Archive for the Category China

 
 

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.

Why no US/India trade war?

Tyler Cowen has a new Bloomberg post on the recent truce in the US/China trade war.  Here is a rare example of where I strongly disagree with him:

Nonetheless, it’s not quite fair to describe the trade war with China as a problem that Trump started and then pretended to solve. The reality is that hostility toward Chinese trade practices has been building for some time. Anti-China measures have long commanded bipartisan support not only in Washington but also among corporate leaders, who see themselves as victims of unfair Chinese trade practices and espionage. This is an issue that predates Trump, and he deserves some credit for doing something to help solve it.

Everything in that paragraph is completely correct–except the last portion of the final sentence, which is wrong. Tyler’s right that Democrats and Republicans and corporate executives have been complaining about China for years.  For instance, Chuck Schumer used to constantly complain about China’s huge current account surpluses.  He demanded a sharp revaluation in the Chinese yuan.  China did exactly what he requested, sharply revaluing the yuan upward and reducing China’s current account surplus to near zero.  But as with any schoolyard bully, capitulation of the victim just whets the appetite for more bullying.  Schumer is not at all satisfied.

China needs to know that if they give in to US demands once again, we’ll just find new topics to complain about. The US is a bully—that’s what we do.  We bully small countries any time they don’t agree with our foreign policy, on anything from Iran sanctions to breast milk.  (Yes, China also occasionally bullies small countries on issues such as the disputed islands in the South China Sea.)

I read the situation very differently from Tyler.  Previous presidents like Clinton, Bush and Obama occasionally complained about Chinese trade practices, but their economic advisors were not foolish demagogues like Peter Navarro, they were serious people who correctly advised them that China’s policies were not a big problem for the US and that we’d be better off with a policy of engagement.  As a result, these presidents wisely ignored the calls for a trade war with China.

Tyler mentions practices that we object to such as government supported Chinese state-owned enterprises, and these are indeed bad policies.  But it’s up to China to decide how to organize its economy, not the US.  After all, Europe was also full of state-owned enterprises during the 1970s, as well as all sorts of hidden barriers to US imports.  That was too bad for Europe, but would the US have been wise to launch a trade war against Europe during the 1970s?  Obviously not.

Consider the following two cases:

1. China has foolish economic policies that hurt China a lot and also hurt the US a little bit.

2. India has even more foolish economic policies that hurt India enormously and also hurt the US somewhat.

If the reasons cited by Tyler were the actual basis for the trade war, then India should be the target, not China.  India’s policies are even more anti-market, and deprive the US of even more potential gains than what we’d get from a liberalized China.

Now suppose I’m right, and this is all window dressing that is disguising the real motive—crude protectionism based on economic doctrines that were discredited 200 years ago.  In that case the trade war would be launched against the country with the largest amount of exports to the US, which is China, not India.  Protectionists believe that imports hurt an economy.  Pundits may complain about Chinese policies like state-owned enterprises, but if China’s exports to the US were at the level of Cambodia then no one would care.  Does Cambodia even have state-owned enterprises?  Most Americans don’t know and most don’t care.

So while Tyler’s right that many people in America have been complaining about China for years, he’s wrong in claiming that Trump deserves credit for listening to those complaints and trying to “solve” the problem. It’s up to China to determine how to run its economy.  It’s up to American consumers and firms to decide if they want to buy Chinese goods, or invest in China under the conditions offered by the Chinese government.  Although the US is less protectionist than China, we are far from being a free trading nation.  How would we feel if other countries put sanctions on the US, in retaliation against our numerous protectionist policies?  We should lead by example and unilaterally adopt 100% free trade, unless there’s a clear national security issue (not a phony one like cars and steel.)

I encourage the Chinese to continue liberalizing their economy, as they’ve been doing for the past 40 years—but only because it’s good for them.  Regarding US demands, the best strategy for China is to stand its ground.  Fortunately, Trump has shown he’s desperate to get deals, even if the concessions on the other side are trivial.  Fortunately, Trump also worries about the stock market, and thus he will eventually give in, as he has done so many other times. On the other hand, it makes sense for the Chinese to look like they are willing to compromise, as that will make things easier for Trump.  Like the Chinese, he doesn’t like losing face.

PS.  There may be a few national security issues with China where sanctions are appropriate. I’m no certainly expert on high-tech espionage.  But that’s only a tiny faction of the trade dispute, and if it is a problem is better addressed through sanctions targeted at specific high-tech companies like Huawei.

