Nature of Rights

The escalation of the US-China tariff war is like two people trying to force each other to yield by self-mutilation. It seems that efforts should be made towards another direction. At the beginning of Sino-US trade disputes, Professor Steven Cheung suggested that China should adopt zero tariff, even unilateral zero tariff. But there are few respondents, and even many people think this is a strange theory. I think that’s because they don’t understand. Probably in most people’s minds, classical mercantilism still dominates. For example, if tariffs are abandoned, foreign products will be flooded in, domestic enterprises will lose their markets, workers will be unemployed, and ultimately suppress the development of their own economy. The second concern is that if there is a large trade deficit, gold and silver will flow out and the supply of domestic currency will decrease, resulting in deflation.

In fact, with the passage of time, neither of these two worries needs to be worried. Firstly, about currency. Since modern money is paper money, money supply can be adjusted artificially according to demand. When the trade deficit leads to money outflow, domestic monetary authorities can increase money supply by reducing the base interest rate or reserve ratio. The outflow of gold and silver and the insufficient supply of money that classical mercantilism feared no longer existed.

Then we will talk about the protection of the domestic market. Firstly, the way in which one country’s enterprises enter another country’s market is not only to export products to that country, but also to invest directly in that country. This is an alternative for profit-seeking enterprises. The difference is that export products use domestic labor and land, while direct investment uses the labor and land of the target country, which will bring about factor income and economic development of the country. This may have been difficult in the early days of industrialization. At that time, there were great differences in institutional cultures among different countries, and the infrastructure in the developing countries was not perfect. The cost of foreign direct investment will be high. But now it’s different. After more than two hundred years of contacts and integration in modern times, the understanding between different nations and nationalities has deepened, institutional culture has also influenced and blended with each other, and infrastructure has been completed a lot. Even if there are still many problems, in countries with lagging institutional structure and infrastructure, specific regions can be established, such as special zones, export processing zones, economic development zones, bonded zones, free trade zones, etc., to simulate a more suitable small environment for foreign investment. In this way, the cost of foreign investment can be greatly reduced.

This shows that governments have realized that the introduction of foreign capital can promote their own economic development better than mercantilist tariff protection policies. Foreign investment brings foreign advanced technology and management, not only creates local employment opportunities, but also buys local spare parts, bringing about local consumption demand. In the long run, foreign-funded enterprises often bring spillover effects of technology and management. That is, the transfer of technology from multinational parent companies to local subsidiaries; the new technology of foreign-funded enterprises causes competition in the local market and promotes research and development of local enterprises; the technological requirements of foreign-funded enterprises for affiliated enterprises bring about improvement; and more importantly, foreign-funded enterprises will cultivate local human capital, and the local personnel they employ are influenced in technology and management, starting a business by themselves after leaving office, and so on. Therefore, the means of competition among countries have changed from raising tariffs to protect domestic industries to attracting foreign investment. Since all countries have realized this, more than one hundred countries in the world have established more than 4000 free trade zones, so they are not simply attracting foreign investment, but competing with other countries for foreign investment.

Once foreign investment is to be competed for, the meaning of tariffs will be completely changed. Traditionally, tariffs are a means of forcing foreign firms to invest in their own countries, but this only assumes that a single product is subject to high tariffs. Considering that trade protection is comprehensive, the average high tariff level increases the cost of direct investment. Capital is to invest in places with good quality and low price. This means that in addition to a good institutional environment and infrastructure, tax rate is a dimension of competition. In China’s special zones and other areas, an important preferential policy is tax relief. For example, in China’s coastal economic and technological development zones established in the 1980s, the enterprise income tax is 15%, which is significantly lower than the enterprise income tax of 35% in the same period, and there are “three deductions and two exemptions”. Tariffs, in fact, are also indirect taxation of local and foreign-funded enterprises. Not only does the tariff on spare parts actually directly increase costs, but the tariff on final products also increases investment costs and labor costs. As a result, the level of tariffs also affects the competitiveness of a country or special zone relative to international capital. Therefore, reducing tariffs to zero is also attractive. For example, a bonded area is such a zero-tariff area, where enterprises invest without being negatively affected by the tariffs of that country.

On the other hand, with the development of transportation and communication technology, transportation and communication costs are getting lower and lower, which promotes the deepening of international division of labor, from product level to component level. According to Huang Qifan, in 2018, more than 70% of international trade is made of spare parts or raw materials. The cost of an end product depends on the cost of an intermediate product, which in turn is largely affected by tariffs. Therefore, reducing tariffs to zero is not to weaken the domestic industry, but to enhance the competitive advantage of the domestic industry. Of course, zero tariff also has the advantage of “zero formalities”. Professor Steven Cheung also emphasized it very much. Don’t underestimate the “formalities” issue, which is actually the transaction costs regulated by the government. Once there are formalities, there will be checkpoints, queues and waiting, there may be rent-seeking behavior, which is the cost. According to the experience of Shanghai Free Trade Zone, after the implementation of the system of “first entering the zone, then declaring”, goods need not be transported by customs supervised vehicles. The cost of goods per vehicle is saved by 200 yuan, which is about 10% of the logistics cost. (Wang Haimei, “The impact of Shanghai Free Trade Zone on surrounding cities and countermeasures”. Journal of Changzhou University, March 2014 ) Of course, this is only part of the cost of the procedure.

Of course, Hong Kong is the most successful example. The evidence of Professor Steven Cheung’s zero tariff is the success of Hong Kong. During the period of rule by Britain, Hong Kong had zero tariffs except for tobacco and alcohol. Other taxes are also significantly lower than in most other countries and regions. If the enterprise income tax is 15%~16.5%, the personal income tax will not be higher than 15%, and the property tax is about 12% of the rent payable. In the 1950s-1970s, with zero tariffs and low tax rates, combined with low labor costs, foreign capital flowed in and the local capital were activated, Hong Kong changed from an entrepot trading city to an industrial city in a short period of one to two decades, with the advantages of sufficient capital and low cost. The number of manufacturing workers increased from 92,000 in 1953 to 549,000 in 1970, with an average annual increase of 11.8%. From 1960 to 1970, the export of manufactured goods in Hong Kong increased by an average of 15.7% annually (Lu Shoucai et al., 2004, P. 210). From 1961 to 1979, Hong Kong’s GDP grew at an average annual rate of about 8.8% (the World Bank, the US dollar unchanged in 2010), which is a high-speed growth. This is the result of zero tariff and low tax rate.

Figure 1  Hong Kong Economic Growth Rate (1962-1979)                                 Unit.: %Data source: World Bank.

However, the tax burden is used to provide public goods. Whether the government can finance enough to assume the responsibility of providing adequate public services, if the zero tariff and other tax rates are too low？ At this point, we should talk about the principle of tax and rent alternation. The so-called “rent” refers to the value brought about by the scarcity of resources, which is the remuneration of the owners of resources; the so-called “tax” refers to the price of public goods, which is the provider of public goods, often the cost of the government. The two are homologous and complementary. The reason why the resource owner can be remunerated is that his rights are protected, and the protection should be institutionalized and cost-consuming. It is the public authority who provides the service of protecting property rights, so the rights of resource owners can be protected. The reason why the public authority can get such remuneration as tax is that resources are scarce and it can bring scarce value. Land property rights and property rights protection are similar to a pair of complementary products. When the price of a product decreases, the price of complementary products will rise. Less tax, more rent.

In Hong Kong, we find this phenomenon of tax-rent substitution. When the tax rate in one place is significantly lower than that in other areas, businesses flock to it, but land prices (rents) rise at the same time. According to statistics, from 1959 to 1979, the price of industrial land in Hong Kong rose 132.5 times; the price of non-industrial land rose 41.5 times; and the price of residential land rose 86 times (Zheng Deliang, Modern Hong Kong Economy, China Finance and Economics Press, 1982, P. 173). If a taxpayer is a rent collector at the same time, he can attract enterprises to settle in by reducing the tax rate and get a bumper harvest of land rent or land price in a little later time. It is this role that the Hong Kong authorities play. With the soaring land prices in Hong Kong, the revenue from land sales by the Hong Kong government has also risen. From 1961 to 1980, the government’s land sales revenue increased 103 times, an average annual increase of 126%. The proportion of land sales revenue in fiscal revenue increased from 9.5% in 1970 to 47% in 1980 (Zheng Deliang, P. 256, P. 265). See the figure below. It should also be pointed out that the benefits of zero tariff and low tax rate will also be reflected in property tax and profit tax. Because the land price rises, the total amount of property tax at a certain tax rate will increase; because of the influx of enterprises, the total amount of profits will also increase.

Fig. 2  Financial revenue and land sales revenue (1970-1980) in Hong Kong  HK$1 million

Data Source: Zheng Deliang, Modern Hong Kong Economy, China Finance and Economic Publishing House, 1982, P. 256, P. 265.

Under this financial structure, Hong Kong not only has sufficient financial resources to provide adequate infrastructure, but also maintains a rare fiscal surplus. From 1949 to 1979, only four years were deficit (Deng Shuxiong, Public Finance History of Hong Kong (1949/1950-1979/1980)). This shows that the financial structure of zero tariff, low tax rate and land sales income is not a barely substitute for the traditional financial structure, but has advantages.

Some people will say, since rent and tax are substituted for each other, what is the benefit to the enterprise? In fact, the rise in land prices caused by zero tariffs and low tax rates is a process. Initially, companies saw signs of zero tariffs and low tax rates, and land prices were rather low before the influx of enterprises. Only when a large number of enterprises enter, the land price rises gradually. But at this time, the advanced enterprises not only enjoy the benefits of zero tariff, low tax rate and low land price, but also enjoy the benefits of market expansion or land value added brought by the continuous influx of enterprises. For this reason, zero tariff and low tax rate also have a time incentive mechanism, that is, the first entrants will gain greater benefits, thus attracting enterprises to rush ahead. Only after a long time, the per capita income of the local people has reached the top of the world, and the competitive advantage has been reduced by the higher labor cost, will the structure of zero tariff, low tax rate and high land price be close to equilibrium. However, twenty or thirty years have passed, and the economy has grown at a high speed in this stage.

There will also be doubts as to whether this Hong Kong model can only be applied to Hong Kong, a small place, and whether it will not work if it is placed in the vast Chinese mainland. In fact, one of the most important measures of China’s reform and opening up is to learn from Hong Kong. This is the system of special zones or development zones. The development zone not only has relatively perfect infrastructure and relatively mature market economy system, but also has only 15% enterprise income tax rate, and zero tariff on imported raw materials, spare parts and equipment. This is basically similar to Hong Kong. Since the establishment of fifteen coastal economic and technological development zones in the early 1980s, it has increased to 2543 by 2018. Of these, 219 national economic and technological development zones account for 11.3% of GDP and 17.7% of the added value of secondary industry in the whole country (Office of Development Zone, Foreign Investment Department, Ministry of Commerce, “Main Economic Indicators of National Economic and Technological Development Zones 2018”, June 4, 2019). Today, China has become the second largest foreign capital inflow country in the world. It should be said that the Economic and Technological Development Zone is an important driving force for the reform and opening up and even the miracle of China. This also shows that the Hong Kong model has in fact been partially promoted in mainland China.

On the other hand, the development zone also brings good financial situation to the local government. Many cities with development zones have a considerable amount of revenue from land, which is called “land public finance”. Its scale and extent are far beyond Hong Kong’s level. See table below. On average, from 2016 to 2018, Hangzhou was the highest, and its income from land was 143% of the general fiscal revenue. In this group of cities, Shenzhen, the earliest open city, was the lowest, only 22.9%. Among these factors, the local government used the government to forcibly seize land from farmers around the city for sale at a low price. This is obviously wrong, which is a violation of farmers’ land rights. So the excessive dependence on land finance is problematic. However, this does not deny that the high land price in this area is due to the substitution of rents and taxes caused by the preferential policies of development zones, that is, the high land price caused by zero tariffs and low tax rates. This is the result of the Hong Kong model. If the local government respects the land property rights of farmers, the revenue of land finance will still be considerable, though less than the current situation.

Table 1  Urban Land Fiscal Dependence Rank (2016-2018)       Unit.: 100 million yuan

Cities	Urban land sales revenue in 2018	fiscal dependence on land in 2018	fiscal dependence on land in 2016	Fiscal Dependence on land in 2017	Average
Hangzhou	2442.9	134%	155%	140%	143.0%
Foshan	894	127%	100%	141%	122.7%
Nanjing	956.9	65%	155%	136%	118.7%
Jinan	722.3	96%	106%	129%	110.3%
Wuhan	1380.8	90%	84%	111%	95.1%
Zhengzhou	1063.6	84%	69%	78%	77.0%
Guangzhou	1475.9	90%	52%	80%	74.1%
Kunming	575.6	97%	36%	80%	70.9%
Shijiazhuang	454.8	89%	75%	39%	67.7%
Chengdu	849.3	60%	34%	99%	64.5%
Xián	680.6	99%	38%	53%	63.5%
Changzhou	465.9	83%	45%	55%	61.1%
Suzhou	875.5	41%	85%	49%	58.4%
Ningbo	547.5	47%	62%	41%	50.0%
Tianjin	1059.2	50%	48%	43%	47.1%
Chongqing	868.9	38%	35%	56%	43.1%
Beijing	1682.9	29%	17%	51%	32.4%
Qingdao	574.5	47%	20%	30%	32.2%
Shanghai	1908.8	27%	26%	22%	25.0%
Shenzhen	449.6	13%	32%	24%	22.9%

Source: Leju Finance and Economics, “The list of 20 cities in China, most dependent on land public finance!” January 15, 2019. (https://baijiahao.baidu.com/s?Id=1622717925819983737 & wfr=spider&for=pc)

Some people will ask whether the huge size of China’s mainland will lead all regions of China to compete for less capital. In fact, more than 2,000 economic development zones in our country have covered most of the regions and cities with superior geographical position, and opening all areas will only give more choice space for capital, so as to better allocate capital in space. This will slow down excessive land prices in individual areas and increase capital in other similar areas. On the other hand, the current situation is clearly overcapitalization. Japan’s central bank’s base interest rate lasted only 0.1% for 10 years, while the deposit rate has remained below 1% since 1995. Since 2016, short-term interest rates in the EU have been negative, reaching – 2.345% in June 2019 (CEIC, European Union Short Term Interest Rate). In fact, investment opportunities and regions are more scarce than capital. At this time, zero tariff is an important means to compete for capital. On the contrary, raising tariffs, even as a means of trade warfare, is not conducive to domestic enterprises’ competing for capital.

Back to the feasibility of zero tariff as a strategy of Sino-US trade war. The United States is clearly China’s largest national market. In the face of setbacks in Sino-US trade relations, China clearly wants to expand its relations with other trading partners. Professor Steven Cheung’s proposal that a bilateral zero-tariff agreement with Britain should be signed first is a good suggestion. Britain is a country with mature trade system and has an international exemplary role. It can be extended from Britain to the European Union. If China achieves zero tariff parity with the EU and the UK, it will increase trade by at least 6 percentage points. Even in the face of the US tax increase, Professor Steven Cheung’s proposal that unilateral zero tariffs should also be considered. If China reduces tariffs to zero, that is to say, it is reducing the cost of enterprises. Those enterprises that increase the cost in the US market because of the US tax increase will offset part of the cost by China’s zero tariffs. Moreover, zero tariffs are also the goal of trade negotiations in the United States. China’s proposal of zero tariff is more likely to be echoed by the United States. If China, the United States, European Union and the United Kingdom can achieve reciprocal zero tariff, it will open a new era of world free trade. As one of the important promoters, China’s contribution will never be forgotten.

In fact, as early as 2002, China and ASEAN countries established a free trade area to reduce tariff rates year by year. In 2010, tariff rates dropped to zero with the six old ASEAN countries and zero tariff with the new ASEAN countries in 2015. According to some studies, for every percentage point of tariff reduction, trade volume will increase by 0.8 percentage points (Wang Yueshuo, Evaluation of Tariff Concessions in China-ASEAN Free Trade Area, 2018). From 2005 to 2016, China’s direct investment in ASEAN countries increased 64-fold, with an average annual growth of 41.4% (calculated according to China’s Statistical Bulletin of Foreign Direct Investment). This shows that the reduction of tariffs to zero promotes foreign direct investment, which also promotes the economic development of the countries. The experience of these free trade zones is enough to support the full realization of the choice of reciprocal zero tariff. On the other hand, since the establishment of Shanghai Free Trade Test Zone in 2013, China has established 11 Free Trade Test Zones. According to the Ministry of Commerce’s China Free Trade Pilot Area Development Report (2019), by the end of 2018, the FTA accounted for 2% of the territory, attracted 12% of foreign investment and created 12% of imports and exports. At the same time, the government consciously summarizes the experience of simplifying and facilitating trade, and replicates and promotes it throughout the country. This proves the effectiveness of zero tax rate, but also accumulated experience of zero procedures. Total zero tariff is only one step away.

The greatest tragedy of mankind is to insist on doing something harmful to oneself, but still think it is beneficial. Keynes once said, “Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” This situation may reappear today when we face the zero tariff problem. Many people are still slaves of classical mercantilism. They play games against each other to hurt themselves. Although the practice of Hong Kong and mainland China has proved the validity of the new model, except for Professor Steven Cheung’s hypothesis of new theory, the economic circles are still lagging behind, and no mature new theory has emerged, so that people seem to be “slaves of some defunct economists”. However, the vivid facts should have a stronger impact on people than the theory, and influence people’s decision-making better, so that they will not insist on the negotiating conditions that are unfavorable to themselves in the Sino-US trade war. In that case, what we have to do is not to calculate under the theory of the late economist, but to get rid of that “slave” status.

