Archive for the Category China

 
 

Is populism popular? Has it peaked?

I don’t know the answer to these questions, but Simon Kuper presents an interesting contrarian view:

Sometimes, our street is so packed with protesters that you can hardly open the front door. But last Saturday, I gingerly stepped outside to encounter only a few hundred marchers in gilets jaunes (yellow vests). Later, on TV, I watched the tear gas and shoving on the Champs-Elysées. But the odd aerial camera shot revealed that the Champs was mostly empty. Friends abroad asked if we were safe. We were: I spent half the weekend freezing on suburban touchlines watching my kids play football.

About 10,000 gilets jaunes marched in Paris and 125,000 across France, says the government. That same day, the green “march for the climate” drew about twice as many protesters in Paris

His observation on the US election is also interesting:

Populist movements may be the past, not the future. In November’s midterms, Trump’s Republicans lost the popular vote for the House of Representatives by 8.6 per cent — the biggest defeat for a majority party since records began in 1942. Meanwhile, as Brexit becomes increasingly hilarious, polls consistently show that most Britons now oppose it. Approval of the EU across the rest of Europe is the highest since 1983, says the European Commission’s polling wing.

Don’t assume that “the populists” are equivalent to “the people”.  Hillary got millions more votes than Trump.  The French gas tax increase was defeated, but worry about climate change is extremely widespread:

The new obsession with white-working-class politics misses much else. If you’re worried about poverty, look at very poor non-whites. And if you want to identify movements of the future, try the greens. For a so-called elitist movement, they seem pretty broad-based. About two-thirds of French people say they support the gilets jaunes, but 85 per cent worry about climate change, according to pollsters Ifop. In Germany, the much fussed-over far-right Alternative für Deutschland party now polls at 14 per cent; the Greens are six points higher. German anti-immigrant rallies (like Tommy Robinson’s British versions) are typically dwarfed by protests against them.

Scott Alexander has a post showing that Trump’s views on trade and immigration are becoming less and less popular.  I made a similar observation about 20 months ago.

Speaking of Alexander, another of his posts provides an almost perfect example of how commenters misinterpret my views:

Imagine the US currently devotes 100% of its defense budget to countering Russia. Some analyst determines that although Russia deserves 90% of resources, the Pentagon should also use 10% to counter China. Since no one person can shift very much of the defense budget, this analyst might spend all her time arguing we need to counter China more, trying to convince everyone that China is really very dangerous; if she succeeds, maybe the budget will shift to 99-to-1 and she’ll have done the best she can. But if she really spends all her time talking about China, this might look to other people like she’s an extremist – that crazy single-issue China person – “Why are you spending all your time talking about China? Don’t you realize Russia is important too?” Still, she’s taking the right strategy, and it’s hard to figure out what she could do better.

Because I’m trying to talk the US out of starting a foolish cold war with China, I’m seen as an apologist for Xi Jinping’s authoritarian policies.  In fact, I view almost all countries as being too authoritarian (think of the 400,000 Americans in jail for drug violations), and China as being far too authoritarian, much worse than the US.

My views on foreign policy

Many commenters have great difficulty understanding my views on foreign policy.  I presume this is because many (most?) commenters think this way:   “Sumner said X.  People who say X usually believe Y.  Therefore Sumner thinks Y”.  That might work for most people, but it doesn’t work for me.  Actually, my views on foreign policy are boringly conventional and quite moderate:

1. Some of my commenters accuse me of being a bloodthirsty warmonger, because I support NATO.  I.e., I think we should go to war against Russia if they invade Estonia.  I also think we should go to war against China if they invade Japan or Australia, due to our defense treaties with Pacific powers.  I like mutual defense treaties among countries that have their act together.  AFAIK, it’s the only “foreign policy” that seems to consistently work.  They are one of humanity’s greatest achievements.

2. Another group of commenters think I’m a lily-livered, Neville Chamberlain appeaser, because I don’t wish to go to war against China over Taiwan or Xinjiang.

