(What’s Left of) Our Economy: America’s Persistent China Delusion Syndrome

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agriculture, China, comparative advantage, establishment, Made in China 2025, Mainstream Media, offshoring lobby, private sector, tariffs, The New York Times, The Wall Street Journal, Trade, {What's Left of) Our Economy

The week has barely started and already the Mainstream Media have delivered some genuinely bizarre – indeed seemingly clueless – China-related moments.

There’s the big New York Times series titled “China Rules.” It usefully describes how the People’s Republic has completely confounded the bipartisan American political and policy establishment’s confidence that its growing integration into the global economy would turn it into more cooperative, more economically and politically open power. And thankfully, the series does point out this mistaken official U.S. optimism – which it notes spanned fully eight presidencies. But it says nothing about the massive amounts of money spent by offshoring multinational corporations in Washington, D.C. and the rest of the country’s political and policy communities (encompassing academia and think tanks alike) to foster China myth-making and spoon-feed it to the national media, which overwhelmingly swallowed it hook, line, and sinker.

Given that this self-interested myth-making bears so much blame for China’s emergence as a major threat to America’s national security and prosperity, it’s imperative that The Times (and the rest of the Mainstream Media) start telling this story in detail – both to reveal how active and influential the myth-makers remain, and to reduce the odds that they’ll stage a comeback down the road.

The Times itself just provided one clear example of such influence in a tweet this morning about a piece on the just-concluded summit of Asia Pacific countries in Papua New Guinea – which tells readers that “The Chinese delegation sought to reaffirm its opposition to the protectionism and unilateralism that have been a focal point for criticism of the United States.” Honestly. “Reaffirm”? Like China’s (stated) opposition to protectionism as such is something to be taken seriously? Or that even China takes seriously?

Are such longstanding journalistic conventions the product of simple laziness? Or of literally decades of media reliance for information and analysis on myth-makers with strong vested stakes in portraying China as a steadily reforming economy? The answer, of course, is “both” – and that the latter fosters the former.

Another example of these habits’ persistence: today’s Wall Street Journal article describing how China’s central government and major local governments are now trying to support a “private sector” that “has become a weak link in a slowing economy.” Yes, there are entities in China that are now customarily called “private sector.” But in a command economy like China’s, where the state wields power in a wide variety of direct and indirect ways, they have about as much in common with genuine private sector companies as fool’s gold has with the real thing.

But perhaps the week’s most important China media reference – at least so far – appeared in a Journal article on how the country’s farm sector is coping with the advent of high tariffs on many U.S. agricultural products. It came in the form of some statements made by China’s President, Xi Jinping that deserve major coverage on their own, but that were presented as little more than boilerplate:

“Unilateralism and trade protectionism are rising, forcing us to take the road of self reliance. This is not a bad thing. China ultimately depends on itself.”

Xi was speaking specifically about agriculture, and can’t reasonably be criticized for wanting his country to be more self-sufficient in this sector. After all, what national leader could genuinely be happy about depending on other countries for food?

But there are two glaring problems brought up by his remarks. First, as I’ve written frequently, the contemporary global trading system, and the conventional economics underlying it, condemn the quest for self-sufficiency in any part of a country’s economy as a No-No. Trade (and therefore production) patterns are supposed to help develop the most efficient global division of labor possible. In plain English, this means that countries are supposed to specialize in what they make best, and to remain satisfied with importing most of the rest. And if food production isn’t their strong suit, they should be confident that they’ll always be able to buy from abroad all that they need.

Second, as I’ve also written, China’s quest for self-sufficiency is hardly confined to food. The country’s policy record makes clear that it’s the goal for its entire economy. The regime’s Made in China 2025 manufacturing and technology program is only the latest example. Among its objectives is reducing the country’s dependence on foreign-made parts, components, and materials for a wide range of manufactures. In other words, China’s leaders aren’t satisfied with importing goods and services where it currently lacks what economists call “comparative advantage.” They want to create this advantage for China – and according to a very specific schedule of highly concrete goals.