 

At Fivewoods Study, Aug. 20, 2019

Published firstly in FT Chinese on August 27

A Research on

Efficiency and Fairness of Resources Allocation 

by the Governmental Administrations in China

Sheng Hong      Qian Pu

Abstract

• Currently, governmental administrations play a dominant role in China. The methodology that the administrations adapts for resource allocation now deviates from the typical procedures of allocation by public choices. The will of the administrative departments predominates the decisions of resource allocation, which showcases a tendency to lean towards their own interests.
• This report is to present researches in three fields of interest, namely education, health care, and land. All three sectors can be categorized as private goods with partial public goods properties. Therefore, the market mechanism should be the basic institution for resource allocation in these sectors. Non-market institutions, including administrative measures, should only be allowed to supplement the market failures as a complimentary approach.
• In China, it should be noted that the structure of the government is still flawed. There is a lack of legal bond and constraint from legislative entities on the scale and conduct of resource allocation by administrative departments, as well as a lack of control on the executive department by legislative entities. As a result, the range, scale, and conduct of resource allocation by administrative departments surpasses its reasonable extent.
• Resource allocation by administrative departments has the following advantages: (1) high mobilization capabilities to allocate resources; (2) guarantee to concentrate resources of the entire society on one specific critical goal; (3) supplement market failures by allocating the limited government resources in order to achieve a positive interaction between the market and the government.
• The disadvantages of resource allocation by administrative departments are as follows: (1) the administrative departments lack the capability to handle the information generated in a decentralized manner during the specific transactions; (2) as there is no market signal to benchmark when the administrative departments are allocating resources, no positive feedbacks are received from market signal as incentives; (3) the hierarchical structure of the administrative departments promotes a priority for the superior administrations during resource allocation, which they in turn have access to better and more resources; (4) the centralized decision-making process lacks civil perspectives and attention to details; (5) the administrative departments feature unequal submissive relationship between the superiors and the inferiors as a rule of operation; (6) the invisible rule that stipulates the administrative leader as the “smartest mind” limits the possibility for better decision-making as internal intelligence resources are not best employed; (7) the singular goal evaluation system risks compromising other goals for social benefits; (8) the administrative departments, in general, are nearsighted and short-term benefit oriented, which can result in inefficiencies of resource allocation; (9) Correction mechanism is lacking.
• In China’s practice, there are direct and indirect ways to allocate resources by administrative departments. The former involves direct resource allocation by the administrative departments or state-owned-enterprises (SOE); and the latter involves setting up entry barriers and price regulations.
• The proper scope of resource allocation by administrative departments include public goods, quasi-public goods, and remedies for market failures. A loss of efficiency may occur when administrative departments go beyond this sphere. When administrative departments are allocating resources where the market mechanism functions, it disrupts the market equilibrium and causes a loss in economic efficiency.
• Rawls’s first principle of justice regards the liberty of everyone’s maximum equality; and Rawls’s second principle of justice stipulates that if inequality must be accepted, the lean should be towards the disadvantaged group. We will adopt these two principles to review the fairness of resource allocation by administrative departments.
• The standards for evaluating the fairness of direct financial resource allocation by administrative departments are as follows:
• Generally speaking, the fair and just financial resource distribution should be equal distribution where the Gini Coefficient for financial resource distribution should be zero. If such distribution cannot be achieved, then a low Gini Coefficient, 0.1, for instance, can be tolerated. However, it should be stressed that in this case, Rawls’s second principle of justice should be adopted, and the financial distribution should be tilted towards the group with the lowest income. The extent to which the financial resources should be distributed to this group shall not change the current income structure, that is the subsidies to the poorest shall not make their income exceed that of the less poor.
• Typically, legitimate entry regulations consist of entry barriers brought forth by natural monopoly, or existing entry barriers to guarantee the qualification of the current practitioners. Otherwise, entry barriers normally lead to stagnation of competition and decrease of supply, which deprives consumers of the benefit from competition, low prices and convenience from abundant supply. Hence, such entry barriers are not fair by nature.
• During price regulation in either natural and oligarchy monopoly, deviation from the principles of setting average cost pricing, multi-part pricing or Ramsay pricing would cause loss of benefit for the consumers regardless if the price is higher or lower as aforementioned. This is especially true for the low income families and the less advantaged.
• The criterion we use to review the fairness of regulation on commodities is whether the regulation reduces information asymmetry and damages to consumers.
• In China, the resources of education, health care, and land are mostly allocated by, or indirectly influenced by the conduct of the administrative departments. In terms of education and health care, the main forms of resource allocation by administrative departments are: (1) through various administrative regulations, including entry barriers, price regulations, personnel regulations, which control the distribution of social resources; (2) resource allocation according to the class and type of ownership within the industry through industrial and financial policies.
• The main forms of land resource allocation by administrative departments include: limiting purpose of land use through planning, monopolizing the primary land market, implementing quota for land use and applying a dual track system for land allocation.
• Research shows that the total amount of supply and demand in education, health care, and land is out of balance. Educational resources are in short supply. Total admission rate for secondary education is at 81%, and merely 25.9% for post-secondary education.
• There is a severe lack of medical resources. Between 1978 and 2012, the comparable demand increased by 3500%, while there was only an increase in the number of hospitals by 137%, and certified (assistant) doctors by 167%.
• For lands, from 2004 to 2013, average annual urban population growth rate was 3.4% while the average annual urban construction area increase was 5.2%. With the latter growing at a 53% faster rate, land resources has been developed highly wastefully.
• Studies show that the distribution structure of land resources is distorted. Due to regulations on industrial land price and competition for investment between regions, the industrial land price is much lower compared to that of commercial service land and residential land. This not only leads to the invasion into agricultural land, but also a decrease in commercial and residential infrastructure out of construction land.
• The distribution of public land including land for government use is mainly dependent on designation by administrative departments. This has led to more waste of land resources, and also less land for commercial use and residential use.
• Considering that about a quarter of the residential land is used for low-income housing, which squeezes the ratio of residential and commercial lands to be less than 30% or even 25% of land in the property market. This then contributes to the sheer high prices of land for commercial and residential purposes.
• Studies also suggest that the resource allocation in these three sectors are rather more unfair. Financial resources should be allocated manually and fairly among individuals. If a certain level of unfairness is unavoidable, then the resource distribution should be tilted towards the less advantaged group. However, financial resource distribution in the three sectors of discussion are distributed more to the well-off and privileged, especially for education and health care resources.
• In terms of regional distribution, resources are inclined to concentrate in administrative power centers. Putting the number of “211” colleges to the population of the respective provinces and autonomous regions, the ratio is seen to be the highest for Beijing with 1.11 colleges per million people, followed by Shanghai with 0.38. The Province of Henan is the lowest at 0.016 colleges per million people, 1/69th of Beijing.
• The chance of admission is also a form of education resource allocation. In 2012, the ratio for Tier One colleges for Beijing, Tianjin, and Shanghai is respectively 5.2, 4.7, and 4.2. This ratio sets Sichuan, which has the lowest chance of admission as the basis of reference, meaning the students from the these three places are 5.2 times, 4.7 times, and 4.2 times more likely to be admitted by Tier One colleges of that in Sichuan.
• In 2012, the net admission rate of the National Matriculation Examination was 30%; while that of Beijing exceeded 60%, and that of Guizhou Province was only 25.5%.
• In 2012, the city with the most first class hospitals was Beijing with 2.5 first class hospitals per million people. The lowest were Henan Province, Anhui Province, and Hebei Province with 0.59 first class hospitals per million people. There are also 3,374 certified doctors per million people in Beijing, 3.6 times the number of doctors of the Tibet Autonomous region, which sits the lowest.
• The level of medical resources for rural residents per capita, including medical technicians and certified (assistant) doctors, was only half of that of urban areas. The difference is even greater for the number of nurses per capita for rural areas was 30% of that of the urban areas.
• After adjusting the average income and filtering the gap between people’s average income across provinces, the financial subsidies to students per capita still greatly varies across provinces with an obvious tilt towards administrative centers. According to Rawls’s second principle of justice, with technical design, we used “relative loss and return index” to demonstrate this phenomenon. The two figures below show the relative loss and return index for financial subsidies from elementary schools to colleges. As seen in the figures, Beijing, Shanghai and Tianjin all have “extremely unfair advantages”.

Relative Return and Loss Index for Financial Resource Allocation among Elementary Schools and Middle Schools across Provinces

Relative Return and Loss Index for Financial Resource Allocation among High Schools and Secondary Schools across Provinces

• According to the standards of this report, the fairness of financial resource distribution for elementary schools, middle schools, and high schools is “poor”, with elementary schools being the worst. The fairness of financial resource distribution for high school education is “intermediate.”
• In terms of average medical subsidies, the figure for Beijing is RMB 921 per person, and lowest figure is for Henan Province with RMB 103.
• As the cities with the highest income level, Beijing, Shanghai and Tianjin are also the most advantageous in terms of average medical subsidies per capita received. In the current financial resource distribution system, Beijing and Shanghai are the “largely unfair receivers of subsidies”, while Henan, Hebei, Jiangxi, Guizhou and Heilongjiang Provinces would be labeled as the “largely unfair receivers of losses”.
• The fairness index of financial resource distribution system in the healthcare sector is 0.413. Fairness is “poor”.
• Over the years, large portions of the fiscal input in the healthcare sector have been provided to urban than rural regions. Per capita, the level of fiscal input in the healthcare sector for urban areas is three to four times that of the rural areas.
• While there is evident tilt towards administrative centers in terms of education resource allocation across regions, there is also apparent unfairness in resource allocation among different groups of population within the same regions. According to some researches, the higher class (medium to high level managerial professionals and technicians) receive more quality education resources in key urban middle schools than the middle to lower class (labourers, farmers, displaced workers, unemployed and homemakers). In terms of receiving higher level education, the generational output rate (i.e., the proportion of the decendants of a given working class receiving higher level education in the total population of full time professionals within the same class) of executives of the state and the society, managers, private business owners, and vocational technicians, is 2-6 times that of the average value. The generational output rate of the higher class can be up to 14 times that of the lower class.
• The difference of medical resource allocation among groups is reflected in the health care system. Staff and personnel of the party, government and social enterprises enjoy public-funded health care paid by the financial funds, while other citizens enroll in various forms of medical insurances paid by themselves and their employers. According to Mr. YIN Dakui, former Deputy Minister of Ministry of Health, 80% of all the funds for healthcare are spent on the 8.5 million party and government officials.
• The national public expenditure on health care was RMB 365.74 billion for the year 2012. Comparing the extent of coverage, medical subsidies to civil servants averages RMB 1,142 per capita, RMB 169 per capita to the rural subsidized, and RMB 213 per capita for urber residents.
• On duty and retired civil servants lead in income levels among other groups, yet bear the lowest medical expenditure of all. For instance, the expenditure burden rate for on duty civil servants in Beijing is about 8-10%, while it is 36-43% for company employees, and 30-80% for farmers.
• In the current institution where the local government deprived land from farmers who have no right to refuse, the farmers with land seized not only receive no compensation, nor receive stable alternative job offers. From 1996 to 2012, some 64.92 million rural residents’ land has been taken. As the compensation for such land was only worth 2-10% of the market value, and the difficulty to get re-employed is high, the livelihood of farmers with seized lands was lowered enormously.
• After the residential housing institutional reform in 1998, the administrative departments stressed the development of economic housing, or budget housing, and they stipulated that such houses could be constructed by central party and government departments and be provided to officials. Party and government departments of lower levels followed suits. 36 million sets of budget houses were proposed by former Premier Wen Jiabao. In a conservative estimate, with 60% of such housing units provided to officials and employees of SOEs, some RMB 4.86 trillion would be transferred to the class who drafted this policy in the name of construction and provision of economic houses.
• In light of the inefficiency and unjustness of institutional resource allocation, citizens have been compensating this error in various forms, such as migration through the National Matriculation Examination, incomplete rights houses, seeking medical treatment in big cities, and offering monetary gifts. Yet, such behaviors are mostly suppressed by the administrative departments. Therefore, it is clear that there still exist severe mismatch and misallocation of resources in the three sectors this report concerns.
• From the constitutional level, reasons must be given and approved by the legislature if the executive departments try to intervene and regulate in the resource allocation of education, health care, and land resources. Market institution should be the main reference of resource allocation. Limits and supervision must be conducted by the legislature upon the executive branch. And the Rawls’s second principle of justice should be followed where the financial resources are allocated. The executive branch should be held accountable if this principle is violated.

 Content

Abstract 2
Chapter1 Administrative department as a mechanism of resource allocation 14
I. The basic resource allocation mechanisms 14
II. The economical and technical characteristics of the three sectors and their proper resource allocation mechanisms 15
1. Economic and technical characteristics of education 16
2. Economic and technical characteristics of medical care 17
3. Economic and technical characteristics of land allocation 18
III. Characteristics of market system and administrative departments in resource allocation 19
1. Market system 19
2. Administrative departments 19
IV. The scope and modes of resource allocation by administrative departments 21
1. Appropriate scope of resource allocation by administrative departments 21
2. Current study of allocation of resources led by administrative departments in China: overstepping and non-presence 22
Chapter2 The evaluation criteria for efficiency and fairness on resource allocation led by the administrative departments 23
I. The efficiency evaluation criteria for resource allocation led by the administrative departments 23
1. The efficiency evaluation criteria for the scope of resource allocation by the administrative departments 23
2. Efficiency loss due to overstepping of the administrative departments 23
3. The efficiency evaluation criteria of allocating resources among individuals by administrative departments 25
4. The efficiency evaluation on the regulating behavior by the administrative departments 25
II. The fairness evaluation criteria of resource allocation by administrative departments 26
1. Rawls’ principles of justice 26
2. The fairness evaluation of directly allocating public financial resources by administrative departments 27
3. The fairness evaluation criteria of entry regulation 28
4. The fairness evaluation criteria of price regulation 28
5. The fairness evaluation criteria of product regulation 28
6. The fairness index of public financial resource allocation 29
Chapter3 Applying rent seeking theory to analyze resource allocation by the administrative departments 33
I. Concept of rent and its extension 33
II. The theory of rent dissipation and its generalization 35
III. Rent retention 39
IV. Rent seeking 41
V. The fairness evaluation criteria of rent setting, rent retention and rent seeking 42
VI. Applying the rent seeking theory to analyze allocation of resources by administrative departments 42
Chapter4 The efficiency and fairness of educational resource allocation by the administrative departments 44
I. The specific mechanism and content of the educational resource allocation by administrative departments 44
1. The basic resource allocation mechanism of the education system 44
2. Educational resource allocation and deployment mechanism of public and private education 52
3. Allocation and deployment of basic educational resources 56
4. Allocation and deployment mechanism of higher education resources 62
5. Summary 69
II. Strategic countermeasures and corresponding games against resource misallocation in the field of education 70
1. Strategic countermeasures against resource misallocation in the field of basic education – fight for quality services in basic education 70
2. Countermeasures of resource misallocation in the field of higher education – NCEE (National College Entrance Examination) migration 72
3. Foot voting – studying abroad 73
III. The administrative departments’ countermeasure against the strategic behavior in the field of education 74
1. Cracking down NCEE (National College Entrance Examination) movers 74
2. Restraining the “school selection fever” 74
IV. The consequences of education resource allocation by administration departments 77
1. Total inflow of investment and structural distribution 77
2. Spatial allocation of educational resources 81
3. Allocation of state financial funds in the field of education 86
4. Resource allocation among different groups 95
5. Prevalent phenomenon of rent-seeking 101
6. Rent seeking in education leads to social opposition and political tension 105
7. Summary 107
Chapter5 Efficiency and fairness allocation of medical resources by administrative departments 109
I. The mechanism of medical resource deployment by administrative departments and its content 109
1. The allocation of social resources in medical field 109
2. The mechanism of resource allocation and deployment in medical industry 120
3. The mechanism of medical resource allocation and deployment among different social groups 123
4. Summary 126
II. Strategic response to the misallocation of resources and the corresponding game process in the field of medical care 126
1. Seeking medical treatment in large cities / advanced hospitals 126
2. Hospital ticket scalpers 127
3. Red packets, kickbacks and moonlighting 128
III. Countermeasures of administrative departments against the strategic behaviors in the field of healthcare 131
1. Investigation and treatment on receiving red envelops 131
2. Investigation and treatment on “moonlighting” 131
3. Cracking down on unlicensed medical practice 132
IV. Results of resource allocation by administrative departments in the field of healthcare 133
1. The quantity allocation 133
2. The spatial allocation of healthcare resources 134
3. The justice of financial fund allocation in the field of healthcare 137
Chapter6 Efficiency and justice of land resource allocation by the administrative departments 152
I. The specific mechanisms of land resource allocation by the administrative departments and its contents 152
1. Direct allocation of land resources by the administrative departments – Planning 152
2. Direct allocation of land resources by administrative departments – examination and approval on projects 153
3. Regulations on usage and transaction: the conversion of collective land into construction land must go through governmental expropriation 153
4. Cultivated land protection: examination and approval on the conversion of agricultural land and quota restraints 154
5. Supply system of construction land 156
6. Price regulation 159
7. Regulation on plot ratio 162
8. Affordable housing: quantity regulation, price regulation, buyer regulation 162
9. Summary 163
II. Strategic behaviors in the field of land and the cost resources 163
1. Rent dissipation coming from direct allocation and regulation of administrative departments 163
2. Strategic behaviors of local governments against the central government 165
3. Strategic behaviors of peasants against administrative departments 169
4. Strategic behaviors of real estate developers against administrative departments 176
III. The administrative departments countermeasures to combat various strategic behaviors in the land sector 177
1. The central government’s countermeasures to suppress illegal activities of the local governments 177
2. The administrative departments suppressing the strategic behaviors by the private individuals 178
3. Measures of central government: strengthening construction of affordable housing 183
4. Regulations leading to more regulations 184
IV. Results of land resource allocation by administrative departments. 185
1. Impact on total quantity of land allocation 185
2. Impact on the structure of land allocation 187
3. Land allocation among people 198
4. Severe corruption in the land rent-seeking 203
5. “Small property right housing” and “Urban village” property 210
6. Summary 210
Chapter7 Basic conclusions and reform suggestions 215
I. The evaluation of overall efficiency 215
1. The institutional evaluation: regulation on market for private goods is inefficient 215
2. The evaluation of results: total quantity imbalance and structural distortion 215
II. Evaluation of fairness: unfairness of motivation and unfairness of results 217
1. Unfairness of resource allocation among different areas 217
2. The unfairness of resource allocation among different groups 218
III. Analysis of specific phenomena 220
1. Price regulation due to entry regulation 220
2. Fairness inspection of admission quota of the National College Entrance Examination 222
3. Legal analysis on the Self-benefiting behavior on resource allocation of administrative departments 222
4. Summary 230
IV. Basic conclusions 230
V. Reform suggestions 231
1. Basic principles of reform 231
2. Reform suggestions in the educational field 232
3. Reform suggestions in medical care field 233
4. Reform suggestions in land field 234

References: 236

Abstract：In the term of economics, so-called “Familism” is that family is as the basic unit to calculate costs and benefits. The fundamental difference between traditional Chinese society and modern Western society is that the former is a familist society, while the latter is an individualist one. A familist approach to economics has two important differences from the individualist approach: (1) Familism regards lifetimes as unlimited, while individualism regards life as limited; (2) Familism regards individuals as members of a family who are not independent and equal with each other, while individualism describes individuals who are independent and equal with each other. Most conclusions change a lot if we do not accept individualist assumptions. Calculating costs and benefits of each family as a unit, the maximization of family benefit is not only the sum of the benefits of the members of the family as individuals; and the preservation of a family over time plays a more important role in raising family utility, which aggregates as time passing. Familism explains many distinctive features of Chinese traditional society, including aspects of its unique economic, political and cultural structures. Such a familist approach will expand the territory of economics and provide new accounts of Chinese, even world, history.

