(What’s Left of) Our Economy: A Strong Case for Decoupling from China Much Faster

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China, China market, decoupling, exports, globalization, imports, Joseph C. Sternberg, protectionism, The Wall Street Journal, Trade, XiJinping, {What's Left of) Our Economy

What if Americans no longer had to pay so much attention to two of the biggest economic reasons for worry about China? Specifically, if Americans didn’t need to be nearly so concerned that much smarter, tougher measures against China’s predatory economic policies would cost their exporters access to a gigantic current and potentially bigger market? And they believed that decoupling from the hostile, dangerous People’s Republic could be much less economically damaging than widely supposed? 

Those are fascinating and important questions asked and suggested by Wall Street Journal columnist Joseph C. Sternberg in a piece over the weekend, and he presented some compelling evidence that, however “preposterous” it sounds now, these possibilities are surprisingly close to becoming realities. Moreover, they’re getting closer all the time, thanks to dictator Xi Jinping’s reversal of the free market-ish reforms and integration into the global economy begun by Beijing in the 1980s.

His evidence? The big payoff that supposedly motivated the U.S. and foreign governments and their multinational companies to push so hard to bring China into the world trading system – that aforementioned access to the Chinese market – is stalling out way short of expectations. In fact, as Sternberg documents, “China makes a disproportionately low contribution to Western firms’ bottom lines relative to its population and potential.”

To support these claims, the author cites data showing that the China market’s share of the revenues of several big Western economies’ multinational businesses (including America’s) remains well below ten percent. And this even though:

(a) more than twenty years have passed since China’s entry into the World Trade Organization (WTO), which entitled the People’s Republic to nearly all the benefits of integration with the global economy (while de facto enabling it to avoid most of the obligations); and

(b) China’s share of global economic output (which should approximate its share of the worldwide market for goods and services) had reached more than 15 percent in 2020 – and this percentage had jumped by some 50 percent in 2013.

But even these figures may be exaggerated, at least in the U.S. case. The financial research firm Calcbench has examined the share of revenues 67 of companies in the Standard & Poor’s 500 stock index earned in China in 2020. It came to a total of 10.48 percent – a little higher than Sternberg’s figure.

Most of the firms most reliant on China revenues, however, like Qualcomm (59.5 percent of its global total), Texas Instruments (55.5 percent), Lam Research (35.1 percent), and Applied Materials (31.7 percent) are either semiconductor manufacturers, producers of semiconductor manufacturing equipment, or makers of other advanced electronics parts and components. And large percentages of their China revenues are sold to the China-based factories that turn out consumer electronics products (like personal computers and cell phones), and that export huge shares of their own output. That is, those revenues aren’t really earned by sales to final customers located in China. They’re earned by sales to final customers located outside China (like the United States).

Just how large are some of these export percentages? According to this source and this source, 64.4 percent of all the cell phones made in China were sold overseas. According to this source and this source, 65.04 percent of the notebook computers made in the People’s Republic were exported that year. So that should more than satisfy the definition of “large”.   

One important claim that Sternberg gets wrong, however – that contention that “Countries wanted to open China to trade because of its population of more than 1.4 billion consumers. Their ascent into the global middle class, buying U.S. and European goods and services along the way, was the great prize to be won.”

In fact, as Ohio Democratic Senator Sherrod Brown explained in 2007, the companies “really had way more interest in one billion Chinese workers” when they were lobbying so hard to bring China into the WTO. I.e., they recognized at that point that China would long remain far too poor to become a major final market for their goods and services. But they were rightly confident that, with foreign training and management, China’s vast population could become highly productive (but still extremely cheap workers) long before that. A 2000 study by yours truly presented abundant evidence 

And China’s continuing heavy reliance on exports means that for all its spectacular progress, the People’s Republic is still far from the point where it can generate acceptable levels of growth and employment by relying on its own market for sales. In other words, for decades, the United States in particular -which has run the by far the world’s biggest trade deficit with China – has enjoyed much more leverage over China than vice versa. 

