Archive for the Category China

 
 

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:

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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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China is cleaning up fast

Here’s the NYT:

On March 4, 2014, the Chinese premier, Li Keqiang, told almost 3,000 delegates at the National People’s Congress and many more watching live on state television, “We will resolutely declare war against pollution as we declared war against poverty.” . . .

Four years after that declaration, the data is in: China is winning, at record pace. In particular, cities have cut concentrations of fine particulates in the air by 32 percent on average, in just those four years.

Back in 2013, I was very skeptical of claims that pollution was dramatically shortening life expectancy in China.  Despite the following, I’m still skeptical.

To investigate the effects on people’s lives in China, I used two of my studies (more here and here) to convert the fine particulate concentrations into their effect on life spans. . . . Applying this method to the available data from 204 prefectures, residents nationally could expect to live 2.4 years longer on average if the declines in air pollution persisted.

The roughly 20 million residents in Beijing would live an estimated 3.3 years longer, while those in Shijiazhuang would add 5.3 years, and those in Baoding 4.5 years. . . .

The U.S. Clean Air Act is widely regarded as having produced large reductions in air pollution. In the four years after its 1970 enactment, American air pollution declined by 20 percent on average. But it took about a dozen years and the 1981-1982 recession for the United States to achieve the 32 percent reduction China has achieved in just four years.

. . . Bringing all of China into compliance with its own standards would increase average life expectancies by an additional 1.7 years (as measured in the areas where data is available). Complying with the stricter World Health Organization standards instead would yield 4.1 years.

I’m still not buying these claims.  Beijingers currently live to be 82.  Will this reduction in pollution push their life expectancy up to 85.3?  I doubt it.  Would meeting the WHO standards boost life expectancy up an additional 4.1 years to 89.4?  Very unlikely.

To be sure, life expectancy has been rising in Beijing, and will keep rising–perhaps to 85 or 86.  But that was equally true when pollution was getting worse.  The effects of pollution have been exaggerated in the press, as Andrew Gelman so ably pointed out back in 2013.

Having said all that, this news is certainly very good, and means that Chinese RGDP growth was overstated during the boom period of 1980-2012, and is currently being understated.

You knew this was coming

Why am I not surprised?

Chinese President Xi Jinping recently consolidated power. Trump told the gathering: “He’s now president for life. President for life. And he’s great.” Trump added, “I think it’s great. Maybe we’ll give that a shot someday.”

There are a lot of people in China who believe in classical liberal principles.  At one time they respected America.

PS.  If you think presidential character doesn’t matter, read this.

PPS.  I just crossed 10,000,000 views:

 

Was the dotcom mania “mad”? (And let’s lower the relative status of pessimists)

Tim Harford has a very good piece on bubbles in the FT.  This caught my eye:

Yet even with hindsight things are not always clear. For example, I first became aware of the incipient dotcom bubble in the late 1990s, when a senior colleague told me that the upstart online bookseller Amazon.com was valued at more than every bookseller on the planet. A clearer instance of mania could scarcely be imagined.

But Amazon is worth much more today than at the height of the bubble, and comparing it with any number of booksellers now seems quaint. The dotcom bubble was mad and my colleague correctly diagnosed the lunacy, but he should still have bought and held Amazon stock.

I wish I had bought Amazon in the 1990s, just as I wish I had bought Bitcoin at $12, when I was writing posts claiming that it was not a bubble.  But I didn’t, and given what I knew at the time there was really no reason for me to do so.  But what about the claim that “the dotcom bubble was mad”?  I do recall people saying that in 2002, after the bubble had burst and the NASDAQ fell to 1200.  But is that true?

The argument made in 2002 is that tech valuations made no sense unless you believed that tech companies would push aside old stalwarts like GE, GM and Walmart, and that companies like Apple and Amazon would become the most dominant corporations on Earth.  Well, hasn’t that happened?  Another argument was that you’d have had to believe that all the dotcom companies would be successful.  Actually, if you didn’t know which ones would be successful, it would have made sense to buy an index fund in the NASDAQ.

