Archive for the Category China

 
 

Economic reform in China

There’s a more interesting new post over at Econlog.

Almost every week I see articles about China opening up its economy.  Here’s a recent example from The Economist:

CHINA is home to 1.4bn people. The population is ageing, and thus more vulnerable to ailments. Sustained economic growth is making the country richer, and more able to afford remedies. To foreign pharmaceutical firms, this looks like a winning combination. They are less keen on protracted review times, onerous rules and the reams of paperwork required to sell drugs in China. It can take a decade after approval in America for foreign drugs to reach Chinese patients.

The Chinese authorities at last appear to have acknowledged the problem—and are administering a cure in doses that have surpassed even optimists’ expectations. A reinvigorated regulator is waving through drugs from abroad, and clamping down on unscrupulous domestic companies. The government is spending more on drugs, including foreign ones, as it expands public health care. It is letting market forces weed out frail local firms. In other words, China is becoming a more normal market. Global drugmakers are rubbing their hands. By some estimates China became the second-largest global consumer of medicines in 2017. The market is worth $122.6bn, according to IQVIA, a research firm.

And another recent example from the Financial Times:

China has been opening up its financial sector in recent months, a move that some Wall Street groups hope to benefit from. Since Beijing raised the cap on foreign ownership of securities trading and fund management companies from 49 per cent to 51 per cent in April, several big US banks have said they aim to gain majority control of their operations in China.

A few months back, CNN provided this example:

China is making good on the promise to open its huge car market to foreign automakers.

The country will remove its longstanding restriction on foreign ownership for manufacturers of electric cars, ships and aircraft this year, the government announced Tuesday.

The announcement is just a first step in what China promised will be gradual phasing out of all restrictions on foreign ownership in the automobile industry.

This has been going on for decades, and I could cite many other examples.

Another trend that has been going on for decades is media claims that China is no longer reforming its economy, and is going back to the bad old days of state control.

Which set of news stories is true?

PS.  Sometimes things happen that are so weird that if they were not true you could never imagine making them up:

For decades, Taiwan and China have competed for recognition. In 1979, the United States switched its support and officially established sovereign relations with China, and many other countries followed. . . .

In recent years, China has had success in courting Taiwan’s diplomatic partners. Only 17 nations recognize Taiwan; outside the Vatican and Swaziland, they are all islands in the Pacific and the Caribbean or countries in Latin America.

American officials have expressed growing concern over the shift.

The US government, the Chinese government in Beijing, and the Chinese government in Taipei all agree that there is only “one China”, which includes the Chinese mainland and Taiwan.  In 1979, the US decided that the Beijing government was the legitimate government of China.  That’s still our official policy.  Now several countries in Latin America are following our lead, and we are upset with them.

PPS.  Tyler Cowen has an interesting Bloomberg column about 30 years of changes in Guangzhou.

PPPS.  This Fu Ying essay is one of the few articles on US/China relations that I actually agree with.

PPPPS.  Russ Roberts has a very interesting interview of Frank Dikötter on the Great Leap Forward.  This caught my eye:

Anyway, in October 1957, to mark the 40th Anniversary of the Bolshevik Revolution, 1917, all the leaders of the socialist camp are invited to Moscow, and there Khrushchev announces that he will overtake your country, the United States, in the production of dairy products. Mao doesn’t miss a beat: he says, without even standing up, ‘If you wish to overtake the United States, we will beat England–the United Kingdom–in the production of steel within 15 years.’ That’s the start of the Great Leap Forward.

At the time, the goal seemed preposterous.  China’s attempt to do this with backyard steel mills backfired, causing lots of misery.  Interestingly, today China produces 100 times as much steel as the UK.

A bigger China shock?

I have a new piece at The Hill.  Here’s an excerpt:

The biggest puzzle is what the Trump administration is trying to achieve with its trade war. Is it a move to pressure the Chinese to open up their economy, thus reducing barriers to U.S. trade and investment? Maybe, but it was precisely the opening of the Chinese economy that first created the “China shock.”

Indeed, China was no threat at all to U.S. firms when its economy was closed under the leadership of Chairman Mao. An even more open China would create an even bigger shock, resulting in even more economic dislocation in the Rust Belt. Presumably, Ohio manufacturing workers who supported candidate Trump were not hoping China would buy more Hollywood films and computer software, so that America could buy more auto parts from China.

Read the whole thing.