Whether dealing with another party, it’s crucial to define it correctly, and doubly so when that party is a “competitor” or a “rival” or outright enemy. Thanks to articles like those above, Americans have just been reminded vividly how far much of their leadership class remains from achieving this objective when it comes to China.

(What’s Left of) Our Economy: U.S. Trade Success Increasingly Depends on Raw Materials

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commodities, comparative advantage, exports, manufacturing, net exports, raw materials, Trade, trade surpluses, {What's Left of) Our Economy

History teaches pretty clearly that relying heavily on exports of raw materials isn’t a great formula for long-term national economic success. That’s one big reason that the release last week of the full-year 2017 U.S. trade statistics tells such a depressing story. Because that’s exactly what the United States has been increasingly engaged in.

The best measure of such trade performance is net exports, or trade surpluses. These data show which goods and services a country sells overseas most proficiently – and therefore which goods and services they’re likely to produce most successfully. Were this not the case, trade could not possibly – as the prevailing comparative advantage theory holds – foster the most efficient possible global division of labor.

And according to the new annual trade statistics, America’s greatest comparative advantage is in commodities. Here’s a list of the top ten trade surpluses run in goods by the United States in 2017, and their magnitude. (For the wonky, these are categories from the six-digit level of the North American Industry Classification Series (NAICS) – the main system now used by the U.S. government for slicing and dicing the national economy. The six-digit level is the one that does the best job of distinguishing between final products and their parts and components – which is critical given how much American and global trade now takes place in the latter, due to the development of global supply chains.)

1. Petroleum refinery products: $34.39 billion

2. Special classification provisions: $23.50 billion

3. Soybeans: $21.25 billion

4. Plastics materials and resins: $15.31 billion

5. Liquid natural gas: $14.60 billion

6. Waste and scrap: $12.19 billion

7. Non-anthracite coal & petroleum gases: $9.22 billion

8. Motor vehicle bodies: $9.18 billion

9. Corn: $8.99 billion

10: Non-poultry meat: $7.38 billion

Six of these ten are commodities, and “special classification provisions” – which are mainly “exports of articles imported for repairs etc.; imports of articles exported and returned, unadvanced; imports of animals exported and returned” – might as well be.

To be sure, aerospace products, especially commercial aircraft, should be at or near the top of this list. But because Boeing doesn’t want final products and parts and components broken out in trade data, it’s no longer possible to find apples-to-apples figures for these products. And even their inclusion would produce a raw materials-heavy list.

Here’s the list of the top ten trade surplus items ten years ago, in 2007 (when these disaggregated aerospace numbers were still reported publicly):

1. Aircraft: $39.54 billion

2. Semiconductors & related devices: $22.71 billion

3. Waste and scrap: $17.69 billion

4. Plastics materials and resins: $15.32 billion

5. Aircraft parts and auxiliary equipment: $13.46 billion

6. Soybeans: $9.92 billion

7. Special classification provisions: $9.84 billion

8. Corn: $9.84 billion

9. Miscellaneous basic organic chemicals: $9.70 billion

10. Oil and gas field machinery & equipment: $8.54 billion

Only three of the sectors on this list are commodity sectors, and adding the special classifications trade surplus makes four of ten low value sectors.   

Here’s another way to look at this comparison. In 2007, the U.S. manufacturing trade deficit (the flip side of course of the above surpluses) accounted for 76.99 percent of the overall merchandise deficit on a Census basis. The 2017 figure? 116.50 percent.

There’s a first time for everything, and maybe the United States will prove the exception to this rule about the value of manufactures versus commodities trade. Maybe what’s decisively important that two of the new commodities items on the 2017 list were energy items (liquid natural gas and non-anthracite coal and petroleum gases). But with energy-heavy countries like Saudi Arabia frantically trying to diversify their economies, that seems doubtful. As to the question of a comparative advantage in commodities providing a durable foundation for American prosperity – the burden of proof surely remains with the optimists.