3.  Another group thinks I don’t care about human rights abuses in foreign countries, even though I passionately care about human rights abuses in foreign countries—far more than 90% of Americans, and infinitely more than Trump—who is quite upfront about not caring at all.  Reading about the Rohingyas and the Yazidis literally brings tears to my eyes.  I care so much about foreigners that other commenters say I’m not patriotic enough, putting the interests of the most oppressed people in the developing world ahead of red-blooded Americans.  I can’t win.

4.  Another group claims I don’t believe that distinct regions should be free to secede from larger entities, even though I’ve expressed support for peaceful examples of secession, as with the Czechoslovakia.  They confuse my statements about the current agreed upon rules of international law (no secession without consent) with my personal views as to what sort of world would be best.  My claim that Taiwan would be foolish to secede from China without their permission, thereby triggering a horrific war, makes me a Chinese apologist in their view.  Taiwan already has all the advantages of de facto independence, and is fortunately too smart to take the advice of my rash commenters (safely out of harms way) and commit mass suicide by seceding. While I have no problem with the idea of an independent Taiwan achieved peacefully with Beijing’s consent, the US should tell Taiwan “If you formally secede, you’re on your own.”  I’d guess we already have.  And in any case, Taiwan is currently doing fine.  If it ain’t broke, don’t fix it.

Are there other occasions where you might want to use military force, beyond mutual defense treaties?  As a utilitarian I cannot say there are no circumstances where military force is appropriate, but I’m generally almost as skeptical as Bryan Caplan.  Perhaps military force should be used to stop extreme human rights abuses like genocide.  But how many now favor a US invasion of Myanmar, where the government is massacring the Rohingyas?  There are enormous practical problems with that policy option. Saddam Hussein had an appalling record in many different dimensions, and indeed in 2003 I thought there was a pretty good utilitarian case for getting rid of him.  (I wrongly assumed a quick war like the 1991 Gulf War.)  The 2003 Iraq War obviously turned out to be a disaster, and this has helped to shape my views on foreign policy.

I’m now more skeptical of the hawks than before.  History is full of examples where the hawkish stance turned out to be a complete disaster (1914, Vietnam, Iraq War, etc.)  Even cases where we had a quick victory (Spanish-American War) look like clear mistakes in retrospect.  People often point to 1938 as an example of the doves being wrong.  But even there, a hawkish stance by Chamberlain would have merely triggered the “Phony War” portion of WWII a year earlier, resulting in a less clear cut historical record that the Nazis were 100% the aggressors.  Would you want a modern Germany full of Germans who feel that Germany was picked on twice?  So I still say we should use the military primarily for self (or mutual) defense, and any other use should be exceedingly rare. Countries allowed into mutual defense pacts should be free of ongoing border disputes.

There’s a better case for using economic sanctions as a foreign policy tool.  But here again, the historical record is quite unimpressive.  Yes, the sanctions against South Africa may have contributed to the end of apartheid.  But for every success like that there are far more failures, such as the Cuban sanctions.  If you are using sanctions because of human rights abuses in the targeted nation, the goal should be to make the people in the targeted nation better off.  Thus it helps if you have popular support, which seems to have been the case in South Africa (but not Cuba.)

As an example, I’d guess that 98% of the Chinese public would oppose Western economic sanctions.  The Chinese are very nationalistic and intensely feel the humiliation imposed on them by Western powers in the 19th century.  None of that may matter to you, but it will definitely impact the effectiveness of any sanctions that try to force China to change its ways.  US sanctions on China will certainly make the US worse off, and certainly make China worse off in the short run, and definitely make China more prickly and nationalistic.  For that sort of “human rights” policy to pass the utilitarian test you’d need a series of political changes in China that are about as likely as making a 4 bumper shot in billiards.  How’s our previous track record in that regard?  In contrast, economic development usually (not always) improves human rights.  And yes, Xi Jinping is an exception.

I’m particularly amused by my right-wing friends who are outraged by human rights abuses against Muslims in Xinjiang, but are silent about Modi’s record in India. Or Saudi Arabia’s appalling record in Yemen.  Or who had no problem with the US torturing Muslims and imprisoning them without trial. (And no, I’m not saying these abuses were anywhere near as bad–but do you have consistent principles?) Or those conservatives who favor economic sanctions against the Chinese for violating human rights in Xinjiang, but used to complain that sanctions against South Africa under apartheid “hurt the people they were supposed to help”.  (A view I held at the time, but now less certain about.) Unlike many people on both the left and the right, I don’t tailor my views to whether the human rights abuses are committed by a right wing or a left wing government.

