China’s best friend?

I’m not sure what’s funnier, Trump’s claim that China’s 6.2% GDP growth shows his trade war is working, or his belief that the Chinese government’s GDP data is not fake news. (I don’t believe it is fake news; I just find it funny that Trump is one of the tiny number of pundits who (like me) trusts the Chinese government’s figures.)

In fact, China’s RGDP growth has been slowing gradually for a decade, just as I predicted, and over the next 5 years it will slow some more, to roughly 5%/year. Nothing has changed.

If anything, Trump’s trade tweets might be helping China:

But Helfenbein does not see retail companies leaving China anytime soon.

“The administration is sending us a signal, they would like us to vacate China. That’s the signal we get, but then they’re also blocking all the roads out,” he said. “You look at the places that we would go, number one is Vietnam, number two is India, number three is Indonesia, Bangladesh, and Mexico. All have been under some sort of threat. So what are my retailers doing now? They’re starting to throw their hands up in the air and say maybe I’ll just tough it out in China.” . . .

Vietnam saw U.S. imports jump 36% this year, according to U.S. Census Bureau. But just last month, Trump threatened Vietnam with tariffs, telling local media that the country is “almost the single worst abuser of everybody.”

Of course Trump’s attacks on Vietnam are just as silly as his attacks on China, but when you are a politician who believes that “bilateral trade deficits” actually mean something, then any country with a trade surplus with us is at risk.

I’m increasingly inclined to believe that Trump is China’s best friend. Xi has recently hardened his stance on the trade negotiations, even as Trump has been furiously backpeddling on Huawei and other issues:

In a meeting with his Chinese counterpart at the g20 summit in Osaka he agreed to extend trade negotiations with China—but only after making concessions, including the reversal of his decision to blacklist Huawei, a Chinese telecoms firm his administration accuses of spying. President Xi Jinping also adopted a less conciliatory public tone than he had before the two leaders’ previous meeting, last year in Argentina. The prospects of a substantial China settlement appear remote. Mr Trump’s subsequently arranged trip to meet Kim Jong Un on the front-line between the two Koreas looked like an effort to divert attention from this climb-down.

Perhaps the Chinese now believe that they have more leverage than the US, something I’ve been suggesting for quite some time.

Even worse for Trump, his group of rapid rabid nationalists don’t seem to know what they want. One group has been demanding that China open its capital markets to the rest of the world, while others are demanding exactly the opposite:

On July 2nd the prime minister, Li Keqiang, said that foreign investors would be allowed to take full ownership of investment banks and insurers in China from 2020, a year earlier than previously promised. Over the past two decades they have been limited to minority shares, and only last year were they permitted 51% stakes. . . .

Meanwhile the trade war looms over all. Some hawks in America want to sever financial ties with China. Marco Rubio, a Republican senator, has challenged MSCI over its inclusion of Chinese shares, accusing it of helping authoritarians. A headhunter in Hong Kong reports that American fund managers slowed their hiring after trade talks between China and America broke down in May. With talks set to resume, they can breathe a sigh of relief—for now. The worry is that, just as China clears away some of the obstacles in their path, America will replace them with new ones.

If we must have a nationalist president, let’s at least give thanks that we have such an incompetent one.  I shudder at the thought of a President Rubio.

PS.  Don Boudreaux has an excellent piece explaining why China’s so-called “IP theft” does not justify US tariffs.



28 Responses to “China’s best friend?”

  1. Gravatar of E. Harding E. Harding
    20. July 2019 at 07:19

    “I don’t believe it is fake news”

    I do. There’s at least a 20% chance China is in recession now.

    “I shudder at the thought of a President Rubio.”

    Same. He’s be even less competent.

  2. Gravatar of ssumner ssumner
    20. July 2019 at 07:46

    Less competent? How is that even possible?

  3. Gravatar of Pranav Cheruku Pranav Cheruku
    20. July 2019 at 16:28

    Well, my belief is that the US has a lot more leverage than people estimate in the trade war then one would assume.
    Remember, when you use constant dollars, the Chinese economy is only 20% bigger than the US, and the US’s net wealth is still twice that of China’s.
    Though I think the trade war is stupid, if Trump wants to beat China, and have us rub our greatness to the Chinese, we should do major supply side reforms like Texas, which grew 7.2% last year!
    Still Scott, I think you are underestimating Trump a little bit, people completely boneheaded don’t usually win a democracy, they usually get some issues right. Perhaps Chinese relations, especially with IP theft, could be improved more.

  4. Gravatar of Benjamin Cole Benjamin Cole
    20. July 2019 at 17:20

    That Don Trump is the vulgarian reality TV-show host who became US President (bulldozing the establishment-globalist GOP Potemkin Village in the process) is beyond dispute.