PS.  A recent NBER paper by Zhi Wang, Shang-Jin Wei, Xinding Yu, and Kunfu Zhu reversed the finding of the famous Autor, Dorn and Hanson paper on the “China shock”.  Here is the abstract:

The United States imports intermediate inputs from China, helping downstream US firms to expand employment. Using a cross-regional reduced-form specification but differing from the existing literature, this paper (a) incorporates a supply chain perspective, (b) uses intermediate input imports rather than total imports in computing the downstream exposure, and (c) uses exporter-specific information to allocate imported inputs across US sectors. We find robust evidence that the total impact of trading with China is a positive boost to local employment and real wages. The most important factor is employment stimulation outside the manufacturing sector through the downstream channel. This overturns the received wisdom from the reduced-form literature and provides statistical support for a key mechanism hypothesized in general equilibrium spatial models.

I don’t “believe” either result.  The science of economics has not advanced to the point where it’s possible to have a high level of confidence in these sorts of empirical studies.

PPS.  Off topic, this made me smile:

Trump has moaned to donors that Powell didn’t turn out to be the cheap-money Fed guy he wanted. The president repeated the effort this week in an interview with Reuters, adding the ridiculous claim that the euro is manipulated and the more credible notion that China is massaging the yuan. (The European Central Bank rarely intervenes directly in currency markets; when the ECB does, it’s usually with the Fed.)

Where to begin:

1. Trump had a choice between Yellen and Powell.  I suggested Yellen, as she had done a very good job.  Trump’s advisors said he shouldn’t pick Yellen because she’s not a Republican.  So Trump picked Powell, even though he was slightly more hawkish than Yellen.  Trump is tribal and assumes everyone else in the world is just as corrupt as he is.  He thought Powell would be “better” because he’d want to help a Republican president.  And now Trump is shocked to find out that Powell is not his lapdog.  (Actually it’s too soon to know for sure, as Trump also wrongly assumes that higher interest rates mean tighter money.  But we can cut him some slack, as lots of other people make the same mistake.)

2. I also smiled at the notion that the ECB doesn’t intervene in the currency market.  Of course they have a 100% monopoly on the entire supply side of the euro currency market.  Yes, I understand the reporter meant “foreign exchange market” when he said “currency”.  But even that’s a bit misleading, as ECB policy does affect the forex value of the euro, and there have been ECB actions in recent years that were clearly aimed at depreciating the euro.  Ditto for the Fed and the Chinese central bank.  Still, the reporter is correct in claiming that Trump has no grounds to complain about ECB policy; I wish he had made the same point about China.

PPPS.  Another day, another two convictions of close Trump advisors.  In one case it was for for a crime that Trump ordered him to commit.  Trump’s now as deeply enmeshed in scandal as Nixon was back in 1974.  The good news for Trump is that none of this matters.  Trump’s support is in the low 40s and it will not decline at all.  There was no Nixon cult—his supporters abandoned him in droves.  But the Trump cult would support him if he murdered someone in the middle of Times Square, at least that’s what Trump himself claims.  As long as those 40% of voters stick with Trump, frightened GOP Congressmen will do the same.  Trump is safe.

Still, it will be fun watching the scandal play out—lots more to come!

Screen Shot 2018-08-21 at 6.53.56 PMPPPPS.  Focus on the blue line, as the yellow line partly reflected the worsening economy.

The China Threat?

The normally sober Financial Times has a truly bizarre article on the perceived threat posed by China:

Marketing slogans aside, since at least the 1980s there has been no presumption that US companies had to operate in the national interest. Goods, capital, and labour could move where they liked — that is the definition of globalisation. Most people believed that if US companies did well, Americans would prosper. But, as the past several decades of wage stagnation have shown, the fortunes of US companies and consumers are now fundamentally disconnected.

The wealth gap alone wasn’t enough to persuade politicians from either party to rethink the rules. But China is. While tariffs are President Donald Trump’s personal preoccupation, fears over losing an economic and cultural war (and possibly a real one at some point) with China is a worry that is shared broadly in the US, no matter what circles you travel in.

In my entire life, I’ve never met a single person worried about losing a cultural war with China.  What does that even mean?  Are we worried that Americans will give up Hollywood films and start watching Chinese movies?

As far as losing an economic war, that reminds me of the absurd claims in the 1980s that Japan would overtake us.  By the early 2000s, those Japanophobes had become widely ridiculed.  Have we already forgotten that fiasco?  Is America condemned every 30 years to engage in hysterical fears about the “yellow peril”?  What “circles” does this reporter travel in?  I could sort of understand talk of a military threat, although the threat is to Taiwan and some uninhabited atolls, not the US, but a cultural and economic threat?

