Dealing with China

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Relations with China are important.  By some measures the Chinese economy is already the biggest in the world and still growing rapidly.  The Chinese military is the most comprehensive challenge to US hegemony since the heydays of the USSR.  Chinese technology has evolved rapidly to near parity with ours.   The Chinese political system could not be more diametrically opposed to ours.

With such a significant adversary, it goes without saying that we need to manage the relationship carefully.  At the moment, though, all we’ve got is war-mongering.  The Trump people have always been big on scapegoats, and the Chinese are just as convenient as the immigrants.  A difference is that immigrants have some defenders—Trump can’t get away with just calling them all animals.  But by playing patriot, Trump has gotten away with pretty well anything about the evil Chinese.

A couple of comments:

– Since the Chinese were major allies in recovering from the 2008 crash—and the Republican Party was not—there’s a strong case that Republicans (deliberately) caused more pain to the US economy than the Chinese did.

– The Chinese intellectual property theft we keep hearing about had been diminishing until Trump ignited his trade war, and Chinese hardliners felt empowered to fight back.

Competition with China is a fact of life.  No amount of trade war is going to make them go away.   So “getting tough with the Chinese” is publicity not policy.  What matters is how to get results, as we’ll discuss.  Further, it should be recognized that we actually have quite a lot of influence on the form our relationship will take.

We’ll start with some background.

  1. Political and economic systems.

China is very unfree.  There is extreme control of information available internally, and consequences for speaking outside the party line can be very severe.  Recently deployed surveillance systems add another dimension of party control.

Before we get too far up on our high horse, though, we should recognize that support for the regime in the population is now very strong, perhaps stronger than ever.  The regime has delivered unimaginable economic success for a very wide swath of the population.  Just to be clear this wasn’t stolen from us—US trade is a small part of the overall Chinese economy—it is a legitimate success.  And it created a sense of pride in China that had been lost for centuries.

There were two primary factors for that success, one intentional and the other not.  The intentional part was government investment in the population (e.g. education) and national infrastructure.  That prepared the country for technological achievements that would have been impossible otherwise.  In that, China was very much like the US in the fifties—when the government sent the GI’s to college and built the interstate highway system.  Public investments we’ve forgotten how to do.

The other success factor—strangely enough—was an accidental surge of free enterprise.  As a minor weakening of collective economic control, Chinese municipalities were freed to carry out their own businesses once obligations to the state had been met.  That minor bit of freedom took over the economy.  Municipal businesses became dominant to the point that they dwarfed the (corrupt) state-run enterprises.  Municipalities ended up devoting all attention to their own businesses, to the point that they were meeting their obligations to the state with products purchased by free-market profits!

So China’s success was as a mixed market economy.  Where Xi’s new stress on state enterprises will take them remains to be seen, but it certainly raises questions.  In many ways Xi’s push to consolidate power in the state is just as radical as Trump’s push to turn everything in the US over to the private sector.  Both are abandoning past recipes for success to cults of personality and personal ideological visions.

  1. History, nationalism, and negotiation

Western imperialism in China was terrible and recent.  The Opium Wars were fought for the profits from addicting the population, and it took Mao’s hell to drag the country out of the consequences.  While the Europeans were primary players, we had a role in it too.  We have conveniently forgotten all of that, but the Chinese most emphatically have not.  Not just their leaders but the population as a whole has reason to see their current place in the sun as hard-won against forces that have done their best to keep them down.

That’s a dangerous situation.  It sounds like Germany in the 1930’s (eerily, that’s also the only other example that comes to mind of such a dramatic economic recovery).  From that example we know what doesn’t work: neither draconian efforts to keep them down nor appeasement after the fact is going to be successful.

In that context our unilateral trade wars have several bad effects:

– They complicate negotiations by mixing fair trade with measures to retain dominance.  In that the trade wars are counterproductive even domestically, by encouraging the false belief that we can “defeat” Chinese competition.

– They make negotiation a matter of pride not just interest.  Worse, they produce broader nationalist reactions in both countries.

– They lead to more destructive isolation of countries from each other, always a bad idea.

The only path that works is to make them part of the world economic order.  That such approaches work is the primary lesson from the changed world order after the second world war.  The point was discussed recently in a piece by former leaders of ten disparate countries.  The WTO is the means by which rules can be established for free trade as well as conditions of labor and environmental concerns.   As such, it is a much more effective instrument of national policy than the pot shots we’re taking now.