Abstract

• The market for healthcare features uncertainty, lack of price elasticity, and information asymmetric, besides other market characteristics.
• The purpose of medical insurance is to eradicate uncertainty and bring about the utility of certainty by transforming the uncertainty of personal medical affairs into predictable risks through integration and professionalization.
• People tend to “buy more” and “buy the expensive” as insurances lower the part of the medical expenses borne by the individuals, which in effect pushes up the prices of health care, and the demand for medical services and goods. The overall effect is an increase of health care expenditure.
• Insurances pushes up 73% of the prices of China’s medical services and goods, leading to an over-expenditure of 21% of all the medical services and goods by consumers, which further increases the healthcare expenditure per capita to 115% of that without these insurances .
• Even though insurances bring about an increase of welfare by 2.25% of the GDP, compared to the loss caused by it, a net loss of some44% of the GDP, that is some RMB361 billion, is caused by insurances.
• By 2013, a total of some RMB45.7 billion has been wasted by the public healthcare system.
• The managerial cost of healthcare institutions, i.e., expenditure by healthcare administrations and cost of managing the healthcare insurances, skyrocketed year on year, and reached RMB 35.9 billion in 2017.
• Per capita medical expenses are rising, from 4.03% in 2008 to 5.2% in 2017. In 2017, the national total health expenditure accounted for 6.4% of GDP.
• Therefore, it is not enough to criticize only the use of healthcare insurances. See below:

 Weighing the Gains and Losses of Insurance.   Unit: Percentage of GDP per capita (%)

• Quality medical resources concentrate disproportionately in big cities and big hospitals, which causes insensible spatial allocation causing an overly high time cost and other indirect medical cost. In 2013, if we put together the overspent cost and time for local and cross-region healthcare services and goods, it equaled to a total waste of resources that priced some RMB445.2 billion a year.
• The growth of labor costs for doctors is lower than that of the per capita GDP. The proportion of labor costs for doctors in per capita GDP fell from 11.7% in 2002 to 3.2% in 2017.
• In an aggregate sense, the demand for healthcare increased 45 times from 1980 to 2017, while the number of health technical personnel only increased 64times. Demand surpassed supply by a large margin.
• Average healthcare resources are distributed in a balanced manner across regions. It coincides with the resource allocation planning approach based on population taken by the Chinese government.
• Quality healthcare resources are distributed in a very imbalanced term with more resources concentrated in administrative centre. And this situation is exacerbating.
• Beijing is the “utmost unfair benefactor” of this distributional system of healthcare finance, while the “unfair victims” include provinces such as Henan, Anhui, Hebei, Hunan, Jiangxi, Guizhou, Guangxi and Shandong.
• The unfairness index of the financial distribution system in the healthcare system is 0.335. According to our evaluation standard, this score is interpreted as intermediate.
• Civil servants are the “utmost unfair benefactor” in the current healthcare financial distribution system, while the “unfair victims” include farmers, urban residents, and urban workers.
• This research proposes the basic principles for institutional healthcare reform is taking the market institution as the basis, and government regulations as complement.

1. To increase the self-pay ratio and its scope, to enlarge the function of the market;
2. To facilitate the market competition for healthcare;
3. To let the market make the price for healthcare services under the market mechanism;
4. To let the price of medicines fluctuate when the market makes prices for healthcare services;
5. To abandon compulsory social insurance and rely more on commercial insurance institutions;
6. The government should subsidize the medicine fees for the poorest people.

• The main measures proposed by this research include:

1. Canceling the insurance covering out-patient medical services: the fee inflicted by out-patient medical treatment can be paid either by the patients or by the individual account;
2. Canceling the threshold for insurance coverage and raise the self-pay ratio for in-patients to 70%;
3. Setting up a national severe disease charity fund to subsidize those whose self-pay portion exceeds their yearly income’s 40%.

• Estimated according to the model in this research, setting 2017 as the baseline, the proposal of this research should be able to hold back a 62% increase of the price, which would save RMB 1404.9 billion, 1.7% of the GDP.
• It would hold back some 5% of healthcare overuse, which would save up to RMB 397 billion, about 0.48% of the GDP.
• Some RMB1537 per person would be saved for healthcare, about 2.6% of GDP per capita, which rounds up to some RMB2036.4 billion nationwide.
• Those whose self-pay proportion exceeds their yearly income’s 40% constitute about 2.45% of the total population. If a severe disease fund is set up with a scale of about RMB 250 billion, it will be only about 0.3% of the GDP.
• If the monopoly is eliminated and competition is promoted, that is the slope of the supply function, e, changes from 0.47 to 2, then everyone would be able to save about RMB 127 for healthcare, a total RMB152.3 billion nationwide.
• Healthcare resources will be better allocated in space. If the distance and waiting time for medical treatment is shortened by half, that is the 4 hours needed for local treatment is shortened to 2 hours, then a total value of time amounting to about RMB 266.2billion will be saved; if the distance and waiting time for cross region treatment is shortened from 12.5 days to 6days and 6 hours, according to data of 2013, when a total value of time amounting to about RMB 29 billion will be saved. Putting them together, a total waste of time estimated for the value of RMB 295.2 billion will be avoided.
• Canceling out-patient (small illness) insurance would reduce 2/3 of the current insurance-related managerial operations, saving a total of RMB23.9 billion according to the current administrative fees of insurance agencies that is RMB 35.9 billion.
• When the increase of healthcare expenditures is contained, a huge amount of resources are saved, which will bring back the advantages of insurances. See blow.

Situation after the Reform            Unit: Percentage of GDP per capita (%)

• In summary, this reform proposal will reduceper capita medical expenses from 5.2% to 2.6% of the per capita GDP, a decrease of 49.9%.
• This reform proposal will also reduce the per capita medical expenses originally covered by insurance from 3.1% to 0.4% of the per capita GDP, a decrease of 87%.
• If it is shown by the deduction of healthcare insurance fees for urban workers, the deduction from their monthly wage will be decreased from 9.5% to 1.2% of their monthly wage, which would also lower the burden for enterprises.
• Even though the self-pay fees account for a higher ratio than before, as the healthcare expenditure decreased in general, patients pay 112% of that they paid for their medical treatments before the reform.

Abstract

The economic characteristics of the oil-gas industry determine that the system of the oil-gas industry should mainly depend on the market institutions, supplemented by proper government interventions, e.g. levying fuel oil taxes, adopting short-term intervention for large price fluctuation, commandeering oil resources and products in time of war, and establishing resource reserve in time of peace.

The current oil industry system of China basically reflects the three aspects: the state-owned enterprise, price regulation and entrance restriction. Thus, the oil industry of China has a high degree of monopoly, e.g. two to three monopoly enterprises have integrated monopoly in exploration, mining, refining, wholesale, retail, even import and exports.

The monopoly in the oil-gas industry is an administrative monopoly, which is such a kind of monopoly established by administrative departments through issuing administrative documents. These administrative documents are not issued through due legal procedure, but they determine the affairs influencing the vital interests of Chinese people, so that they are illegal.

The current oil monopoly system and corresponding monopolistic behaviors of oil monopoly enterprises violate the constitutional principle of socialist market economy and the Anti-Monopoly Law. The reason as basis for administrative documents to establish oil monopoly right is not economically rational.

Diagram of welfare loss and distribution distortion of administrative monopoly

The oil monopoly system has brought about a great efficiency loss in the whole society. It is estimated the welfare loss in the oil industry reached as high as RMB 3.477 billion from 2001 to 2011.

The system also distorts the income distribution and violates the principle of fairness. From 2000 to 2011, three monopoly oil companies lacked to payed profit of RMB 1470.1 billion. But in their income level, these companies are far higher than social average level, e.g. the per capita salary of the China National Offshore Oil Corporation in 2010 was about RMB 340,000, about 10 times of social average level.

The system violates the market rule and makes oil monopoly enterprises become unfair competitors. From 2001 to 2011, CNPC underpaid land rent of RMB 395.8 billion, while oil enterprises underpaid resource rent of about RMB 307.9 billion and financing cost of about RMB 287.8 billion.

The system makes an originally competitive market become a monopoly market, consequently it makes the market-based pricing system ineffective, so that the government regulation-based pricing mechanism is adopted. However, such a pricing mechanism is inefficient, causing the price it determines to deviate from the price determined by the market and will undoubtedly cause welfare loss. Meanwhile, it makes monopolists reduce their production and supply when the price is low but overproduce or oversupply when the price is high. With the quantities of production and stock in turn influence the price.

The system also directly damages other competitors including private enterprises in the following aspects: (1) to prohibit entrance, or to drive those enterprises in the industry out of oil extraction and sales realms; (2) to impose restrictions or discriminations on competitive enterprises that have already entered the oil industry; (3) to cooperate with local governments and rejects competitors through administrative powers; (4) to directly violate the property rights of private enterprises, etc.

The regulation on crude oil import has resulted in serious insufficiency of capacity utilization of other oil refining enterprises in addition to oil monopoly enterprises, so that a total loss of sales volume reached about RMB 300 billion every year.

Because the quality standard of petroleum products of China is lower than other major countries, while the quality standard of petroleum products of Beijing is higher than the national standard and is close to European standard (see the figure below), We here have conducted a comparison between the adjusted price of petroleum products in Beijing and the average level of other main countries.

For making the comparison more fair , we use the price before tax. The consumption tax and actual added-value tax is deducted from the price of petroleum products in Beijing. From 2006 to 2011, the comparison between the prices of petroleum products in China and weighted average prices in other main countries (Yuan/L) is as follows:

From 2006 to 2011, the losses of consumers caused by the high monopolistic (regulated) price were as high as RMB 839.6 billion; from 2009 to 2011, the monopolistic (regulated) price of petroleum products in China (before tax) was about 31% higher than average price of main countries, so the losses of consumers reached as high as RMB 1198 billion.

• Map of oil monopoly enterprises to seize profit

The system also damages national security and influences social stability. It provides the conditions and excuse for oil monopoly enterprises to create “Gasoline Shortages”, results in the tension and opposition between the central government and local governments, and damages the interests of central and western regions and minorities areas. Meanwhile, monopoly enterprises blackmail the government at a crucial time.

Finally, the system itself violates the framework of Chinese constitutionalism. Monopoly enterprises arrogate to use public power and impliment administrative power or quasi-administrative power, while administrative departments arrogate to have legislative power and abuse legal enforcement power in order to carry out the monopoly and regulation described in administrative documents.

Therefore, it is a system with significant problems, which should be reformed radically. The reform has constitutionality, validity and economic rationality.

Fundamental objectives of the oil industry reform:

• To establish a system based on the market institutions for the oil-gas industry;
• To form a fair and effective competitive mechanism involving the upstream, midstream and downstream sectors of oil-gas industry;
• The government represents the state to grant the mining permiit of oil and gas to economic agents in a competitive way;
• The government should impose limited regulations only in special fields at specific

Basic measures for the oil industry reform:

• To abolish the monopoly powers and parts of administrative powers of the oil monopoly enterprises;
• To establish an unconventional and neutral regulator for the energy industry;
• To opening all fields of the oil-gas industry;
• To stop the price regulation.

Diagram on the static effects of the oil industry reform (RMB 100 million)
Figure A: Before the reform

FigureB: After the reform

The reform on opening the markets of crude oil and of petroleum products is a supporting point or lever of the whole petroleum industry reform, which involves fewer aspects,and is with less rigid comparing with the reform that touches the vested interest of the upstream industries of the oil monopoly enterprises, such as oil extraction and petroleum refining, ,while would get twice the result with half the effort. On the one hand, the reform can obtain most of benefits quickly from the breakup of monopoly, namely it can eliminate the losses of consumers caused by monopolistic high prices, and will eliminate the net loss of social welfare caused by the limitation on enterprise entrance.

The price of petroleum products will lower to the international level of the petroleum products with the same quality, which will benefit consumers. According to the data during 2009 to 2011, the prices of both diesel and gasoline in China could have been reduced by about 31%. So if the consumption is the same with 2011, consumers could pay less RMB 401.8 billion each year.

Even according to the price of petroleum products in the trading center beyond the current monopoly system of China, the price will also decrease after the markets of crude oil and of petroleum products are opened. It can be seen from the figure below that the price of 93# oil in the trading center of the Yangtze River Delta is about 13% lower than the regulated price by the National Development and Reform Commission.

Comparison between the price of 93# Oil generated in the Trading Center of Yangtze River Delta and that issued by National Development and Reform Commission (from February 16, 2013 to March 21, Yuan/L)

According to welfare loss caused by the monopoly in 2011, the reform will obtain 79% or four-fifths of static effects of petroleum industry reform (as shown in the table below), moreover, it will increase a total sales volume of above RMB 300 billion every year due to the increase of the capacity utilization of local oil refining enterprises.

Static effects of the reform on opening the markets of crude oil and of petroleum products (RMB 100 million)

On the other hand, the market-oriented reform in the trading field will have significant effect on the upstream production field and will promote the final completion of the oil industry reform in China. Thus, it is a reform to achieve quite number of benefits with low costs.

The analysis on the reform motivation structure indicates that most of people in China will support the oil industry reform. Since the monopoly is unpopular and the current oil monopoly system lacks constitutionality and justice, the governing party and the central government have the desire to reform, meanwhile, consumers and private enterprises are asking for a reform. Besides that, other central enterprises, local state-owned enterprises and local governments all support the reform. Only those administrative departments connected to the oil monopoly system and the managements and employees of oil monopoly enterprises may oppose the reform, but most of them still support the reform.

When we select the scheme for the reform on opening the markets of crude oil and of petroleum products, we should choose a way with the lowest cost.

The strategies for the reform on opening the markets of crude oil and of petroleum products are as follows:

（1）Gradually opening: as described above, the markets should be opened in the order as fellows:  the crude oil import market, imports and exports markets of petroleum products, domestic market of petroleum products, and domestic market of crude oil;

（2）To reform outside of the system: to remain current institutional arrangements for the monopoly enterprises in importing and exporting of crude oil and petroleum products  while  the markets of crude oil and petroleum products are opened,;

（3）Gradually entering: during the process of opening the markets, it would be considered to grant  enterprises other than monopolistic ones to enter the markets group by group;

（4）Subsidying reform: for possible laid-off or even unemployed workers from oil monopoly enterprises, if other oil enterprises can not absorb all of them, the government can establish the employment fund for oil industry;

（5）Transactions of planned rights: for all oil monopoly enterprises, the government can abolish the price regulation on the selling of petroleum products to exchange their agreement on  opening the markets of crude oil and petroleum products.

The reform in China has proved that when state-owned enterprises can’t absorb so many workers and even bring about large quantities of unemployed workers, non state-owned enterprises have become the main force in providing job opportunities. For example, from 2008 to 2011, among all new employments, non state-owned enterprises provided 96% of employments (according to the data from the State Statistics Bureau). Therefore, if the market-oriented reform can be successful, it will arouse the prosperity of non state-owned enterprises and create numerous job opportunities, which will be certainly more than the decrease of job opportunities of state-owned enterprises.

Because the oil reserve-production ratio rises to 55, “Shale revolution” will lead to strategic growth of oil and natural gas supply, and natural gas will become the dominant energy in the new period;in addition, the growth rate of economies would slow down in China and India; the supply and demand relations will become relatively loose in the world oil markets, which is conducive to the reform of opening crude oil and refined oil markets.

Time sequence of the reform

 

The US restricted Tiktok and WeChat is the initial application of Principle of Reciprocity. It’s a golden rule for both sides. In this article published last year, I said, “the Internet of any party should be free and unimpeded.”. I hope that the implementation of this rule will become a way to solve the Sino-US friction.

President Trump suddenly imposed tariffs on $200 billion of Chinese products to 25%. The Chinese government immediately responded to impose the same tariffs on $60 billion of American goods. Apart from the drastic reaction of the stock markets of the two countries, we heard a lot of shouts for war. It seems that the trade war has officially begun. Both sides are claiming that they can win in this battle. This seems familiar. We have seen a lot in human history. Edward Gibbon, author of The Decline and Fall of the Roman Empire, once said, “History is, to put it bluntly, a record of human crime, folly and misfortune.” The greatest “crime” is war, and what leads to war is “stupidity”, and the result of war is “misfortune”. When a war is over, people often find that compared with the disasters brought about by war, the cause of war is often a trivial matter. For example, World War I. The so-called “stupidity” is the wrong calculation. Generally, people often overestimate their winning rate. The result is that the loser thinks in advance he can win, and the winner thinks he won’t pay too much.

