China and industrial theft: What U.S. history says about trade wars

He pretended to be a farm laborer, slipping out of the world’s leading industrial power with high-tech secrets he wasn’t supposed to divulge, and came to a nation desperate to borrow or steal technology.

21st-century China? Hardly. It was 18th-century America.

The story of how Englishman Samuel Slater created a successful water-powered cotton-spinning mill here in Pawtucket, Rhode Island, and helped usher in America’s Industrial Revolution has become the stuff of legend and spawned its own historical site just two blocks from city hall. But the history of early industrialization in the United States also offers parallels to the U.S. and China today as they struggle to resolve two radically different visions of trade and development.

Two lessons are particularly salient: Trade wars can contribute to the start of real wars. Attempts to halt intellectual property theft are doomed to fail.

“It’s a fool’s errand,” says Doron Ben-Atar, a Fordham University historian and author of “Trade Secrets: Intellectual Piracy and the Origins of American Industrial Power.” “We maybe delay it by six months, maybe by 10 years. [But] China will not fail in acquiring the knowledge that it wants.”

It’s hard to bottle up knowledge

Fearing that the newly minted U.S. might develop into a rival, Britain jealously guarded its industrial technology, especially its state-of-the-art textile factories. It imposed heavy fines on those who would reveal details to rival British mills or take them out of the country. But after seven years’ apprenticeship in England as a kind of management trainee, and no prospects for getting the management job he craved, Mr. Slater ignored the penalties and made his way to America to make his fortune. Eventually, he landed in Pawtucket where, according to legend, he re-created the key British spinning machine from memory.

China and other developing nations have periodically pointed to America’s theft of British technology and subsequent tariffs to protect its budding manufacturers as justification for their own protectionist measures. There’s no question that Mr. Slater and other early American industrial heroes copied British ideas. But the reality is more nuanced than that. In copying the technology, they also made improvements – which happens with all technology.

This doesn’t mean nations like the U.S. should abandon efforts to protect intellectual property. In theory, it may make economic sense to define some knowledge as property so societies can encourage inventors to make new things by temporarily protecting their profits, Mr. Ben-Atar says. 

But in practice, he adds, it also pays to remember that humans have been copying and improving on other people’s ideas from the beginning. “It’s never quite clear where innovation begins and imitation ends,” he adds.

The difference in today’s China

There’s a difference between early America and 21st-century China. The Chinese program to acquire Western technology is more far-reaching and government-organized than anything the U.S. did, points out Douglas Irwin, a trade economist at Dartmouth College. When Treasury Secretary Alexander Hamilton got the U.S. government to sponsor the financing of giant mills in Paterson, New Jersey, in 1791, his plan failed. Instead, America’s development relied mostly on entrepreneurs and private capital to speed ahead. 

Tariffs helped. In 1812, the U.S. doubled tariffs to an average of about 25% on imported goods. But since the American market was large and growing, foreign and even British firms began moving manufacturing plants to the U.S. in order to sell their goods. The policy has parallels with today as multinationals and even Chinese firms move plants out of China to Vietnam and other developing nations to avoid U.S. tariffs.

This week, President Donald Trump’s latest round of tariffs took effect – on $100 billion of Chinese imports from footwear and clothing to consumer electronics. If he carries through with all his threats, the president will have doubled tariffs on China in six months to an average 24.3%, according to Chad Bown, a trade specialist at Peterson Institute for International Economics in Washington.

Development hinges on people, not just patents

Another lesson from America’s early history: Immigration – or at least cultural exchange – may be key to economic success. The myth surrounding Mr. Slater is that he came to the U.S. and built from memory the key machinery that he’d apprenticed on in England. The reality is that knockoffs of that machinery were already kicking around America. As the Old Slater Mill Association points out, what Mr. Slater really brought was a knowledge of factory management – how the system worked as a whole – that allowed labor and machinery to operate profitably. 

Skilled people make the difference, not the actual technology, says Mr. Ben-Atar of Fordham. “What works is that people who had the knowledge wanted to live here. As long as you are attractive to people with skills, they will come.”

Between 1790 and 1850, the U.S. population grew more than fivefold. China’s population, by contrast, is set to shrink over the next 60 years, according to the United Nations. A big boost in salaries for Chinese researchers, as well as a recent U.S. crackdown on U.S.-based Chinese scientists suspected of transferring technology out of the country, has curbed China’s so-called brain drain to America, according to some Chinese scientists. Aside from that, it’s not clear that China will be able to draw in foreign talent. 

China’s sheer size and burgeoning consumer economy will make the nation an economic power to reckon with. But demographic decline and a slowing economy suggest that China’s government-directed approach may not turn that nation into a juggernaut that overtakes the U.S.

“It remains a question whether China can avoid the middle-income trap,” at which some other developing nations have stalled, says Mr. Irwin of Dartmouth. “They still have a lot of headwinds.”  

From trade war to armed conflict?

Early American history also offers a warning: Unresolved trade tensions can lead toward war. To fight Napoleon, England blockaded French ports in 1807 and wouldn’t let in ships of neutral powers, including the U.S. Worse, it was so short of experienced sailors that it started to board U.S. merchant ships and press into service any British-born sailor, whether he was an American citizen or not. 

In an attempt to force Britain to back down, President Thomas Jefferson got Congress to pass an embargo against all British goods. It failed. Five years later, the U.S. declared war, at least in part because of Britain’s trade and impressment policies.

The War of 1812, which ended in a draw, redoubled American efforts to reduce their economic dependence on Britain. Today, U.S. columnists and technology advocates are sounding a similar theme, saying the nation must decouple its economy from China in order to remain strong.

Such a decoupling, if it is carried out, would represent a U-turn from the ideals of globalists, who sought China’s participation in the world trading order as a further step toward peace. Their idea: Nations that trade with each other are far less likely to fight each other, especially with a set of agreed-upon rules.

“Although many of Trump’s policies can be reversed, the tariffs on China are a game changer,” writes Mr. Bown in the latest edition of Foreign Affairs. “The Trump administration, together with China, as it retreats from pro-market reforms, may be moving the world back to the historic norm of political and economic blocs.”