As far as the first paragraph, is the author unaware that for many decades US companies have been banned from selling sensitive technology with military applications to countries such as China?  Yes, it’s difficult to decide exactly which technologies meet that definition, and undoubtedly a fair bit of useful stuff slipped through, but it’s simply false to claim that companies had complete freedom to sell technology to China.

And how about the logic here:

But, as the past several decades of wage stagnation have shown, the fortunes of US companies and consumers are now fundamentally disconnected.

Let’s make the list even longer:

But, as the past several decades of wage stagnation have shown, having a democratic form of government does not guarantee consumers will do well.

But, as the past several decades of wage stagnation have shown, developing an internet does not guarantee consumers will do well.

But, as the past several decades of wage stagnation have shown, having private private property rights does not guarantee consumers will do well.

But, as the past several decades of wage stagnation have shown, having freedom of the press does not guarantee consumers will do well.

During Mao’s 27 years in office, China lacked a democratic form of government, private property rights, freedom of the press and an internet.

Therefore . . . ????

And BTW, American consumers have done fabulously well in recent decades, at least in terms of autos, TVs, phones, cameras, internet, entertainment choices, restaurant quality and choice, cheap clothing, etc., etc., etc.

PS.  I have a related post at Econlog.

PPS.  V.S. Naipaul, RIP.  Whatever you think of him, Naipaul had no patience for bullshit, from either colonialists or anti-colonialists.  I notice that his death is receiving relatively little attention in the mass media.  We lavish praise on warm and fuzzy people and shun those telling us things we don’t want to hear.  At one time or another, he said things that would annoy almost everyone (including me.)

 

The China that can say no

I’m not at all a fan of the Chinese government, especially Xi Jinping.  But I do wish the best for the Chinese people, so I’m offering some advice in this spirit.

Right now the Trump administration is pressuring China on a number of fronts.  I believe that China is in a far stronger negotiating position than many people realize, perhaps stronger than they realize.  Here are some factors to take into account:

1. China is a huge country.  It has the world’s biggest economy and the gap with the US gets wider every year.  It has more than 4 times the US population.  It does far more trade than any other country.  Its current account is approaching balance.  Trade with the US is a small share of China’s GDP.  The US does have a big military advantage, but that’s of no use in trade negotiations.

2.  It’s true that China has a large trade surplus with the US, but that cuts both ways.  We could hurt China by cutting off Chinese imports, but that action would hurt the US just as much.  Imagine consumers showing up at Walmart or Target and finding no Chinese goods—the shelves would be almost empty.  Now imagine Walmart’s buying manager calling up their Indian purchaser, and asking how long it will take India to make up for the lost output from just the Pearl River delta.  A decade?  Two decades?  Are American consumers that patient?

3.  The Chinese people have been through much greater hardship than the American people, and are much better positioned to survive the unpleasantness of a trade war.  (BTW, the greater Chinese tolerance for hardship has been noted by historians going way back in history.)  In addition, Trump has little support for his trade war in either the Democratic or Republican Party leadership, whereas the Chinese government is more unified. Trump may lose the House in November, and has to think about the 2020 election as well.  The Chinese should delay, delay, delay. Time is on their side.

Overall I think it’s in China’s interest to stand up to Trump.  Bullies like Trump tend to be cowards, who back down when someone actually puts up a fight.  If the Chinese do want to grant any concessions, they might consider lowering a few trade barriers, which would actually help China and thus not really be a “concession” at all.

What about Chinese rules that force foreign companies to provide intellectual capital as a pre-condition for entering the Chinese market?  It’s hard for me to get worked up about this issue, for a number of reasons:

1. The US does far worse things, such as putting extreme sanctions on companies that do business with Iran, even if those companies are located in countries that have perfectly good relations with Iran, and who support the Iran deal along with 90% of the rest of the world.  The US is a big bully that tries to force the whole world to do as we do.  We also bully smaller countries like Canada in international trade disputes, often ignoring our own agreements.  We are the last people who should be criticizing China for not playing by the rules.

2.  One can make a good case that it’s efficient for foreign companies to be forced to transfer technology to China. Intellectual property laws are too restrictive, and the benefit of the technology to the 1.4 billion people in China probably far exceeds the cost to the companies and their stockholders.  And who are we to complain about a country using its size to get its way?