President Trump was wrong in his calculating to impose tariffs on Chinese products. He said tariff increases had no negative impact, but only increased the revenue of the U.S. government. As President of the United States, he seems to have no concept of seigniorage. I have pointed out that if the dollar is also counted as a commodity, the United States has no trade deficit. The dollar is the most profitable of all U.S. exports. If the technical and institutional costs of issuing US dollars are 20%, the profit margin is as high as 80%. If Trump wants to reduce the $200 billion trade deficit by imposing a 25% tariff on $500 billion of Chinese goods, the U.S. government will get $75 billion in tariff revenue (some of which are paid by American citizens), but reduce the $200 billion Seigniorage tax, which is obviously not worth it. What’s more, seigniorage revenue is an additional part of U.S. national income, which can be used to equalize the higher-than-world-average portion of U.S. military expenditure. Reducing the trade deficit means reducing seigniorage revenue, and reducing resources for military expenditure.

Some would argue that the dollars foreigners earn through trade are their creditor’s rights to the United States, not the income of the United States. Perhaps this is where Trump and his economic advisers’ vague understanding of seigniorage. As long as we regard paper money as gold and silver, we know that money is a commodity. Its utility is to facilitate transactions and thus has independent value, which can be seen from the independent value of Bitcoin. This independent value will be recognized as long as people believe it, and insufficient-value money and even paper money can emerge. The advantage over gold and silver is that the seigniorage profit of paper money is very high, and through artificial monetary policy, even a large amount of outflow will not make the domestic money supply insufficient. In fact, the US dollar exported through trade deficit and returned to the United States in the form of purchasing US financial assets, especially US Treasury bonds, enabled the seigniorage revenue to actually allocate resources to the military industry of the country in the form of US government orders to enterprises.

On the other hand, some people in China have made calculations in favor of China. As Mr. GAO Lingyun, Institute of World Politics and Economics, Chinese Academy of Social Sciences, points out, 90% of Trump’s tariffs are borne by Americans and only 10% by Chinese. Even if the algorithm is correct, it is obviously only a simple and comparative static calculation. As we know, the calculation of Chinese as producers is different from that of Americans as consumers. For consumers, if the goods are expensive, they can buy less or not. They can also buy similar products produced in other countries. The more tariff costs American consumers bear, the higher the price of Chinese consumer goods they buy, because there is price elasticity, the less they buy. This will become more pronounced over time. Reducing the total demand for Chinese goods will reduce the orders of Chinese producers. The misleading thing about static estimates is that they only see short-term reactions, such as China’s trade surplus with the United States rising in 2018 without falling, while temporarily failing to see negative long-term results. In fact, by the first quarter of 2019, China’s exports to the United States had fallen by 8.5% compared with the same period last year.

As a producer, 25% of 10% is 2.5%, which is fatal for manufacturing enterprises whose normal net profit of sales is less than 5%. This can completely offset the effect of China’s massive tax cuts this year (2%). In recent years (2012-2016), the return on net assets of China’s manufacturing industry minus risk-free interest rates and reasonable risk premiums, averaged about -2.6% (SHENG Hong, “government share expands, profit margins are exhausted”, 2018), and capital is no longer profitable. Considering the reduction of total demand, the idle rate of equipment will be increased and the unit cost will be increased. In the long run, a large number of Chinese enterprises and foreign-funded enterprises in China have to consider reducing or even closing their production capacity in China and transferring to other countries. Similar products produced in these countries will eventually replace Chinese products in the U.S. market. Permanent loss of market is a significant loss of customer assets, the amount of which should be estimated by the future discount value of the total reduced profits each year. For example, if the annual loss of profits is $10 billion and the discount rate is 4%, the discount value of future earnings is about $250 billion. If various factors, such as labor and land, are taken into account, the loss will be calculated in terms of added value, which is $60 billion in terms of manufacturing value added rate of 30%, and the loss of customer assets will be as high as $1500 billion.

In fact, it is a simple common sense of economics that trade brings trade dividends. This trade dividend is divided into producer surplus and consumer surplus and is shared by producers and consumers. Reducing a transaction will reduce the corresponding producer surplus and consumer surplus. In an undisturbed market, an existing trade partnership is the best relationship. If a seller threats not to sell or a buyer not to buy as the weapon for a trade war, it is impossible to harm the other party without loss. Because they leave the traditional trading partners, they can only find suboptimal partners, that is, sellers can only sell at a lower price than the original price, and buyers can only buy at a higher price than the original price. So when we see people saying what kind of “weapon” with we can “win” in trade wars, we must understand that even if we can win, we would be worse than “no fight”. It hasn’t been calculated yet that the losses caused by the other side’s retaliation and repeated retaliation between the two sides. More importantly, we must not use this as a basis to stimulate our fighting passion and push the conflict that may be peacefully resolved into a state of war.

It should be said that because of the complexity of economic system and human society, human beings have no ability to calculate all the losses that a trade war may bring. Hayek once said, “The direct effects of any interference with the market order will be near and clearly visible in most cases, while the more indirect and remote effects will mostly be unknown and will therefore be disregarded. We shall never be aware of all the costs of achieving particular results by such interference.” Compared with non-trade, distorted trade, or restricted trade, the value of free trade is not only static producer surplus and consumer surplus, but also the deepening of division of labor and specialization caused by the expansion of market scale brought by trade. The market information system formed by trade guides producer’s investment decision-making and stimulates innovation inspiration, and the business model The change of business models, technical means and production technology caused by trade competition, and the new institutional arrangement formed by the change of contract modes; all of them will bring about unexpected efficiency improvement, cost reduction and market expansion. So when free trade is distorted and restricted, the losses we suffer are incalculable. If someone says they can count and claim that one side can win, it’s probably not because of patriotism. We need to keep a high degree of vigilance.

Although we cannot quantify and compare the losses of all parties in the trade war, we do know one of the most basic and simplest criteria: free trade is better than non-trade, distorted trade and restricted trade. This means that, at least among roughly equal trading partners, free trade will bring benefits to either side, while non-trade, distorted trade and restricted trade will bring disadvantages. The best trade negotiations must aim at following the principles of free trade rather than calculating the specific gains and losses of trade wars by what means. The worst strategy is based on the so-called calculation. Therefore, the ultimate goal of this Sino-US trade negotiations should be to improve existing trade relations and move towards a more equitable free trade. Trump’s tariff stick should be used only as a means of facilitating negotiations and correcting distortions, not as an end in itself.

Unfortunately, it now seems that the tariff stick has come. It has two disadvantages. First, it makes Sino-US trade relations more far away from free trade, which not only increases trade restrictions, but also makes the market more distorted. In China, non-state-owned enterprises have the real ability to export and compete with other enterprises in the world market. Not only are state-owned enterprises inefficient and unable to compete with other enterprises in the world, but they also have monopoly power in the domestic market in addition to huge subsidies. Even in this case, the nominal return on net assets of state-owned enterprises is significantly lower than that of private enterprises without these subsidies, such as the return on net assets of non-state-owned industrial enterprises in 2013 is 15.64%, and the return on net assets of state-owned enterprises is only 8.73%. This shows that the inefficiency of state-owned enterprises completely offsets the benefits of subsidies. With such low efficiency, most state-owned enterprises cannot compete in the international market.

Therefore, the real cause of the high trade deficit in the United States is mainly China’s private enterprises and foreign-funded enterprises. According to the Ministry of Commerce, according to March 2019 data, state-owned enterprises account for only 10% of the total export volume, and the remaining 90% of the export volume is created by private enterprises and foreign-funded enterprises. As a result, the bulk of Trump’s tariffs are imposed on private enterprises and foreign-funded enterprises without government subsidies. This is not to correct market distortions, but to punish companies that follow market rules, and make the market more distorted. Consideration should also be given to the $60 billion in US goods that have been tariffed because of the Chinese government’s counter-measures, whose producers are also innocent. If only $20 billion of the $260 billion is the commodity of state-owned enterprises, it would be equivalent to punishing and correcting $20 billion (7.7%) of unfair trade, by imposing tariffs on $240 billion (92.3%) of fair trade. It’s not fair, also foolish.

Figure 1 Export share of various kinds of Chinese Enterprises

Data source: Ministry of Commerce website (http://data.mofcom.gov.cn/hwmy/imexComType.shtml).

Secondly, it may shift the focus of trade negotiations and focus the attention of both sides on tariff wars, and on this basis, carry out further retaliation against each other. The original purpose may be completely forgotten. The general imposition of tariffs on Chinese goods has caused widespread losses to private enterprises and foreign-funded enterprises. They will rise up against this measure, and become the political motive force of negotiation that seemingly safeguards the interests of the state while protecting the monopoly interests of state-owned enterprises. It is precisely because Trump’s tariff stick did not hit state-owned enterprises, so they are not afraid of such tariff war, but hide under the shell of “national interests” and do their best to influence China’s trade negotiations, so as to deviate from China’s overall national interests and benefit them. Private enterprises and foreign enterprises that follow the market rules are their hostages. Once the tariff stick smashes, they hide among the hostages and will not be directly injured. They even snicker. On the other hand, Trump, in order to punish a handful of enterprises for unfair trade, has generally harmed Chinese enterprises, especially private enterprises, making them enthusiastic and resentful, supporting state-owned enterprises with nationalist attitudes. This, on the contrary, prevents China and the United States from reaching agreement on correcting unfair trade and following the principle of free trade. Further, the resulting Chinese counteraction is more likely to lead the two sides into a vicious circle of mutual retaliation, so that they may forget what they were negotiating for.

What is the negotiation for? As has been said before, the purpose of negotiations is free trade. To make it concrete, it should be the principle of fair trade and the rule of law. Following fair trade rules is to eliminate all unfair phenomena, including subsidies, restrictions on entry, infringement of intellectual property rights, concessions, monopolies and other preferential policies, while the rule of law is to use the compulsory force of the state to fairly adjudicate trade disputes. Fair trade is voluntary in most cases, while in a few cases it requires the compulsory maintenance of the rule of law. Therefore, the rule of law is also an important system of fair trade. Moreover, the principle of fair trade and the rule of law are the basic consensus of the two countries and their governments. We needn’t say anything about the US side. The Chinese government stresses that “the market plays a decisive role in resource allocation” at home and that the principle of free trade with foreign countries goes hand in hand with the principle of fair trade. The Fourth Plenary Session of the Eighteenth Central Committee of the Communist Party of China emphasizes the construction of a “country ruled by law, a government ruled by law and a society ruled by law”. Although there are many problems violating the rule of law in reality, in principle, efforts should be made towards the realization of the rule of law. Therefore, this is the principle basis of Sino-US trade negotiations. We can use the principle of fair trade and the rule of law to measure the means of negotiation used by both sides in trade negotiations and the text of the agreement to be reached.

Liu He pointed out that an important disagreement in this round of Sino-US trade negotiations is that the Chinese side requests that after reaching an agreement in the negotiations, the US side should cancel the tariffs, 25%, already imposed on China’s $60 billion commodities and 10% on $200 billion. This is clearly a normal requirement. And as mentioned above, this measure actually violates the goal of the negotiations – fair trade, imposing tariffs on innocent Chinese non-state-owned enterprises, and is a blow to the principle of fair trade itself. Similarly, according to the Wall Street Journal, it is against the principle of fair trade that the United States requires a reduction of the trade deficit with China by $200 billion by 2020. If this requirement becomes an intergovernmental agreement, the Chinese government will either increase purchases by government agencies or state-owned enterprises, or force private enterprises to buy it. This will not be a market behavior based on cost-benefit calculation, but will greatly reduce the efficiency of resource allocation, and even bring false demand information to American enterprises. In this process, government agencies and state-owned enterprises will also increase their weight in China’s economy. They may also ask for government subsidies to execute administrative orders for purchases. This is clearly not fair trade.

Of course, China is in a period of strategic transformation from its current stage of development. As I have proposed, China should change from “Made in China” to “China Market” and open up a larger domestic market to contribute to the world economy. At the same time, because of the “gigantic- country effect”, that is, according to Professor Krugman’s new trade theory, “in free trade, larger countries will have advantages”, China as the largest country has the greatest advantages”; although China is still ranked low in technological and institutional competitiveness (the 13th in 2018, according to the Swiss Lausanne School of Management),  there is a trade surplus with  countries and regions ranked before it (such as the U.S. ranks No.1). This shows that China has the strength to achieve equal or even unilateral free trade relations. Therefore, the fair rule of reducing the trade balance between China and the United States is to implement the equivalent tariff rate and other non-tariff arrangements between China and the United States, that is, China can first reduce the tariff rate to the level of the United States, and further, China and the United States can implement zero tariffs with each other. Thus, the Sino-US trade agreement can achieve this principle of reciprocity to replace the mandatory requirement of reducing the balance of $200 billion by 2020.

Figure 2 Weighted average import tariffs imposed by China and the United States on each other’s products

Data source: World Bank, World Integrated Trade Solution.

Considering the asymmetry of tariff rates between China and the United States so far, the weighted average tariff rate of the United States on Chinese goods is 2.9%, while that of China is 6.3% (2016). Once the tariff rate is equal, the trade gap between China and the United States will gradually narrow. When this problem is solved, only structural problems will be solved, and the scope of the problem will be greatly reduced. Moreover, on structural issues, China and the United States are less antagonistic, and the principle of reciprocity can play a more effective role at this time. The structural issues raised by the United States include the protection of intellectual property rights, the opening of the domestic market, the subsidy of state-owned enterprises, the free flow of Internet data and so on. All these problems are also structural in China.

For example, for the intellectual property system, different types of enterprises have different performance. Non-state-owned enterprises mainly depend on the intellectual property system, and their effective patents account for 97% of all patents, while the effective patents of state-owned enterprises only account for 3% (2016, National Statistical Office), they rely more on the so-called national research fund, which is about 800 billion yuan per year. As I pointed out in the article “Rule of law is the core technology”, it is precisely because of the lack of an effective incentive and restraint system in the National Research Fund system, the inefficiency of its use and the fact that only 20-30% of the patented scientific research achievements are applied for, that the state-owned scientific research institutions and state-owned enterprises are more focused on introducing technology. Because a large number of state-owned enterprises are in monopoly industries, only they have the ability to force foreign enterprises to transfer technology at low prices, such as high-speed rail technology. The reform of China’s scientific research system is to reduce the government’s Research Fund for applied research to state-owned scientific research departments for 500~ 600 billion yuan per year, to use more funds for basic research, and to make state-owned scientific research institutions more dependent on the intellectual property system for applied research. Therefore, Chinese society needs to further improve the intellectual property system and strengthen the protection of intellectual property rights. This is in line with the requirements of the US side.

Again, the problem of administrative monopoly is a problem that Chinese society has been trying to solve for a long time, but it is difficult to solve. Some state-owned enterprises have long monopolized oil, banking, telecommunications, railways and salt industries. According to our estimates, the welfare losses caused by these administrative monopolies reached 2273.4 billion yuan in 2013 (Unirule Institute of Economics, Causes, Behaviors and Elimination of China’s Administrative Monopoly (Second Edition, 2015). They not only bring enormous loss of efficiency, but also unfair redistribution of wealth. Monopoly interest groups are an important obstacle to the further marketization and legalization of China. Although there is no corresponding legislative basis for the establishment of these monopolies, even if successive governments want to break monopolies, such as Premier WEN Jiabao proposed breaking oil monopoly and Bank Monopoly, two “Non-state Enterprises 36 Articles” emphasize opening up the monopolized market to private enterprises, shortening the negative list of market access, and the Nineteenth National Congress of the Communist Party explicitly proposed “breaking administrative monopoly”. However, there has been little real progress in the confrontation of monopolistic interest groups. However, it is still the case at home, which is manifested by international problems, and is regarded as a problem that China’s market is not open to foreign enterprises. In fact, this is also a structural issue in China, and is the goal of reform. This is in line with the pressure of the US side to open up China’s domestic market.

The free flow of information on the Internet is also a structural problem. Although China’s Cyber Security Law stipulates that “the state protects the rights of citizens, legal persons and other organizations to use the Internet in accordance with the law,…”, “to ensure the orderly and free flow of network information according to law.” However, in violation of Article 35 of the Constitution and the Law on Network Security, the relevant administrative departments set up firewalls, which, besides suppressing attempts to expose corruption and criticize abuse of power, selectively prevented foreign enterprises from entering the Chinese market. The beneficiaries are the competitors of these overseas enterprises in China. For example, restrict Google, Twitter, Facebook, Yahoo, YouTube, Instagram, WordPress,… And cloud computing services, etc., are unfairly protecting domestic counterparts and hurting domestic consumers. These enterprises, especially the platform monopoly enterprises, not only without a bottom line invade the privacy field of citizens and enterprises by using the convenience of providing network services, but also arbitrarily close the websites, microblogs, WeChat public numbers, live broadcasts and other network media with commercial value, violate Article 40 of the Constitution to arbitrarily invade and close personal WeChat which accumulated communication resources and being necessary communication tool. The beneficiaries of restricting the free flow of data are only a few monopolistic and power-abused interest groups. Most Chinese enterprises, citizens and even government agencies are victims.

This structural inequality is isomorphic at home and abroad. One country protects the intellectual property rights of domestic enterprises while protecting the intellectual property rights of foreign enterprises; another country cannot effectively protect the intellectual property rights of domestic enterprises, so it cannot respect the intellectual property rights of foreign enterprises; one country provides subsidies to some domestic enterprises, which not only compete in the domestic market, but also export to another country; another country does not provide subsidies to all domestic enterprises, there are no enterprises enjoyed governmental subsidies to export to foreign countries; some industries in one country are only open to some enterprises, not to other domestic enterprises, also not to foreign enterprises; while the domestic market in another country is open to all enterprises, while all non-key industries are open to foreign enterprises; and the Internet in one country restricts the entry of domestic enterprises, also restrict the entry of foreign enterprises, while the internet of another country has no access restrictions at home, and no access restrictions on foreign countries. These structural inequalities between China and the United States and structural inequities in China are actually a problem. The United States put forward “structural reform” in the negotiations, and the Chinese government put forward “supply-side structural reform” in 2016. Its main content is to solve structural problems by promoting marketization and reducing government intervention. In this seemingly irreconcilable area, China and the United States actually have a common ground and mutual needs. The solution is the principle of reciprocity in structure.

