Don’t kowtow to China
Australia’s government recently called for an investigation into the source of the coronavirus epidemic, and China’s government responded by threatening retaliation. Australia may have been unwise in calling for the investigation (exactly what would be investigated, by whom, and for what purpose?), but they should not give in to Chinese threats.
China greatly benefits from trade with the world, and these threats are mostly empty:
In 2010, Beijing imposed restrictions on Norwegian salmon exports in apparent retaliation for the award of the Nobel Peace Prize in Oslo to Chinese dissident Liu Xiaobo — a move that cost Norwegian salmon exporters up to $1.3bn. And after Seoul agreed to deploy a US missile defence system in 2017, Beijing stopped travel agencies from sending tourists to South Korea, causing visitor numbers to almost halve in a year.
However, in both instances total trade with China continued to rise during the stand-offs and the targeted restrictions were eventually eased.
There is good reason to think Beijing’s implied threat of a consumer boycott of Australian goods and services may be overblown because of the disruption it would cause to Chinese companies’ supply chains and the shift in consumer behaviour that would be required.
After all, iron ore, gas and coal are all vital commodities for powering China’s economy. Beijing’s reliance on Australian iron ore mined by BHP, Rio Tinto and Fortescue grew from 40 per cent in 2011 to 60 per cent in 2019 and continuing supply problems experienced by Brazil’s Vale make it almost impossible to supplant.
The best way to handle China is to remove all trade barriers against China. Remove all barriers to Chinese investment, except perhaps defense contractors. Remove travel bans with China. Give the Chinese people a big hug and dare the Chinese government to cut themselves off from the rest of the world. They won’t. But don’t refrain from speaking out against Chinese practices when appropriate. Don’t cower in fear.
Similarly, the rest of the world should stand up to US bullying. Don’t give in to US demands that they close tax havens as long as the US is the world’s largest tax haven. Keep trading with Iran and Cuba. Welcome investment from Huawei. If the US government threatens to go sit in the corner and pout like a spoiled brat, let it.
This caught my eye:
Shelton’s views on the Federal Deposit Insurance Corporation have also drawn criticism. In her 1994 book, “Money Meltdown,” Shelton advocated for ending federal deposit insurance, which most economists credit with restoring faith in the banking system following the Great Depression. Shelton called it a government subsidy that distorted financial markets. “Depositors no longer have to make judgments about the competence of bank management or the characteristics of the loan portfolio,” she wrote.
She’s right. And then this:
“I totally support federal deposit insurance. We’ve had it since 1933. I think it’s essential to reassuring depositors that they can safely put their money into American banks,” Shelton said. She added that she wasn’t even certain where the idea came from that she opposed the insurance.
That’s why I could never, ever, ever hold an important position in government. I strongly oppose FDIC, and always will. (Not that I’d ever be nominated.)
BTW, here’s what life is like in Hong Kong, a place that took the coronavirus threat seriously and never had to close its restaurants:
Today social distancing measures were relaxed after authorities reported no new locally transmitted cases for a 16th consecutive day. Bars, gyms, beauty parlours, cinemas and other entertainment venues will be allowed to be reopen on May 8. A strictly enforced limit on the number of people allowed to dine together in restaurants will be also increased from four to eight people.
And this:
As local transmission has all but stopped, health authorities are relaxing some restrictions. Taipei reported one new imported infection on Wednesday, but it has not seen any new local transmissions for 24 days.
This is also good news:
Disney closed Shanghai Disneyland and Hong Kong Disneyland in January, Tokyo Disneyland in February, and its U.S. and France parks in mid-March. All Disney parks in the world remain closed right now.
But Disney sees light at the end of the tunnel. Disneyland Shanghai will reopen on May 11, “in light of the lifting of certain restrictions there in recent weeks,” new Disney CEO Bob Chapek announced on the Q2 earnings call.
Nice to know that at least some parts of the world are doing well.
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6. May 2020 at 12:02
Good Sumner op-ed, very wise counsel. To answer the question: “exactly what would be investigated, by whom, and for what purpose?” – it would be Dr. Shi Zhenghli’s lab creating SARS-CoV-2 from a chimeric virus, by the United Nations, and for the purpose of having BSL-4 labs worldwide, including the USA’s Ft. Detrick, MD bioweapons lab, be open to UN inspection to prevent future outbreaks.
6. May 2020 at 12:37
Agree. The difference though is that US sanctions can hurt a country a lot more than Chinese boycotts. Iranian GDP shrank by over 6% the year Trump re-imposed sanctions. I do not believe there is a single case of a country experiencing a GDP contraction as a result of Chinese sanctions or boycotts.