From a fairness perspective, keep in mind that China’s size is a disadvantage in international trade.  China contains by far the most homogenous large population anywhere; indeed there is nothing else on Earth like the 1.26 million billion strong Han ethnic group.  This means that China is constantly suffering from disadvantageous terms of trade whenever it goes into a new industry.  In contrast, Switzerland can specialize in a few industries without driving prices down to rock bottom.  So from a “fairness” perspective, the forced technology transfers merely offset the huge disadvantage China faces in trade due to its massive size and homogeneity.  (This homogeneity is a gold mine for US corporations—why shouldn’t they have to “pay to play”.)

(It would be different if the job skills in various Chinese regions were as diverse as in Europe, but they are not.)

I didn’t even mention other possible Chinese advantages, such as their strong authoritarian dictatorship, because I’m not convinced dictatorships actually do have more power.  However, others might cite that factor.

PS.  Several commenters asked me about an article claiming that the Chinese thought Trump was a formidable negotiator.  Here’s how I responded:

Trump’s been in office 18 months and done an amazingly bad job of negotiating.  For instance, he desperately needed McCain’s vote to repeal Obamacare, and instead mocked the fact that he was captured by the North Vietnamese (where he was tortured.)  Is that how smart negotiators win people over to their side?  He gave N. Korea the recognition it wanted and got nothing meaningful in return.  He tore up the Iran agreement and failed to negotiate anything better.  The EU president ran circles around him in yesterday’s agreement.  Putin made a fool of him.  He blabbed out top secrets to Russian officials in a White House meeting.  Where is the evidence that he’s a good negotiator?  I know; it’s all a secret master plan that only a select few can understand.

I’m guessing that a few of these glowing comments from the Chinese are a tactic to butter Trump up so that they can more easily use their vastly superior negotiating skills to run circles around him, just as Juncker did yesterday.

Things that smart people don’t know

It would be interesting to make a list of things that smart people don’t know.  Unfortunately, I don’t have enough paper or barrels of ink.  One of my favorites is trade, where smart people think China is an outlier.  Actually, only tiny Belgium has more balanced trade than China:

Screen Shot 2018-07-09 at 2.16.19 PM

Why don’t smart people know this?  Because they don’t bother looking at the data.

Another misconception is that trade deficits are bad.  This article at National Interest caught my eye:

Trump is right to push on trade. A simple return to anything resembling a balanced international trading system would result in massive gains for the United States. What presidential advisors Peter Navarro and Wilbur Ross call the deficit drag depresses the American economy by about 3 percent overall. That is to say, if international trade were balanced, the American economy would be 3 percent larger than it is now.

I had to read this twice, to make sure my eyes weren’t deceiving me.  The Navarro/Ross argument is based on this equation:

GDP = C + I + G + (X-M)

They assume that if X-M is negative 3% of GDP, then this causes GDP to fall by 3%.  Actually it has no effect, because the negative caused by subtracting M (imports) is exactly balanced by a positive to C + I (consumption and investment).  Every time you buy an imported car, consumption rises by the amount of the purchase.  Every time someone buys an imported truck, investment rises by the amount of the purchase.  If you switch from imports to domestic cars, the labor to produce those domestic cars doesn’t just magically appear on the scene, it gets diverted from some other type of production.  Can reducing the trade deficit boost total aggregate demand? No, for standard monetary offset reasons.  But even if I’m wrong, higher AD has no long run impact on employment, for standard “natural rate” reasons.

Yup, this is all just EC101. And yes, Trump’s top economic officials do not know this stuff.  It reminds me of when freshmen in economics get lost trying to write an answer to an essay question:  “Demand goes up so price rises.  The higher price causes demand to fall.  The fall in demand then lowers the price, which causes demand to increase . . .”  Eventually they give up and stop writing, hoping for the curve to allow them to pass the course.

Irving Kristol, who was a supply-sider, founded The National Interest back in 1985.  Perhaps it’s fortunate he passed away in 2009, and did not have to see what happened to his neoconservative journal.  The article was titled:

Trump Is Right: The U.S. Can’t Lose a Trade War

BTW, Trump supporters who care about trade deficits (do they even exist?) might be interested in knowing that Trump’s policies are making the US trade deficit larger.  Or maybe they don’t care.  In fairness, it’s not growing as fast as the budget deficit, which is now rising rapidly. During an expansion.

PS.  The comment section after my previous post reminded me of an old joke.  A guy tells his friend that he has an uncle who insists that there’s an alien from Alpha Centauri who wears a sport coat with pink polka dots, and that lives in a tiny teapot on his fireplace mantle.  The friend responds, “Oh come on, how likely is it that someone from Alpha Centauri would rear pink polka dots.”

Commenters thought the best way to respond to Trump’s latest outrage was to discuss the merits of breastfeeding.

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