(What’s Left of) Our Economy: A Big New Hit to Free Trade Theory

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Adam Smith, Bruce R. Scott, comparative advantage, David Ricardo, economics, economists, factors of production, free trade, Great Britain, machinery, manufacturing, Portugal, protectionism, Ralph E. Gomory, Steve Keen, technology, textiles, The Wealth of Nations, Trade, William J. Baumol, wine, {What's Left of) Our Economy

OK, time for some good news – at least if you’d like the economics community to come up with more realistic views of trade policy and its impact on the national and global economy. As made clearest by a (sadly overlooked) journal article by Steve Keen of Kingston University in London, some noted academic economists have identified fatal-looking flaws in comparative advantage theory – the 18^th century concept that ever since has anchored mainstream scholarly thinking about the entire discipline, along with justifying the virtues of the freest possible trade flows.

As Keen writes, comparative advantage identified benefits flowing from economic specialization, and was first advanced by British economist Adam Smith in his seminal The Wealth of Nations to explain the superiority of laissez-faire, free market practices within industries. His compatriot David Ricardo extended the concept to relationships between industries and countries. The core idea in its trade theory version is that all countries and their peoples will reap maximum gains if they limit themselves to those tasks that represent their own best efforts – even if they’re laggards by international standards in that particular sector.

I first encountered a compelling objection to comparative advantage in the early 1990s, in the form of a sharp observation by Harvard Business School professor Bruce R. Scott. As he noted, Portugal, one of two countries in Ricardo’s classic description of comparative advantage’s virtues, basically hewed to the Ricardian prescription, specialized in turning out relatively simple products (in this case, wine) – and remained a poor country for centuries. The second country was Great Britain. It specialized in higher value goods (epitomized, in that era, by textiles), and became the world’s greatest and richest empire.

More fundamentally, Portugal specialized in activity that could generate good levels of growth in the short-term, but whose long-term wealth creation potential was limited by low levels of productivity growth, capital and technology intensiveness, by limited potential for innovation, and by deficiencies in other closely related indicators of dynamism. Great Britain specialized in activity whose positive spinoffs were bound to be far greater.

Other major Ricardo blind spots have been pointed out since then – for example, his skepticism that capital would ever easily move across borders. But his central insights have continued commanding pervasive respect among professional economists. Just as important, they’re still revered by political leaders and opinion molders who find these theories convenient for portraying their often self-interested trade policy preferences as indisputable truths, or who learned in a freshman economics class that they’re gospel.

Keen’s big addition to comparative advantage critiques has to do with unfettered free trade’s likely effect on an economy’s diversity and growth potential. As he notes, Ricardo’s case for liberalizing trade flows hinges on a completely unrealistic assumption about its impact on a national productive base, and hence on national output and incomes. The assumption: that countries will wind up better on net if they abandon those activities that don’t meet the comparative advantage test, and refocus their efforts on activities that can pass it, and that such a transition is feasible in the first place.

In other words, Portugal would scrap all of its textile factories (and presumably all its other industries as well), and become for all intents and purposes a mono-economy devoted to wine. Great Britain would abandon whatever wine-making and other non-textile work it was engaged in, and turn into a big cloth-making facility. What of the other necessities of national and individual life, at least those that are in theory trade-able? They would be imported – and paid for by the earnings from exports of the national champions.

Simply articulating this scenario reveals how completely fanciful it is. For example, what about supplying needs before the envisioned transitions are completed? How long will they last? And even over decades under a free trade regime, could the global economy possibly be expected to turn into the kind of exquisitely complex but perfectly functioning mechanism that could enable a large number of mono-economies from securing the full range of traded goods and services that are either needed or simply wanted?

Keen, however, identifies what he reasonably seems to view as a more fundamental problem: The sectors of the economy in which Ricardians want countries to specialize are relatively strong because they efficiently use various factors of production (chiefly, according to Keen, machinery). The Ricardian transition entails other parts of the economy switching to that strong sector (again, wine-making and textile-making in Portugal and Great Britain, respectively), and essentially becoming just as good as wine-making – largely because all the kinds of machinery used in that economy can easily, and indeed seamlessly be redeployed in the strong sector.