A better argument for sanctions is as a deterrent to countries that engage in dangerous military behavior.  Thus sanctions on Russia were appropriate after they conquered part of the Ukraine, and sanctions on China would be appropriate if they attacked Taiwan without provocation.  Perhaps sanctions are appropriate on North Korea; I think that’s a close call.

My views are pretty simple.  We should have defense treaties with like-minded countries to deter aggression.  Otherwise try to avoid going to war.  Trade freely with all nations, except under a few very limited conditions.  I have an open mind as to what sort of military behavior or human rights abuses calls for sanctions, but in general I think the bar should be pretty high.

What about non-military predatory behavior, such as what China is accused of?  First we need to figure out the facts.  The news media has recently reported claims of Chinese spying that turned out to be false.  When there is Chinese spying, or related behavior, it should be handled in the same way we’d handle spying from Russia or some other country.  Tit for tat is fine.  If they punch us, then punch back.  But it’s extremely unlikely that a policy such as 25% tariffs on Chinese goods, which was first developed as a weapon to be used to reduce our trade deficit, would suddenly be the appropriate policy for Chinese human rights abuses in Xinjiang, or Chinese spying on US tech firms.  What sort of tariff should we have on Vietnam, for its severe human rights abuses?  (Vietnam is in many ways the most similar country to China.  A reforming communist East Asian country that is growing fast and still has lots of human rights abuses.)

Some regard China as a military threat to the US, which I think is implausible.  The combined strength of NATO plus Japan, South Korea, Australia and New Zealand towers over anything else on the planet.  These mutual defense pacts are hugely successful and will almost never be attacked by outsiders (except possibly by the accidental launch of nukes or, of course, terrorism.)

To summarize, I’m a utilitarian on foreign policy.  Show me evidence that an alternative plan will make the world a better place, and I’ll support it.  I’m not an ideologue.  But right now the evidence suggests that mutual defense and free trade are generally the best options.

I’m certainly no expert on foreign policy.  But when I read some of my commenters, I feel like most other people are even more clueless than me.

One final point.  Whenever you read a commenter saying,”Sumner believes . . .” you can be pretty confident that I do not in fact believe what comes next.  And when you read, “Because he has a Chinese wife, Sumner believes . . .” LOL.

Update:  I recommend this Edward Luce piece in the FT:

In most professions, such a litany of errors would prompt a soul-searching. Heads would roll. Schools of thought would close down. The magic of Mr Trump is that by uniting the elites in revulsion against his abrasive style, he has restored their sense of moral self-belief. Last month, William Kristol, a leading Never Trumper and Iraq war cheerleader tweeted: “Shouldn’t an important foreign policy goal of the next couple of decades be regime change in China?”

On China, Mr Trump and the blob are ominously coming around to the same view — that it must be confronted. They differ on methods. Mr Trump’s critics would prefer the US to build an allied consensus to win the “new cold war.” They dislike Mr Trump’s bilateral pugilism. They also bemoan his obliviousness. How could he have not known of the arrest of one of China’s business stars on the same day he was negotiating a truce with its president?

Yet they concede that Mr Trump has identified the right target. All of which presages danger. Whenever Mr Trump leaves office, the chances are that the blob will find itself back in the situation room. The story of this young century is a series of US blunders that boosted China’s power far beyond its expectations. It would be odd to hand back control to the people who brought this about.

 

How costly is Chinese IP theft?

Christian List directed me to some studies of the costs of IP theft.  The first link was to an AEI report on the subject, which criticized the US definition of IP theft:

The leaders of the IP commission, Admiral Dennis Blair and General Keith Alexander, penned an opinion piece last year that not only points the finger directly at China but also illustrates confusion as to just what the US should target. They stated: “Chinese companies, with the encouragement of official Chinese policy . . . have been pillaging the intellectual property of American companies.” They listed a large array of US economic sectors as examples, including automobiles, chemicals, aviation, pharmaceuticals, consumer electronics, and software, among others.

