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Can Allied Cooperation Against Russian Aggression Continue and Broaden?

Can Allied Cooperation Against Russian Aggression Continue and Broaden?

March 24, 2022

When national governments take steps to help their own economies, they can end up helping other economies, too. Sometimes that result is a win-win. But all too often the result is beneficial for a nation’s direct competitors in the fierce race for global advantage in key, innovation-based industries. As such, nations need to consider the implications of their policies and decide how they want to balance global goods relative to national goods. For the United States, this will require coming to terms with the fact that, for too long, it has been one of the few nations focused on helping the world as a whole, rather than just itself.

One way to differentiate policies along these lines is on the basis of what economists call positive and negative spatial externalities. In other words, when the impacts of a policy action are largely confined to the nation implementing it, the spillovers are small. When the policy impacts other nations, the spillovers are large.

An example of an activity that nations invest in principally help themselves is funding workforce training programs, which are of little benefit to other nations unless trained workers migrate to one of them. Likewise, the benefits of tax incentives or spending programs to attract globally mobile investments, like semiconductor factories, accrue almost exclusively to the nation implementing them.

Conversely, a good example of the kinds of policies and programs that end up helping other nations is funding for basic research. Scholarly research shows that when a country, even as large as the United States, funds basic research (a significant share of the benefits “spill over” to other nations that can use the resulting discoveries of knowledge to help firms in their own economies. This is because the results that come from basic research—knowledge generation—are largely “non-excludable.” The information is published in scholarly journals that scientists in foreign nations can readily access. Or scientists present the results of their research at academic conferences that foreign scientists attend. It is hard to keep other nations from benefiting from basic research.

In contrast, funding of research at later stages—when proof of concept has been established or laboratory testing is underway—generates outputs that are more excludable. Some of these discoveries are patented. And some generate tacit knowledge that cannot easily be communicated in a conference or academic setting. As such, the geographic spillovers are more limited. In fact, these spillovers often remain very local, at least for a while, as evidenced by the presence of significant university-related technology hubs, such as Silicon Valley and Boston.

Because of this, the rational thing for any country wishing to maximize its own welfare to do is invest more in later-stage research that its domestic firms are able to use. If one country did that, there would be only a small reduction in the global basic science pool, but it would get to keep a bigger share of the benefits of its later-stage research. This dynamic is similar to why companies tend to invest in later-stage research where they can capture more of the benefits, rather than having them spill over to their competitors.

This dynamic produces a prisoner’s dilemma in which the rational thing is for all countries to cooperate and invest more in basic research. But without the ability to coordinate and prevent free riders, the world underinvests in basic research. Many nations invest heavily in later-stage research to help their key industries compete globally and hope other nations will do the “responsible thing” and invest in basic research to improve global welfare.

For too long, the United States has been doing the responsible thing while other nations have been doing the “selfish” thing. The United States has long invested significant funds into basic research through agencies like the National Science Foundation (NSF), the National Institutes of Health, and the Department of Energy. In contrast, nations like China, Germany, Japan, South Korea, and Taiwan devote a larger share of their R&D budgets to applied research (or even development) to benefit their domestic industries.

This is why the Senate U.S. Innovation and Competition Act is so refreshing, as it proposes significantly expanding research funding at NSF that would be more oriented to industry and more likely to produce results that would be captured in the United States. In contrast, the NSF provisions in the House America COMPETES Act, which is supported by the science community, would for the most part increase basic science funding.

It would be one thing if most other nations were investing the same share of their budgets in basic research: All would be investing in a collective good. But when other nations are focused more on competitive advantage and economic growth, and the United States is funding basic science, the main beneficiaries will be those other nations—especially China, which focuses much more on later-stage research and development.

Spillovers can be negative as well as positive. As the Information Technology and Innovation Foundation (ITIF) highlighted in its report “Contributors and Detractors: Ranking Countries’ Impact on Global Innovation,” many of the actions nations take to improve their competitive positions—including intellectual property theft, forced technology transfer, and limiting market access—may help their own economies but harm foreign economies and the global ecosystem of innovation. Not surprisingly, China ranks as the worst such offender in that report. Taken as a whole, its policies impose significant harm on global innovation. In other words, China’s domestic economic and technology policies help China, but harm innovation in the rest of the world. This is the case largely because China’s predatory policies take market share away from more innovative foreign companies.

Under the Trump administration, the United State was the only nation that spent significant political and economic capital to push back against China’s harmful policies. Those actions represented a global good because, to the extent the United States could limit China’s predatory policies, other nations would also benefit. However, most other nations, especially in Europe, took a free ride on U.S. “investments” in this public good of pushing back against Chinese mercantilism. Europe received most of the benefits as China was forced to marginally reduce its economic mercantilism and provide more access to its markets, but while the Chinese government acquiesced somewhat on those fronts it also responded by penalizing the United States with even less market access than before. Germany, in particular, was more than happy to take market share away from American companies being hurt by China’s retaliatory policies.

We see a similar dynamic with drug pricing. The United States and a few other nations have drug-pricing systems that support the expensive and risky investments in new drug development by allowing pharmaceutical companies to earn enough revenue from one generation of medicines to underwrite the cost of the next. They have not, at least yet, adopted the short-sighted and selfish approach of imposing draconian price controls on drugs like many other nations, especially in Europe. In this case, U.S. actions benefit the world, because if the United States imposed drug price controls, there is no doubt that the rate of new drug development would significantly decline. Conversely, if other nations did not so heavily keep down drug prices for their own benefit, there would be more revenues for the industry to invest in biomedical research. It is important to note that this policy situation provides some offsetting benefits to the United States by enabling it to be the biopharmaceutical leader and home to hundreds of thousands of good-paying jobs and thousands of growing companies.

But what about other policy areas, like climate? Here, the rhetoric of the European Union is all about working for the global good. EU officials regularly tout their global responsibility of fighting climate change. Yet, when it came time for nations to meet with “Mission Innovation” commitments to double their funding in clean energy R&D, the United States increased its clean energy RD&D budget, but France, Italy, Norway, Finland, Netherlands, Sweden, Denmark, and the European Union all invested less in 2018 than they did in 2015.

Yet the Russian invasion of Ukraine has shown that nations can cooperate for the global good, as this aggressive action has spurred many nations to cooperate and not engage in free-riding. The fact that many European nations, and Japan and South Korea, among others, agreed to limit technology exports to Russia as part of an international package of sanctions, does, at least for the moment, show that collective action for global good can happen. Any one of these nations, faced with such a prisoner’s dilemma, could have chosen to continue exporting, thereby gaining market share, while other nations were acting for the global good. But in this case, it took a naked act of aggression on a sovereign state to propel many nations to cooperate.

Hopefully, this cooperation, built out of tragedy and crisis, can become more institutionalized, and applied to address other global challenges, including the need to support science research, enable drug pricing that spurs innovation, invest more in clean energy R&D, and finally the need to limit Chinese innovation mercantilism.

However, in the absence of such concerted effort, the United States needs to rebalance its science and tech initiatives to focus more on its national interest. Among other things, this means rebalancing science policy away from the idealist view that the United States should fund mostly basic research simply because it’s good for the world.

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