If this assumption was valid, as Keen observes, then it would be reasonable to suppose that each rejiggered national economy could produce even more output, and generate higher incomes for its population, than before. But as the author also observes, this outcome makes no sense because “machinery is specific to each industry, and the crucial machines in one industry cannot simply ‘move’ to another without loss of productivity.” And if you believe, as is the case with mainstream economics, that rising productivity is a key – and over the long run, the biggest key – to rising incomes, then you should recognize this Ricardian transition also as a recipe for worsening national impoverishment.

That is, in the kind of mono-economy Ricardo hoped would eventually comprise the global economy, most of the populace would be struggling with inappropriate capital stock and other assets to earn a living engaged in activity with which it boasted little, if any, experience.

Why did Ricardo overlook something so obvious? In Keen’s words, it’s an example of “a confusion of monetary capital (which Ricardo, as a stockbroker by trade, knew intimately) with the physical machinery in factories (about which he knew very little). Yes, monetary capital moves easily in search of a profit—today, even internationally. But machinery is specific to each industry….”

However, Keen continues, “The archetypal machines for cloth and wine manufacturing in Ricardo’s time included the spinning jenny and the wine press. It is stating the obvious that one cannot be turned into the other, but stating the obvious is necessary, because the easy conversion of one into the other was assumed by Ricardo, and has been assumed ever since by mainstream economic theory.”

Here’s another example of the same delusionality that will be familiar to everyone who’s followed the U.S. trade policy debate for the last few decades: the claim by supporters of current trade policies that trade-related production and job losses are no big deal because America’s real edge in the global economy going forward is, say, services. So the best response is to train all those displaced auto workers to become nurses (and, pace Keen, to use all that surplus auto production machinery to write software).

Just as interesting, Keen points to a small but growing body of research touting the advantages of industrial and other economic diversity – the opposite of Ricardo’s aim. A broad-based manufacturing and technology base has of course long been supported by critics of current trade policies for national security reasons (to ensure the ability to produce an adequate range of defense assets), and to avoid potentially dangerous dependence on foreign supplies of civilian goods as well.

Similarly, it’s been contended that too many linkages exist among manufacturing industries, and between manufacturing and many kinds of services, to assume that entire sectors can be lost without major collateral damage.

Keen’s piece, however, also spotlights evidence that the world’s least successful national economies tend to possess narrow – at best – productive bases and to generate a comparably narrow range of exports, and that the most successful turn out a wide variety of goods for both domestic and foreign markets.

Keen’s theoretical critique of Ricardo is by no means the only one that’s come from the ranks of economists themselves. In 2001, William J. Baumol (a former President of the American Economic Association no less) and Ralph E. Gomory, one of the nation’s leading technology authorities, produced this study purporting to show that explicitly promoting national industries and technologies via various forms of government intervention (including tariffs) can produce better results for individual countries that toeing the free trade line.

But the Baumol-Gomory case has (so far) failed to dent confidence in Ricardian trade theory notably. And certainly the Mainstream Media never displayed much interest. In that vein, of possible import is the appearance this week on Bloomberg.com of this follow-up of sorts to Keen-like analysis. More steps on a  journey of a thousand miles?

(What’s Left of) Our Economy: Into the (Crucial!) Weeds on America’s Trade Performance

Tags

comparative advantage, exports, imports, manufacturing, Trade, trade balances, Trade Deficits, trade surpluses, {What's Left of) Our Economy

The U.S. International Trade Commission has finally added the June American trade statistics to its wonderful Trade Dataweb, an invaluable database and search engine. So now it’s possible to view in needed detail the nation’s trade performance for the first half of 2017, and the first groups of these figures is presented below.

Just so you’ll know exactly what you’re seeing, these are results according to the most granular level of the North American Industry Classification System (NAICS), the federal government’s main system for slicing and dicing industry-specific economic data. I like this six-digit level because it draws the greatest number of distinctions between final manufactured products and the parts and components of these products. This distinction is critical because the rapid growth in recent decades of global supply chains (i.e., the rapid growth of American production offshoring) means that a large percentage of U.S. and global trade consists of trade in these manufacturing inputs.