But even these two highly knowledgeable leaders then went on to confuse the US case against Beijing’s “pillaging” by adding a list of military IP thefts, including plans and designs related to the F35 fighter, the Patriot missile system, the Aegis Combat System, thermal imaging cameras, and unmanned underwater vehicles, among others, as examples of Chinese spying operations. The problem and confusion to the reader here is that such military espionage is considered fair game by all nations, including the US. And one hopes that US intelligence agencies have been equally diligent in ferreting out Chinese (and other nations’) advanced military designs and equipment.

Chinese theft of US military secrets is certainly something that the US should be concerned about, and try to prevent.  But perhaps the moralistic tone one sees is a bit inappropriate, given that the US government does the same thing.  I’m all for trying to prevent this sort of espionage, but here I’ll focus on commercial theft, which seems to be the bigger issue.  The AEI piece linked to a 2017 US government report on IP theft.  Indeed the term ‘theft’ is used right in the subtitle of the report:

THE THEFT OF AMERICAN INTELLECTUAL PROPERTY: REASSESSMENTS OF THE CHALLENGE AND UNITED STATES POLICY

I was thus surprised to see the report discuss activities that cannot possibly be regarded as “theft”:

China continues to obtain American IP from U.S. companies operating inside China, from entities elsewhere in the world, and of course from the United States directly through conventional as well as cyber means. These include coercive activities by the state designed to force outright IP transfer or give Chinese entities a better position from which to acquire or steal American IP.

I.e., we’ll let you invest in China if you share technology.  In fairness, most of the report does focus on three types of outright IP theft:

We estimate that the annual cost to the U.S. economy continues to exceed $225 billion in counterfeit goods, pirated software, and theft of trade secrets and could be as high as $600 billion.

Wait until you see where they got these numbers:

Counterfeit and pirated tangible goods.

In 2016, the OECD and EUIPO used worldwide seizure statistics from 2013 to calculate that up to 2.5%, or $461 billion, of world trade was in counterfeit or pirated products.23 By applying this percentage to U.S. trade, we estimate that in 2015 the value of these goods entering the U.S. market was at least $58 billion.

The United States, however, is a much larger market for imports than the average market. It is nearly equivalent in size to the European Union, where the OECD/EUIPO study determined that approximately 5% of imports are counterfeit or pirated tangible goods. By using 5% as a proxy for the proportion of counterfeit and pirated tangible goods in U.S. imports ($2.273 trillion),25 we estimate that the United States may have imported up to $118 billion of these goods in 2015. Thus, anywhere from $58 billion to $118 billion of counterfeit and pirated tangible goods may have entered the United States in 2015. This represents the approximate value of counterfeit and pirated tangible goods (not services) entering the country.

With respect to counterfeit and pirated tangible U.S. goods sold in foreign markets, the OECD/EUIPO study found that they accounted for nearly 20% of the value of reported worldwide seizures. In 2015, estimated worldwide seizures of counterfeit goods totaled $425 billion, meaning that as much as $85 billion of counterfeit U.S. goods (20% of worldwide seizures) entered the world market (including the U.S. market).

Certainly, in the absence of counterfeit goods some sales would never take place, and thus the value of illegal sales is not the same as the sales lost to U.S. firms. The true cost to law-abiding U.S. firms in sales displaced due to counterfeiting and pirating of tangible goods is unknowable, but it is almost certain to be a significant proportion of total counterfeit sales. For purposes of aggregating the total cost to the U.S. economy of IP theft, we have estimated that 20% of counterfeits might have displaced actual sales of goods. When applied to the low-end estimate ($143 billion) of the total value of counterfeit and pirated tangible goods imported into the United States and counterfeit and pirated tangible U.S. goods sold abroad, the conservative estimate of the cost to the U.S. economy is $29 billion. When applied to the high-end estimate ($203 billion), the cost to the U.S. economy is estimated at $41 billion.

“Displaced”?  So let me get this right. If my wife buys a Coach handbag for $100, and it’s a counterfeit from China, and she enjoys the handbag, then the “cost” to America is $100?  I’m guessing that no actual economists participated in the writing of this government report.