This doesn’t mean that Sternberg is under any illusions that further decoupling the U.S. and other foreign economies from China’s would be painless (though the still relatively self-sufficient U.S. economy would obviously feel much less – short-term – pain). But as he notes, China’s economy is running into big, growing problems – in particular a massive, already deflating real estate bubble that is undercutting the ability to China’s consumers to maintain current levels of spending on anything. In addition, Xi Jinping’s evident determination to squeeze foreign companies out of China as soon as feasible is leaving these foreign companies and economies little choice over the longer run.  So shouldn’t the United States and the rest of the world take these hints more closely to heart and greatly step up decoupling from China?  

Following Up: Podcast Now On-Line of National Radio Interview on Pelosi Taiwan Visit and U.S. Stagflation Prospects

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Asia-Pacific, China, decoupling, Following Up, geopolitics, Indo-Pacific, inflation, manufacturing, Market Wrap with Moe Ansari, Nancy Pelosi, national security, Pelosi, recession, sanctions, semiconductors, stagflation, Taiwan, tech, Trade, trade deficit

I’m pleased to announce that the podcast is now on-line of my interview last night on the nationally syndicated “Market Wrap with Moe Ansari.” Click here for a timely conversation on two headline issues:  how U.S. House Speaker Nancy Pelosi’s controversial visit to Taiwan could hit U.S.-China economic relations and America’s access to Taiwan’s world-class semiconductor manufacturing prowess; and why what’s in store for the U.S. economy could be even worse than the recession that’s now widely forecast.

And keep on checking in with RealityChek for news of upcoming media appearances and other developments.

Our So-Called Foreign Policy: Still ISO a Coherent Biden China Strategy

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Antony J. Blinken, Asia-Pacific, Biden, Biden administration, China, climate change, Cold War, decoupling, Indo-Pacific, Jimmy Carter, national interests, Our So-Called Foreign Policy, rules-based global order, Soviet Union, strategic ambiguity, Taiwan

In June, 1978, then President Jimmy Carter laid out in a speech the tenets that were going to guide his strategy toward the Soviet Union at a time when East-West tensions were mounting. His clear aim during this key juncture of the Cold War was telling Moscow what kinds of actions it could take to make sure that superpower rivalry was “stable” and even “constructive,” and what kinds would be sure to place it on a “dangerous and politically disastrous” path.

Unfortunately, the speech was widely considered to be such a confusing word salad that rumors quickly spread claiming that what Carter read were drafts from the hawkish and dovish groups of his advisors that he simply stapled together. This rumor turned out to be untrue (at least according to this study of Carter’s foreign policy), but the fuzziness of Carter’s bottom line surely helped ensure that U.S.-Soviet relations continued worsening for most of the remainder of his one-term presidency, largely because the Soviet Union became more aggressive – especially when it invaded Afghanistan.

I bring up this historical episode because Secretary of State Antony J. Blinken just gave a speech laying out the tenets of the Biden administration’s strategy toward China. It, too, seeks to ensure that today’s superpower relationship becomes more stable rather than move ever closer to conflict, but it looks just as incoherent as Carter’s address – and just as likely to produce the outcome it’s trying to prevent.

But I’ll start with a problem that was only barely detectable in Carter’s speech but that’s bound to undermine Mr. Biden’s efforts to deal with China successfully: a failure to identify American interests precisely and concretely. To be sure, the Carter speech wasted a great deal of verbiage on Soviet activity that never held any potential to endanger U.S. security or prosperity – especially in sub-Saharan Africa. Eventually, however, the President specified that “We and our allies must and will be able to meet any forseeable challenge to our security from either strategic nuclear forces or from conventional forces.”

These kinds of specific objectives were at best secondary themes of Blinken’s. Instead, his emphasis from the get-go was on defending and reforming “the rules-based international order – the system of laws, agreements, principles, and institutions that the world came together to build after two world wars to manage relations between states, to prevent conflict, to uphold the rights of all people.”

Not only can this definition of U.S. interests way too easily turn into a formula for wasting America’s considerable but ultimately finite resources on an infinite number of international troubles having nothing to do with the nation’s safety or well-being. But good luck motivating the American population and its military to fight or even sacrifice for an objective this gauzy.