Another technical note: Because trade data for major aerospace products aren’t made public in order to protect corporate information considered proprietary, the six-digit NAICS results in this sector are unreliable, and the five-digit level data are being used.

So here are the nation’s top ten goods exports for the first half of this year, and how their performance has changed in dollar terms since the first half of 2016:

1. Aerospace: -4.0 percent

2. Petroleum refinery products: +26.1 percent

3. Autos & light trucks: -8.5 percent

4. Special classification provisions: +9.7 percent

5. Semiconductors & related devices: +4.7 percent

6. Miscellaneous auto parts: +1.4 percent

7. Miscellaneous basic organic chemicals: +3.7 percent

8. Pharmaceuticals: +3.9 percent

9. Plastics materials & resins: +6.3 percent

10. Primary smelted non-ferrous metals: +54.0 percent

It’s an encouraging list because most of these products are high-value manufactures, which historically have been very productive, still create lots of high-wage jobs, and incorporate lots of innovation. At the same time, these export growth rates seem pretty meh.

Here is a similar list of the top ten goods import categories and how their levels have changed on a year-to-date basis:

1. Autos & light trucks: +4.5 percent

2. Crude oil & natural gas: +53.7 percent

3. Pharmaceuticals: +2.3 percent

4. Goods returned from Canada: +4.3 percent

5. Broadcast & wireless communications equipment: +10.3 percent

6. Computers: +6.2 percent

7. Telecomms equip: +8.2 percent

8. Aerospace products: -3.4 percent

9. Petroleum refinery products: +22.2 percent

10. Semiconductors & related devices: -6.4 percent

This looks like a higher value list, and the growth rates seem somewhat higher. So that appears less bullish.

The real test of trade performance, though, has to do with trade balances. For the theory of comparative advantage that’s at the heart of modern thinking and policy in the trade field tells us that economies that trade goods and services most successfully (as indicated by surpluses) will wind up as the most successful producers of those goods. Conversely, economies that trade goods and services least successfully will wind up as the least successful producers of those goods. How else could unfettered trade flows create an optimal global division of labor – which is supposed to be their prime economic virtue according to mainstream economics?

So here are the ten goods sectors that wracked up the biggest trade surpluses in the first half of this year, and how those balances compare with the first-half 2016 figures:

1. Aerospace products: -2.03 percent

2. Petroleum refinery products: +33.11 percent

3. Plastics materials & resins: +4.73 percent

4. Soybeans: +28.21 percent

5. Other special classification provns: +7.13 percent

6. Corn: +20.26 percent

7. Waste & scrap: -7.82 percent

8. LNG: +56.54 percent

9. Semiconductor machinery: +64.73 percent

10. Non-anthracite coal & natural gases: +223.22 percent

If you recognize the outsize economic value of manufacturing, this is a less encouraging list, since fully half the products are commodities. Nor is the growth rate of the surpluses in these manufacturing sectors impressive except for semiconductor production equipment and petroleum refinery products.

And here’s the trade balance flip side: the sectors with the top ten U.S. goods trade deficits and their rates of change:

1. Autos & light trucks: +10.64 percent

2. Crude oil & nat gas: +45.31 percent

3. Goods returned from Canada: +4.25 percent

4. Computers: +1.16 percent

5. Broadcast & wireless communications equip.: +11.06 percent

6. Telecomms equipment: +19.10 percent

7. Printed circuit assemblies: +47.12 percent

8. Audio & video equipment: -11.50 percent

9. Institutional furniture: +8.56 percent

10. Iron & steel: +76.28 percent

This list is full of high-value manufactures – so that should be a concern. Ditto for the growth rates, which are mainly well into the double-digits. And check out the number for steel — a sector that’s been making headlines because of the Trump administration’s consideration of national security-related tariffs.  

Coming up tomorrow: the best and worst export and import growers, and the sectors with the most rapidly improving and the most rapidly worsening trade balances.