Update:  Bob Murphy pointed out that my wording was wrong.  I should have said; “So let me get this right. If my wife buys a Coach handbag for $100, and it’s a counterfeit from China that displaces the sale of an American handbag, and she enjoys the handbag, then the “cost” to America is $100?”

Otherwise, my point is the same.

You might argue that my handbag example trivializes the problem, and that the real problem is patent infringement, which slows innovation.  I agree.  But how big a problem is patent infringement?  Again, the US government:

The same OECD/EUIPO study found that while 95% of counterfeit goods seized by customs officials were protected by trademarks, only 2% were counterfeits of patent-protected goods.

Here is the summary data for all three types of IP theft:

Totaling It All Up

In summary, we estimate that the total low-end value of the annual cost of IP theft in three major categories exceeds $225 billion, or 1.25% of the U.S. economy, and may be as high as $600 billion, based on the following components:

• The estimated low-end value of counterfeit and pirated tangible goods imported and exported, based on a conservative estimate that 20% of the cost of these goods detracts from legitimate sales, is $29 billion. The high-end estimate for counterfeit and pirated tangible goods imported and exported is $41 billion.

• The estimated value of pirated U.S. software is $18 billion.

• The estimated low-end cost of trade secret theft to U.S. firms is $180 billion, or 1% of U.S. GDP. The high-end estimate is $540 billion, amounting to 3% of GDP.

The software estimates are flawed in much the same way as the pirated goods estimates.  But it really doesn’t matter, because the total estimated cost of IP theft is almost entirely driven by the third category (trade secret theft), especially when you consider that the first two categories use methods that exaggerate the costs by at least an order of magnitude—indeed it’s not obvious that there are any net costs at all.  So where does the trade secret data come from?  The report doesn’t provide any methodology, merely citing a PriceWaterhouseCoopers study.  The following graph summarizes the methods employed by PWC:

Screen Shot 2018-12-08 at 2.20.54 PMPWC have done the following.  They start with the admission that they have no idea how to directly estimate the losses from trade secret theft.  Instead, they look at 8 other types of (mostly) illegal activities, which are also extremely difficult to measure.  Then they notice that 4 of these 8 activities involve between 1% and 3% of GDP.

Where to begin?

1.  Why assume that the estimates for other activities are accurate?

2. Why assume that the loss from trade secret theft is typical of other activities?

3.  If this is indeed the right method, then why not include other illegal sectors, such as the smuggling of tropical birds into the US?  Why just pick the large activities?

4.  Why assume that the size of an illegal activity like drug smuggling is a proxy for the cost of that activity to society?

5.  Why include R&D, which is 2.7% of GDP?  It’s not an illegal activity.  And does it seem plausible that the losses from trade secret theft exceed the total amount spent on R&D? But the high end of their range is 3% of GDP. As an analogy, is it plausible that losses from shoplifting exceed total revenue for retail sales?

6.  Notice that the most similar activity (software piracy) has a far smaller cost than the other 7.

The bottom line is that there is no there there.  No matter where you look, there is no reliable estimate of the cost of IP theft to the US (much less the cost in foregone utility to the entire world.)

In fairness, it’s quite plausible that the losses in this area are pretty large in dollar terms, certainly in the billions, or even tens of billions.  But that view is not based on any of these near worthless studies; rather it’s my intuition given two facts:

1. Information is a more and more central part of the global economy.  Commodities are an increasingly small share of the economy.

2. Information is easy to steal, and can be almost costlessly replicated.

Given these facts, IP theft will almost inevitably be an increasing problem.  Not just with China, but with India and many other countries as well. (Recall the slogan, “information wants to be free”) For fans of IP protection, this theft is a valid concern.

But this perspective also suggests that as with drug smuggling, the problem will be almost impossible to stop.  Consider the 2017 US government report’s discussion of China’s new communication satellite technology:

Perhaps the most recent case is China’s development of the Micius satellite, considered the world’s first quantum communications satellite, which China launched into orbit in 2016. Scientists at national laboratories and academic institutions around the world have been working on developing technology based on quantum mechanics to create a communications system that is considered to be completely secure from penetration. China is eager to develop this technology to protect its own communications from potential adversaries like the United States. However, perhaps ironically, China was able to develop quantum communications technology ahead of its rivals by incorporating their research findings. In an interview with the Wall Street Journal, Pan Jianwei, the physicist leading the project, was quoted saying, “We’ve taken all the good technology from labs around the world, absorbed it and brought it back.” This may be just an innocent quip about how scientists share their basic research findings with one another across borders. However, it has been demonstrated that the Chinese government systematically collects information and secrets from abroad to further its technology development goals, as illustrated by the cases discussed above.