At the same time, the kind of ambivalence so broadly conveyed by Carter toward the Soviet Union permeates the picture drawn by Blinken of China. For example, the Secretary argued that China

>”is the only country with both the intent to reshape the international order and, increasingly, the economic, diplomatic, military, and technological power to do it.  Beijing’s vision would move us away from the universal values that have sustained so much of the world’s progress over the past 75 years”:

>rather than using its power to reinforce and revitalize the laws, the agreements, the principles, the institutions that enabled its success so that other countries can benefit from them, too…is undermining them.  Under President Xi, the ruling Chinese Communist Party has become more repressive at home and more aggressive abroad”:

> “has announced its ambition to create a sphere of influence in the Indo-Pacific and to become the world’s leading power”;

> is “advancing unlawful maritime claims in the South China Sea, undermining peace and security, freedom of navigation, and commerce….”

> “wants to put itself at the center of global innovation and manufacturing, increase other countries’ technological dependence, and then use that dependence to impose its foreign policy preferences.  And Beijing is going to great lengths to win this contest – for example, taking advantage of the openness of our economies to spy, to hack, to steal technology and know-how to advance its military innovation and entrench its surveillance state”;  and

> is “trying to cut off Taiwan’s relations with countries around the world and blocking it from participating in international organizations.  And Beijing has engaged in increasingly provocative rhetoric and activity, like flying PLA aircraft near Taiwan on an almost daily basis.”

In all, according to Blinken, “The scale and the scope of the challenge posed by the People’s Republic of China will test American diplomacy like nothing we’ve seen before.”

So given these malign aims and actions, how could Blinken also insist that

> “We don’t seek to block China from its role as a major power, nor to stop China…from growing their economy….”;

> “We know that many countries – including the United States – have vital economic or people-to-people ties with China that they want to preserve.  This is not about forcing countries to choose.  It’s about giving them a choice….”;

> ”The United States does not want to sever China’s economy from ours or from the global economy – though Beijing, despite its rhetoric, is pursuing asymmetric decoupling, seeking to make China less dependent on the world and the world more dependent on China.”; and that

> “as the world’s economy recovers from the devastation of the pandemic, global macroeconomic coordination between the United States and China is key – through the G20, the IMF, other venues, and of course, bilaterally.”

That last point, and a companion Biden administration argument about climate change, seem compelling – at least superficially. But think about it for a moment: Why would anyone holding the view of China’s hostile actions and intentions laid out by Blinken expect any meaningful cooperation from Beijing on anything?

Even on climate – that supposedly quintessential threat that respects no bordes – it logically follows that the kind of Chinese leadership depicted by Blinken will be working overtime to ensure that China minimizes any sacrifices it makes to prevent dangerous warming, and maximize those required of everyone else. Consequently, the most effective way to spur China to do its share and therefore boost the odds that the climate problem actually gets solved is to deny Beijing the economic power to stay off the hook.

There’s a big (and in my view, legitimate) debate currently underway over whether the United States should continue its longstanding policy of “strategic ambiguity” regarding defending Taiwan from China, or explicitly pledge to do so, as President Biden may or may not have done a week ago (and not for the first time). But there shouldn’t be any debate over whether America’s underlying strategy toward the People’s Republic should be as completely ambiguous – not to mention as nebulous – as the approach just articulated by Blinken.

Following Up: Podcasts of National and New York City Radio Interviews Now On-Line

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American politics, Bernie Sanders, Biden, Biden administration, China, decoupling, Democrats, Donald Trump, election 2022, election 2024, Following Up, Frank Morano, inflation, Market Wrap with Moe Ansari, midterms 2022, Moe Ansari, prices, recession, Republicans, Ron DeSantis, tariffs, The Other Side of Midnight, trade policy, trade war, Ukraine, Ukraine-Russia war

I’m pleased to announce that the podcasts are now on-line of my two radio interviews yesterday (and one technically this morning) on a wide range of foreign policy, economic, and U.S. political topics.

Click here to listen to my appearance on Moe Ansari’s nationally syndicated “Market Wrap” show, where we did a deep dive into the questions of whether or not President Biden’s thinking seriously of cutting some of the Trump tariffs on imports from China, and the likelihood and wisdom of America pulling off any kind of significant divorce from the Chinese economy. The segment starts at about the 21:40 mark.