    That Trump’s trade policies are attacked by orthodox macroeconomists and globalists is also beyond dispute.

    But is Trump wrong?

    There are some strange features to US trade deficits, and I cite the International Monetary Fund.

    So, put on your tin-foil hats, and let’s dive in:

    The IMF again reiterated its view that the US, as a matter of policy should try to reduce its large current-account trade deficits in its July-issued External Sector Report. Moreover, the IMF says:

    “External imbalances are not necessarily a cause for concern, as there are good reasons for countries to run deficits and surpluses at certain points in time. For example, it is natural for young, fast growing economies to run deficits and borrow from aging advanced economies with weaker growth potential.”

    Is it a lugubrious feature of orthodox trade theory that we see the US running chronic and large account-account trade deficits, while the younger Far East nations run surpluses? Something is backwards.

    Then, the IMF lauds the declining US current-account trade deficit since 2008 (as a percent of GDP) as opposed to the apex reached in 2008.

    Then, the IMF posits that the large and chronic US current-account trade deficits, though reduced, leaded to artificially bloated asset prices in the US, and the real chance for financial instability. Remember what the globalists always trumpet: All that trade-deficit money comes back to the US, axiomatically. The IMF says so too, but that is why US equity, property and bond values are doped up.

    And those doped up asset values could lead to a Hyman Minsky moment, when investors realize assets are overpriced. The IMF broadly hints this describes the US asset-price collapse of 2008.

    A repeat in the making?

    The S&P 500 presently trades at 22 times earnings, trailing 12 months, compared to the long-term average of 15. Commercial property prices trade at record-low “cap rates.” Well, you know the story on bonds. But, perhaps US interest rates are headed even lower. Maybe the US will skate through.

    Still, the IMP strongly advises the US should open up overseas markets for US-based companies, and “lower labor costs.”

    The US has succeeded admirably on the latter score for a couple generations…but not on the former.

    So Trump may be on the right road, but proceeding in his vulgarian and often incoherent way so as offend even those who should be clear-thinking about trade as it is.

    I think the US needs no Singapore- or Sino-style industrial policy, unless you want manufacturing to look like our agriculture sector, that is to say successful but a creature of government.


    “Using a combination of numerical tools and country-specific insights, we estimate that about 35–45 percent of overall current account surpluses and deficits were excessive in 2018. Excessive current account surpluses remained centered in the euro area (driven largely by Germany and the Netherlands) and in other smaller advanced Asian economies (Korea and Singapore), while excessive current account deficits remained concentrated in the United Kingdom, the United States, and some emerging market economies (Argentina and Indonesia).”—-the IMF.

    Add on: Michael Pettis, the China expert who lives in Beijing, says the large US current-account trade deficits are a “consequence of significant global economic distortions.”

    I wave my tin-foil hat in salute!

  5. Gravatar of Pranav Cheruku Pranav Cheruku
    20. July 2019 at 18:37

    I don’t know why the last comment didn’t work, so I’m trying again
    I still think that you are underestimating the US’s position in this trade war.
    In constant dollars at PPP, the Chinese economy is truly bigger than the US economy, but only by 20%. Meanwhile, the US’s net wealth is more than double that of China, hardly the sign of a country with less leverage.
    I think the trade war is a silly idea, and supply reforms are necessary for us to compete with China in the long run. Our policy should approximate Texas, with 7.2% growth, then Trump’s mercantilist ideas.
    In a democracy, your vision has to match up with reality. If it diverges to much, then you will lose. Trump’s victory, and rising approval ratings doesn’t bode with the reality of a complete buffoon.
    He’s a moron, but is very quick to discard and adapt new ideas, such as using trade as leverage for Mexico to solve the migrant crisis. It’s not implausible that he will stumble upon the right strategy for China.

  6. Gravatar of Timothy Hopper Timothy Hopper
    20. July 2019 at 21:52

    Benjamin Cole: Michael Pettis is clearly both highly intelligent and overall highly knowledgeable regarding China, but his ability to misunderstand international economics, and to be rather rude in his criticisms of other positions, led me to stop reading him regularly.
    Scott: I assume you meant rabid nationalists; though if not, the thought that all the current nationalists were rapid converts to nationalism under Mr Trump, who could convert back just as rapidly, does have considerable appeal.

  7. Gravatar of ssumner ssumner
    21. July 2019 at 04:06

    Timothy, Clever. And yes, that’s a nice thought.

  8. Gravatar of Benjamin Cole Benjamin Cole
    21. July 2019 at 05:23

    Timothy Hopper-

    Remember the first rule of macroeconomics: no one is ever wrong.

    Thus we have highly intelligent US-based macroeconomists gleefully embracing large and chronic current-aacount trade deficits, while we also have highly intelligent individuals at the IMF calling on the US to enact programs to reduce current-account trade deficits.

