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(What’s Left of) Our Economy: Why China Really is Like Nazi Germany

22 Friday Jan 2021

Posted by Alan Tonelson in Our So-Called Foreign Policy

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Albert O. Hirschman, allies, Biden, China, dumping, Information Technology and Innovation Foundation, intellectual property theft, Japan, multilateralism, NATO, Nazi Germany, nuclear umbrella, Robert D. Atkinson, sanctions, South Korea, tariffs, tech industry, technology extortion, Trade, tripwire, Trump, {What's Left of) Our Economy

Because Nazi references can be so irresponsibly inflammatory, and therefore have been so often abused, I haven’t yet compared the threat posed by China to the rest of the world to that posed by Nazi Germany. (In my view, these comparisons have been used even more recklessly lately in U.S. domestic politics, chiefly to describe former President Trump and his views and policies.) So even though the People’s Republic, its ambitions, and its burgeoning capabilities do scare the living daylights out of me (and should scare you), I was nonetheless pretty surprised to see precisely this comparison just made by Robert D. Atkinson.

Atkinson is the head of a technology-focused Washington, D.C. think tank who I’ve known since the early 1990s. I’ve admired some of its work and haven’t been so crazy about other examples of its output, but I’ve never, ever considered him a boat-rocker, much less a rhetorical bomb thrower. In fact, my criticisms of the numerous studies and articles issued by his Information Technology and Innovation Foundation stem from my view that they’re way too cautious when it comes to countering China’s wide range of predatory economic practices (which include predatory technology policy practices like the theft and extortion of intellectual property).

And I’ve attributed much of this caution to the Foundation’s donor base – which is dominated by the U.S. and in some cases foreign tech and manufacturing companies that have worked so hard to send so much production and employment, and (voluntarily) so much technology to China for decades. It’s true that many of these firms are now crying foul as Beijing in recent years has aimed to strengthen its own entities’ positions at the foreigners’ expense. Yet their stubborn opposition to the unilateral Trump tariffs and some key sanctions on the Chinese tech outfits that have been major customers made clear their vain hope that they could somehow have their China cake and eat it, too.

Yet here comes Atkinson in the Fall issue of The International Economy (a publication that’s as – proudly – establishment oriented as they come) with a piece titled “A Remarkable Resemblance” likening China’s international economic policies to those of “Germany for the first forty-five years of the twentieth century” – which of course include the twelve Nazi years (1933-1945).

As the author argues, Germany during these decades was:

“a ‘power trader’ that used trade as a key tool to gain commercial and military advantage over its adversaries. Likewise, China’s trade policy is guided neither by free trade nor protectionism, but by power trade, with remarkably similar strategy and tactics to those of 1940s Germany. Understanding how Germany manipulated the global trading system to degrade its adversaries’ capabilities, entrap nations as reluctant allies, and build up its own industries for commercial and military advantage, just as China is doing, can shed light and point the way for solutions to the China challenge.”

Atkinson reports that this description of German policies came from a 1945 book by the important economist Albert O. Hirschman, which concluded that “[I]t’s is possible to turn foreign trade into an instrument of power, of pressure, and even of conquest. The Nazis have done nothing but exploit the fullest possibilities inherent in foreign trade within the traditional framework of international economic relations.”

The author rightly observes that

“Hirschman’s key insight was that some countries— in this case Germany under three very different government regimes from 1900 to 1945—focus not on maximizing free trade or even on protecting their industries, but on changing the relative power of nations through trade to achieve global power. Germany’s policies and programs were designed not only to advance its own economic and military power, but to also degrade its adversaries’ economies, even if that imposed costs on their own economy relative to a free trade regime.”

Germany also consistently sought, as the author points out “to make it more difficult for its trading partners to dispense entirely with trade with Germany, thus creating dependency.” And if that’s not enough to convince you about the comparison with China today, Atkinson himself notes that the German policy recipe also included massive industrial espionage, and Hirschman identified a major element as the equally massive dumping (selling at prices way below production costs) of goods into foreign markets to destroy overseas competition.