At this link, you can access my conversation with host Frank Morano on his late-night WABC-AM (New York City) show “The Other Side of Midnight.” It covered the impact of tariffs on consumer prices, the outlook for America’s inflation-ridden economy, the chances that the Ukraine war goes nuclear, and the odds of (figurative) earthquakes down the road for American presidential politics – for starters!

In addition, click here for the second half of my interview on the U.S. government-run Voice of America – which zeroes in on Ukraine war-related global economic disruptions. (Yes, the segment was pre-my latest haircut!)

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

Making News: Back on National Radio Talking U.S. Economic Divorce from China…& More!

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China, decoupling, Immigration, inflation, investment, Jeremy Beck, Making News, Market Wrap with Moe Ansari, Moe Ansari, NumbersUSA, tariffs, tech, Trade, wages

I’m pleased to announce that tonight I’m scheduled to be back on the nationally syndicated “Market Wrap with Moe Ansari” radio program to discuss U.S.-China economic relations. Our focus:  the crucial question of whether and how easily America can decouple trade-wise, tech-wise, and investment-wise from the hostile regime in Beijing.

“Market Wrap” is broadcast nightly between 8 and 9 PM EST, the guest segments typically come in the second half-hour, and you can tune in by visiting Moe’s website and clicking on the “Listen Live” link on the right-hand side.

As usual, moreover, if you can’t tune in, the podcast will be posted as soon as it’s on-line.

In addition, it was great to see Jeremy Beck of the immigration realist group NumbersUSA quote from my April 7 post in a column on the damage done by decades of mass immigration to the U.S. economy — including to the wages of working class Americans. Here’s the link.   

And keep checking in with RealityChek for news of upcoming media appearances and other developments

(What’s Left of) Our Economy: Encouraging Brexit Lessons for the United States

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Brexit, China, decoupling, European Union, Eurozone, Financial Times, France, Germany, IMF, International Monetary Fund, United Kingdom, {What's Left of) Our Economy

Some awfully interesting evidence supporting my view (see, e.g., here) that the United States is uniquely positioned in the world to prosper quite nicely from seeking to maximize its already high degree of economic self-sufficiency has just emerged — and from some awfully unlikely sources.

It’s indirect evidence, to be sure, and concerns the United Kingdom’s (UK) economic perfomance since the Brexit referendum of 2016 that mandated its pull-out from the European Union. But it’s relevant to the United States’ situation because the U.S. economy is far more actually and potentially self-sufficient.

The evidence – from the ardently globalist International Monetary Fund (IMF) and from the just-as-ardently anti-Brexit Financial Times – makes clear that since the UK finally left the EU at the end of January, 2020, it’s gross domestic product (GDP – the standard measure of a national economy’s size), has not only risen about as fast as those of the major members of the EU, but that it’s closed the gap that existed pre-withdrawal. And all the while, the UK has reaped a crucial benefit – much more control over its future.

The IMF evidence came in today’s release of its World Economic Outlook – a twice yearly Fund publication that surveys the state of the globe and includes growth forecasts for major countries, geographic regions, and formal groupings of countries like the eurozone (which overlaps pretty thoroughly with the EU).

According to the Fund, last year, the UK economy expanded by 7.4 percent in inflation-adjusted terms (the most closely monitored gauge of growth). The figure for the countries using the euro as their currency? A mere 5.4 percent. And it’s not like the lagging eurozone performance was dragged down by its long-time economic laggards. Germany’s real 2021 growth was a measly 2.8 percent, and France’s much better seven percent still trailed the UK’s.

In other words, a single country that’s cut itself off from all the alleged benefits of economic integration with a much larger market had out-grown the collective members of that market that presumably were enjoying all the economic advantages of such integration.

Moreover, the IMF’s latest projection for this year crowns the UK as a growth winner, too. Its 2022 price-adjusted GDP is forecast to improve by 3.7 percent, versus 2.8 percent for the euro area. The French after-inflation growth rate is expected to top the UK’s slightly (2.9 percent), but Germany’s will be stuck at a lowly 2.1 percent.

The only solace Brexit-haters can take from the IMF analysis is that the UK supposedly will fall way behind growth-wise next year. Its real GDP performance is pegged at a mere 1.2 percent – slower than that of the euro area (2.3 percent), France (a not-so-impressive 1.4 percent), and Germany (a respectable 2.7 percent, but a performance coming off an unusually low baseline). Yet needless to say, it’s much more reasonable to put more stock in near-term predictions and longer-term predictions.

