For Sanity on China

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What are our stated objectives with China?

  • We want to bring them into the world economic system on appropriate terms of fair play.
  • We want access to their markets according to those rules of fair play.
  • We want protection for our businesses and workers, also according to those rules of fair play.

Those are perfectly normal and achievable objectives.  We can be specific about how to get there, and the probability of success is high.

What are our actual objectives in the trade war?

Trump has been clear about this in both words and deeds.  Our trade war is to assure that China will never be able to challenge our technological, economic, and military dominance.

Those are not the same as the stated objectives (although the press seems confused about the difference).  They are objectives for a real war.  And if you’re going to fight a real war—with bullets or with tariffs—you had better be sure you’re going to win, or the results won’t be pretty.

Problem #1:  We don’t run the world.  We are 18% or Chinese exports, same as the EU.  We’ve gone out of the way not to have an alliance with the EU on this issue.  (It’s worth noting that the EU already has a far lower balance of payments deficit with China than we do.)  The Chinese domestic economy is already larger than ours.  We can inflict pain, but we can’t put them out of business.

Problem #2:  China’s technological and military strength is not just because they’re stealing from us.  That genie is already out of the bottle, and it is an imperialist delusion to believe we can keep them poor and dumb.

Problem #3:  We’ve converted an issue of international good behavior into a matter of domination.  Without boots on the ground there’s no way in hell we’re going to enforce an agreement of subjugation.  (The distinction is not a gray area—we’re either thinking about rules we’d be willing to apply to ourselves or not.)

What’s going to happen?

The Chinese will go build their (very large) part of the world without us.   We will have no effective access to their markets or their technology (already today technology is a two-way street).  We’ll be back in a cold war with all that entails in risk, mutual hostility, military spending, and stunted world growth.

What should we do?

  1. The first step is to cool the chest-beating jingoism. (China is in fact a mixed bag for the US economy.) That way we can at least recognize the difference between the two types of objectives.  It’s the only way to behave rationally.
  2. If what we want is a correct and viable world order, then that means we need an alliance supporting our view. Ultimately this should end up in the WTO, but a first step is to codify what we want and assemble wide support.  That will add both carrot and stick to achieve our objectives.  The Business Roundtable of corporate CEO’s was explicit about this from the beginning.
  3. History shows that the best way to avoid war is mutual commerce. That means establishing rules we can all abide by.
  4. If we’re worried that the Chinese are going to take over anyway, then the best thing to do is to recognize and play to our strengths. Overall the odds are well in our favor.   The fact is that we’ve been here before.  Not so many years ago the perceived technology threat was Japan.  In China, Xi’s thirst for control makes him an enemy of what made for China’s success.

History is full of disastrous, inconclusive wars that no one wins.  Trade wars too.  We’re not so weak that we have to blunder our way into this one.

Losing by Bullying in China and Elsewhere

Most of us choose not to run our lives as bullies.  That’s not because we’re all so nice; it’s because being a bully is usually a bad option.  For one thing it’s precarious—the bully loses everything as soon as he’s not top dog.  And what’s worse is that it precludes other ways of getting things done.  The bully has nothing to offer but bluster.

The US has been the predominant world power since World War II, but we’ve generally chosen not to play the bully.  Instead we’ve used international institutions to enshrine our views as a kind of international rule of law.  That has been a very successful enterprise—no one wants to be odd man out.  And after 50 years we remain both the military and the economic powerhouse.  (How that filters down to the well-being of the population is another story.)

Recently however we’ve made the all-too-common mistake of believing our own propaganda.  We’re just too nice, and in our beneficence everyone is stealing from us.  For example NATO—which exists to make sure a Russian WW III is fought in Europe and not here—is now a case of wasting money to defend ungrateful allies.  The time has come to step out from behind the curtain and take all that we can get.

How have we been doing as a bully?  Let’s look at a few examples:

Iran

In Iran we’ve decided to take off the kid gloves and go for everything short of war.  The result thus far has been to strengthen the hard-liners in the government and to unite the population behind hatred of the US.  Initial steps have begun to resume nuclear weapons development—an effort that has strong support in the population as a whole.

Regime change remains unlikely, and even if it happens, it won’t be pro-US.  As for nuclear weapons, we’ve made North Korea a proof-positive of their value.