For example, under the premise of tariff rate reciprocity, to the enterprises who enforced the enterprises of another country to transfer technology by monopolizing the domestic market, another country should impose restrictions on the entrance of these enterprises in the markets of another country; one country should impose high tariffs on such import enterprises, which enjoy governmental subsidies, for offsetting the advantages of the subsidies; these subsidies include free land, low-interest loans and low-price royalties. In the case of monopolizing the domestic market, especially the monopoly power obtained by administrative order, which prevents other enterprises and enterprises of another country from entering the same kind of market, another country may also take corresponding measures to prohibit them from entering the same kind of market in that country; in the case of domestic competitors blocking Internet enterprises of another country from entering its own market, another country shall also prohibit such enterprises from entering the country’s Internet market. As long as we adopt this structural principle of reciprocity, we find that trade negotiations only need to discuss the equivalence of tariff rates and non-tariff measures. Other issues can be placed outside trade negotiations and only structural negotiations can be conducted. In this way, the general tariff war can be avoided, and innocent enterprises that follow market rules cannot be hurt. The effect can be immediate if the pressure is directly applied to the parties involved in unfair trade. While solving structural problems, it will also have a positive impact on Sino-US trade balance.

To the issue of implement that The United States emphasizes, the best way is the rule of law, which is consistent with the direction toward rule of law decided by the Fourth Plenary Session of the Eighteenth Central Committee of the Communist Party of China. Since the reform and opening up, China has gradually established a relatively reasonable legal system through long-term legislative work. In view of the above structural problems, there are corresponding legal provisions to solve them. Its biggest problem is that it cannot be effectively implemented. In the above-mentioned “Decision”, it emphasizes “improving the system to ensure the independent and impartial exercise of judicial and procuratorial powers according to law”, and makes specific provisions that party and government leaders should not interfere in and interfere in the judiciary. This is the joint point of joint efforts between China and the United States. The principle of the rule of law is “no connivance, no wronging”. It’s much better than waving a tariff stick indiscriminately. And the law and due process can only be activated in litigation, and can also produce the role of a model case in society. Therefore, it is necessary to solve the problem through case litigation in the judicial system, so as not to harm the majority of innocent people, but also more targeted. Considering the lack of legal capacity of individual enterprises, the U.S. government can also set up a comprehensive legal aid program to help enterprises. In China, the promotion and implementation of the rule of law also requires specific litigation cases. Therefore, this arrangement should not only be regarded as a substitute for tariff measures, but also as a help and promotion to the construction of the rule of law in China.

Finally, the principle of structural equivalence should also be embodied in textual equivalence and mutual respect. Seeing the U.S. Negotiation Text disclosed by the Wall Street Journal, if it is true, seems to show some emotional and inappropriate universal judgement. This is a detail, but it may eventually hamper the agreement. Since we believe that unfair trade is not a general problem, but a structural one, the universal judgements to a country is wrong. The real war is not between the United States and China, but between the two principles, between free and fair trade and distorted and restricted trade, between trade and war, so the text of the agreement should not be disrespectful to one country at all. What really deserves no respect is distorted and restricted trade, and war. So all the above principles of equivalence can be expressed in a balanced way. For example, subsidies to trade and investment by either party should be prohibited and punished, monopolies by either party should be broken, infringements of intellectual property rights by either party should be stopped, and compensate for those who are infringed, and the Internet of either party should be free and unimpeded, and so on. This is fair in principle, but in specific cases, it may impose greater constraints on specific entities that violate fair trade rules. This is just as the law is fair, but it plays a different role for offenders and law-abiders.

Once the general tariff confrontation is replaced by the principle of structural equivalence, the scope will be 7.7% or one thirteenth of the original tariff confrontation. This not only greatly reduces the cost of confrontation, but also makes compromise easier and agreement easier to reach, so as to solve the problems that should have been solved. Otherwise, the corpses are everywhere, and the blood flows in vain. Punishments are not upon the criminals. The illegal are at large, and the problem still exists. People don’t know why they fight. Faced with those who advocate a trade war “at all costs”, people will ask why they cannot compromise with one percent or one thousandth of the price they want to pay for a trade war to reach an agreement that can greatly reduce current losses and benefit future generations. This part of the price is paid by the people who should pay, that is, those who do not follow the rules of the market. We can’t support Chinese people who don’t follow fair market rules and hurt other Chinese people just because we are Chinese. When structurality is combined with the principle of reciprocity, compromise is not sacrifice, but the necessary cost of achieving better results, just like the cost of any investment. Because the principle of reciprocity itself is a priceless treasure of mankind. For China, the principle of reciprocity can not only solve international disputes, but also solve the reform problems that China has to solve domestically. It shows the prospect of continuing the road of reform and opening up that has been going on for more than 40 years, so that China’s miracle shocked the world once again.

Recently, I saw Mr. MA Xiaoye’s clarification of “the principle of reciprocity”, and I think it is very necessary. I want to emphasize that the principle of reciprocity was not invented by Americans. China has a long tradition. Confucius said, “do not impose on others what you yourself do not desire” Isn’t it the principle of reciprocity? If you do not want other people’s high tariffs, you should not impose them on others; if you do not want your intellectual property rights to be infringed, you should not infringe on other people’s intellectual property rights; if you do not want others to prevent them from entering their market, you should not prevent others from entering your own market; if you do not want others to get subsidies and gain advantages, you cannot get subsidies to gain advantages. 。 Mencius said that monopolists are “contemptible men”, so the idea of breaking monopoly has existed in China since ancient times. The civil elites in On Salt and Iron states that “Emperor does not say more or less, princes do not say benefit or cost, and officials do not say win or lose”. It means that government departments cannot do business, so state-owned enterprises should reform and finally withdraw from history. In terms of structural reform, China and the United States have not only a consensus in principle, complementary interests, but also cultural overlap. Think of this, feel that there is no important things to fight in the world; if there is no wisdom, there will be a war without reason. Was Edward Gibbon wrong?

 

May 25, 2019 at Fivewoods Studio

May 29, 2019 firstly published by both FT Chinese and China-review Weekly

Britain finally left Europe. But there is controversy. Johnson’s success is still due to that he finally chose the resolution of Northern Ireland temporally no leaving the EU single market. It has been tested by the British Parliament and accepted by the European Union. Procedural justice means that brexit may be a good thing. But ultimately, it depends on the long-term results. In my old article last year, I discussed the problem of Northern Ireland staying in the EU. It seems that there is still some information. Reissue it.

I remember in the British political comedy Yes, Prime Minister, there is a joke about Britain’s accession to the European Union. Sir Humphrey Appleby, the cabinet secretary, said, “We join the EU in order to destroy it.” This is, of course, British self-mockery. Unexpectedly, the task was not completed, but Britain had been unable to bear the hardship of undercover, decided to withdraw, and was almost overwhelmed by the Brexit. Prime Minister Teresa May’s plan to leave European Union ran into a wall three times in the British Parliament and had to ask the European Union to relax its deadline. In desperation, it was postponed to the end of October by the European Union. This is a good news, but there is still no bright future. In Britain, there have been public demonstrations calling for a referendum again, and the Labour Party has also expressed its support. Regionally, most people in Scotland and Northern Ireland in the referendum opposed leaving Europe. The European Union has also said that through a referendum back to Europe is the best option. However, if the previous referendum is negated by a new referendum, the new referendum will also be negated according to the same rule. There will be no peace in Britain. The unrest in Northern Ireland on April 18 and the death of a female journalist illustrate the urgency of the problem. How can this be done?

The problem of Brexit is fundamentally that this voting rule has serious defects, but it is regarded as an undoubtedly superior system. The voting system is based on the principle of consent. When a person agrees with a decision, it means that he thinks it is good for him, at least not harmful to him; when he opposes it, it means that he thinks it is bad for him. So Professor Buchanan argues that unanimous consent is the best rule of public choice, which means that no one is harmed. But in reality, among such a large number of people, it is difficult to agree. So people have to choose second best, voting rules are actually majority rules. But this raises the question that a minority who disagree will suffer from this decision. In the tradition of economics, there is a belief that among different people, their utility is not comparable. That is to say, it cannot be said that two people’s utility must be more than one person’s utility. Therefore, the majority rule in voting does not have a very solid economics foundation, but in reality, it is intuitively better than the rules of the majority obeying the minority, and is accepted as an alternative rule of unanimous consent rule.

However, the majority rule is bound to bring harm to minorities in voting, especially under the simple majority rule. There may be 51 Paul depriving 49 Peter, or even 51 Paul depriving 49 Peter of 2 million yuan in order to get 1 million yuan. Thus, although the majority rule saves the cost of voting, it does harm to minorities, which is called “external cost”. And the deeper the damaged interests are, the more intolerable the outcome of such public decision-making will be. This is precisely the situation of the referendum on Brexit, with about 52% in favor and 48% in opposition. There is little difference between the votes of the two sides. The closer the votes are, the more harm minorities suffer and the more likely they are to be unwilling to accept the result. What’s more, there are regional differences in the results of the referendum, such as Scotland and Northern Ireland’s opposition to Brexit. The result of the vote is not fair because of the difference of sizes of the population in difference of regions. More importantly, since the majority rule is an alternative form of the unanimous consent rule, the effective quality of the latter is transferred to the former, and the result of the majority rule has the authority of the unanimous consent rule. In the public sphere, since the opposing minorities cannot withdraw from the system to avoid harm, they have to only tolerate the public decision imposed on them.

Explanation: Blue represents to favor Brexit in referendum, yellow represents not.Source: BBC News, https://www.bbc.com/news/politics/eu_referendum/results

As for the drawbacks of voting system, Buchanan’s reform plan is that with the increasing importance of voting decision-making, it can increase the proportion of majority rule, such as two-thirds majority, three-quarters majority, and so on. In Buchanan’s view, the Constitution is the most important public decision-making in a country, so it is necessary to increase the proportion of the majority. The same is true in reality. For example, the amendment procedure of the U.S. Constitution is to be approved by two-thirds majority of the Senate and the House of Representatives and three-quarters of the state legislature. The result of the decision on Brexit will directly affect the actual economic interests of millions of people, which can be called “deep”. More importantly, the nature of “leaving Europe” and “staying in Europe” is asymmetric. To leave Europe is to “change the status quo”, while to stay in Europe is to “maintain the status quo”. The key is that “the status quo” is a situation in which people live and experience. In theory, people have grasped all the information of the present situation, but they may exaggerate the shortcomings of the present situation. “Changing the status quo” is to propose a future plan. For most people, the plan has only a rough outline, but no details. Proposers will emphasize the benefits of the scheme and underestimate its costs. This will cause people to overestimate the future plan, so that more people will agree with it, and once the new plan is implemented, people will find the hidden or neglected defects and costs.

Therefore, respect for the status quo is an important principle. Buchanan said, “If an existing institutional structure is really inefficient, then there must be some factors to change or transform it, so as to benefit all members of society or all groups. If an economist cannot find out the ways and means of reform (objectively, of course, there will be many ways and means), then he has no right to say that the existing structure should be changed.” (Freedom, Market and the State, Shanghai Sanlian Bookstore, 1989, P. 257) If we use the voting rule to describe it, we should adopt the unanimous consent rule when we want to change the status quo, which means that no one is harmed, and at least one person benefits, which is what economists call “Pareto Improvement”. For the referendum on Brexit, the reality is to change from a simple majority rule to a more majority rule, for example, two-thirds rule. This can be used not only in future referendums, but also in correcting the mistakes of the previous referendum. In other words, a two-thirds majority is needed if the second referendum is to be held on the Brexit. This can not only correct people’s psychological deviation of cost and benefit of “present” and “future”, but also solve the problem of regional differences in the referendum, that is, it is more likely to reach a two-thirds majority when the votes of all regions are more than a half.

But the premise is to change the rules, which requires a decision by the British Parliament. This in itself adds to the time and difficulty of the political process, and may not be the solution to the problem. In fact, in a January vote, the British Parliament has vetoed a second referendum. More likely, Britain will have to face the existing referendum to solve the problem. This is the dispute between soft and hard Brexit schemes, as well as the different solutions to Northern Ireland’s land boundary problems with Ireland. Soft Brexit scheme refers to the “single market” and “customs union” that Britain still wants to remain in the EU, while following the relevant rules of the EU. Hard Brexit scheme is unwilling to accept these arrangements in which Britain has no rule-making sovereignty. One solution to the border between Northern Ireland and Ireland is that Northern Ireland remains in the European Union for the time being, so that there is no need to establish a hard border between Northern Ireland and Ireland, but only customs control between Northern Ireland and Great Britain. But neither dispute seems to be reconcilable. For Northern Ireland’s plan to remain in the EU for the time being, some argue that this will reinforce Northern Ireland’s independence. The Republican Army of Northern Ireland, which has always been a headache for Britain, laid down its arms just 20 years ago; in Scotland, the independence referendum was approved by Parliament; and in Northern Ireland, the Sinn Fein Party also proposed an independence referendum.

Perhaps Northern Ireland’s plan of not leaving Europe for the time being is a better solution. That’s because Northern Ireland and Scotland are both parts of the UK that are more closely related to the European continent. In the referendum, Scotland voted 62% to 38% and Northern Ireland voted 56% to 44% to remain in the EU. Only in the United Kingdom as a whole, with their smaller populations, will they be rejected by an English-dominated vote. But in this case, a unified de-Europeanization will inevitably hurt Northern Ireland and Scotland. At this time, not only is Northern Ireland’s temporary remaining in Europe not a temporary measure, but perhaps a solution to the conflict. In fact, if Northern Ireland were to remain in the EU’s single market and customs union, it would alleviate Northern Ireland’s independence tendency. It could have both the economic interests of the EU and the political interests of the UK, as well as moderating the disputes over the hard and soft Brexit schemes. As a result, Britain itself maintained both region of soft Brexit and that of hard one. For the British, companies willing to stay in Europe can be based in Northern Ireland, while those willing to leave Europe can be based in Great Britain.

In fact, in the process of China’s reform and opening up, there is a similar situation. This is the special economic zone system. The five special economic zones established in the early 1980s, with Shenzhen as the representative, were mainly established by distinguishing the trade system from the tax system in the mainland. On the one hand, this special zone system promotes China’s opening up, and shows the benefits of free trade in the development of the special zone. On the other hand, the special economic zone is also a demonstration area of reform, in which the market-oriented reform experiment has been extended to the whole country because of its success. However, in a certain period of time, due to the differences in tariffs and other economic systems implemented inside and outside the Special Economic zone, the boundary between the Special Administrative Region and other regions needs to be temporarily separated by a hard boundary. With the development of reform and opening up in the whole country, the economic system and tariffs inside and outside the special economic zone are getting closer and closer, and the hard border of the Special Economic Zone is finally dismantled. For example, the Shenzhen Special Economic Zone Management Line (the second line) is 85 kilometers long and was put into use in 1985. It was abolished after 25 years. In this process, the Shenzhen Special Economic Zone separated the scope of the implementation of the two systems, witnessed and compared the advantages and disadvantages of different systems, and gradually integrated the two systems, which played an important role in the whole process of China’s reform and opening up, but did not cause alienation between the Special Economic Zone and other regions.

On the other hand, the United Kingdom we see today is a historically formed country. One of her greatest characteristics is to respect the particularity endowed by the historical process. The full name of Britain is the United Kingdom of Great Britain and Northern Ireland. Northern Ireland, Scotland, Wales and others are integrated into the United Kingdom by various historical opportunities. Their status is strongly marked by history, and their systems are somewhat different from those of England. For example, Scotland joined the United Kingdom in 1707 by agreement between the Scottish Parliament and the English Parliament, while Northern Ireland was the result of British colonial rule over Ireland and its end, and joined the United Kingdom in 1922 after leaving the Irish Free State. The basic political framework of Northern Ireland and Scotland is somewhat different from that of England, and the legal system is even more different. Scotland is even a region of continental law. So for Britain, it is not difficult to regard Northern Ireland as a special area of the United Kingdom for practical reasons in the dilemma of leaving Europe, but rather in line with British tradition. It may even be considered that the time of the Northern Ireland SEZ should be set at more than ten years.

When Britain has formed two different regions in the process of decoupling from Europe, the advantages and disadvantages of different systems will gradually emerge. If Northern Ireland outperformed Great Britain, it would be a better model; it would also give all the British people a more authentic and convincing message to make a new choice. Conversely, if Great Britain develops better, so does it. In any case, the two schemes are not “future plans”, but can be compared as “current situation”. Another possibility is that in many years of running-in, a mode between the two modes will be found, which will be generated in parallel between the two modes, and will eventually be confirmed by the new referendum. Of course, this is all imagination under the assumption that the public choice process must be like this. There is also an imagination that whether to leave Europe or not is not a public issue, but a private one. That is to say, with the development of big data and artificial intelligence, every enterprise or even individual can choose to leave or stay in Europe. As long as the individual information indicates the choice, the customs will automatically identify and adopt personalized tariff processing. For example, enterprises or individuals who stay in Europe can buy “EU tickets” to enjoy EU tariff treatment. If we can do so, we can really avoid the inevitable loss and conflict caused by the helpless rules of public choice.

May 23, 2019 at Fivewoods Study

Initial Published both in FT Chinese and China-review Weekly in April 29, 2019

The rule of law is the core technology

Sheng Hong

 The US allegations against Meng Wanzhou and the entire Huawei Company are a major blow to Huawei. But its nature should not be exaggerated. For example, some people say that this is a “technical war” between China and the United States. Because Americans do not want to see China’s high-tech surpassing the United States, it is against China’s most successful high-tech enterprise, Huawei. If you think about it, if all these “crimes” of Huawei are established, the most serious consequence is that the sale of Huawei products is prohibited in the United States and some of its allies, but it does not prevent Huawei from being in China – this is the world’s largest market, and others, to sells products. If you say that this breaks the path of Huawei’s research and development, it is even more bizarre. Is Huawei’s technology really stolen from the United States? Can it be a world-leading company by “stealing”? Conversely, if the purpose of the Americans is to suppress China’s high-tech development by suppressing Huawei, it seems to be very It is ridiculous. This is to assume that Americans also believe that by stealing technology, they can become the world’s leading technology power. If the Americans really think so, there will be no American technology today; if the Chinese think that the Americans think so, then China has indeed no hope to catch up.