Atkinson’s diagnosis of the problem is so spot-on that it makes his recommended solution especially disappointing. Kind of like President Biden, he believes that the best internationally oriented option by far (on top of more effective support for U.S. industry, which I strongly support) is forming a “NATO for trade” that would be

“governed by a council of participating [free trading] countries…if any member is threatened or attacked unjustly with trade measures that inflict economic harm, DATO [the “Democratically Allied Trade Organization] would quickly convene and consider whether to take joint action to defend the member nation.”

I’ve already pointed out that the consensus on standing against China economically among America’s allies is way too weak to enable such multilateral approaches to succeed. But as long as we’re talking in terms of NATO – the military alliance between the United States and much of first Western and now Eastern Europe – and the Cold War, let’s not forget two other big problems. First, NATO (and this also goes for America’s security ties with South Korea and Japan) was never so much an alliance as a protector-protectorate relationship. The vast bulk of the heavy lifting was always done by the United States.

This allied security dependence in turn has produced the second major obstacle to a DATO’s effectiveness. Because the United States coddled allied defense free-ridingcand opened its markets one-sidedly for so long, the allies’ protectorate status was substantially cost-free economically, and even came with trade rewards no other country could remotely offer. (In addition, as I’ve also written, the creation of an American nuclear umbrella combined with the stationining of U.S. “tripwire” forces on the NATO frontlines in Germany also greatly minimized the military risks of siding with Washington.)

Today, however, economic power between the United States and the allies is more evenly distributed, and the allies’ profitable trade with and investment in China has, as noted in my aforementioned writings, greatly increased the economic price they would pay for lining up against China.

Still, by comparing the China threat to the Nazi threat, Atkinson’s article significantly bolsters the case for the United States escalating its response to the “all of society” level – or at least intensifying it qualitatively. Let’s just hope, as the author writes, that this time around the United States fully awakens a lot faster.

(What’s Left of) Our Economy: Can We Get Real About China’s Trade Dumping?

26 Tuesday Dec 2017

Posted by Alan Tonelson in Uncategorized

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China, consumers, dumping, free markets, Martin Feldstein, prices, steel, subsidies, Trade, Trump, {What's Left of) Our Economy

In the spirit of the holiday season, rather than slam noted economist Martin Feldstein for producing yet another stale though dangerously misleading blanket warning against the horrors of trade protectionism, I’ll note that he’s just (unwittingly, to be sure) created a teachable moment about instances in which erecting trade barriers is absolutely necessary. Those instances concern a practice called dumping, and in particular when the culprit is a country like China.

In U.S. and world trade law, dumping consists of selling a product or service in a foreign market at prices deemed to be excessively low. (Their specific definitions differ – see here and here for how.) For someone not steeped in these subjects, it’s entirely reasonable to ask, “What’s the problem?” After all, if a producer wants to provide a major price break for his or her foreign customers, why should those customers look a gift horse in the mouth? But for a leading economic light like Feldstein – who has been a top presidential economic adviser (in the Reagan years), it’s hard to excuse his use of the term.

The reason is that the decision to dump can result from dramatically different circumstances with dramatically different stakes for the future of the kind of U.S. economy most of us presumably want to ensure. Feldstein suggests that dumping is basically no different from the kind of price drops businesses can put in effect when they’re so technologically advanced or otherwise efficient that they can undersell less competent rivals. But this example is completely irrelevant to dumping law.  Neither the U.S. nor World Trade Organization versions penalizes this kind of progress.

Feldstein might have added a common claim that, even when these international price differentials do exist, they’re no different than when producers (or service providers) decide to put their wares on sale in certain parts of the United States but not others – maybe as a special deal to jump-start business in a region they’re entering, or to energize business in a region where they’re lagging.