This anecdote reveals more than the US government might have intended.  It suggests that it will be almost impossible to prevent scientific and technical information from rapidly spreading around the world.  The US should still crack down on IP thieves on a case-by-case basis, when they are caught, but we should not assume that this “war” is any more winnable than the drug war. Our pharma companies have basically accepted the fact that they are innovating for the high price American market, and the Europeans and Canadians will (legally) free ride.  Our other companies need to accept that there will be a lot of (illegal) free riding in IP intensive products, and there’s only so much we can do about it when it occurs in other countries.  Starting a trade war is a particularly inappropriate response.

I’m going to end with a comment left by Dallas Weaver after an earlier post on this topic:

You can divide IP into “real deep knowledge based IP” such as detailed scientific inventions and “fluff stuff” like “mickey mouse” or the business methods or “single click” IP.   The latter is obvious and easy to “borrow” and the owner could and do object.  I don’t care that much as the outcome is usually just rent-seeking with little contribution to humanity.

However, in the case of “real IP”, if you don’t have the knowledge base you can’t even steal it.   You could give the detailed IP for the F-35 to all the countries in the world and only a very few could, even, in theory, make the plane.    You can’t steal what you don’t understand.

If you have the ability to steal and utilize “real IP”, you also have the ability to create your own inventions.   Why copy the obsolete designs of others rather than creating improvements.   If you copy, you are always behind the curve.

Modern technology is so complex that the associated IP is all about people who understand the technology and China produces more STEM graduates in two weeks than we do in a year.  Guess who will win the real IP game?   Meanwhile, we demand that the new Ph.D. STEM graduates from our universities who are from China go home after graduation.

Most of the discussions about IP theft are by people who don’t have a strong enough STEM background to really understand what they are talking about.  Even Tyler with his deep understanding of economics doesn’t understand that the “tree of knowledge” is producing more fruit than ever in history, but to reach it requires “standing on the shoulders of giants”.

To even be able to stand on the shoulder of giants requires being able to read primary references in the area and I would like to drop the challenge to the readers to pick up the Reports section of Science Magazine (AAAS Journal) and see how many refereed articles they could read and understand.   When you stand on these shoulders you can see tons of what appears from your lofty perspective “low hanging fruit” for the picking.

PS.  I’m pretty sure that Tyler does understand the amazing fruits produced by the “tree of knowledge”, but I thought his comment made some interesting points.

PPS. I have a related post at Econlog.

Rogue nation

Most foreign policy experts in the US, and the overwhelming majority of foreign countries, believe the Iran nuclear deal was a good thing, and that Trump made a mistake in walking away from the agreement.  But it’s worse than that.  Not only does the US no longer wish to participate in this agreement, but we insist that the rest of the world follow our wishes.

And now the US has arrested a top Chinese business executive for violating our misguided Iran sanctions policy.  News of the arrest caused stock prices to plunge all over the world, as investors expected the US-China trade war to get worse.  And the war may not be confined to China, as there is talk of putting tariffs on cars made in Europe and Japan.  Let’s hope the administration comes to its senses, before things get out of control.  Everyone loses from trade wars.

I still expect neoliberalism to win out in the long run (see my previous post), as the alternative is too dangerous.  But right now the Trump administration is playing with fire.

In recent posts here and at Econlog I’ve been discussing how the US should respond to Chinese misbehavior.  How should the rest of the world respond when the US becomes a rogue nation?  That’s a difficult question.

PS.  The 10-year yield still exceeds the 3-month yield by 45 basis points.  Based on an empirical study by Arturo Estrella and Frederic Mishkin, the probability of recession within 12 months is now about 15%:

Screen Shot 2018-12-06 at 12.04.59 PM

Fed funds futures also point to a slowdown but no recession.  A slowdown doesn’t concern me because recent growth has been unsustainable—partly a sugar high from fast NGDP growth, and partly a one-time response to the corporate tax cut.

