Tuesday, December 4, 2018

Summers on China

(Continues from my last post on China trade)

Larry Summers has a good Financial Times oped on the same subject, titled "Washington may bluster but cannot stifle the Chinese economy."  He puts well the point of my previous post:
At the heart of the US’s problem in defining an economic strategy towards China is the following awkward fact. Suppose China had been fully compliant with every trade and investment rule and had been as open to the world as the most open countries at its income level. China might have grown faster because it reformed more rapidly or it might have grown more slowly because of reduced subsidies or more foreign competition. But it is highly unlikely that its growth rate would have been altered by as much as 1 percentage point.
Equally, while some US companies might earn more profits operating in China [IP sharing requirements] and some job displacement in American manufacturing due to Chinese state subsidies may have occurred, it cannot be argued seriously that unfair Chinese trade practices have affected US growth by even 0.1 per cent a year.
Larry gives more voice to China critiques than I do, which is excellent. One should listen to what people are saying, understand their objectives, and if one disagrees on outcomes -- tariffs -- usually it is because one believes a common objective has a preferable means of achievement. 

Yes, China misbehaves, to the annoyance mostly of producers in other countries and their mercantilist governments:
Few observers doubt that China needs to make significant changes in areas such as intellectual property, the rights of foreign investors and subsidies to state-owned companies if it is to meet international norms....When foreign governments get past their frustrations with the Trump administration, they acknowledge that they, too, are frustrated with Chinese commercial practices.
Yet it is also easy to sympathize with Chinese leaders who insist that China’s political system is for it to choose, and that economic negotiations should focus on the pragmatic identification of win-win opportunities, rather than on questions of ideology. 
As above, China's misbehavior mostly hurts China -- just as India's and Venezuela's poor economic policies (to choose middle of the road and bottom of the barrel examples) mostly hurt them, not us, facts which the US thereby mostly ignores. Why bother with China? Well, really, only because it's big. 
At the same time, it is hard to see how anyone with a modicum of historical knowledge could fail to be concerned by a combination of increased domestic repression, centralization of power in one man, rapidly increased military spending and rhetoric about enlarging China’s role in the world.
Yes, but again most of the world is like that. China is only a worry because it's big and still growing.

China is still a poor country. And, as long as China keeps its current economic system, it is doomed to middle income status.  But if you multiply even $20,000 per capita GDP (compared to US $60,000 per capita) -- a doubling of China -- by a billion capitas, you get a lot of GDP. That's a lot of total weight to throw around on the world stage.

This is not to say that China is not a threat to the international order. It is a seismic event for the United States to be overtaken after a century as the world’s largest economy. If, as is plausible though far from certain, the United States loses its lead over the next decade in information technology, artificial intelligence and biotech, the trauma will be magnified.
On the latter, let us continue to remember the hysteria about Japan taking over circa 1990, and the USSR taking over circa 1935 until 1960. Large government directed industrial policy has never worked. (Perhaps unless the competitor (the US) squashed its own dynamism.) We have enough problems on the table today to worry about the vague future.

The former is the interesting question. What does the world look like with China middle income per capita but larger overall than the US?
Can the United States imagine a viable global economic system in 2050 in which its economy is half the size of the world’s largest? Could a political leader acknowledge that reality in a way that permits negotiation over what such a world would look like? While it might be unacceptable to the United States to be so greatly surpassed in economic scale, does it have the means to stop it? Can China be held down without inviting conflict?
These are hard questions without obvious answers. But that is no excuse for ignoring them and focusing only on short-run frustrations. China appears to be willing to accommodate the United States on specific trade issues as long as the United States accepts its right to flourish and grow, knowing that sheer weight of numbers will make it the clear world’s largest economy before long.
"Questions without obvious answers" is a very polite way of saying that trade warriors have not explained any answers to these questions either.

I have one. If you're worried about China growing in might, so that on total GDP it can afford more aircraft carriers than we have, even though each individual Chinese is poor; if you're worried that China's state-run system can surpass our mixed state and big company military development system in quality of its forces; if you're worried that China develops past ambitions to flex its' muscles in its backyard, a sort of Monroe doctrine; then there is only one answer: get US growth back on track and in a hurry. Let international competition spur us to greater things, not to a desire to keep the average Chinese person to $9,000 of GDP per capita and filthy air so we can continue to be the Big Guy in Town. Which tariffs cannot do, by the way, as Larry points out.