But although this argument against sanctioning foreign producers for dumping is more on target, it still misses the mark in a crucial respect: The dumping engaged in by countries like China is fundamentally different. And the reason is that it’s typically subsidized by foreign governments.

Such subsidized dumping is objectionable, and downright dangerous to the American economy, for several reasons that have somehow eluded Feldstein – and most of his fellow economists. Principally, it forces companies that operate in a free market setting, with all the constraints that imposes on pricing policies, to compete against companies that face no such constraints – or tend to enjoy the freedom to under-price for long periods of time.

If you’re fine (like Feldstein and other conventional wisdom-mongers?) with government-dependent entities (I hesitate to call them “businesses”) gaining the upper hand in the United States, then logically this isn’t a problem. If you believe that the American economy works best for all concerned when free market principles and practices are encouraged to the greatest extent possible, then you should be deeply concerned.

As a result, it should be easy to distinguish between bargain-basement pricing from companies that have either very patient founders or other shareholders, or lots of cash on their balance sheets, or both, from such pricing from entities that can keep drawing on foreign treasuries. The former, after all, stems from actors that are trying to judge the fundamentals of a market place, that “put their money where their mouths are,” and who will eventually be rewarded for being correct or punished for getting it wrong. The latter is a function of the decisions and priorities of foreign governments. And with a country like China, where the government maintains a whip hand over the economy, there can be no reasonable doubt which kind of pricing we’re dealing with.

All believers in free markets by definition agree on the superiority of the free market incentive system. But as often seems to be the case, they easily forget free market values, and the need to safeguard them, when it comes to international trade. (Monopoly and competition issues represent another example of this selective capitalism syndrome.)

That’s not to say that all government subsidies should be opposed. Many (like America’s minority- and women-owned business “set asides”) seek to promote important goals that societies have every right to prize. Others seek to promote important goals that societies literally can’t do without (like government support for defense industries). And even these wrinkles can have wrinkles. For example, many manufactured goods can be crucial for national defense even though they’re not weapons themselves, or even though they have many uses other than military. Steel, to which the Trump administration is considering extending major protection for just these reasons, is a newsy example.

So many dumping allegations and cases can be genuinely complicated, and understandably controversial. But even if you believe that systems of trade law can ultimately resolve these disputes in acceptable ways (I don’t), it should be clear that government-fostered dumping simply doesn’t belong in this category, and that government-run economies like China’s don’t deserve the standard legal protections (like presumption of innocence) when put in the dock.

What should be even clearer: Anyone not recognizing this basic dumping distinction should never gain the ear of those officially responsible for America’s well-being. But because it’s the holiday season, I won’t specifically recommend blackballing Martin Feldstein. At least not right now.

(What’s Left of) Our Economy: China’s Urgently Needed Rebalancing is Still MIA

22 Monday Feb 2016

Posted by Alan Tonelson in (What's Left of) Our Economy

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China, current account surplus, dumping, Europe, European Chamber of Commerce in Beijing, Financial Crisis, Global Imbalances, Great Recession, manufacturing, overcapacity, rebalancing, Trade, trade surplus, {What's Left of) Our Economy

One of the biggest hopes for vigorous, sustainable recoveries in the American and global economies is the widespread conviction that China will show real progress in shifting its growth strategy from one based on maximizing exports to one focused on expanding consumption at home. Recently, three sets of data have appeared making clear that, despite repeated balances by its government, such China rebalancing still remains much more hope than reality.

The first figures show that China’s chronic merchandise trade surplus hit an all-time record last year of $624.89 billion. That’s up from $380.20 billion in 2014 – a 64.36 percent jump. (These numbers come from my monitoring of China’s reported monthly trade figures.)  Since China’s 2015 economic expansion slowed to 6.90 percent – a 25-year low – the contribution to the country’s growth made by net exports by definition is on the rise.  And 2016 promises more of the same: China’s January merchandise trade surplus hit another new all-time monthly high of $63.35 billion.   