BTW, fed funds futures markets are currently predicting a fed funds rate of 2.55% in July 2020.  If that outcome occurs, the yield curve will still likely have a positive slope, and we probably won’t be in recession.

Nonetheless, the probability of recession is certainly a bit higher than last week.  There is reason to be concerned.

If I were the Fed, I’d probably raise rates this month (by 20 basis points), but also announce that no further rate increases are expected, unless the economy moves in an unanticipated direction.  But then if I were the Fed, I wouldn’t even have this policy regime in the first place.  I’d end IOR and use the monetary base (which would then be 98% currency) as my policy instrument.  I’d use 3.5% and 4.5% futures contract “guardrails”, to help steer the base.

Monetary policy should be about money and NGDP expectations, not about banking and finance and interest rates and inflation. K.I.S.S.

 

 

Is China a threat?

Tyler Cowen responded to my recent post, arguing that China is a threat to the liberal world order:

If you are the global hegemon, and another country, largely hostile to your political values and geopolitical desires, engages in widespread subversion of your power and influence, you must in some way hit back.  Otherwise you will not be global hegemon for much longer.  And unlike India or the EU, China desires to build an international political and economic order which would destroy liberalism as we know it.  Imagine a world where autocracy is a much more widespread norm, the Xinjiang detentions and North Korean nuclear weapons are considered entirely appropriate behavior, Taiwan is a vassal state, and few Asian countries could allow their media to print criticism of the Chinese government, for fear of retaliation.  Institutions such as the WTO would persist only insofar as they created loopholes which gave China the benefits of membership without most of the obligations.

Did I mention that politics in Australia and New Zealand are subverted regularly and blatantly by Chinese influence and money?  Very likely the same is underway in the United States (and other countries) right now.

You can put aside trade practices altogether, and simply look at the extreme and still under-reported degree of espionage and spying conducted by China, aimed at major U.S. corporations.  It’s not quite an act of war, but it is not the classical model of trade either (“Mercantilism is bad…what’s wrong if they send us goods and we just send them back paper dollars?”).  China is violating U.S. laws on a massive scale, and yes, I am sorry to say, trade is our main way of “reaching” them and sending a message.

First I’ll explain why I mostly don’t agree, and then I’ll also briefly describe how Tyler might be correct:

1. I don’t believe that China is trying to destroy the liberal world order.  Here’s what I think they are actually trying to do.  China accepts that the liberal world order will remain in place.  The most developed countries will continue to be free market democracies.  China likes to trade with those countries, and China respects their achievements.  China doesn’t like or respect places like North Korea and Turkmenistan.  Rather, China wants a free hand to continue being an authoritarian country, with a crackdown in places like Xinjiang. Unlike the Soviet Union, they are not trying to instill communism in other places.  Their support for autocracies in the developing world is simply a marriage of convenience; they know that (in the UN) these countries will also oppose American attempts to force human rights on China.  I believe that many Westerners wrongly apply the Soviet model, which doesn’t fit China at all.  As an aside, Trump loves autocracies and views countries like Canada as enough of an enemy that we must stop buying their steel for national security reasons.  (Of course, Tyler would not defend Trump on those points.)

2. The Xinjiang detentions are a gross human rights violation, but Trump is making no attempt to do anything about it.

3.  China is probably unhappy with North Korea’s nukes, but doesn’t know what to do about it.  Neither do we.  Unlike the US, China also wants to avoid the collapse of North Korea, for geopolitical reasons.  That’s the actual reason that China deserves criticism on North Korea; a collapse of their regime would be a good thing.

4.  “Vassal state”?  Taiwan is part of China.  At least that’s the official view of Mainland China, the US, and the Taiwan constitution.  According to international law, accepted by the US, regions like Taiwan, Crimea, Catalonia, etc., do not have the right to unilaterally secede, without permission from the central government.  That doesn’t mean I oppose independence for certain regions—the Czech divorce seemed to work fine; I’m just describing the rules of the game. China is not claiming any inhabited land, anywhere in the world, that the US does not consider a part of China.  China is not a Soviet style expansionist power, and for the past 2000 years has been the least expansionist great power in all of world history.  They have 1.4 billion people at home to worry about; the last thing China wants to do is run other countries.  Rather they like regimes who won’t criticize their human rights and are open to doing business with them.