(What’s Left of) Our Economy: Where Trump Deserves High, Low, and “Incomplete” Marks on Germany Trade

Tags

advanced manufacturing, automotive, commodities, comparative advantage, Financial Crisis, Germany, Global Imbalances, Great Recession, innovation, manufacturing, productivity, Trade, Trade Deficits, trade surpluses, Trump, {What's Left of) Our Economy

As I’ve suggested, President Trump has big, valid points to make about Germany’s auto trade with the United States. Not only does America run an enormous deficit with Germany in vehicles and parts, but claims that Germany deserves great praise from Washington because it makes so many vehicles in the United States are completely unjustified. For they overlook its companies’ very low levels of U.S. content and only very modest improvement on this score. That is, German vehicles are overwhelmingly screwed together in the United States, and therefore add much much less value to the American economy than autos made with domestic parts.

The trouble is that America’s troubles with German trade policies greatly transcend the automotive industry and, to a great extent, Germany. I’ve previously written that there’s a fundamental problem that both the administration and it’s critics are missing:  Germany’s economy, like China’s and many others around the world, is simply not structured in such a way as to make mutually beneficial trade with the United States possible.

But there’s another big U.S.-Germany trade issue that needs highlighting, along with a major danger that Bonn’s approach to trade is creating for the entire world – at least in the medium or long-term.

That other U.S. Germany trade problem has to do with the makeup of bilateral commerce. If you look at the nature of what the United States trades most successfully with Germany and vice versa, you find that the former category contains a mix of high value manufactures and commodities, while the latter is dominated by advanced industrial goods. Here are lists of the sectors in which America last year ran its biggest trade surpluses and deficits with Germany. (To the surplus list should be added – prominently – aircraft, which are not counted accurately in the U.S. International Trade Commission database I’m relying on.)

Top ten U.S. trade surpluses with Germany: 

glass products 

tree nuts 

soybeans 

computers 

non-costume jewelry 

non-anthracite coal & petroleum gases 

fin-fish products

computer parts 

surgical appliances and supplies 

pulp mill products 

 

Top ten US deficits with Germany

autos and light trucks 

pharmaceuticals

goods returned from Canada 

motor vehicle transmissions and transmission parts

aircraft engines and engine parts

construction machinery

miscellaneous general purpose machinery 

miscellaneous basic org chemicals 

miscellaneous engine equipment 

motor vehicle parts

These results are disturbing because, contrary to the superficial conventional wisdom, if you take seriously standard trade theory and its core concept of comparative advantage, sectoral trade balances matter tremendously. For the main idea behind the freest possible international trade is structuring the world economy so as to enable those countries most proficient at producing various goods and services to dominate their output. So surpluses and deficits in different industries show which countries are passing and failing this test – and thus which countries look likely eventually to control worldwide supplies of the sophisticated goods that create so many high wage jobs and foster so much innovation and productivity growth.

Since the U.S.-Germany data aren’t U.S.-global data, in theory they could be anomalies. In other words, Americans could be doing better with the world as a whole, and therefore, the nation’s prospects in high value industries could be a lot brighter. Unfortunately, that’s not the case at all. The makeup of U.S.-Germany trade isn’t terribly different from the makeup of U.S. global trade, in that America’s trade winners are, again, a mix of commodities and high value goods (again, including aircraft), and its losers are nearly all advanced sectors.

Top ten US surpluses globally

petroleum refinery prods

soybeans

special classification goods

plastics materials andcresins

waste and scrap

corn

liquid natural gas

semicaonductor manufacturing equipment

non-poultry meat products

turbines and turbine generator sets

 

Top ten US deficits globally

autos and light trucks

crude oil and natural gas

goods returned from Canada

broadcast and wireless communications equipment

computers

pharmaceutical products

telecommunications equipment

audio and video equipment

aircraft engines and engine parts

games, toys, and children’s vehicles

Yet Germany also is contributing significantly to a major trade-related threat that threatens the entire world, not just the United States. I’ve repeatedly spotlighted blue chip academic research concluding that unprecedented global imbalances centered on American trade shortfalls were instrumental in setting the stage for the last global financial crisis and the painful recession that followed. Worse, evidence keeps accumulating that international commerce is becoming worrisomely lopsided again, and that Germany’s overall international surpluses – currently the world’s largest – have generated much of the problem.