China’s broader international surplus – in its current account – is on the rise as well. It surged by no less than 33 percent on year in 2015, to just over $293 billion. More important, as a share of China’s economy, it hit 2.70 percent – the highest level since 2010. It’s true that this surplus compared with the Chinese gross domestic product is far from its pre-financial crisis levels. But it’s also true that global growth is much weaker as well.

Finally, this morning, the European Chamber of Commerce in Beijing has just released a report showing that, contrary to the Chinese government’s promises, industrial overcapacity is getting worse, not better. As a result, China keeps exporting this glut – which the Chamber reminds is the inevitable consequence of Chinese government policies – at artificially low prices.  Therefore, jobs and valuable output keep being taken from China’s trade partners for reasons have nothing to do with free markets, global deflationary forces keep strengthening, and the world economy keeps building up the kinds of distortions that set the stage for the financial crisis and ensuing Great Recession.

According to the Chamber study, six of the eight major Chinese industries it examined not only continue producing far more than the domestic economy can consume: paper and paperboard, flat glass, steel, refining, aluminum, and cement. These levels of overcapacity have worsened in recent years – due largely to cheap credit from state controlled banks and support from local officials desperate to prevent China’s overall slowdown from boosting unemployment and political instability in their backyards.

The European Chamber has warned Chinese and European officials that China’s overcapacity “leads to job loss, which leads to protectionism in Europe” – warnings that sound credible given that they come from the continent’s powerful business lobby. At the same time, the absence of such warnings from America’s powerful business lobbies is likely sending another message entirely to Beijing: that China can remain on the overcapacity course, and keep avoiding economically and political risky real rebalancing, simply by dumping even more of its surplus production in a U.S. economy that can ill afford it, either.

Those Stubborn Facts: Cheaters Prosper in World Steel Trade

23 Wednesday Dec 2015

Posted by Alan Tonelson in Those Stubborn Facts

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China, dumping, overcapacity, steel, subsidies, Those Stubborn Facts, Trade, United States

Global steel production* ytd 2014-15 (November) -10.64%

China: -10.25%

United States: -17.05%

*in volume

(Source: Calculated from “Monthly Crude Steel Production, thousand tonnes,” World Steel Association, https://www.worldsteel.org/dms/internetDocumentList/steel-stats/2015/Crude-steel-production-Jan-Nov-2015-vs-2014_/document/Crude%20steel%20production%20Jan-Nov%202015%20vs%202014.pdf)

(What’s Left of) Our Economy: New Fed Figures Show Manufacturing Doldrums Continue

15 Wednesday Apr 2015

Posted by Alan Tonelson in (What's Left of) Our Economy

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automotive, dumping, durable goods, Federal Reserve, industrial production, manufacturing, nondurable goods, recession, recovery, steel, {What's Left of) Our Economy

The latest Federal Reserve industrial production report showed that, after inflation, U.S. manufacturing output inched back up in March, but revisions for February and January kept its levels down below November’s figures. Although the automotive sector – a manufacturing leader for most of the current recovery – saw real production rise for the first time in four months, the sector remained in a technical recession, along with durable goods industries overall. Steel has emerged as another worry, with foreign dumping crippling its output, and overall, the manufacturing sector has grown by only 2.15 percent in inflation-adjusted terms since the last recession began.

Here are the manufacturing highlights of the Federal Reserve’s new release on March industrial production:

>This morning, the Federal Reserve reported that inflation-adjusted American manufacturing production in March posted its first monthly increase since December, but feeble growth and downward revisions left its output levels down on net since November (by 0.68 percent).

>Real manufacturing output advanced by 0.13 percent on month in March, and February’s 0.24 percent sequential drop was revised up to a 0.22 percent decrease. Yet January’s 0.27 percent decline was revised down to 0.59 percent.

