 billion of stuff to the US. That is to say, trade in these commodity categories was subject to the same Red Ponzi distortions and mispricings, but since they involve de minimis labor costs, the US actually ran a huge trade surplus.

At the end of the day, the Donald is huffing and puffing down a dead-end that will eventually lead to a huge global trade dislocation and the Great Trumpian Recession.

Maybe even the Wall Street chart monkeys are beginning to sniff out this scenario.

After another apparently failed run today at the 50-DMA at 2947 on the S&P 500, they ended the day on the sidelines in a zone that marks 18 months of treading water.