Those inscrutable occidentals

Put yourself in the position of the Chinese leadership, trying to figure out the goals of Western policymakers, particular the Americans. Recall that last spring we negotiated a trade agreement with China, and then changed our mind.  What do those Westerners actually want from us?

For years the West has complained about the massive Chinese current account surpluses, which peaked at about 10% of GDP.  This year China’s surplus is expected to be 0.5% of GDP, the most nearly balanced of any major economy.  Only Belgium will be closer to “perfection”, if that’s how you look at a current account of zero.

Is the West happy?  Not at all.  Two new complaints have arisen.  First, China continues to run a large surplus in the trade in manufactured goods:

Many analysts doubt that most trading partners will be persuaded by Beijing’s rhetoric or by the declining current account surplus. While commodity exporters and tourist destinations have increased sales to China, displaced manufacturing workers who have fuelled support for Mr Trump and other populist leaders have not seen much benefit.

“Workers in the manufacturing sector around the world do not have much reason to be impressed by China’s rebalancing, since it hasn’t helped them in the aggregate,” said Brad Setser, senior fellow for international economics at the Council on Foreign Relations.

And second, many foreign policy hawks are now saying that the rise in China is itself a bad thing.  We need a “new cold war” aimed at slowing China’s rise.  So if those are your two policy concerns, what is the single most disastrous action that China could take?  Here’s a FT piece discussing the recent trade war truce:

Complicating matters further were different interpretations of the deal emerging on Saturday night from the two capitals.

China raised the prospect that the tariffs could be eliminated entirely after the new round of talks, which the US did not highlight. Beijing did not mention the 90-day deadline for the negotiations, or the possibility that the tariff escalation could return if no agreement was reached. China was also much less detailed on the purchases of American goods it was committing to.

However the optimistic tone struck by the two leaders in Buenos Aires suggested a willingness to strike a deal.

If China liberalized its economy then it would grow even faster.  That should be really bad news for the Cold War crowd, those who fear the increasing military strength of China.  In addition, a liberalized China would buy even more commodities, services and high tech goods, and export even more of the manufactured goods that are adversely impacting America’s Rustbelt.  So is this what the Trump Administration wants?  More Chinese liberalization?  Or would they prefer that China go back to the Maoist era when they were a threat to neither the US military nor to America’s blue-collar workers?  Search me.

As for the protectionists who are looking to Trump as their savior, good luck with that:

There were already some signs of a backlash to the truce from some of Mr Trump’s supporters most hostile to China.

“Is #Trump making a huge mistake? The devil is in the details! But I’d be lying if I didn’t say at first glance this is very disappointing,” wrote Dan DiMicco, a steel executive who led Mr Trump’s trade unit during the presidential transition. “I don’t agree but I defer to the president.”

Defer to the president? DiMicco might want to consider what happened to those who worried about the South Korean Free Trade agreement and “deferred to the president” to renegotiate it.  Or those who trusted Trump to re-negotiate NAFTA.  Or those who trusted him to strike a deal with EU President Juncker.  Or those who trusted him to negotiate with North Korea.  Or those who trusted him to lobby Congress to get rid of Obamacare.  Or those who trusted him to get Congress to build a border wall.

I’m actually not all that upset that’s there’s no there there.  When it comes to protectionism, incoherence and incompetence are something to be welcomed.  But I do feel for the Chinese leadership, trying to figure out whether the US wants China to be like the US, or whether the US believes the world’s only big enough for one United States of America.

I sometimes wonder if Trump is a secret fan of Mao, worried that rapacious capitalists residing in the world’s largest economy are exploiting Latin American countries:

At times, Mr Bolsonaro’s gripes echoed those of the Trump administration, far to the north. In October Mike Pompeo, the American secretary of state, accused Chinese state-owned firms of “predatory economic activity” in the region. Mr Pompeo’s predecessor, Rex Tillerson, had urged Latin Americans to reject “new imperial powers” like China, bent on extracting natural resources while issuing unpayable loans.

Is Noam Chomsky now writing Pompeo’s speeches?