Indeed, a valuable reminder came in this morning’s Washington Post:

“[G]ermany is one of a number of countries, including China, Japan, and South Korea that are now saving far more than they are either consuming or investing….At some point, the world will be unable to absorb the capital surpluses of Germany, China and others, leading to another painful correction that might undermine the liberal order.”

Interestingly, Germany itself has indirectly acknowledged these risks, and hinted that it recognizes some responsibility to get the surpluses down. Unfortunately, Berlin has demonstrated few signs of following through. So although some of President Trump’s focus on the German trade issue seems off target, it’s also clear that the sense of urgency he’s brought to the issue, from both an American and global standpoint, is not only appropriate, but necessary.

(What’s Left of) Our Economy: China to Foreign Tech Firms: “Get Lost”

Tags

China, comparative advantage, free trade, government procurement, Information Technology Agreement, protectionism, self-sufficiency, technology, Trade, {What's Left of) Our Economy

So much excitement (of both kinds) over the last 24 hours about President Obama’s predominantly symbolic announcement yesterday that full diplomatic relations would be restored with Cuba. And so little about a development that actually threatens America’s prosperity and national security, not to mention mountains of dollars in corporate profits: Bloomberg.com’s report that China is systematically moving to end its reliance on foreign technology products and services and replace them with domestic supplies.

No one who’s been reading RealityChek or following my previous writings will be surprised. I’ve long maintained that China’s leaders completely reject the foundational ideas of global free trade and commerce. Whereas Americans and so many others continually preach the virtues – and indeed the inescapability – of comparative advantage and specialization, Beijing therefore quite reasonably sees no need for China to rely on foreign inputs of anything that its homegrown enterprises can provide themselves.  Once this domestic capability is developed — typically by extorting technology — foreign competitors get shown the door.

Indeed, China’s reasoning is something that I’ve urged Americans to take seriously: With the world’s first or second-biggest economy (depending on how you measure it), and a huge chunk of the globe’s population, China potentially is large and diverse enough to create a critical mass of the benefits of competition within its own borders. Beijing places a heavy burden of proof on those insisting that the further advantages of buying imported goods and services outweigh the costs and risks (including the perils of using high tech hardware and software from the United States that could be bugged).

But whether the Chinese (or yours truly) are indeed right or wrong on this matters much less than their government’s determination to act on these convictions, and the Bloomberg article makes clear that Beijing’s policy of maximizing self-sufficiency is entering a new phase. The state-owned sector from which foreign technology products and services are to be barred by 2020 represents a market that reportedly was in the $180 billion neighborhood last year, and in China, the so-called private sector surely won’t be far behind. Nor is there any reason to believe that Beijing will limit its drive for self- sufficiency to information technology sectors.

The Obama administration is definitely aware of China’s techno-protectionism. Its responses? First, bring Beijing in to a global trade regime that prohibits discrimination against imports in government procurement, and second, conclude another global agreement to abolish tariffs on a wide range of high tech goods. But these approaches continue to wish away China’s long record of ignoring similar treaty obligations, and Washington’s equally long record of making only the weakest monitoring and enforcement efforts. Add to this the news that Beijing has just decided that it didn’t want to stop protecting certain key info-tech goods, thereby scuttling the new tech trade deal for the time being.

Will U.S. leaders reading the Bloomberg report recognize it as the equivalent of a two-by-four blow to Washington’s China trade delusions?  Or will they be too busy obsessing about trifles like Cuba?