>March’s small manufacturing rebound was led by the automotive sector, whose real production rose by 3.22 percent on a monthly basis – its first improvement since November. But February’s fall-off was revised down from three percent to 3.55 percent, and January’s decline was revised down for the second straight time, from 0.61 percent to 0.71 percent..

>Largely because of these figures, both the automotive industry and the durable goods sector saw their technical recessions continue. Inflation-adjusted production for both is now down on net since July.

>Overall manufacturing and durable goods output was also undermined the steel sector, which has recently been targeted by a massive foreign dumping campaign. Inflation-adjusted iron and steel output plunged 5.23 percent in March on a monthly basis, and is now down 12.36 percent year on year. In fact, real production in the sector is now down on net for more than five years – since February, 2010.

>The new March figures mean that inflation-adjusted overall U.S. manufacturing output is only 2.15 percent higher than it was when the Great Recession in December, 2007 – more than seven years ago.

>Non-durable goods production, long a manufacturing laggard, rose for the fifth straight month in March, though the increase (0.07 percent) trailed that for durable goods (0.17 percent).

>Sluggish March growth depressed manufacturing’s year-on-year gains from a downwardly revised 5.10 percent in January to 2.70 percent. Between March, 2013 and March, 2014, inflation-adjusted manufacturing output increased by 3.13 percent.

>Including the February data, durable goods output is now 8.92 percent greater in inflation-adjusted terms than at the December, 2007 start of the last recession.

>Real non-durable goods production is now 5.74 percent less after inflation than at its pre-recession peak, which was hit in July, 2007.

Making News: New Video Interview on TPP; Research Cited in Pittsburgh and Dayton; and More!

14 Saturday Mar 2015

Posted by Alan Tonelson in Making News

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China, dumping, exports, imports, manufacturing, Obama, skills shortage, steel, TPP, Trade, trade law, Trans-Pacific Partnership, wages

I’m pleased to report that a lengthy interview I recently did with the cable business news series International Investor is now on line.  The subject is the President Obama’s proposed Trans-Pacific Partnership (TPP) and his trade policy agenda in general.  Click on this link to watch.

Also, on March 8, a tweet of mine on the (negligible) political impact of a new U.S. trade law action against Chinese steel dumping was featured in IndustryWeek‘s coverage of the subject.

On March 6, the Dayton (Ohio) Daily News quoted me criticizing the offshoring lobby’s habit of touting the effect of trade agreements on the exports of individual states, but never discussing the imports.

And on February 25, the Pittsburgh Post-Gazette featured my take on a new study claiming that America’s manufacturers are facing a mammoth shortage of skilled workers – even though wages in capital- and technology-intensive manufacturing are going nowhere at best.  The Post-Gazette piece was reprinted in the Albany (New York) Times Union and on a leading website for the printed circuit board industry.

Keep checking in with RealityChek for new reports on such media appearances!

Those Stubborn Facts: China’s Mammoth, Still Growing Steel Overcapacity

23 Wednesday Jul 2014

Posted by Alan Tonelson in Those Stubborn Facts

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China, dumping, overcapacity, steel, subsidies, Those Stubborn Facts, Trade

China steel overcapacity: 200+ million tons

Latest U.S. annual steel output: 87 million tons

Latest European Union annual output: 166 million tons

Latest monthly China steel production rate: Fastest this year

(Sources: “As credit dries up, troubled Chinese steel makers lose lifeline,” by David Stanway, Reuters, July 23, 2014, https://au.news.yahoo.com/world/a/24525579/as-credit-dries-up-troubled-chinese-steel-makers-lose-lifeline/
and “China’s Steel Industry Keeps Growing, Whether or Not the Government Likes It,” by Chuin-Wei Yap, ChinaRealTime, The Wall Street Journal, July 16, 2014, http://blogs.wsj.com/chinarealtime/2014/07/16/chinas-steel-industry-still-overproducing/)

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