The development of science and technology is not based on stealing, which is very clear. Because stealing always has something to steal, it is original. So original things are better than stealing things, and the way to create original things is better than that of stealing. The reason why original science and technology can develop rely on the environment for growing. This mainly refers to the institutional environment. For a society, this includes universities and research institutions for free discussion, fair debate and open communication, including the sharing and dissemination of public knowledge, as well as the intellectual property system. For an enterprise, it is in this institutional environment to establish a R&D team, which is called “going concern” by Commons. For this concept, I said in an article entitled “Intel’s Success and Operational Institutions”, “It seems to be more appropriate to use it to describe a steady stream of ‘production’ knowledge…. The production of knowledge is a dynamic tradition is like a river that stays up all night and flows. It must exist for a long time, and there will be enough opportunities to try and error; it must have a tradition of accumulation, in exchange for the fruits of knowledge by the cost of trial and error, and avoid the try and error from scratch again; it must be open to the future, and there will be constant innovation.”

If the team that produces knowledge and its mechanism is a big river, “relative to this constantly flowing tradition, any so-called knowledge product, whether it is academic writing, drug formulation, software source code, or computer microprocessor, is nothing but like a freezed cross section of the river; any individual with innovative ability is just a wave in the river; and the production process of knowledge is just a by-product of the existence of the river, much like a ditch excavated by a large river. “So, the true technological ability or source of innovation is this “in-service organization”, and the knowledge products that have been formed are actually only the most end of this technological capability. If you steal technology, you can only steal the last thing, but you can’t steal the “running organization” and its scientific research capabilities. This will not only form your own R&D team and its mechanism, but it will never be able to go ahead. Because it is inevitable that it can be stolen, it is already outdated. The individuals in this team are not that important. Even the best people, if they leave the team and the mechanism, lack the knowledge to complement and promote them, and the probability of success will decrease.

Therefore, between enterprises and between countries, the competition of science and technology ultimately depends on institutional competition. In this case, the most important thing for a company or country is to refine its internal strength, that is, the establishment and improvement of own institutional environment and of scientific research organizations. In this way, external pressure is not worth mentioning. The question is, is Huawei a company like this? Is China such a country? If so, the US government said that Huawei and other Chinese companies are mainly relying on stealing technology to develop it. Is it not a dirty lie? It should be said that the problem is more complicated. Since the reform and opening up, China has been fully open in the fields of thought, scholarship and culture. It has established a system of university and scientific research institutions that have exempted from political interference, and has gradually established an intellectual property system. This provides a preliminary institutional framework for China’s knowledge “production”, including public knowledge and system-protected knowledge, and is also the main cause of China’s science and technology development. In 2017, the number of patent applications in China ranked first in the world, accounting for 40% of the world. Huawei is developing in such a big environment. That year, its number of invention patents authorized was second in China, reaching 3,293.What is superior to other Chinese companies is that Huawei has created its own excellent R&D team. It is a “going concern” with its own rules, traditions and people, so that new technologies can flow out continually.

However, while the new institutional framework for knowledge “production” was formed, the old system of our country did not withdraw. It redistributes the wealth that flows out of the market through financial means, and transfers a large amount of funds that have been used in the market to non-marketized uses. This is the distribution system of scientific research funds in China. Originally, basic research produced public knowledge and required a certain degree of funding from the state. Countries around the world have similar mechanisms. European countries established the National Academy of Sciences in the 17th and 18th centuries, and now countries such as the United States also have National Science Foundations. Then there is the application research with strong externalities, and sometimes it needs state funding. For example, the British Parliament has offered a reward for determining the longitude technology. The Internet is also developed on the basis of the US military network. The problem is that China’s distribution system of scientific research fund  is not only ultra-large-scale, with more than 800 billion yuan per year (compared to about 200 billion yuan in the United States); and the direction is wrong, China’s national research fund uses only 11.6% for basic research (2017, According to the Ministry of Science and Technology data estimates), while 90% of the National Science Foundation of the US federal government is used in basic research.

Even the part used in basic research has a relatively low efficiency in input and output because there is no good identification and evaluation mechanism. Because the distribution of such huge amounts of money is not based on academic rules, market rules or intellectual property systems, but on the distribution rules of administrative agencies. The procedure is that the fund is applied by various research organizations or personnel and is determined by the judging committee. Due to the lack of constraint on power of the authorities in charge of the fund, the judging committees are mostly furnishings, and the competing research organizations and personnel do not rely solely on the superiority of their own research projects to obtain funds, but more to rely on their own resources in the officialdom. Prof. Rao Yi of Peking University and Professor Shi Yigong of Tsinghua University criticized that “doing good research is not as important as having good relationship with officials and experts they appreciate”. Some researchers have analyzed the scientific research situation of colleges and universities in China, and the conclusion is that, overall, “the scientific research performance of colleges and universities is not ideal, only 38.7% of the regions have reached the best state, and most of the rest are in the stage of diminishing returns.” (Zhong Jie, Chen Jingwei, “Empirical Research on the Output Efficiency of University Scientific Research Inputs”, China Science and Technology Resources Guide, January 2016).

On the surface, the number of papers in China in 2016 has surpassed that of the United States, ranking first in the world. But Professor Shi Yigong warned that there are too many “garbage” papers in China. The reason is that China’s scientific research system relies on government funds and uses quantitative indicators as evaluation criteria. As Professor Steven Cheung proposed “the law of fulfillment”, when the unit of measurement of the price is determined, the seller will try to fulfill the requirements of the unit of measurement, ignoring other aspects. For example, if the diamond is priced only in carats, the seller will not pay attention to color, cut, and flaws. If you only use the number of papers as the standard of hero, there is definitely a problem with quality. The evaluation system can of course be further evaluated by the “impact factor” of the publication, but this is just another “pricing standard” and a new round of “law of fulfillment” effect will emerge. Not only can a large number of academic journals in China be able to cite each other to improve the “impact factor”, but it will also damage international journals. Since publishing a paper in an international academic journal is an evaluation criterion, it can bring bonuses as well as job title evaluation, as well as research funds. The idea of playing international journals is a natural result.

Mu Yunqiu and Jiang Xiaoyuan pointed out that the trend of “open access” in academic journals that has emerged in recent years is essentially a benefit of academics. Although it cannot be completely denied, it is combined with China’s scientific research system, but it has formed a cycle of “willing of both.” Under this trend, international journals such as Nature, Scientific Data, Science Report, Lancet and Cell have also created “Open Access” sub-publishes to absorb silver of low-quality papers can be as high as $5,000 each. The biggest source of funding is China. It is estimated that “Chinese authors published a total of 69,051 open access papers in 2017, … the total cost of contribution is about 760 million yuan.” They pointed out that the proportion of Chinese papers in the notorious Tunor Biology is as high as 65.5%. Oncotarget is as high as 80.3%, and the International Journal of Clinical and Experimental Medicine has reached an astonishing 95.3%. It is simply a US journal tailored for Chinese authors!” (“Science Publishing Utopia: From Open Access to Predatory Journals (Second), “Reading”, No. 10, 2018)

If the national research fund for basic research is not ideal, then it will be even worse for commercial purposes. This is because basic research has theoretical ambiguity and uncertainty, and it is difficult to judge the advantages or disadvantages of scientific research. Commercial research has a clear purpose, and it is easy to evaluate from the market point of view. However, if it is distributed mainly with power and relationship, it will deviate more from the optimal configuration. According to the National Bureau of Statistics, in 2017, the government research funds of China’s scientific research institutions were about 202.6 billion yuan, accounting for 83% of all their expenditures; the government research funding of universities was about 80.5 billion, accounting for 63%.Due to a large part of government funds, 82% of research institutions and 33% of universities are used for applied research and product testing, but adopt a attitude toward basic research, that is, no practical effect, resulting in people after the publication of a paper or patent application. , no longer care; and because of the lack of market linkages between scientific research institutions and enterprises, a large number of scientific research results are more hidden behind the surface of the results, and cannot enter the enterprise and the market. Therefore, the problem of transformation of results has always been a difficult problem for scientific research institutions within the system of China. According to the “China Patent Investigation Report 2017” issued by the State Intellectual Property Office, the patent application rate of scientific research institutions in China is about 35.4%, and the ratio of colleges and universities is only 22.6%.

Enterprises are directly facing the market, and should rely more on the intellectual property system. In this respect, the performance of state-owned enterprises is far less than that of private enterprises. In 2016, although the original value of fixed assets of state-owned and state holding industrial enterprises accounted for 45% of all industrial enterprises above designated size, the human resources and funds invested in research and development accounted for only 7.4% and 2.6% respectively. What is even more shocking is that in the context of the growing R&D investment of most Chinese companies, the R&D investment of state-owned enterprises has been significantly reduced year by year. From 2011 to 2017, the manpower input decreased from 148,871 person-times to 55,692 person-years (see chart below); R&D expenditure decreased from 467,934,400 yuan to 213,367,000 yuan. The reason that can be guessed is that, first, state-owned enterprises rely more on the research and development of state-owned scientific research institutions. Second, state-owned enterprises have no incentive to research and develop. In other words, state-owned enterprises do not rely on the intellectual property system and market. According to the National Bureau of Statistics, in 2016, state-owned enterprises only accounted for 3% of all valid patents. That is to say, non-state-owned enterprises are the main force in using the intellectual property system. In 2017, the turnover of China’s technology market was 1342.4 billion yuan. The funds from the market far exceeded the funds from the government. According to the above ratio, these funds mainly support the research and development of non-state-owned enterprises.

Source: National Bureau of Statistics website.

But this does not mean that state-owned enterprises are more suitable to use government funds. In an article entitled “Does government subsidies promote the improvement of corporate patent quality?”, the author concludes that “government subsidies have a significant role in promoting the quality of private enterprise patents” but “failed to effectively upgrade the quality of the patent of state-owned enterprises, on the contrary, has a certain inhibitory effect.” This is because “state-owned enterprises and the government have a natural connection”. Because “the government controls the pricing and distributing power of key elements such as land, capital, labor, etc., state-owned enterprises are more inclined to choose to establish rent-seeking links with the government to obtain excess profits. Or rent-seeking income.” The authors also found that “in areas where intellectual property protection is more perfect, government subsidies have a more significant effect on the improvement of corporate patent quality; on the contrary, in areas where intellectual property protection is less perfect, government subsidies have an inhibitory effect on corporate patent quality” (Kang Zhiyong, Science Research, No. 1 of 2018).This conclusion can also be applied to different types of businesses. Compared with private enterprises, state-owned enterprises are less dependent on the intellectual property system, and there is also no incentive mechanism for technological innovation within them. A large number of inventions are regarded as service inventions, and only a small number of rewards are given.

This seems to be different from people’s impressions. Isn’t there a lot of state-owned enterprises that have created leading technology? State-owned enterprises have an advantage, that is, monopoly power to the domestic market. When foreign companies want to enter the Chinese market, these monopolistic state-owned enterprises use the huge domestic market as a bargaining chip to force foreign companies to submit. The key is that when they acquired foreign technology at low prices, they claimed that this was a technology of “independent innovation”. One of the most typical examples is high-speed rail technology. On the Internet in China, it is full of words that “high-speed rail is China’s independent innovation technology”, but an article entitled “On the promotion in independent innovation of China’s high-speed rail technology by government procurement  ” said, “the railway department represents the government as the procurement entity. China’s huge railway equipment procurement market and railway sector are the largest and most powerful single consumers in the domestic market. These factors have strong attractions and competition to Western companies such as Siemens, Bombardier and Alstom”, “finally led to the introduction of advanced high-speed rail technology at a lower price” (Xu Wei, Pan Lei, “Kehai Story Expo Science and Education Forum”, 2011).Among them, “single consumer” “introducing advanced technology” seems to have explained the issue.

It can be argued that the claim that a certain imported technology is China’s independent innovation technology is the greed of the relevant administrative departments or state-owned enterprises in the absence of innovative capabilities. According to industry insiders, in the presence of national leaders and foreign experts (he can’t understand Chinese)，the former railway minister Liu Zhijun announced that China’s high-speed rail technology is independent innovation .However, after Liu Zhijun’s fall, there was a controversy over his approach. Regardless of the pros and cons, it is acknowledged that the high-speed rail technology was introduced from Germany, France, Japan and other countries, but the pro-Liu faction affirmed his introduction, while the anti-Liu faction slammed him for suppressing domestic independent research and development for the purpose of introduction. Pro-Liu faction said, “In order to obtain more orders, Japanese, French, Germans and Canadians are competing to push prices down.”The price is lower and lower.” “After three years, the Ministry of Railways bids for  trains with true speed of 350 kilometers per hour, the price quoted by Siemens is cheaper than the 250-kilometer train three years ago, and promised to sell the whole vehicle manufacturing technology for 80 million euros, so that Liu Zhijun can announce ‘having independent intellectual property rights’ to the media.” (Kato Kato, “How does Liu Zhijun succeeded a high-speed railway in China?”) If we understand the institutional background of state-owned enterprises in technological innovation, know that they can neither effectively use the intellectual property system nor even effectively use government subsidies. The probability of introducing technology called “independent innovation” is great.

If the above discussion is correct, we can know that the development of science and technology in China over the past few decades has mainly relied on the promotion of private enterprises in the context of the intellectual property system and the market system; and the technological Innovation of the state-owned sector in our impression is more likely to be the result of “low-cost introduction of foreign technology” + “propaganda for independent innovation”. The reason why they do this is to maintain the traditional scientific research system. It consumes more than 800 billion yuan of national financial resources each year. The actual effect is very poor, but it is the cake of interest groups. Although this phenomenon has been noticed by the scientific and technological circles and the government, and it is said that the national research fund is like “Tang Seng meat”, there have been some minor reforms, but this system still stands, perhaps the result of such false propaganda. However, although this has deceived society and the people for quite a long time, it happened to give foreigners a strong impression that China’s technological development mainly relies on government subsidies and uses the Chinese market as a bait to force foreign companies to transfer technology at low prices. Take a look, this is one reason why the United States complains about China’s “unfair trade”.

However, the issues of the intellectual property rights and government subsidies presented by the Sino-US trade war can make us think about what is the problem of the government-led research system. In short, that is that it needs the result without the process, the end product without the mother machine, and the short-term visible results without long-term institutional basis. Under this dominant concept, apart from the achievements based on statistics and self-propaganda, China will never be able to advance to the forefront of science and technology; on the contrary, it will be criticized by other countries on the basis of misunderstanding. The solution is to reverse the concept of putting the cart before the horse. This is a traditional Chinese view. There is an old saying in China that “it is better to teach fishing than to give a fish.” This sentence can also be said in reverse. “It is better to learn fishing than to eat a fish.” Fish is only the result of fishing, and intellectual property is only the result of the institutional structure that makes it. Broadly speaking, this “institutional structure” is the rule of law. Why? Because it provides all the institutional conditions for knowledge production and intellectual property. Such as personal freedom, freedom of expression, freedom of communication, property security, judicial justice, academic tolerance, open information, free enterprise operation and intellectual property protection.

The most characteristic of the “all institutional conditions” of the rule of law is that it has nothing to do with any particular purpose, and it is naturally seems that it is not directly related to technological innovation. However, this is the biggest advantage of it. As Hayek said, the core of the rule of law is a set of “rules of just conduct”. One of the conditions for the working of this set of rules is that it does not target any specific purpose, so it is abstract, universal, and generally fair, and can also become an environment of environment for technological innovation .He said, “The ‘values’ which the rules of just conduct serve will thus not be particular but abstract features of an existing factual order which men will wish to enhance because they have found  them to be conditions of the effective pursuit of a multiplicity of various, divergent, and unpredictable purposes.” It is precisely because of this characteristic that the function of the rule of law, in the overall and long-term perspective, is the nature that best promotes all aspects of humanity’s purpose, and easy to be ignored by the utilitarian. To compete in science and technology by means of violating the rule of law is to win small games at the expense of losing big games. It is their violation of the rule of law that makes our science and technology will never lead. If the human wise man has already told us this connection, if we are still dull and ignorant, then we cannot always blame the ancestors.

Law in English means natural law, including the rules of nature, as well as the rules of human society. Scientific and technological innovation must also follow natural law, otherwise it will be inefficient. In short, the basic resource of technological innovation is the human brain, and the most fundamental mode of technological innovation is to form an institutional structure that can maximize the spark of wisdom in the human brain. The human brain is the most unpredictable resource. We don’t know what kind of whimsy it inspires from whose head. However, this is the original intention of “innovation.” If this is the case, this institutional structure must be the most inclusive, allowing exploration in all directions; the most impartial, the most accurate match to the contribution; the most efficient, all potential brains have the opportunity to burst inspiration. This is an academic system with fair exchange and without restriction on discussion, a market system that allows innovators to work according to usefulness, and an intellectual property system that allows innovators to get a fair return. Under this institutional structure, people don’t know who will be the next Newton or Einstein, Edison or Jobs; but people are convinced that the innovators emerging under this institutional structure will certainly go far beyond the imagination of planers based on existing knowledge.

However, as mentioned above, the problem of China’s science and technology innovation system is precisely that there are too many resources allocated by the government, and too few resources are allocated by means of academic rules, markets and intellectual property systems. This is not only a problem of inefficient resource allocation, but also corrupts scientific research groups, allowing them to focus more on power and relationships than on scientific research itself. One more problem is that the system itself becomes a cake for those who have the power to decide. They may know from the beginning that it is ineffective, but it will bring huge benefits to themselves. These people are the ones who have power. They will not only promote the reform of this system, but also reduce the proportion of resources allocated by power, but will continue to expand it. If there is no restriction on power, and power itself is naturally expansive, this distorted scientific research system will be difficult to reform, because once the size of the national research fund is to be reduced, the power role in the science and technology evaluation system will be constrained. The boycott of the relevant power department. The rule of law is intended to limit power. Because “rule of law” is the rule of law, and rule by men, that is, everyone, including the most powerful, must obey the law, and the rule of law is the panacea for healing this ailment.