Let’s be very clear that this is not about being nice—it is the path of maximum leverage.  The reason why our current discussions with China are getting nowhere is because we have chosen weakness—replacing leverage by bombast for public consumption.  Under Obama, with far less economic leverage than we have today, both the balance of payments deficit and incidents of intellectual property theft declined markedly.   Both have increased under Trump.

  1. Morality, Chinese minorities, and Hong Kong

There’s a lot we don’t like about the way the current Chinese government does business.  In addition to repression of the population, there is the imprisonment of Uighurs in concentration camps and the heavy-handed suppression of democracy in Hong Kong.

Let’s start with repression of the population.  An important question is why the population is enthusiastically ready to accept that Xi’s model over ours.  Part of it as noted is the economic success and rise in stature of China.  However, another part of it is that—correctly or not—they don’t see the current version of the US as a good argument for our ideals.

The Chinese government may be repressive, but at least they have a proven commitment to improving the economic well-being of the population.  Seen from the outside the US is run for corporations—who can buy elections with impunity—and those corporations have no commitment to anything beyond return for their investors.   Government sees no reason to intervene for the well-being of the population, and the all-pervasive corporate influence leads to a relentless consumerism that dominates daily life.

Where we see in Xi a return to discredited socialist control of the economy, they see in Trump the triumph of corporate power.  It’s up to us to prove them wrong.

Until that happens, our support for the Uighurs is hypocrisy from a country that puts immigrant children in cages and demonizes its own citizens.  Support for political liberalism is strange from a regime than calls the press “enemies of the people”.   And support for democracy in Hong Kong is nothing more than the nth Western effort to keep China down.

That doesn’t mean there’s nothing we can do, but we shouldn’t delude ourselves about the power we really have.  Our actions on Crimea were ultimately little more than symbolic, and we could do nothing at all about Tiananmen Square.  For Hong Kong, the Chinese have already branded the unrest as a Western plot, so overt pressure can be counterproductive.  Just like the US, China is less likely to cave in to coercive power than to international outrage.  For that we need allies and behavior that matches our rhetoric.

 

Where does all that lead?  Here’s one list of conclusions:

– We must bring China into the world economic system with updated rules reflecting today’s reality.  That’s why the WTO exists.  This would have started before now with any other President.  We have a major responsibility to make it happen.

– There are other areas, climate change is an obvious example, where we have a strong need to work together.

– There are also compelling reasons for vigilance, particularly with the military.  But even there we have a large interest in agreements (with Russia too of course) wherever possible.   In particular we all need to avoid arms races and military instability.

– Economic competition with China is inevitable and will be intense.  There is no reason either we or they will be sole winners, as the differences between the societies will lead to different strengths.  That should be good for worldwide prosperity.  The most important thing for us is to recognize and play to our strengths.

– We should (at least for now) view both Xi and Trump as anomalies.  Both are roadblocks to domestic and international progress, and there is no way to know how long they will last.  But they do not define their countries or the possibilities for the future.

– Finally if we’re worried about the decline of our ideals in the world, then we should accept the challenge of living up to them!

Thinking About Manufacturing

There seems to be a lot of confusion about manufacturing.

We’ll start with a few slogans that pass for generally-accepted truth:

  • Manufacturing is the core of the US economic base.
  • Restoring manufacturing is key to the viability of the US working class.
  • The Chinese have gutted manufacturing in the US.
  • The continuing decline of manufacturing is another indication of the failure of Trump’s economic policies.

One indication that something might be fundamentally wrong in all of that comes from looking at trends in the service and manufacturing sectors over the past twenty years:

mfg_in_gdp_wbsvcs_in_gdp_wb

To say the least, it looks like there is something more fundamental going on than politics or even globalization.   Manufacturing has been declining relative to services for many years and in a big way.  It’s not just because of China, and it’s not even just in the US:

mfg_in_gnp

The US has been undergoing a massive migration from a manufacturing-oriented economy to a services economy. One problem is that we don’t really have a good vocabulary to talk about that situation.  The term “services” goes from McDonald’s to Google.  But in any case manufacturing is no longer the core of national economic success.  Think about television.  The sets have become so cheap that only huge volumes can cover the low margins.  But every major company you can think of wants to get into content to run on those sets.  There are hardly even any DVD’s manufactured for that stuff anymore!