Regarding investigations, countries should begin investigating by back-testing all their own pneumonia samples from the last couple months of 2019 and doing antibody tests. The recent finding of a confirmed French patient with no travel history on December 27 changes what we know of the timeline of the virus a lot. There are also many anecdotal stories of people who claim to have gotten severely sick in December or January, and later tested positive in an antibody test. We’d probably learn a lot about the spread of the virus that way (and the information we learn would probably be a lot more useful for combating the virus than learning whether the virus began as an accidental release from a lab or from a market or from a pig farm, which statistically seems to me the most likely as there are far more pigs around than exotic or lab animals), and it wouldn’t require any cooperation from China.
6. May 2020 at 16:43
I think there is a problem of externalities and the so-called bsl-4 virology labs.
There have been lab leaks from bsl-4 labs of artificially altered viruses. In bsl-4 labs viruses are manipulated, called “gain-of-function,” to be more infectious and lethal. It is public record that a bat virus was altered in the Wuhan lab, to be more infectious and lethal to mice.
As the covid-19 pandemic has proved, we are all mice.
Certainly, any nation does that does not open up its bsl-4 labs to complete transparency and rigorous international inspections should be subject to trade sanctions.
6. May 2020 at 19:22
@ssumner: Like a lot of libertarian ideas, opposing FDIC insurance makes theoretical sense. But also like a lot of those ideas, it wouldn’t work well in the real world. In my experience most libertarians are above average intelligence, and usually also of good character. Their blind spot is they assume others are the same way.
So it might seem like no big deal for everyone to have to “make judgments about the competence of bank management or the characteristics of the loan portfolio”, in the real world 90% of people would not be able to do so, and many more have better things to do. FDIC insurance provides a reasonable signal in which the benefits outweigh the costs.
Extreme libertarianism, like communism, works well in theory, but not in the real world. I am glad however that they are out there banging the drum to provide a counterweight to statism. There needs to be a balance.
7. May 2020 at 07:04
Do any economists actually support FDIC insurance? It was a bad idea in 1933 and it is a bad idea now.
It was, of course, small banks in states with state deposit-insurance systems that failed in the 1930s, since they had more risk and less diverse portfolios than large banks in states without state deposit-insurance systems. So what did the federal government do? Enact nation-wide deposit insurance and limit how diverse banks could be. Brilliant.
7. May 2020 at 09:07
Mark, Good points. I got sick after going through LAX international terminal on January 26, and then had a bad cough for 5 weeks. At the time I thought there was almost no chance it was Covid-19, but I increasingly wonder . . . .
msgkings. Then why did they do so before FDIC was created?
Tacitus, I believe that many do support it.
7. May 2020 at 09:56
Another reason why economics needs more economic history, then. That’s unfortunate.
It is frustrating that even historians, however, confound bank suspensions and bank failures, as well as losses of depositors and losses of other creditors and/or equity holders. The history of banking pre-FDIC is not a horror story.
7. May 2020 at 09:58
Scott,
This is once again no reflection of reality. The US seems to have very effective methods of enforcing its sanctions, otherwise many European companies would not comply with the them. But they are complying with them, and even though some European governments have been claiming for years that they are against the sanctions on Iran and that they will be circumventing them “any day now”, nothing of this sort has ever happened (in a relevant way).
The CCP in China is also very powerful and can of course impose parts of its will on a much less powerful country like Australia. This could only be prevented if all Western countries were to unite in the fight against the CCP, but is not the case. On the contrary, if the CCP picks individual governments, such as the Australien one, or before that, I think it was the Canadian one, then usually all the other Western governments usually duck away, sometimes with the exception of the US, but even the US likes to duck away in such cases.
7. May 2020 at 10:04
I used to be more in the camp of cultivating China, but three decades after Tienanmen, China is vastly richer and more powerful yet still run by the CCP. The CCP is a big problem.
But even apart from the CCP, a powerful China will assert its interests as aggressively as it is able to. Not a knock on China, this is just the way nations behave. And China has had a pretty crummy 500 years, a horrific 19th century at the hands of the West, and an even more horrific 20th century at the hands of the Japanese, (in both centuries, of course, they saw horrific self-inflicted tragedies too). I fully expect a resurgent China to be pugnacious and interested in projecting power as far as it can, and one run by the CCP to be nasty to boot.
This is a more powerful counterweight to the US than Hitler or the Soviet Union ever were.
As far as hegemons go, you can do a lot worse than the USA.
7. May 2020 at 11:56
Brian,
exactly right. In fact, when was there ever a hegemon more benevolent? The Habsburg Empire might come to mind, but otherwise I can’t think of too many other benevolent hegemons at the moment. The Brits have brought progress to many parts of the world, but I also think they have been more cruel.