Let us remember that the EU has more total GDP than the US. And we want them to spend more on their military. Getting China to want to live like the EU seems like a much better long-term strategy  than stoking a cold-war III competition with China.

Trump, for all his failings, has China’s attention on economic issues in a way that eluded his predecessors. The question is whether he will be able to use his leverage to accomplish something important. That will depend on his ability to convince the Chinese that the United States is capable of taking yes for an answer, and on his willingness to go beyond small-bore commercialism. 
A workable approach would involve feasible objectives clearly conveyed and supported by carrots and sticks, along with a willingness to define and accept success.
We can hope, but we should not hold our breath. 
Indeed. And for good reason. A successful half-century geopolitical strategy is  unlikely to spring from the mind of one President or to be accomplished by his force of will alone.   


  1. I think you mean to say that EU *total* GDP is higher than the US, not that "the EU has more GDP *per capita* than the US."

  2. Pardon the quibble, but does the EU have a higher GDP per Capita than the US?

    Per the World Bank, I am seeing US GDP per capita (measured in current USD) at 59,531.7. And the EU at 33,715.1.

    I hate to trivial, but I was under the assumption that on a per capita basis, the US is richer than the EU.

    Any help?

  3. "Let us remember that the EU has more GDP per capita than the US."

    Typo? Some EU members have a higher GDP per capita than the USA but most do not and the average is far less.


    P.S. Reminder: The USA walked away from the TPP trade deal that might have provided incentives to China to change some policies. File under myopic and self-loathing.

  4. "Let us remember that the EU has more GDP per capita than the US."

    Where are you getting this from? A quick Google search shows that the EU as a whole has no where near the GDP per capita of the US. Some European nations (not all EU) do, but as a whole the EU seems to have significantly lower GDP per capita than the US.

  5. Per tradingeconomics.com, US GDP per capita is almost 50% higher than that of the EU.

    1. Thanks. I meant total GDP, not per capita, and now fixed the typo

  6. "Let us remember that the EU has more GDP per capita than the US."

    I'm pretty sure it doesn't.

  7. > Large government directed industrial policy has never worked.

    It worked fine in South Korea.

  8. As you point out - pressuring China into stopping its subsidies for capital intensive low margin businesses like primary steel and aluminum may make China more efficient and competitive in other sectors.

    Central government suppression of the standard of living in China is probably a bigger long run problem than any subsidy to individual industries.

  9. It amazes me how, in 2018, politicians around the world still implement policies which economists have unanimously opposed since the 18th century. Adam Smith wrote a world renowned treatise in 1776, the same year that America declared its independence, which profoundly debunked the mercantile system. Smith’s anti-Mercantilist theories, apart from his anomalous and ironic support for the Navigation Acts, have vitally contributed to the evolution of economic thought since then.
    It shocks me, the fact that a treatise delegitimising mercantilist economic policies, which has tremendously influenced economic thought since America’s inception, hasn’t had nearly as heavy influence on American voters. Though it is less shocking to see China, or any other country which has been around longer than 1776, implement mercantilist economic policies. It seems that almost regardless of country, the average voter has little to no general knowledge of the history of economic thought, and the mercantile system seems to be no exception. This is why the field of economics should be studied in all schools with as much importance as typical subjects, such as math or English or history.

    1. Well, to be fair to the anti-trade crowd, economics is not the only valuable discipline of study. History also matters, and some might fear that China will someday be to the U.S. what the Dutch were to the declining Spanish empire.

      Now of course history is always a mess of confounding variables, and over consumption of Dutch imports at the expense of its own industrial base was just one of several reasons the Spanish empire collapsed. The point is simply that (as with any contentious issue) the opposing side is generally not as foolish as the straw-men we like to create for them. If the worst fears of the anti-traders do come to pass, it would not be the first time a great empire squandered its wealth and power on cheap imports.


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