(What’s Left of) Our Economy: The Real and Surprising Lessons of China’s Bullying of Foreign Firms

Tags

China, comparative advantage, crackdown, economic nationalism, free trade, globalization, multinationals, protectionism, rule of law, {What's Left of) Our Economy

It was tempting to dismiss a recent Financial Times op-ed by a China-based international lawyer with a few (appropriately) cynical tweets. The author, after all, was urging the Chinese government to heed Premier Li Keqiang’s call for more rule of law in the People’s Republic, and wrote that abundant evidence indicated that Beijing authorities are picking exclusively on foreign firms in their investigations of corporate wrongdoing. What else can you reasonably say but “Too funny” and “Duh”, respectively?

Worthier of serious comment was author Tao Jingzhou’s observation that “none of the foreign companies singled out by” China’s National Development and Reform Commissin for price rigging “has mounted a defence. All admitted wrongdoing even before a price investigation began.”

Yet what’s important about the foreign firms’ behavior is not the apparent cravenness it reveals. These companies have meekly endured corruption and legal and regulatory discrimination for decades. Their reasoning? Access to China’ big and potentially gargantuan market would eventually more than offset their tribulations. What’s important instead is what the multinationals’ assumptions show about an ignorance of China’s development philosophy that far transcends the corporate sector, and that explains why continued economic integration with the current Chinese regime can only be a loser for America, and for the entire world economy.

For China’s behavior, and especially its clearly ramped up campaign against foreign investors, should make clear that Beijing emphatically rejects the doctrine of comparative advantage that has justified global trade liberalization literally for centuries and U.S. trade policy in particular for decades. This theory, of course, holds that the freer global trade flows become, the better able national economies will be to focus on the goods and services production at which they’re most proficient, the more efficient the entire world economy will become, and the more prosperous all countries and their people will grow. In other words, freer trade will enable the power of specialization to create an optimal global division of labor.

In particular by encouraging foreign firms to bring their capital and technology to China, and by reducing many trade barriers and introducing numerous other free market reforms, Chinese leaders have long indicated that they buy into comparative advantage and all of its implications. But as revealed by their ever rougher treatment of foreign investors, and by other signs of resurgent protectionism, helping to create the most efficient possible global division of labor and the most prosperity for all was never part of China’s game plan.

Rather, the aim was always maximizing China’s wealth and capabilities, whatever the international impact. As long as foreign capital and technology have been needed to achieve this goal, they’ve been welcome. Now, however, China evidently views foreign contributions to its economy as ever less important. And having chewed up these non-Chinese enterprises, it now looks like it’s starting to spit them out.

Comparative advantage, of course, portrays this behavior as perverse not only from a global standpoint, but from China’s standpoint. But before reflexively endorsing this view, think of the situation as China’s leaders undoubtedly do (unless you believe they’re completely stupid): China is already an immense economy and keeps growing. Its population, though stabilizing, is even bigger. Therefore, the country is already a gigantic store of actual and potential talent, knowledge, and resources. Which means that China already possesses, or can realistically hope to develop on its own, all of the main assets and capabilities that comparative advantage theory and its corollaries claim can only be accessed by extensively integrating with the global economy. That is, Chinese leaders view their own country as a reasonably close approximation of the international economic system as a whole in crucial respects, and believe that by focusing exclusively on China’s own development, it can reap all of the advantages of such integration while paying none of the costs.

And here’s an irony for you: The United States has always been, and remains in, a far better position to prosper without freer trade and greater global integration than China. For unlike China, the United States has always been diverse enough economically and socially to reap on its own at least most of the benefits of competition that free global trade alone supposedly can provide. A much greater degree of competition, moreover, could easily be created through greater anti-trust enforcement. Finally, whatever the United States does need to access from the international economy could readily be obtained, in principle, China-style – by capitalizing on the truly matchless lure of its domestic market, and strategically opening to trade and investment. Surely that’s why, for most of its history, free trade etc. had nothing to do with the strategy the United States actually pursued — and the unprecedented success it achieved.

China’s social and political systems are so noxious that it’s easy to understand why Americans reject the notion that the PRC’s bullying of foreign firms can teach them anything useful. Why Americans keep refusing to learn from their own economic history, especially given the mounting failures of their current approach to the world economy, is much harder to figure out.