The NASDAQ peaked at just over 5000 in early 2000, but that was for just a very brief period.  The average “mad” dotcom investor would have purchased stock at some time during 1999 or 2000, probably at a NASDAQ level closer to 3500 or 4000.  NASDAQ is now above 7200, and if you add in dividends it would not be unusual for an investor to have doubled their money over 18 years.  That’s not particularly good for a risky investment, but it’s not horrible.  It’s a higher rate of return than T-bills, but lower than T-bonds.  But keep in mind that T-bond investors lucked out, as actual NGDP growth was far less than expected when T-bonds were yielding 6%, and if people had known what was going to happen to the US economy, yields would have been far lower in 2000.  Alternatively, if NGDP had grown as expected, the NASDAQ would be far higher today.

Just to be clear, even today it seems like the tech market was a bit frothy at the peak in March 2000, I’m not denying that.  But my point is that all of these judgments are provisional.  If people really believe that markets are irrational, they ought to be writing posts in the FT talking about the negative bubble of 2002.  What were those morons thinking when they sold tech stocks when NASDAQ was at 1200?  Were they insane? Were they idiots?  Instead, pessimism is intellectually respectable so the pessimists get off scot-free, while optimists are ridiculed for being wrong.  Why?

Here’s how the FT article starts out

“Prices have reached what looks like a permanently high plateau.” That was Professor Irving Fisher in 1929, prominently reported barely a week before the most brutal stock market crash of the 20th century. He was a rich man, and the greatest economist of the age. The great crash destroyed both his finances and his reputation.

The fact that Fisher’s wrong prediction had any impact on his reputation is a sad commentary on our society.  His forecast should have attracted no more attention than his forecast as to who would win the World Series.  Would Fisher’s reputation have been damaged if he got a baseball game wrong?

And if we really should trash people for their bad calls on the market, why isn’t Robert Shiller’s reputation damaged for his claim that stocks were overpriced in 2011, when in fact it was near the beginning of one of the great bull markets in US history?  Why trash the optimists but not the pessimists?

And why aren’t the Chinese bears being called to account for all their predictions of a crash in the Chinese economy, or of 3% average real GDP growth during the decade of the 2010s?

Just to be clear, I’m not saying anyone’s reputations should be trashed.  My complaint is that other people are trashing great economists like Irving Fisher with no justification at all.

Speaking of China, remember all those predictions that it would get stuck in the middle-income trap?  Read the following from another FT story, and ask yourself how often you read those sorts of things about Turkey, Brazil or other countries that are actually stuck in the middle-income trap:

Here, too, China is catching up. Chinese internet leaders Tencent and Alibaba have a combined valuation of $1tn. Add in another $200bn or so for Baidu, JD.com and Netease plus other listed or unlisted companies, such as Toutiao, Meituan and Didi, and the scale of the Chinese market becomes apparent. Trends emerging in China are beginning to shape the future of the global tech landscape. To its dominant role in the supply chain we can now add a “demand chain” aspect to the country. . . .

Massive investments in mobile broadband and a highly competitive handset market means that nearly all of China’s approximately 750m internet users use smartphones. Payments via QR codes, led by Tencent’s WeChat and Alibaba’s Alipay, are making cash obsolete. Dockless bikes line the streets of Chinese cities. The country’s physical infrastructure — roads, high-speed trains and airports — are facilitating as big a boost to consumption as President Eisenhower’s roll out of the Interstate Highway System in the US in the 1950s.

I have lived in Beijing for more than 20 years, yet only in the past year have I felt on returning to London or Silicon Valley that I’m going backwards in time. For urban residents, China is increasingly a study in frictionless living. Hopping on a bike, ordering a meal from a huge range of restaurants, paying for utilities, transferring money to friends — all can be done at the touch of a button. Internet services in the west offer increasing convenience no doubt — but nothing beats the experience in China.

What part of “developed country” is China not going to be able to do by 2035?  Be specific.