The US even started out as a kind of anti-hegemon; even though it was of course impossible to keep this up.
7. May 2020 at 12:37
Whats your replacement for FDIC?
I disagree with the above that 90% of people can’t judge a bank’s credit quality. I think less than .1% of the population can make that judgement and probably less. Besides the fact it would impose a huge societal costs of requiring people to do credit analysis even if they could. Thats a huge time sink. And anti-productivity.
Also it creates the run on the bank problem. As people could pull money just because they think others would. And the slowest people would be the bagholder. Maybe if you used a lot more 6 month cd’s that could eliminate the problem.
7. May 2020 at 12:43
@ Christian List,
When has there every been a global hegemon before?
7. May 2020 at 13:21
I agree with Sean and msgkings. The argument that depositors should police banks seems to be fanciful. How is a small depositor supposed to do that? And now the political pressure to bail out non-bank corporations is too great for politicians to resist, how are they going to resist the pressure to bail out depositors even if they are not formally backed?
If you raise the reserve ratio to 100% like Irving Fisher proposed and Milton Friedman supported(at least until 1992), then FDIC is just insuring against outright theft. We could then put Pigouvian taxes on short term corporate debt like Robert Lucas advocates, and then corporate defaults would trigger a quick bankruptcy where shareholders are zeroed out and bondholders simply get shares in the new company. It could be done electronically in a weekend. Bankruptcy would only affect the stockholders and bondholders of that company. Since the payment and deposit system would not own any of those bonds, there would be far less reason to bail out private corporations.
7. May 2020 at 13:52
@Negation of Ideology – “I agree with Sean and msgkings. The argument that depositors should police banks seems to be fanciful. How is a small depositor supposed to do that?” – there was a newsletter back in the 1980s that actually ranked every bank in the USA on bank safety, so this question is trivially easy to answer. I too am in favor of cutting back on FDIC insurance. In Greece it used to be a mere 30k Euro then during the crisis it was retroactively increased to 100k. Caveat emptor should be the rule, rather than government bailout.
7. May 2020 at 18:49
https://youtu.be/DU0Uly5VWZ4
Nikki Haley was once touted about as the voice of reason within the Trump Administration. Now she is breathing fire at the dragon.
By the way, the national headquarters for the Confucius Institutes is at Tyler cowen’s George Mason University.
Maybe it is there so that while they spy on us, we spy on them too.
7. May 2020 at 21:17
Is the argument against FDIC because it is federally mandated/instituted or in principle against insurance?
What if BerkshireHathway or GeneralRe launches a insurer that banks can buy a policy from – they can range from guaranteed $100K min to $2m min range per depositor and the banks pay the premium; the insurer pays out the policy minimum agreed to.
So a bank buying a policy and the insurer agreeing to a very high payout is a signal as to the safety of the bank.
7. May 2020 at 22:23
It’s remarkable how the same economists that advocate for open borders, are the same economists who have bankrupted this nation.
I agree that we should not kowtow to China, but the correct economic response is the one that Japan and India are currently taking. Call their bluff, increase tariffs, and move your manufacturing elsewhere. It’s puzzling that S. Sumner can correctly conclude that China needs the world, yet fails to draw the next obvious conclusion, which is to weaken them through isolation.
The problem with being an idealist, and wearing that lens, is you see the world from a very warped point of view. It’s a world where everyone is friends, everyone plays by the rules, and everyone lives happily ever after. If the west does not wake up from this dream world soon, they will be buried by the CCP.
8. May 2020 at 01:33
@Tacticus
“Global” wasn’t even the definition, we were just talking about hegemons. But since you mention it, there have been quite some empires comparable to US power. The Western culture certainly knows about Alexander the Great. Then of course the Roman Empire, your name alludes to that; especially under Augustus. Then the Mongol Empire under Genghis Khan. I guess, there are more.
China, too, was certainly a hegemon for centuries, if not millennia. Then the Spanish. Then, of course, the British Empire.
Then the attempt of Japan and Nazi Germany, which lasted only a few years. Then the division of the world into two parts by the US and the USSR. And now the US alone for a short time, but CCP China is rising.
Many of these empires were global in the sense that they controlled essential parts of the then known world. This is “global” in some sense, because you cannot control what is not known. And their power, in most cases, was certainly not less than the power of the US today. Just look what happened to Carthage in the Third Punic War.
8. May 2020 at 09:22
I don’t see what the serious problem is with FDIC insurance.