    You say Michael Pettis is wrong. Please explain.

  9. Gravatar of Timothy Hopper Timothy Hopper
    21. July 2019 at 05:45

    Benjamin Cole: I disagreed with his views on unemployment as an inevitable consequence of the process of international macroeconomic ‘imbalances’ being rectified. Specifically through reduced demand when current account/balance of payments imbalances were returned to balance.
    Please note, it is well over a year since I have read anything by him, and I was explaining why I stopped, not disagreeing with anything in your comment or anything you linked to (though it may apply to your comment as well, I haven’t thought it through in detail.) And while everything in macro may potentially be wrong, not everything is even potentially correct.

  10. Gravatar of Michael Rulle Michael Rulle
    21. July 2019 at 07:39

    Few who vote could care less about our trade policies——which are more noise than substance. Trump, as I often say, speaks loudly and carries a small stick. I do believe that whatever negative impact his trade policies have inflicted on the US and the world, they pale in comparison to China’s trade policies negative impact on themselves and the world.

    The noise which drowns out all other noise is the Border problem and the weirdness of the quad squad. That is also what seems to energize Trump. But even he knows there are limits to his otherwise justifiable criticisms—-as he was forced by the GOP to lower his tone on Omar. It is remarkable that states like California and others literally have an open invite to all to just come and stay—-true open border ideologues.

    The quad women are creepily unified with each other against their party and also Trump. I wonder what their trade policies would be like? Trade would not even be relevant if we followed their ideas.

    So, we still have the neo- socialist candidates—-who seem to be similar to quad squad in ideology——to worry about—-all of whom are likely to have far worse trade policies than Trump—-which you seem to not ever acknowledge.

    So yes, we can not like Trump, believe Rubio would simply be an effective Trump, but you have no concern at all about the current alternatives. That is to say, you have said you prefer them over him.

    So why write about “trade”?

  11. Gravatar of E. Harding E. Harding
    21. July 2019 at 14:15

    @ssumner He only won one county in his home state against Donald Trump. Unlike Cruz, Rubio was decently positioned to unify the party. The fact he blew that suggests deep incompetence. His scripted lines suggest similar.

  12. Gravatar of Benjamin Cole Benjamin Cole
    21. July 2019 at 16:34

    T Hopper–great comment.

    Recently Tyler Cowen posted that Taiwan wages have been stagnant since 2000, because Taiwan has invested so much in mainland China factories. There have also been some papers published that Japan went through a long stretch of relative stagnation as it offshored manufacturing processes.

    The prosperity of nations is an interesting topic

  13. Gravatar of Todd Ramsey Todd Ramsey
    22. July 2019 at 05:03

    Scott, can you respond to writings and tweets of Christopher Balding? He seems to have a different view of China’s growth and policies. I would love to hear your perspective.

  14. Gravatar of ssumner ssumner
    22. July 2019 at 06:56

    Pranav, Sorry for the delay in approving your comments.

    I agree about Texas; it makes more sense to attempt supply side reforms than to fight China.

    I don’t view IP theft as a big problem.

    Trump has failed badly on illegal immigration, so I don’t view that as a success for his policies.

  15. Gravatar of ssumner ssumner
    22. July 2019 at 07:00

    Ben, So you believe that Taiwan’s massive trade surpluses, year after year, are hurting their economy? Thanks for clarifying that.

    Yes, this comment is unfair, sort of like how you comment on my posts.

  16. Gravatar of ssumner ssumner
    22. July 2019 at 07:02

    Michael, China’s policies have been getting better for decades. Under Trump, our policies are getting worse.

    Todd, A while back I commented on Balding.

  17. Gravatar of Pranav Cheruku Pranav Cheruku
    22. July 2019 at 10:01

    I think when it comes to Chinese growth, both Michael Pettis and Scott Sumner is right. The Chinese numbers are correct, China’s economy is 22 trillion dollars, and if China’s was faking the data, it would imply a correction that would shock the global economy.
    The big problem is that the composition of growth is being driven by government driven credit expansion than the more natural growth of business. Productivity growth in China has collapsed in recent years, approaching that of the more stagnant developed countries like Western Europe and Japan. China is sacrificing long-term growth rates to maintain high short-term growth rates.
    If you look at institutions like the OCED and the World Bank, they are constantly reevaulating their projections for China in 2050 downward. The OCED, for instance, has China in 2050 being only 50% bigger than the US economy. This is a far cry from projections made at the beginning of the century, where they expected China to be more than twice the American economy in 2050.

  18. Gravatar of Pranav Cheruku Pranav Cheruku
    22. July 2019 at 10:06

    Correction on the OCED numbers, they project China’s economy to be 60% bigger than America by 2050, at which point they predict that the US will grow faster than China.

