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"The Chinese government is trying to internationalize the RMB. But what are the real reasons for doing it? Will it succeed? What are the factors working in its favor? What are the impediments? What are the implications for the rest of the world? In this book, I explain how the problem with the international monetary system since the demise of the Bretton Woods system and the recent global financial crisis prompted China to seek independence from the dollar standard. One way is to make the RMB a widely accepted currency internationally. China, however, is in an awkward position. On the one hand, it is the second largest economy and the largest trading nation in the world, and it would likely become the largest economy before long. This works in favor of the internationalization of the RMB. On the other hand, China is still an emerging economy, meaning that its financial and legal institutions are still immature compared with the more advanced system in the West. Yet, China does not want to fully integrate its financial system with the West any time soon. As currency internationalization requires the currency to be largely convertible in the capital account, this factor works against the internationalization of the RMB. Thus, China tries to internationalize its currency in its own unique way, i.e. by adopting the "one currency, two markets" approach, which entails establishing a global offshore RMB market."

This paper analyzes the setting of national patent policies in the global economy. In the standard model with free trade and social-welfare-maximizing governments à la Grossman and Lai (2004), cross-border positive policy externalities induce individual countries to select patent strengths that are weaker than is optimal from a global perspective. The paper introduces three new features to the analysis: trade barriers, firm heterogeneity in terms of productivity and political economy considerations in setting patent policies. The first two features (trade barriers interacting with firm heterogeneity) tend to reduce the size of cross-border externalities in patent protection and therefore make national IPR policies closer to the global optimum. With firm lobbying creating profit-bias of the government, it is even possible that the equilibrium strength of global patent protection is greater than the globally efficient level. Thus, the question of under-protection or not is an empirical one. Based on calibration exercises, we find that there would be global under-protection of patent rights when there is no international policy coordination. Furthermore, requiring all countries to harmonize their patent standards with the equilibrium standard of the most innovative country (the US) does not lead to global over-protection of patent rights.

Professor Lai presented this essay at the Vanderbilt Journal of Transnational Law Symposium 1997: Hong Kong's Reintegration into the People's Republic of China. Professor Lai has updated his work since Hong Kong and China reunified. The author questions whether Hong Kong will really be able to remain an independent economic entity while also being a dependent political entity under the unprecedented "one country, two systems" concept. In this essay, the author identifies the conditions under which Hong Kong's economy can prosper, both in the short term and the long term. After reviewing Hong Kong's recent economic performance, the author assesses the potential economic problems of political integration. Potential problems include corruption, threats to the rule of law in Hong Kong, self-censorship by the press, and disruption of Hong Kong's tax system. The author concludes that, despite these problems, prosperity will likely be sustained in the short term. For economic prosperity to continue in Hong Kong in the long term, however, the continued expansion of the Chinese capitalist class must continue. As Hong Kong becomes increasingly integrated with China economically, it will also be increasingly susceptible to China's economic woes. Thus, for Hong Kong's economy to prosper in the long term, China must remain stable both politically and economically.

On May 30, 2017, the Supreme Court held that the initial authorized sale of a patented item within or outside the U.S. "exhausts" all rights of the patentee to that item under the Patent Act. This decision goes against the Government's position that a foreign sale authorized by the U.S. patentee should exhaust U.S. patent rights by default unless the patentee expressly reserved those rights. We examine how a shift in Northern regime from presumptive international exhaustion (PIE)---which presumes that a foreign sale triggers exhaustion but permits express-reservation of rights---to absolute international exhaustion (AIE)---which effectively precludes express-reservation of rights---impacts global welfare and its distribution. PIE subjects the firms that source in the South and sell in the North to the risk of a patent infringement lawsuit but allows the firms to price discriminate internationally. AIE allows the firms to avoid a patent infringement lawsuit but also precludes international price discrimination. Firms differ in the extent to which they engage in international fragmentation of their production process. We find that being engaged in the international fragmentation of production is neither a necessary nor a sufficient condition for a firm to prefer AIE over PIE. Nonetheless, it is still true that Northern firms with high cost share of the components that can be outsourced to the South tend to prefer AIE, while firms with low cost share of those components tend to prefer PIE. A shift from PIE to AIE increases fragmentation, lowers production costs, and eliminates North-South price discrimination in the final good. Global welfare rises. Welfare also rises in the North but falls in the South if the impact on firms' incentive for production fragmentation is weak, cost savings from sourcing in the South are low, or the Northern and Southern markets are dissimilar in size and average willingness to pay for each good.

We present a theory to explain government procrastination as a consequence of its present-bias resulting from the political uncertainty in a two-party political system. We show that under a two-party political system the party in office tends to be present-biased. This may lead to inefficient procrastination of socially beneficial policies that carry upfront costs but yield long-term benefits. However, procrastination is often not indefinite even as we consider an infinite-horizon game. There exist equilibria in which the policy is implemented, and in many cases carried out to completion in finite time. When the net social benefit is large, there is no procrastination problem. When the net social benefit is small, the policy can be procrastinated indefinitely, though there may co-exist some gradual implementation equilibria. When the net social benefit is intermediate in magnitude, there are all sorts of procrastination equilibria, including gradual implementation. The theory predicts that a government with a more strongly predominant party tends to procrastinate less.

One important element of a patent regime is the non-obviousness requirement, which captures the minimum improvement to the best patented technology a new invention is required to make in order for it to be patentable. We call it the required inventive step. We explore the implications of a patenting regime based on required inventive step, by incorporating such intellectual property protection considerations in the quality-improvement model of technology, trade and growth developed by Eaton and Kortum (European Economic Review 2001). In considering whether to increase the inventive step, policy-makers trade off the benefits of a higher rate of innovation against the loss of consumer surplus as patent-holders enjoy their monopoly pricing power for a longer duration on average. We first establish that there exists an optimal binding inventive step that maximizes country welfare under certain reasonable conditions. We then proceed to formulate an open-economy model, in which countries interact through cross-order trade and firms patent internationally. We focus on the central case that domestic goods and foreign goods are highly substitutable with each other so as to contrast with earlier work of Grossman and Lai (American Economic Review 2004), who analyzed international IPR issues under an alternative regime based on patent length protection and product innovation. We find that there exists a stable Nash equilibrium of the inventive-step-setting game between national governments that features over-protection of intellectual property from a global perspective. Moreover, country governments set higher inventive steps in the open-economy relative to the closed-economy benchmark. We discuss how these results relate to Grossman and Lai (2004). Of note, globalization in the form of reduced trade frictions leads countries to raise their equilibrium inventive steps. Consequently, globalization leads to higher equilibrium research intensities in all countries.