In addition, even with this possible slowdown, the Financial Times graph below (taken from this article) shows that, despite its glass-half-empty title, if the IMF is right about 2022, the UK will have turned itself from a growth laggard in 2019 compared with France and Germany to a growth equal. And although the 2023 projections are tough to see in this graphic, they show near parity among the three.

Two qualifications to these findings need to be made. First, as I’ve repeatedly noted, all economic data for the last few years has been dramatically affected and surely distorted by the CCP Virus pandemic. Second, although the UK left the EU, it still does business with the bloc and its economic ties with the rest of the world stayed the same organizationally.

At the same time, for years after the referendum vote, businesses in the UK had been dealing with major uncertainties and the inevitable short-term costs of the negotiations over Brexit’s precise withdrawal procedures and terms. And the growth figures make obvious that, on the whole, they and the entire economy have managed to navigate them successfully.

And if the UK has so far emerged successfully from its Brexit-style decoupling from the EU, it’s hard to imagine that the much more economically diverse United States can’t emerge from a much more determined decoupling from China – which will promote vital and intertwined economic and national security interests – at least as well.

Following Up: Podcast Now On-Line of NYC Radio Interview on Ukraine & Inflation…& More!

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Biden administration, Buck Showalter, China, decoupling, Donald Trump, Following Up, Frank Morano, globalization, inflation, Major League Baseball, New York Mets, tariffs, The Other Side of Midnight, Trade, trade war, Ukraine, Ukraine-Russia war, VOA, Voice of America, WABC AM

I’m pleased to announce that the podcast is now on-line of my interview late last night on Frank Morano’s “The Other Side of Night” radio show on New York City’s WABC-AM. Click here for a lively conversation on the Ukraine war, inflation, global economic decoupling, tariffs…and Buck Showalter???

In addition, a video is finally available of a Voice of America (VOA) interview I did last Monday, April 11, on the state of U.S.-China economic relations. Happily, the Chinese language service of this U.S. government foreign broadcasting agency is now offering telecasts that feature the English-language audio of non-Chinese speakers (like me) with the Chinese content in subtitles. So it’s much easier for non-Chinese speakers to understand that non-Chinese content than under the previous system, which featured simultaneous Chinese translation over the interviewees’ barely audible voice.        

And keep checking in with RealityChek for news of upcoming media appearances and other developments

(What’s Left of) Our Economy: Biden Makes Clear: Trump’s China Trade Strategy Sure Won Reelection

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Biden, Biden administration, Buy American, decoupling, Donald Trump, Katherine Tai, manufacturing, monitoring and enforcement, Phase One, sanctions, supply chains, tariffs, U.S. Trade Representative, USTR, {What's Left of) Our Economy

Meet the new U.S. China trade strategy. And now it’s all but official: Same as the old (Trump administation) China strategy. Further, as should be obvious to anyone with a realistic view of core U.S. interests when it comes to the People’s Republic, that’s decidedly great news for America.

Overlooked amid dramatic developments like the Ukraine war and surging inflation and Ketanji Jackson Brown winning a Supreme Court seat, U.S. Trade Representative (USTR) Katherine Tai revealed late last month that after years of dumping on the former President’s approach to the subject as unproductive and even counterproductive, Joe Biden has finally agreed that Donald Trump’s priorities on this front were right all along.

Specifically, rather than trying to change the predatory Chinese practices that for decades have victimized U.S. businesses and workers, Mr. Biden’s trade envoy indicated to Congress that this goal had become quixotic.  So the administration would pivot to the eminently feasible aim of using tariffs both to punish Beijing’s offenses and eliminate the advantages created by its subsidies and intellecual property theft and investment blackmail and host of import barriers.

Not that Trump ever explicitly stated that reforming China was pointless. In fact, the Phase One trade agreement he signed with Beijing in January, 2020 committed the Chinese to dismantle numerous protectionist policies. But for two reasons it should have been clear that his administration’s emphasis lay elsewhere. The first was Trump’s relatively early resort to towering and sweeping tariffs. The second was the lopsidedly pro-U.S. nature of Phase One’s dispute-resolution system.