We’ve talked here before about software.  All of the leading high tech companies (including Apple) are software companies.  Software companies produce product without manufacturing.  And that’s only one of the reasons such companies can be very profitable:

– They typically sit on top of the value chain (or even, like Facebook, have only software as output)

– They tend to have monopoly power (because dominant players can afford to spend more on R&D)

– They tend to have high barriers to entry and effective customer lock-in

The world economy today has increasingly many highly-profitable dominant software companies.  Some like Google produce software; others like Apple rely on a world-wide agglomeration of highly-competitive businesses producing to their specs.  Our current national success is that we have lots of them.  Our military strength depends on their technology.  The Chinese are sensible enough to understand that’s where they want to be too.  Even in biotech—where there has to be manufacturing—you’re still talking about largely high-skilled operations in companies with a large emphasis on R&D.

 

It’s a little strong to say it, but it’s closer to reality than most of what we hear:  mass employment in manufacturing is like mass employment in agriculture—it has had its day.  The migration is as extreme as what happened a hundred years ago.  And we’re better off thinking about the consequences than blaming it all on the Chinese or trying to outdo each other with promises to make it go away.

That point of view is widely held (based on the figures), but somehow it hasn’t managed to penetrate public discussion.  That’s not surprising for the Trump people, since they’ve been making it all up from the beginning.  For the left it’s different.  Traditional socialism has always had an industrial flavor that is hard to give up.  Unions and trust-busting are good, but they won’t bring back the past.  Forcing businesses that take federal research money to do manufacturing here will help some but not enough to reverse the trends.

(For the left, one particular paper has been frequently cited to show manufacturing job loss is reversible.   That paper concluded that the large manufacturing job losses from 2000 to 2010 were not due to automation here.  However, for its purposes it only examined companies that remained here and checked how many robots they had.  Nothing was said about the reasons any single company had left.)

The question then is what we should do.  The key is to start considering what we see around us as reality:

  • A long-term trend of decline in manufacturing
  • Very profitable, highly technical, non-manufacturing monopolies
  • Complete neglect of domestic services for the public good

We’ve talked about those trends here before.  As we’ve noted, some of the monopoly power is structural, so it’s not clear how far we’ll get with breaking them up.  However, monopoly power means companies are far from cost-sensitive, so the last thing we need to give them is more tax breaks.  On the contrary what’s crucial is learning to tax them, and we’ve got Apple as proof of how tough that can be.

In this picture the public sector has two important roles:

  1. Preparing the country for success in the world economy. That means infrastructure of all kinds, including education and child care as much as roads and bridges. The private sector won’t do it.  But—with an appreciation for the role of government derived from the second world war—we used to do a better job of it ourselves.
  2. Making sure the wealth of the monopolies gets translated into benefits for the population. This is another case where the private sector can’t act for its own good. Henry Ford famously wanted his employees to be able to buy his cars, but that’s certainly not the ethos of today. This doesn’t mean free money, it means employing people for the unfilled tasks needed for the public good.

We need the public sector to be the means of addressing the country’s unmet needs with resources from gilded-age inequality.

It’s worth pointing out that we have been wasting resources on a spectacular scale.  Under George W. Bush we fought a $3T war with no identifiable benefit and underwent a privatization effort (including tax cuts) that ultimately produced a near-depression.   Under Obama the Republican Congress shut down government, retarding recovery and preventing the public sector from doing any of the jobs just described.  Under Trump the primary achievement has been another $2T of tax cuts, with a jump in inequality and a deficit big enough to prevent any of the infrastructure work from getting done.  That the tax cuts went straight into stock buybacks is a clear indication of irrelevance.

It is instructive to think back to the time when the country underwent the last such a drastic economic change, when we went from an agrarian to an industrial society.   People had a hard time then thinking about it.  They got tied up in an irrelevancy—the silver monetary standard—and it took a long time before the real problems of corporate power and inequality were addressed.  A contemporary Henry Demarest Lloyd expressed his frustration this way: “The free silver movement is a fake. Free silver is the cow-bird of the reform movement. It waited until the nest had been built by the sacrifices and labor of others, and then it lay its own eggs in it, pushing out the others which lie smashed on the ground.”

We have something of that problem today.  The long-standing decline in manufacturing is a continuing but unacknowledged reality.  Instead we spend our time blaming it on the immigrants, or the Chinese, or the elites, or some combination of everyone else.  Until the blame game stops we can’t begin to decide how our economy really needs to work in the world we’ve got.  For climate actions we worry about coal miners, but there are many others in the same boat.  There is an international aspect too:  we’re too busy looking for villains to spend time on making the system work for global prosperity.

For our part we think it’s time for the public sector to come in from the cold.   In any case it’s time to stop talking about free silver.