5.  I’m skeptical of Tyler’s argument that Asian media outlets are especially afraid to criticize China.  The only one I read frequently is the SCMP, and it’s full of criticism of China (albeit perhaps less harsh than if China didn’t control Hong Kong.) How about the media in Japan?  South Korea?  Taiwan?  India? I don’t doubt that a few pull their punches in order to have better business opportunities with China, but that’s their decision.

6.  Like many developing countries, China is allowed more trade restrictions than the developed world.  As China gets richer, it will adhere more closely to WTO rules. Indeed China has recently been reducing trade and investment barriers, and it’s in China’s interest to continue doing so.

7.  I follow Australian politics pretty closely, and I see no evidence that Chinese influence is a major problem.  When cases of bribes are discovered, the politicians are punished.    For those who have a more conspiratorial mindset than me, tell me why I shouldn’t regard Trump as Putin’s puppet?  I’ve criticized Trump on that basis, but even I don’t think Russia controls the US to any significant extent.  The Russia sanctions remain in place, even though Russia almost certainly has information that could be used to blackmail Trump, who appeared to lie about his business dealings there. That’s not to say that Australia isn’t a bit friendlier to China than it would be if a huge portion of its exports weren’t going there.  But that influence does not require the bribery of local politicians, it’s economic self-interest.  Australia just banned Huawei, over the objections of China (HT:Ray Lopez.)

8.  This is hard to respond to:

You can put aside trade practices altogether, and simply look at the extreme and still under-reported degree of espionage and spying conducted by China, aimed at major U.S. corporations.

Like most bloggers, all I know is what I read.  So if China’s doing all sorts of bad things that are not being adequately reported, I can’t comment.  Nor can I comment on US espionage, something that I know little about.  I’m certainly not going to defend espionage, but in this case I’d guess the actual damage from China stealing intellectual property (in global utility terms) is very small.

Tyler is very polite and often lets others have the last word, so let me try to take the other side of this issue for a moment, in case he doesn’t respond.  Where might I be wrong?  The best argument is that I myself am too much a product of the Cold War.  I don’t see the China threat because I expect it to manifest itself in the way that the Soviets behaved after WWII; taking actual control of countries in places like Eastern Europe, or supporting guerrilla groups in the third world.  Perhaps I’m missing that there is a new form of international competition, involving high tech espionage, fake news, bribing local politicians, economic support for friendly autocrats, etc.  In other words, China’s doing a lot of the “softer” stuff the US did during the Cold War.  That’s not a defense of China on my part, as the US was wrong to support autocrats and wrong to try to change foreign election results.

Here are a few final thoughts.  Yes, the Soviet Union really was a nuclear threat, and we were lucky that there was no accidental escalation into outright war.  But otherwise we Americans were wrong about the Soviets. Its collapse was pre-ordained by the relentless rise of neoliberalism after the 1970s, which continues to this very day.  While I liked Reagan, in retrospect he had little to do with the collapse of Soviet communism.  Similarly, we overestimate the threat posed by China, which is still poorer than Mexico.  Unlike places like Mexico and Brazil, China has a strong desire to be a rich country, and will likely eventually become one.  But it will only be able to do so by continuing to reform its economy.

If the US wants to continue to be a global hegemon, it’s most useful role is in enforcing the international norms against one country invading and taking territory from another country.  (A norm China strongly supports!) And on that issue, there’s another great power that is a much greater threat than China.  Like Tyler, I find NATO to be a very useful organization.

I also wonder if there is a sort of instinctive suspicion of powerful Asian economies, which don’t share our values in some respects. Trump has assigned Robert Lighthizer the responsibility of negotiating with China, despite that fact that he was one of those who warned about the Japanese threat during the 1980s, a threat now almost universally viewed as a false alarm.  That doesn’t mean he’s wrong this time, but it should give us pause.

In any case, it’s all a moot point.  Trump’s not skilled enough to win this game.