By securing China’s agreement to enforcement procedures that on a de facto basis enabled the United States to tariff China for Phase One violations much more aggressively than vice versa, and that greatly reduced the odds of retaliatory levies, Trump and his trade chief, Robert Lighthizer, signaled deep skepticism that China would verifiably comply with the deal.

Candidate Biden, however, faulted Phase One for failing to address Chinese trade predation, and once elected, told a leading pundit that he’d differ from Trump on the issue by pursuing policies “that actually produce progress on China’s abusive practices.”

Last October, Tai was still complaining that Trump’s deal “did not meaningfully address the fundamental concerns that we have with China’s trade practices and their harmful impacts on the U.S. economy,” and her office repeated the charge just two months ago in the administration’s annual Report to Congress On China’s WTO Compliance. In that survey, moreover, the trade office added, “China is an important trading partner, and every avenue for obtaining real change in its economic and trade regime must be utilized.”

But in testimony to Congress at the end of last month (see here and here), Tai reported that this goal had been dramatically modified – and probably in effect abandoned. She stated that after decades of negotiations (including during the Biden term), “real change remains elusive” aside from instances in which China’s compliance with its trade obligations “fit its own interests.”

Therefore, the Biden team had decided to “turn the page on the old playbook with China, which focused on changing its behavior. Instead, our strategy must expand beyond only pressing China for change and include vigorously defending our values and economic interests from the negative impacts of the PRC’s unfair economic policies and practices.”

In terms of day-to-day policy, Tai’s revelation doesn’t change much. As I – and many others have noted – the Biden administration had decided from the get-go to keep in place nearly every single dollar of the Trump tariffs (see the New York Times interview linked above), and continued – and in numerous cases expanded (see, e.g., here) – its predecessors’ sanctions and export controls targeting Chinese tech entities.

Instead, the new strategy’s impact will mainly be felt going forward. With the last two American presidents now having determined that handling the China economic challenge through diplomacy has been futile, their successors will face enormous difficulties returning to engagement-heavy strategies without unmistakable – and enduring – evidence of greatly improved Chinese behavior. That is, Trump’s focus on punishment and protection are here to stay for the foreseeable future. And indeed, forgetting about changing China through a “Phase Two” agreement, and concentrating trade-wise on shielding the U.S. economy from Beijing’s predation using Phase One’s de facto tariff-ing authority, are exactly the courses I recommended in the mid-2020 article linked above.

The only major remaining uncertainty in U.S. economic policy toward China entails how far the decoupling of the two economies will go. Tai said a week ago that the administration’s goals didn’t include “stopping trade or trade divorce.” But that’s a straw man. The real question entails how far economic disengagement will proceed. And given the administration’s aforementioned tariff and sanctions moves, and related objectives both of creating more secure supply chains in economically and strategically important industries, and boosting domestic manufacturing output through increasing government procurement of U.S.-made products and investments to improve the competitiveness of U.S.-based industry, the answer — encouragingly — seems “pretty darned far.” 

Following Up: Podcast On-Line of National Radio Interview on U.S.-China Economic Divorce

Tags

CBS Eye on the World with John Batchelor, China, decoupling, Following Up, investment, sanctions, tech, Trade

I’m pleased to announce that the podcast of my interview last night on the nationally syndicated “CBS Eye on the World” with John Batchelor is now on-line.

Click here for a timely discussion of whether the United States really can afford to decouple from China’s gigantic economy – and how much progress has or hasn’t been made toward such a break up.

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

Making News: Returning to National Radio on Decoupling from China

Tags

CBS Eye on the World with John Batchelor, China, decoupling, Gordon G. Chang, investment, John Batchelor, Making News, Trade

I’m pleased to announce that tonight I’m scheduled to be back on the nationally syndicated “CBS Eye on the World with John Batchelor.” Air time for the segment is yet to be determined, but the show is on nightly during the week between 9 PM and midnight EST. You can listen live here as John, co-host Gordon G. Chang, and I examine whether the Chinese are right in claiming that the United States simply can’t afford to decouple from their gigantic economy.

As usual, if you can’t tune in, the podcast will be posted as soon as it’s on-line

And keep checking in with RealityChek for news of upcoming media appearances and other developments.