PS.  In many ways the US is becoming more like China.  Consider the Tiananmen event of 1976.  Zhou Enlai had recently died, and there was an enormous outpouring of grief in Tiananmen Square.  Lots of flower wreaths were laid at a statue in the center of the square, for day after day.  This continued for so long that eventually people began to recognize that it was an implicit protest against Mao, and the square was then cleared by the military.  It happened again in 1989, after the death of the lead reformer in the Chinese government, Hu Yaobang.  In a totalitarian society, people are afraid to speak out in protest, and must work through a medium that cannot be criticized—the Catholic Church in communist Poland, Islam in Middle Eastern dictatorships, or the death of a hero in China.

Americans are free to publicly criticize Trump, unless they are Republican Party officials.  In that case, they must offer any criticism in the most subtle way possible, which is hard for us occidentals.  Fortunately, some GOP officials have learned from Communist China, and are now offering implicit criticism of Trump via extravagant praise for recently deceased GOP leaders such as McCain and Bush, especially praise focused on exactly those qualities that are lacking in Trump.

PPS.  Speaking of China, the American Cultural Revolution has still not crested.  As in China circa 1966-76, there is still lots of naming, shaming, and public confessions, especially if you are born into a privileged group.  Just today I learned that the holiday song “Baby, It’s Cold Outside” has been banned from a Cleveland radio station.  With each new form of idiocy, I naively think it can’t get any worse.  I recall thinking the Yale Halloween fiasco was the peak.  I’d be interested in the views of commenters—predict the year of “peak idiocy” in the current wave of political correctness.  I say two years into the administration immediately following Trump.

Australia and China keep chugging along

The Economist has a very good essay on the Australia miracle.  It’s not just that Australia’s avoided a recession since 1991, they’ve also done better than other developed countries on a wide range of indicators, such as GDP growth, median wages and public finances (i.e. a small national debt.)  Italy would do well to study Australia.

When I started blogging, some claimed that Australia’s success was due to luck.  They had a mining boom when China began growing rapidly.  But mining has gone into a slump since 2013, with mining investment plunging from 9% of GDP to only 3%.  That’s much worse than the 2006-09 US housing slump:

Yet the collapse in commodity prices was not the end for Townsville or Australia. In fact, it was a fillip for other industries, whose growth helped to make up for mining’s troubles. The plunge in investment allowed the central bank to lower interest rates, lifting the housing business. The sinking currency, which lost 40% of its value against the greenback between 2011 and 2015, caused the number of foreign tourists and students to surge. It also encouraged foreigners to snap up flats in Sydney and Melbourne, giving construction even more impetus.

Building work had reached a nadir in the first quarter of 2012, when construction firms completed projects worth A$20bn. In the last quarter of 2017, that reached A$29bn.

Screen Shot 2018-11-24 at 2.13.17 PMAnd yet Aussie RGDP keeps chugging along at a 3% growth rate.  How have they done it?  The RBA keeps NGDP increasing:

Screen Shot 2018-11-24 at 1.34.32 PMSo the secret of Australia’s success was not the mining boom, it was sound monetary policy.  BTW, Australia has a much higher rate of immigration than the US.  Keep that in mind when you consider the amazing rise in Australian median wages:

Screen Shot 2018-11-24 at 2.40.19 PM

China’s another country that almost everyone got wrong. The NYT has a long article entitled The Land That Failed to Fail.  Here’s the subtitle:

The West was sure the Chinese approach would
not work. It just had to wait. It’s still waiting.

There are lots of experts who know much more about China than I do, and indeed my commenters often suggest that I read those experts every time I do a post on China.  Unfortunately, most of those experts have been wrong, repeatedly predicting the China bubble would soon burst.

Two experts that got it right were Ning Wang and Ronald Coase, who wrote an excellent book explaining the reforms that led to the China boom.

Many experts now insist that China is not a market economy, but I’d put more weight on those who got it right.  Wang and Coase argued that China is much more market-oriented than it appears to outsiders, and so far they’ve been right about the effectiveness of China’s reforms.

That’s not to say China won’t have a recession at some point, most likely they will.  But as we saw in South Korea after 1998, even a severe recession doesn’t prevent an East Asian country from getting rich.

PS.  I wonder if younger readers will find this as hilarious as I do:

In October Mike Pompeo, the American secretary of state, accused Chinese state-owned firms of “predatory economic activity” in the region. Mr Pompeo’s predecessor, Rex Tillerson, had urged Latin Americans to reject “new imperial powers” like China, bent on extracting natural resources while issuing unpayable loans.

By all means, Latin America should avoid imperial powers.