  19. Gravatar of Pranav Cheruku Pranav Cheruku
    22. July 2019 at 10:07

    Here is the link for anyone interested:

  20. Gravatar of Benjamin Cole Benjamin Cole
    23. July 2019 at 02:36


    I will review my comments more carefully. In general, I want to be fair. Sometimes my tin-foil hat gets the best of me. Also, I like to explore ideas, even if I do not know the right answers.

    I never wish to cause tensions. I am just a wag at heart. Forgive, and let’s tackle the next topic.

  21. Gravatar of Christian List Christian List
    23. July 2019 at 10:38

    China’s policies have been getting better for decades.

    Scott is right, we have to see the progress: Instead of driving over protesters with tanks, the communists now hire white shirts to beat the protesters to pulp. And let us not forget the economic and other reforms: Instead of killing millions and millions of people through hunger, as in the past, they have now loosened their feet on the throats of their own people a little bit, so that their GDP per peson is now comparable to Mexico.

    Perhaps from now on we should praise Trump in a similar way: He doesn’t beat protestors to pulp, he doesn’t kill demonstrators with tanks, and GDP/person is better than Mexico. Isn’t that just great? I think any criticism would be some form of “racism” against Trump.

  22. Gravatar of ssumner ssumner
    23. July 2019 at 18:13

    Pranav, I suspect it will be more than 60% bigger.

  23. Gravatar of Pranav Cheruku Pranav Cheruku
    24. July 2019 at 07:36

    Scott, I suspect you might be right on this as well. China has five times US workforce and a higher median IQ, I suspect China’s potential is more than 5 times the US economy. I just think they have made some bad decisions, and combined with the aging of the workforce and low birth rates, that potential will come down significantly. The productivity growth numbers aren’t assuring.
    Also, I wouldn’t underestimate the US. In terms of all developed economies, not only is it significantly bigger in population, it’s per-capita GDP is over 33% bigger than the per-capita GDP of Western Europe and East Asia. It may pull off another miracle yet.

  24. Gravatar of Pranav Cheruku Pranav Cheruku
    24. July 2019 at 07:37

    Addendum: When I mean East Asia, I mean Japan and South Korea

  25. Gravatar of ssumner ssumner
    25. July 2019 at 10:35

    Pranav, I basically agree. It’s quite plausible that the US will remain at least 33% richer than China as well, maybe more. But the huge population means their total GDP is likely to eventually become quite large.

  26. Gravatar of E. Harding E. Harding
    26. July 2019 at 05:29

    Sumner, your post on housing investment is silly. India began its growth spurt when construction fell as a share of investment. Both residential and non-residential investment are necessary, but it is primarily the latter that causes the technological change that leads to long-term growth.

  27. Gravatar of Justin Justin
    26. July 2019 at 06:32

    I haven’t worked with Chinese time series data in years, but last I saw, around 2013, it was a serious challenge to model. Chinese real GDP data, from the PRC government (not OECD), didn’t look like any other country. Quarterly changes were distributed in an obviously artificial way and it was implausibly hard to find a stable, lagged association between the quarterly log changes and other Chinese time series data (for example independently measured trade flow data). Pretty clearly quarterly changes were faked, even if it may have been tethered to the real series in the long run. I don’t know the situation now, the Chinese RGDP series from the OECD on FRED looks plausible to me at first glance.

    When people, usually unhinged right-libertarian loons, claim that US data are faked, it’s easy to respond with: “but the data can be used to produce useful models, including useful models of unpublished private data”. If there were substantial faking of US data, it would show up in unstable parameter values, due to the attenuation bias effect of measurement error. You don’t typically see that, it’s easy to pick up relationships between disparate US time series, it’d be too big a task to produce fake data like that. Chinese data though, looked fake, couldn’t model it.

    I suspect the Chinese don’t think of this as malicious deception the way a western econometrician would. In the same way that Chinese students openly plagiarize, and don’t understand why westerners find that objectionable, I think the Chinese see GDP data as pro forma. The point isn’t to learn something or teach something, but to check the box of “having a research paper” or “having a government GDP report”.

    Just as it doesn’t really matter if a paper fifteen people will read is a composite of other author’s words, it doesn’t really matter if China’s public data releases are fudged, the people who need to know the real numbers know them, and the box is checked. Public Chinese data are Platonic or aspirational, the way numbers are seen in the Bible or Babylonian texts. Seeing them as “truth” in a scientific sense is to miss the point.

  28. Gravatar of Christian List Christian List
    26. July 2019 at 10:14

    Even worse for Trump, his group of rapid rabid nationalists don’t seem to know what they want.

    So if Trump is a rabid nationalist then what is Xi?

    An ultra-rabid rabbit maybe. Or a snake, element water. With vampire-like teeth. Sucking any little drop of democracy out of China, Hong Kong, and Taiwan.

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