To rule the rule of law, it should not be used as a tool to achieve the current purpose, but to pay attention to the generality of the rule of law, the impartiality guaranteed by legal due process, and the predictable long-term stability. The so-called “general” refers to the full exercise of intellectual property rights, relying on the complete system and comprehensive environment related to the protection of intellectual property rights. This is the institutional structure covering all aspects of society. This is because a citizen or enterprise is the main body of intellectual property. If the personal safety of the citizen or the property rights of the enterprise are not protected, the benefits of invention and innovation will not be protected. If we see that personal freedom or corporate property rights are not protected, we also think that intellectual property is virtually unprotected. Even accidentally, this lack of protection of human rights and property rights directly hurts the scientific research itself. For example, Li Ning, an academician of the Chinese Academy of Engineering, is suspected of embezzling public funds. No matter how the judicial decision is made, the most important thing is that the case has been dragged on for a long time. Since 2014, Li Ning has been detained and has not been released on bail according to law, so that the defendant can bear the cost of judicial inefficiency. It is a violation of personal freedom. Therefore, when we saw that the Chinese government responded to the Meng Wanzhou case and the two Canadians arrested were not on bail pending trial, they must think that this is actually the same as Li Ning’s experience and damaging China’s technological innovation.

Second, the purpose of the rule of law is a fair ruling. Although the Coase Theorem assumes that when the transaction cost is zero, the judge’s arbitrary ruling will lead to the optimal allocation of resources, but Coase pointed out in his famous paper “Social Cost Issues” that in the real world where the transaction costs are positive, the fair ruling by the judge has an important impact on resource allocation. Thus, a fair ruling is also an important factor in ensuring the optimal allocation of research resources.T o ensure a fair judgment, the most important thing is to ensure that the legal due process is followed. In China’s reality, these due process are often not implemented. If the court ruling is often made in advance by the “Political and Legal Committee”, it violates the principle of the judge’s independent and unintervined trial (Article 113 of the Constitution); and as the “TV confession” that is not uncommon in China, it violates the principle of  “no forcing any person’s self-incrimination” (Article 50 of the Criminal Procedure Law).Article 33 of China’s Criminal Procedure Law stipulates that criminal suspects “have the right to appoint defenders” from the very beginning, but after the Chinese government detains two Canadians, for a long time their family members have not  been allowed to visit them and they are not allowed to hire lawyers. In connection with the case, that the outstanding scientists and technology entrepreneurs, Chu Jian, he was in the detention house for nine months, “it is stipulated that he cannot meet anyone, including lawyers”, we can know that this is just a part of violation of the general phenomenon of legal due process, this is the harm to the Chinese people through hurting foreigners. It goes without saying that this includes the destruction of China’s technological innovation and its environment.

Third, the rule of law needs to give people long-term and stable expectations. Only making people believe that law is still valid in the future, people will use it as the standard to decide the current action. Some economic historians attribute one of the reasons for modern economic development to “detour production”, that is, the cycle of production becomes longer, including the innovation cycle, which requires longer-term investment decisions. The significance of statute law lies in the fact that the basic rules are announced in advance, giving people a general expectation. In our courts, people can’t sue for unconstitutional behavior, and the Constitution cannot support everyone’s long-term expectations of the Chinese legal environment. Article 35 of the Constitution stipulates freedom of expression, but in reality the creation and publication of academic journals are severely restricted, and the book box is still subject to review and licensing. Article 41 of the Constitution stipulates freedom of communication, but unconstitutional Internet firewalls block platforms like Google Scholar. Academic journals that I have subscribed to abroad have also been lost for four consecutive issues. Therefore, not only the written Constitution can not give people a stable expectation, but also directly damages the information environment of scientific research. The government often replaces the law with opaque policies for the current purpose, regardless of the long-term stability of the law, thereby making things that undermine the expectations of the law. When we see such problems as pointed out by the US Government’s Article 301 Investigation Report, we will not be unfamiliar for its involving infringement only to US companies, Chinese companies also seem to have known the case.

With such an understanding of the Meng Wanzhou and Huawei cases, the correct approach should be to fight under the rule of law. We must strive for the rights of Huawei and China, while we must respect the principle of the rule of law. The so-called “rule of law” refers not only to the principles of common law, but also to the principles of Chinese law. From the point of view of the text, there is no big difference between the two. The only difference is the implementation aspect. On the principle of bigness, there are independent trials, presumption of innocence, no doubts, no self-incrimination and other principles. In the procedural, there are defendants who have the right to hire defenders, have the right to be released on bail, and so on. However, the Chinese government’s move is basically an action outside the legal due process, attempting to win a single game through extra-legal pressure; and the Canadian and American governments’ moves are within the legal due process, which will experience procedure verification and win a long-time victory. The results will be very different. The so-called “technical war” in the way of violating the rule of law actually destroys the basic environment for the development of science and technology, and ultimately leads to the failure of the “technical war.” Therefore, putting Huawei’s efforts into the legal due process will not only increase Huawei’s chances of winning, but also improve the institutional environment for China’s technological development. We have seen that Huawei has taken actions within the legal process, including accusing the “political motives” of the Meng Wanzhou case, including counterclaims against the Canadian government and the US government, which are all worthy of recognition.

When people say that Huawei is facing a “technical war” between China and the United States, it seems to pay more attention to the end products of the intellectual property system called “core technology”, and seriously underestimates the intellectual property system and the rule of law itself which guarantees the system effectiveness. .Lao Tzu said, “The great way is the simplest”; the same, the great way will be obvious. Paradoxically, the end products of knowledge are often secretive, with a wide variety of categories, and require payment of fees; and the most important institutional conditions – the rule of law, is clear and open to the world, the rules are simple, and can be given free of charge. However, the fact in China is that the rule of law knowledge without patent protection is full of houses, but people do not want to implement it; and the end-knowledge products with intellectual property protection are fascinating for people to catch. In fact, if you want core technology, the key is outside the core technology. Although China has established an intellectual property system and made great progress, in 2017, core patents only accounted for 1.6% of the total authorized amount, equivalent to 9.76% of the US core patents (China Merchants Securities, “Comparison of Chinese and American patents in all aspects: Chinese patents are catching up, July 23, 2018).The gap should lie more in the rule of law environment. Some people may say that in the initial stage of China’s technological development, the best strategy is to use ready-made technology. Even so, China is now at a turning point – are they to continue picking the fruits of other people’s trees, or planting trees by themselves?It’s happened that stupid Americans are forcing the Chinese to plant trees. Let us turn their trick to our own use.

 

March 22, 2019, at Fivewoods Bookroom

March 29, 2019 published firstly in FT Chinese and China-review Weekly

 

 

Note: Recently, the authorities is talking about “anti-monopoly”, but the target is not real monopoly, that is, monopoly created by the administrative departments of the government. On administrative monopoly, we have done in-depth research in 2013, and updated the data and revised it in 2015. The title of the research report is “the cause, behavior and elimination of China’s administrative monopoly” (Second Edition). Now I issue the abstract of the report again. ( December 19, 2020)

The Causes, Behaviors, and Termination of Administrative Monopoly in China (Second Edition)

by Sheng Hong, Zhao Nong, Yang Junfeng

May 10, 2016

Abstract

In short, the “administrative monopoly” is a kind of monopolies established by the administrative departments. The definition of Administrative monopoly is that an administrative department, through issuing administrative documents (such as regulations, statutes or suggestions), grants the monopolistic power(s) to business agents–enterprises or profit-making administrative bodies, which are realized as accessing to exceptional facilities and advantages, forming different degrees of monopolistic forces and the status of the situation by setting of barriers to entry and regulating prices.

Granting the monopolistic powers to enhttps://mp.weixin.qq.com/s/QDkE4kS-d01IjYaDPCh0QQterprises is important economic decisions and a change of basic economic institutions (the “socialist market economy”). Under the Law of Legislation, monopolies shall be established by the legislature. According to the principle of law reservation, monopolies, without establishments of legislature, are the damages to economic freedoms of potential competitors and choosing rights of consumers. In practice in China, most of administrative monopolies are established by formal files of administrations. This situation is a kind of self-granted. The monopolistic powers established by the administrative public powers are unconstitutional and illegal at some level.

Broadly, the Administrative departments use their superiority over drafting legislative acts to establish monopolistic powers in favor of some enterprises through a weak legislature, also regarded as administrative monopoly. Since reform and openness, China’s constitution has been amending several times. There are great changes in its fundamental principles, such as adding principle of “socialist market economy”, and that of “that the state encourages, supports and conducts non-public economy”. The laws including content of administrative monopolies are violated from the principles of constitutions.

Almost all of the main administrative monopoly industries discussed in this study is evolved from the complete planned economy. After years of fiscal system reform, the Central Government’s main sources of revenue have become taxable income. Central Government has incentive to reform state-owned enterprises but no incentive to abolish the monopolistic powers. Instead, granting administrative monopolies as preferential policies to State-owned enterprises could be a way to reduce the fiscal burden from State-owned enterprises.

With the success of China’s economic reform, huge domestic markets came to the fore, which in turn highlighted the value of monopolies on these markets. Because the enterprises with monopolistic powers do not need to hand in profits, and have no ceilings on the level of wages and bonuses, they keep all the profit due to administrative monopolies. As interest groups, they have sufficient motivation to strive for greater administrative monopolies.

“In-house Lobbying” refers to the behavior that top managements of State-owned enterprises get administrative monopolies through lobbying administration officials. One of the factors is that industry officials and executives in firms can transform identities; mutual access to each other’s serving area. This is an important indicator of the administrative monopolies of industries. It appears in several industries in our research.

The above “In-house Lobbying” successes because of the existence of “departmental legislation.” The existence of “departmental legislation” is because under the political structure of China, the lacking of practical constraints for administrations leads to the administrative departments, beyond their authorities, influence legislation both directly and indirectly. The so-called “departmental legislation” is administrative-led or even manipulated legislation. Broadly, “departmental legislation” also means that the administrative departments practically make or amend the laws.

The administrative monopolies perform as setting barriers to entry and regulating prices, while the latter can be divided into two categories. One is sellers’ price- regulating; the other one is buyers’ price-regulating, leading to the owners of administrative monopolies may obtain resources and other inputs at discounted even zero prices.

As long as the institutional barriers to entry exist, even if the other conditions are the same as perfect competition, under some level of demand, administrative monopolies may lead to high prices, low production and welfare losses.

Monopolistic, high prices caused by administration’s setting barriers to entry redistribute the original consumer surplus to corporate profits. It is an unfair distribution of income distortions. If using the monopolistic profits as the way which market decided, they can produce a certain number of products. The value of these products (in broad terms, can also be combined with consumer surplus) is the opportunity loss caused by administrative monopolistic (distribution of distorted part), known as social welfare losses.

Buyer’s price regulating (low or zero factor prices) is a serious distortion of income distribution. It transfers huge wealth which originally belonged to the State or other economic agents to the State-owned enterprises. It is clearly unfair. We assume administrative monopolies use the rents that they miss to pay to occupy more factors of production such as labor, land and capital. If these rents were used in other ways that determined by the market, they can produce more products. The value of these products (can also be combined with consumer surplus) is opportunity losses caused by distortions, also known as social welfare losses.

Administrative monopolies transfer wealth in the form of currency from consumers to the monopolistic companies (including their management and staff), which did not use these monetary resources to produce a quantity of products they should do. Take the perspective of society, a large sum of money does not have corresponding product, which will inevitably promote inflation.

In recent years, adjusting the deposit reserve ratio, rather than adjusting interest rates, increasingly becomes the primary means of implementing monetary policy. Frequency of adjusting is very high. It is up to 10 times a year (in 2007). Adjustment range is up to 14%, so that the highest rate is 21.5%. This is “unusual”. From the point of view of bank, adjusting the reserve requirement ratio and interest rates has a noticeable difference. In particular when implementing tightening policies, increasing reserve ratios will enable banks to avoid the huge costs of raising interest rates.

Because public powers are integral factor of administrative monopolies, and impetus of governmental departments in the formation, maintenance and strengthening of administrative monopolies, credibility and authority of the relevant administrative departments were considerably weaken and undermined, while administrative monopolies damage economic efficiency and social justice. Therefore, state-owned enterprises and their control over the national economy (in fact, is the administrative monopolies) is the real “threat to ruling” rather than “ruling basis”.

Figure of welfare loss and distribution distortions caused by administrative monopoly

The deep grey part in the figure is the net loss of social welfare caused by administrative monopolies, we called it “social welfare loss I“; The light grey part in the figure is distribution distortion cause by sellers’ monopolistic (regulating) prices, we called it “social welfare loss II“; the grey part in the figure is distribution distortion caused by buyers’ monopolistic (regulating) prices (lower or zero resources prices), we called it “social welfare loss III“.

Estimation of Social welfare loss I: the net social welfare losses of China Telecom, China Mobile and China Unicom from 2003~2013 is about 93 billion RMB. From 2003 to2013 the cap of net welfare loss of telecom industry is about 573.6 billion RMB, and the net social welfare losses of oil industry is about 1969.6 billion RMB.

Estimation of Social welfare loss II: The annual administrative monopoly rent of telecommunication industry is about RMB 22.3 billion on average. It is also the amount of transferred consumer surplus. Oil industy of monopolistic profit brought about by high monopolistic prices is about 1328.9 billion RMB. Salt industry monopolistic profit is as high as RMB 17.7 billion per year. This also is the loss of consumers each year. These numbers are the amount of social welfare losses.

Estimation of Social welfare loss III: From 2001 to 2013, the amount of land (for industrial use) rent which CNPC miss to pay is about RMB 250 billion; the amount of land (for gas station use) rent which CNPC and Sinopec miss to pay is about RMB 273.8 billion; the oil royalty they miss to pay is about 560.4 billion RMB; the financing costs which the big three in oil industry together miss to pay is about 392.6 billion RMB. These numbers are also the amount of social welfare losses.

The mean of difference between deposit interest rate and loan interest rate in most market economy countries is in 1%~2%, but the difference between one-year loan and deposit rates is3% over several years in China. This is achieved by lowering 1.5% to the deposit rate. According to average balance of the 2013 national deposit which is about RMB 98.06 trillion, the estimation of the individuals and institutions nationwide interest loss is as high as RMB 1.4709 trillion. It is equal to 2.5% of GDP that year.

Generally, it is still very difficult to purchase train tickets. It implicates there is a general supply shortage on ordinary train. From Beijing-Tibet Expressway and Qingdao-Yinchuan Expressway, we can tell the supply shortage of general railway freight. Especially since 2010, there are frequent traffic jams in Beijing-Tibet Expressway which are over 100 km and up to 10 days. Number of trains on the high-speed railway is lower than designed normal levels, which means the high-speed railway resources cannot be fully utilized. This suggests that on the ratio of investment in high-speed railway to ordinary railway is severely misallocated.

Report estimates that when the number of the high-speed railway trains departed is up to 187 pairs daily, the utility created by unit cost of high-speed railway is equal to ordinary railway. As we know, the busiest Beijing-Shanghai high-speed railway depart only 90-105 pairs of train daily. This means that the decrease in the construction of normal railways, caused by every kilometer high-speed railway constructed, will lead to a net social loss. In accordance with the relevant data, the amount of welfare losses caused by the misallocated resources between high-speed and conventional railway is about RMB 89.7 billion per year.

The total amount of social welfare loss I（including the loss caused by resources misallocation in railway）, social welfare loss Ⅱ and social welfare loss Ⅲ caused by administrative monopolies is RMB 2273 trillion in 2013, while the amount of latter two is RMB 1.9911 trillion, which is such a quantity of money without corresponding products and services, and inevitably brings about inflation pressure. Specifically, it will cause inflation by 2.5%, equivalent to 250% of commodity-retail-prices-index inflation that year.

Taking adjustment of reserve requirement ratio as an alternative means of adjustment of interest rates, the Central Bank raised deposit reserve ratios by 0.5% (as of June 20, 2011). The equivalent interest rate change is 0.375%. It can save the banks from paying interest on deposits of RMB 321.7 billion.

Taking adjustment of reserve requirement ratio as an alternative means of adjustment of interest rates, the Central Bank raised reserve ratios six times in 2011, each time by 0.5%. It is equivalent to reduce the interest expense by RMB 1.5623 trillion for banks or their main borrowers.

Although there are some shortcomings in current Anti-Unfair Competition Law and Anti-monopoly Law, there are still some normal content to constraint behaviors of administrative monopoly. The monopolistic behaviors the Anti-monopoly Law defines include achieving monopolistic agreements between business agents, abusing monopolistic positions, concentrating firms for purpose of excluding, limiting competitors. There is a certain chapter in the law to state forbidding “abuse of administrative powers to exclude and to limit competition.”

It should establish “legislation evaded rule” for drafts of making or amending laws to establish specific monopolies. In other words, the administrative departments that related to specific monopolies should not draft Bills. At least it should be drafted by a neutral agent(s) that authorized by legislature. Moreover, the legislature should organize the Committee of experts to consult about the drafts establishing of monopolies for specific industries. Furthermore, the establishing of a specific monopoly should be treated as a single monopoly, that is, we cannot use “category” as the unit to create a monopoly. For instance, it cannot set “national economy related” as a category.

Administrative departments do not have the power to establish specific monopolies. Any administrative department establishes monopoly through regulations or statutes is illegal. Setting up the rules that related administrative departments should evade the drafting of related “implementation details” or “regulations”; or strengthen the reviewing on drafting of “implementation rules” of specific laws to prevent adding the articles related to establishing or expanding of specific monopolies.

The power that administrative departments can regulate the market price should be empowered by the legislature. When an administrative department using its price regulating power, it should be bound by the Price Law, going through fair hearings. In particular, it should differentiate between adjustments of interest rate to implement monetary policy by the central bank and the interest rates of commercial banks, for avoiding regulation of commercial bank interest rates in the name of implementation of monetary policy.

The Constitutional resource of public-owned economy and state-owned sector could be used to monitor and constraint the managements of state-owned companies more effectively. Because public resources and assets should be owned by all people, the supervision of these resources and assets should be strengthened. It must be assured that these assets should not be controlled by managements of state-owned companies. Because it is difficult to monitor public resources and assets on institutional and technological term, it should be emphasized in Constitution, and establish corresponding institutions and rules in laws.