Every day it gets worse

Little did we know that during the golden 1990s we were complaining about things that would look utterly trivial in retrospect. The sheer stupidity of the 21st century is so mind-boggling it leaves me almost speechless.

But not quite.

Consider the “problem” of currency manipulation. Let’s start with the fact that currency manipulation is a strange term to apply to a hodgepodge of government policies that may or may not impact the current account balance. For instance, you might say that “currency manipulation” is almost the sole purpose of having a central bank.

There are some smarter economists who do worry about currency manipulation. But when you read their work, it’s pretty clear that what actually concerns them is “saving manipulation”—when countries enact policies that boost the national saving rate. These policies can “improve” the current account balance. And not all such policies, rather they worry most about a subset of relatively ineffective policies, such as swapping domestic assets for foreign assets. (I’m not saying these policies have no effect; I just don’t see how it could be very large.)  They tend not to worry as much about far more effective pro-saving policies, in the fiscal/tax area.

The Netherlands and Switzerland have CA surpluses of 10% of GDP, while Singapore’s is 20% of GDP.  Does anyone seriously believe those are due to “currency manipulation”?

Even the economists who do worry about currency manipulation find the criteria set by the US government to be absurd:

Congress’s criteria to assess if a country is interfering in its currency are: A minimum $20 billion trade surplus with the U.S., a current account surplus in excess of 3 percent of gross domestic product, and repeated intervention in currency markets.

I’ve got an idea!  Instead of labeling countries “currency manipulators” when they accumulate $20 billion surpluses with the US, how about labeling then “currency manipulators” when they, umm, manipulate their currencies?

I’ll tell you why not.  Because that would force us to actually define currency manipulation in a way that could be measured.  And that would expose the fact that what really concerns us is saving manipulation.  No, not even saving manipulation, it’s current account surpluses in other countries that actually concern us.  No, not even that, it’s bilateral deficits with other countries that concern us.  And of course bilateral deficits have nothing to do with currency manipulation in any meaningful sense of the term. Indeed they have nothing to do with anything meaningful at all.   What’s the bilateral trade deficit between New York and New Jersey?

Trump took office saying he would label China a currency manipulator from day one.  He’s failed to deliver on that promise, just as he’s failed to repeal Obamacare, secure the border, reduce the trade deficit, or stop the rest of the world from laughing at us.  He failed because the Trump’s own Treasury department wasn’t able to find evidence that China is a currency manipulator, despite using a silly set of criteria that are strongly biased toward finding China guilty, such as the provision that it’s not OK to run a $20 bilateral surplus with the US.

But it’s even worse.  Not satisfied with the fact that the Treasury’s own criteria show that China is not a currency manipulator, they are thinking of changing the criteria so that the evidence will match the predetermined verdict—guilty as charged:

Treasury Secretary Steven Mnuchin is open to changing how the U.S. determines which nations are gaming their currencies, a move that could give President Donald Trump the chance to officially brand China a foreign exchange-rate manipulator as he seeks leverage to redefine trade terms between the world’s largest economies.

One method Mnuchin would consider: Using a 1988 trade act with a broad definition of currency manipulation to designate a country a manipulator, even if the label isn’t warranted by specific tests under a 2015 law, he said. The other would be to change the criteria that help establish whether a country is engaging in competitive devaluation of its currency, according to Mnuchin.

Treasury applies three tests to measure whether a country should be labeled a currency manipulator. The framework of the criteria is provided by Congress, but the specific thresholds in the tests are at Treasury’s discretion.

Again, foreign current account surpluses are not a problem for the US.  But if you disagree with me and agree with those pundits who do worry about current account imbalances, you should be focusing on the Eurozone and Japan and Switzerland, which really do have big CA surpluses, not China, whose CA is nearly balanced.

Trump seems determined to launch a cold war against China, a country with an economy that will be twice as large as the US economy by 2035.  In the old days, militaristic countries would engage in warfare by inventing some silly pretext—say demanding that a smaller neighboring country apologize for some imagined slight.  Trump wants a cold war with China, and demands the federal bureaucracy find some sort of fig leaf to justify it.  Why not point to China’s bad human rights record in Xinjiang?  Unfortunately, mentioning human rights would simply highlight Trump’s embarrassingly friendly relationship with the Russians and the Saudis, despite their war crimes in the Ukraine and Yemen.  So Trump needs to seek out an economic rationale for war with China.  In this post-truth world, currency manipulation is as good as any.