Whether or not people can adequately monitor bank risk (and I agree professionals can create lists people could use), many people won’t, and you’ll get sob stories about some poor person who lost $X in their bank account and now can’t pay their rent or buy groceries when their bank fails. That’s not a sustainable political position and I think it’s probably best to let people who use the banking system trust that their money isn’t going to disappear or be unavailable for extended periods.
Even with most citizens actively monitoring bank quality directly or via lists created by professionals, you’ll also get bank runs when a bank is downgraded or when the finance sector in general is weaker due to fears and perceptions, well placed or not. Given how quickly most banks ended up paying off their TARP equity injections, its clear that lack of confidence was a bigger problem in 2008 than lack of capital.
The FDIC insurance isn’t free – if we think it’s causing significant distortions (which seems doubtful to me given how stringently bank capital and liquidity is regulated these days) the assessment fees can be adjusted to minimize it. I’d rather not have to worry that any given bank could potentially be untrustworthy and my deposits would be gone.
8. May 2020 at 09:34
What’s the point talking about FDIC insurance, when everybody knows that the big banks get bailed no matter what, because they are “too big to fail”?
Maybe one should discuss this issue first, and then one can attack the small savers with their ridiculous $100,000.
I’d consider rescuing the smallest savers, up to a very limited amount — but the whole bank?
8. May 2020 at 10:17
Tactitus, Yes, and Canada didn’t even have deposit insurance until 1966.
Christian, If the EU stood up to the US on Iran then I predict the US would back down.
Negation and Sean, I don’t believe you have any idea what a banking system would look like without FDIC. I assure you that depositors would police banks, as they did so before we had FDIC. Safe deposits will be provided by the free market for those that want them.
Anon, I have no problem with private deposit insurance. The current system treats everyone the same, and encourages risk taking.
Michael, You said:
“It’s remarkable how the same economists that advocate for open borders, are the same economists who have bankrupted this nation.”
Oh, and who are those? The Trumpistas who ran up massive public debts even in the good times? The Trumpistas who increased our trade deficit?
You said:
“The problem with being an idealist,”
Yes, the nationalist approach worked so much better in the first half of the 20th century.
Justin, If the public wants safe deposits then the private sector will supply them, even without FDIC. A private company can insure against fraud. The problem is when you take safe FDIC insured deposits and make risky long term loans. That’s perfectly legal in the US.
Christian, The main problem are the small banks, not the big ones.
And AFAIK China’s always been an overwhelmingly Han nation; it’s never been a major empire.
8. May 2020 at 12:32
@ Christian List,
The ‘known world’ was very much a matter of the beholder, though. Alexander, Augustus, Genghis Khan, Tamerlane, etc etc, none of them had the power projection capabilities of the U.S. today, in either qualitative or quantitative senses.
It makes no sense to compare U.S. hegemonic morality to historical hegemon’s. That is not to say the U.S. is a bad hegemon or that China would be better, I don’t believe either of those things, but the historical comparisons are not helpful, in my opinion.
8. May 2020 at 15:59
Scott,
Isn’t this the whole point of banking? I don’t understand the comparison either. Of course, the banks must NOT get a bail-out. They must be fully liable. The managers must be fully liable. I don’t see why you can’t separate FDIC from bank bailouts: The bank goes under completely, only the savers get some money back up to a certain amount. But that does not help the bank.
I’m glad they don’t. I do not see what the EU could do either. It’s not worth it anyway. The US is such a large market, Iran is a small market. The US simply makes it difficult or impossible for European companies to enter the US market if they breach the sanctions. It is not entirely clear what the EU could do about this. They can start a trade war, but as I said, over such a small matter? It’s just not worth it.
The whole idea of “tianxia” is a hegemonic concept oriented towards the whole (known) world. It is a very classical concept with China in the middle, tributary states around, and primitive barbarians at the fringes that are not worth exploring. You can’t get much more “hegemon” than that. In principle it is similar to the Roman concept of a world empire.
@Tac(t)itus
Why not? I still think that the earlier empires were at least as powerful. Of course, “known” world is in the eye of the beholder, no question about that, but that doesn’t really matter.
8. May 2020 at 19:03
scott,
[quote]Anon, I have no problem with private deposit insurance. The current system treats everyone the same, and encourages risk taking.[/quote]
That just takes us to the next question: insurer goes bust, AIG (almost) cough cough, what next? regulation and then next regulatory capture. what next?
9. May 2020 at 19:12
“Remove all barriers to Chinese investment, except perhaps defence contractors. ”
And if Chinese investors are effectively agents of the Chinese governments, and any Chinese firm can be turned into an agent of the Chinese government, how many ports and telecommunication systems do you think they should be allowed to buy?
How is it unwise to want to enquire into origins of a pandemic disease?