Standing Committee of the National People’s Congress, as a specialized constitutional supervisory authority, can and should review and terminate suspected unconstitutional establishment of administrative monopolies. It should declare unconstitutional and terminate unconstitutional ones in accordance with the current Constitution. At the same time, based on the provisions of existing constitutional law, the Law of Legislation, empowered authorities (mainly as Standing Committee of the National People’s Congress or the State Council) terminate, revoke the existing, various administrative files for establishment of administrative monopolies respectively.

The judicial reform proposals of breaking administrative monopolies including: first of all, allow clients (but is not limited to enterprises) directly sue the enterprises suspected of administrative monopoly; at the same time, prosecution is not limited to request monopolistic enterprises to bear civil liability, but also have the right to request the Court to review the legality of monopoly.

Secondly, emend the relevant legislation, so that courts could have the substantive power to review the cases of administrative monopoly and to dispose monopolistic status.

Thirdly, renovate existing antitrust administrative enforcement mechanisms. The keys are to consolidate on institutions and functions, improve authority (for example, it cannot rely on “recommendations to the superior authority”), and legitimate the process (the core is to ensure a fair, transparent and participatory, not internal operations).

Fourthly, it should establish the public prosecution system to administrative monopolies.

Reformation of breaking administrative monopolies at the administrative level as below:

Firstly, directly encourage enterprises, including private enterprises and state-owned enterprises, enter to the areas which absence of legal provisions of monopolies. For instance, in the petroleum industry, there are only the administrative files, but no legal restrictions to enter. The administrative departments that impede enterprises to entry the industries mentioned above should be imposed administrative penalties.

Secondly, abolition and prohibit self-granted monopolies of administrative departments (or industrial associations controlled by them) by executive orders.

Thirdly, require the Ministry of Finance, the Ministry of Land Resource and other related departments to set up specialized agencies to verify the number of public natural resources  (including land, licenses of mining, etc) occupied by enterprises, and charge rents from resources holders at market prices.

Fourthly, require State-owned Assets Supervision and Administration Commission of the State Council to set a reasonable state-owned enterprises ‘ wage ceiling according to the levels of average wage in society, and punish the people who get wage above the bound.

Fifthly, request the Ministry of Finance to establish specialized agencies to monitor state-owned enterprises, particularly central state-owned enterprises, to give recommendations on the distribution of profit to the State Council, to strict implement the profits surrender, and to supervise reinvested part of profit.

Lastly, promote the state-owned enterprise to withdraw from the profit-making area in the long run.

According to the media, the Ministry of Public Security issued the “Regulations on Public Security Organs’ Maintenance of Civilian Police Law Enforcement Authority” (hereinafter referred to as the “Regulations”).It includes such content that “the police perform their duties in accordance with the statutory conditions and procedures, exercise their powers, and cause damage to the legitimate rights and interests of citizens, legal persons or other organizations,  the individual police officers shall not bear legal liabilities, and the public security organs to which they belong shall be given damages according to relevant state regulations. This content expands the power of the public security organs and their personnel, and reduces and invades the rights of citizens. According to Article 82 of China’s “Legislative Law”, “without basis on the law or the administrative regulations, decisions, and orders of the State Council, departmental rules may not set norms that derogate the  rights from citizens, legal persons, and other organizations or increase their obligations, and may not increase the power of the department or the reduction of the statutory duties of the department”, the Ministry of Public Security is clearly a self-authorization of abusing legislative power.

It has been argued that the “performance of duties and exercise of powers in accordance with statutory conditions and procedures” as described here can be interpreted as “performance in accordance with the law.” So, what is the meaning of “law” here? According to common sense, the law is first of all the law of heaven or the law of nature. A country has its reason and legitimacy only because it protects the rights of citizens. This law of heaven is basically embodied in the written Constitution. The core part is the determination of the constitutional rights of citizens, including personal freedom (Article 37), personal dignity (Article 38), expression Freedom (art. 35), freedom of belief (art. 36), the right to inviolability of private property (article 13), the right to inviolability of dwellings (art. 39), freedom of communication and Secrets (art. 40), enjoy fair justice and basic human rights (article 33), criticize the rights of the government and its staff (art. 41), legal rights of the non-public economy (art. 11) ,and many more. The reason why the public security department was established was to protect the constitutional rights of these citizens. The “law” it relied on was first and foremost the constitution. The “Police Law” regards “supporting the Constitution of the People’s Republic of China” as a primary condition for a policeman. Therefore, the “job” of “executing a job according to law” is a duty to protect citizens’ constitutional rights from infringement.

Since “performing duties according to law” is to protect citizens’ constitutional rights, how policemen can “damage to the legitimate rights and interests of citizens, legal persons or other organizations” as the Ministry of Public Security says? This is obviously a constitutional paradox. Being able to “damage the legitimate rights and interests of citizens, legal persons or other organizations” must be a violation of the Constitution and related laws, rather than “performing duties according to law.” “Performing duties according to law” can only make citizens’ constitutional rights safer. Because these “legitimate rights” are protected by the Constitution and laws. Article 21 of the “Police Law” stipulates that “the people’s police shall immediately rescue the citizens if their personal and property safety is violated or in other dangerous situations.” In other words, when policemen see the act of “damaging the legitimate rights and interests of citizens, legal persons or other organizations”, they should be afraid of that they cannot stop it in time, should they also “perform their duties according to law” and “damage the legitimate rights and interests of citizens, legal persons or other organizations”? “If you string together the substantive meaning of the new regulations of the Ministry of Public Security, is it not that when policemen “damage to the legitimate rights and interests of citizens, legal persons or other organizations”, “they personally not responsible for the law”?

According to this reasoning, the “law” mentioned by the Ministry of Public Security in this “Regulations” is not a constitution or a law that conforms to the Constitution, but is otherwise referred to. In reality, we often see police officers calling “law enforcement”, but doing things that violate the Constitution and the Police Law. Once the parties want to protect their civil rights, they say “obstructing official duties”, which has become a routine. There are cases such as, the police breaking through the door in the middle of the night, restricting without reason on the personal freedom of citizens, and damaging to the property rights of citizens; the tens of thousands of mass conflicts caused by a large number of demolitions each year happened mostly under involvement of the police. None of the civil rights stipulated in the aforementioned Constitution is not damaged. Most of these unconstitutional violations have not been punished and corrected, and they also regard these acts as normal. In fact, as a group, the Chinese police have long neglected constitutional education. It is difficult for policemen to consciously implement the vocation of protecting the constitutional rights of citizens, and they more often regard the orders of superiors as “laws.” For example, when a female police officer in Chongqing recalled the days when she was in labor camp innocently, the police of the task group also knew that it was a wrong case, but they said that “the leaders demand that this be done, so what we can only do is doing the wrong case.” It is dangerous to tell the police that they can damage the rights and interests of citizens when they are unable to discern what the “law” they are relying on is, or they know that the leadership order is wrong but they must be enforced.

In the “Regulations” of the Ministry of Public Security, the reason for proposing its new regulations is that “in the past 40 years of reform and opening up, more than 13,000 public security policemen have died for public.” If they are sacrificed to protect the constitutional rights of citizens, we should mourn for them, but this does not mean that we should conclude that if the rights and interests of citizens are damaged, the “personal police officers do not bear legal responsibility” conclusions. Because this is only a unilateral statistic. In the past few years, how many citizens have lost their lives because of the police? The major vicious cases disclosed by the media include the case of that several police officers plotted to kill people in Fuzhou, Fujian Province in 2001, and the case of the killing by 6 police officers in Zhoukou City, Henan Province in 2004. In 2009, the Mengzi County police murder case in Yunnan, the case of police shooting two people in Guanling County, Guizhou Province in 2010, the police shooting the three-person case in Taipu Temple in Inner Mongolia in 2010, the police shooting in Panjin City, Liaoning Province in 2012, Pingnan County, Guangxi in 2013, the police shot the pregnant women, the 2013 Anshun police murder case, the 2015 Inner Mongolia Public Security Director murder case, the 2017 Xinhua County police shooting and killing case, and so on. The most shocking thing is the Lei Yang case. A person passing by the foot washing shop was unexpectedly died, and no police officer was legally responsible for it.

Some of these police murders are in the name of “performing duties according to law.” For example, the Lei Yang case was due to “catching the prostitution”, and the Panjin police murder case was for demolitions, and it was the “law” of leadership. There is also a wider range of police violations of citizens’ constitutional rights. It is carried out under the name of the so-called “legal”. For example, in the period of Bo Xilai’s administration, Chongqing was arrested in the name of “black society”. As many as 4,000 people. Chongqing police abused torture in illegally established “black bases”, including “tiger benches”, “tables”, “duck floating”, “Su Qin back sword”, etc., as well as mental torture, such as the so-called “politics returns to zero” , “economy returns to zero” and “emotion returns to zero”. Many people were sentenced to death without legal due process and 13 people were executed. When some local governments and their officials forced the peasant land, the police were often used to suppress land-losing peasants, causing a large number of casualties, such as the Panjin land acquisition police murdered one person. According to media reports, we have done an incomplete statistics. From 2003 to August 2014, there were 182 demolitions of malignant incidents, resulting in 484 casualties on both sides of the demolitions, 162 deaths and 322 injuries. More vicious incidents have not been reported.

Some people will say that the example I gave is only an individual phenomenon. Bo Xilai is just an accidental situation and cannot represent the mainstream and the overall situation, actually not. All people are mortal. In the absence of institutional constraints, good people will also become bad. What’s more, the facts show that Bo Xilai is not a only bad leader. Zhou Yongkang is another example. He was the main leader of the armed police. From 2012 to 2016, 23 public security system officials were dismissed, including 5 deputy ministerial and above officials. Someone listed a “list of chilling”, ranking 100 senior officials of Public Security System starting from Zhou Yongkang. Despite this, the Central Commission for Discipline Inspection still believes that the Ministry of Public Security’s anti-corruption efforts are insufficient. The key is not whether the leaders of these public security systems are corrupt, but as a mortal, as long as there is no strong restraint on the system, whether they will consciously be loyal to the constitutional spirit and take the protecting constitutional rights of citizens as their top priority. On the other hand, if our police group only regards the superior order as a “law”, it will inevitably lead to violations of the Constitution and harm to the legitimate rights and interests of citizens. And when they follow the orders of the superiors to “execute their duties according to law” and “do not bear legal responsibility”, can it not cause more harm to civil rights?

The new regulations of the Ministry of Public Security also propose that, in the case that the police individual does not bear the legal responsibility of “damaging the legitimate rights and interests of citizens, legal persons or other organizations”, “the public security organs under their jurisdiction shall compensate the damage caused according to relevant state regulations” .This is even more an embarrassing request. Where does “compensation” come from? Is it not the state finance? Where does the national finance come from? Is it not the money of the people? The logic becomes like this, for the damage to the legitimate rights and interests of citizens, the harming person does not have to bear legal responsibility and compensation, but the citizens must compensate themselves. In a society, if the victims themselves compensate their own losses, how can they stop the perpetrators? Can the victims survive if the perpetrators are encouraged? The contracting three rules issued by the first Emperor of Han Dynasty,  “Killer should be die, hurter and theft should be punished according to criminal “The reason why this three rules can stabilize the hearts of people in troubled times is to say the most simple rules: the damager bears the blame. This is the most basic civilized rule in ancient and modern China and foreign countries. The failure of the planned economy tells us how low the efficiency can be when individuals do not bear the consequences of their actions; when the individual does not bear the consequences of harming the legitimate rights and interests of others, the social damage will be unimaginable. What’s more, the police are not ordinary people. They have violent tools in their hands. Once they are allowed not to bear the consequences of damage, policemen will not be controlled by the public security department; the public security department will also not be controlled by the society.

Finally, we must see that this new regulation of the Ministry of Public Security seems to protect the interests of the police. In fact, it is not the case, but the police are placed in a more dangerous situation. If the police do not protect the constitutional rights of the citizens, but execute the order of the superior leadership to deviate from the constitutional spirit, and do not need to bear legal responsibility, it will inevitably aggravate the tension and opposition between the police and the people. When the consequences are caused, the executer is either a scapegoat for the leader or protected by the leader but revenged privately. The facts also tell us that those police officers who execute wrong orders are not good at the end. For example, Chongqing’s “fighting black heroes” in the Bo Xilai period, Wang Lijun did not have to say, Zhou Hao, who was awarded the “Chongqing May 1st Labor Medal”, committed suicide in 2014. “First-class hero”, Tang Jianhua was arrested and imprisoned, and “first-class hero” Guo Weiguo was awarded 11 years of his sentence, Wang Zhi was sentenced to 5 years in prison, Zheng Xiaolin, Yan Hongbo, but Bo was convicted of conviction for extorting a confession by torture. Some people will say, isn’t it because Bo Xilai’s downfall? But isn’t Bo’s downfall just because he issued a sinful killing order? Moreover, if the constitutional rights of citizens cannot be protected, the police’s own constitutional rights will not be available first. Such as the prelude to Chongqing’s fighting black society, is the cleaning of the police force. More than 900 police officers have suffered from it.

Power is short, and Dao is eternal. In fact, for any police or official, the wrong order to refuse the superior leadership’s violation of the constitutional rights of citizens is the safest option for himself. Many criminal police officers always excused themselves by “executing superior orders.” They expect that superior powers will cover them with impunity, but the result is still the punishment that cannot escape the law. It should be understood that their superiors will eventually lose power because they execute the wrong order themselves. Conversely, refusing to execute the wrong command of the superior is a “care” for the superior. In fact, the execution of the wrong command is a kind of sin, which is called “the mediocrity of sin” by Hannah Arendt. She said that this kind of sin is unforgivable because all people can “obey orders” as an excuse to get rid of their responsibilities, so a society is devastated without any personal responsibility. Most societies have rules in place to avoid this. Article 33 of China’s “Police Law” stipulates that “the people’s police have the right to refuse to execute orders that exceed the scope of the people’s police duties stipulated by laws and regulations, and at the same time report to the higher authorities.” I hope that our police brothers will the rights provisions in the Constitution and Article 33 of the Police Act serve as the golden rule and amulet.

Even if you really perform your duties in accordance with the Constitution and the law, you can’t do it casually and you can’t take legal responsibility. Law enforcement also has procedural and methodological issues. From time to time, we have seen cases of violent law enforcement. For example, on May 17, 2016, a college student in Lanzhou was beaten by the police for shooting police brutal law enforcement; on April 17, 2017, four police officers in Shenyang did not show their documents when they arrested suspects without identified the very person. The police beat the person, then found to have caught the wrong person. On September 1, 2017, the Shanghai police tried to stop a woman’s illegal parking and pushed the woman holding the child to the ground and pressed it. And injured the child; on May 27, 2018, Anhui Lu’an teachers demonstrated for salaries and were beaten by the police; and so on. In a nutshell, there is also a question of how to enforce the law. Correcting a traffic violation error, or arresting a suspect is for public safety, if cause unnecessary harm to citizens during the execution process, it violates the original intention of setting up the police. The so-called law enforcement, which does not follow due process and does not take appropriate measures, is still in violation of the constitutional spirit and has caused damage to civil rights. Therefore, this should not be “not legally responsible”.

Finally, what is caused by this “Regulations” of the Ministry of Public Security is actually a constitutional issue. If this “Regulations” can really be established, the Constitution should be amended. This “Regulations” only talks about the rights of the police, and does not mention the constitutional rights of citizens that the police should protect. When there is only one mention about the constitutional rights of citizens, it is assumed that if the damage is done, how the police cannot be held liable. It seems that the police group is a special group that is external to citizens and society. Among other provisions, the “Regulations” extend the scope of application to “being maliciously complained, hype”, and “mistaken accountability or unfair disposition” and so on. What is “malicious”, what is “goodwill”; what is “public opinion supervision”, what is “hype”, not the public security department itself can say the final, but to go through a legal due process to discern the facts. In the reality of our country, having power, the public security department has a practical advantage over other citizens regardless of the law. Therefore, this “Regulations” actually makes the balance slope more to the party that has the advantage. In view of this, the public security department as a department has a very different nature from other departments. The departmental regulations it formulates are not a regulation of the internal affairs of the management department, but have strong external effects. The “Regulations” with such content should not be formulated by the public security department.

If this “Regulations” is practiced, the violation of citizens’ constitutional rights will be several times and dozens of times more than the present. For the ruling party and the government, this is also extremely negative. Because although the policemen are at low position, their behavior and attitude represent the image of the government. Once the government tells the police that they may harm the “legitimate rights and interests” of the people and are not responsible, they will despise the government because of the palliative that even they themselves feel too broad and arrogant, and they may actively abuse the people and cause trouble. Erasmus once said, “Even the most powerful monarch can’t bear the price of anger or contempt for even the most humble enemy.” If the ruling party wants to use such a method to “maintain stability,” it may be counterproductive and further shake the political legitimacy of the ruling party. Therefore, the ruling party and our society still have to correct this wrong “Regulations” in time. Because it has serious content violations of the spirit of the Constitution, I suggest that the State Council can determine that the Provisions “exceed the authority” and “the lower law violate the provisions of the superior law” in accordance with Article 96 of the Legislative Law; And according to the Article 97 of the Legislative Law, the State Council has the power “to change or revoke inappropriate departmental regulations”, and revoke the Regulations. The Standing Committee of the National People’s Congress may also conduct a constitutional review and revoke the Regulations on the grounds of unconstitutionality.

Xunzi said, “God creates people not for kings; but God establishes kings for people.” This tells the source of the power of “king”: Following the Dao for people. Here, “Dao” is the way of heaven, “people” is the public, and “king” is the government. The reason why the policemen exist is because the people need them; if they put themselves in front of people, they need not to exist. This is the law of heaven. The law of heaven is not artificially changeable. If someone think he can change, it is the arrogance of power. The greatest effort of mankind is to bring the artificial law closer to the law of heaven. However, no matter what, human beings have to follow the law of heaven. When the law of man-made approaches the law of heaven, they follow the law of heaven; when the law of man-made departs from the law of heaven, they will be punished by the law of heaven, and eventually return to the law of heaven. The difference is that the former is actively followed, only a small cost; the latter is passively followed, and it has to pay a high price. How much is it depends on when it is corrected.

 

February 5, 2019 in Fivewoods Bookroom

March 11, 2019 published firstly in FT Chinese and China-review Weekly