Venezuela

Trump administration high-handedness has intensified the ever-present fear of US domination—even among Maduro’s opponents.  That played a big part in the failure of the Guaidó uprising.

Arbitrary exercise of power makes us weaker.

China

This is currently the most consequential case.  We have legitimate grievances with China, but the situation is not so black and white, and it matters how we play it.

Our bullying approach began with tariffs before negotiation.  Then we chose to violate the our own trade agreements to go for an exclusive deal to benefit only us.  And we are unabashedly using the process to prevent China from challenging our dominance.  Finally we’re consumed with a feverish China bashing that has nothing with the reality of China’s effect on the US economywhich has many positives, and the negative effects don’t begin to compete with what we’ve done to ourselves.

There are two points worth emphasizing:

  1. The US represents 18% of Chinese exports, as does the EU. By making this an exclusive deal we lost half our leverage. That was a “get out of jail free” card for the Chinese. They didn’t have to worry about dividing the West, because we did it for them. (Not the only example of giving China exactly what they want.)
  2. We have dispensed with the idea that this is about international rules for fair trade. Instead this is strictly about what our national leverage can get us.  That’s not a great basis for compliance (particularly given history), and there are many ways that trade deals can fail to deliver.   Further, by setting arbitrary tariffs we’re striking a blow for protectionism, not open markets.  That’s the last thing we should be doing when a primary goal is access to a Chinese economy that is already larger than ours and growing faster.

The is another way to do this, and it was waiting to happen.  Within the WTO China is still classified as a developing country.  All parties recognize that needs to be renegotiated, which would have happened regardless of who was President.  The hand we were dealt was better leverage, better compliance, and no trade war.

There’s another way to look at this.  The following chart shows the kinds of items China exports to the US.

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It’s not just cheap widgets.  It’s the computer equipment that runs the software that is the basis for our economic strength.  The worst thing China could do to us is stop its exports.  So what do we really want?  In some order, we want access to the Chinese market, we want a say in how China competes in the rest of the world, and we want to address intellectual property theft.

We have good means of addressing all of these, but bullying China isn’t one of them.  A trade war is counterproductive for the first two, which is why we created the WTO.  For the third, we now have a common interest, and it’s worth noting that Chinese hacking has gone way up, since Trump declared economic war.

Bullying behavior may give a rush of power, but it’s no better for countries than for people.  It makes the world worsemost of all for US!

More To Say About China

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This piece is a little broader in scope that our past posts about China.  That seems useful, since war-mongering in press coverage of China has put us all in blinders.  We’re not claiming here that the Chinese are angels, but there is a lot more to the story that needs to be discussed.

We start with a couple of basic points, of interest regardless of whether we consider China friend or foe:

  1. China is now the world’s biggest economy and is continuing to grow rapidly. Further its population is more than four times the US.  That has many consequences worth thinking about.
  2. China has built itself up from nothing to a world class challenger in many areas. This is not just—or even primarily—a case of “stealing from us”. It is imperative that we understand their example and what we can learn from it.

On the first point, it should be noted to begin with that while the Chinese economy is the biggest in the world, the country is so big that its per capita income is well-below Mexico.  A rising standard of living in China could drive growth in the rest of the world for quite some time.

That is a dramatic turnaround in what China means to the rest of the world.  It is also the reason why virtually everyone expects China’s trade relations to be renegotiated.  Opening China has moved from a largely theoretical matter (because there just wasn’t that much to be sold) to become the primary issue.

This is the time for negotiation, but it’s also a window of opportunity we can easily miss.  In this, as we’ve noted before, a unilateral trade war is actually counter-productive. We’re defending protectionism, when the primary issue is open access to the Chinese market!  Further by insisting on a bilateral deal, we’re substantially reducing the leverage needed to make the deal a success.  The Business Roundtable of corporate CEO’s said as much prior to the start of current negotiations.  This isn’t about trade deficits; it’s about worldwide rules of fair trade going forward.

Trade negotiation, however, is not the only issue here.  US businesses have long had the luxury of focusing on the domestic market.   Economies of scale will now demand a less parochial view.  An obvious example is loosening of fuel economy standards.  That’s a concession to our automobile industry for the domestic market that will hurt international competitiveness.  Another example is 5G mobile equipment.  US vendors are behind the curve, because the domestic market has been fractured and slow-moving.

We are not doing our economy a favor by granting special favors (including tariffs) to domestic businesses.  That’s just perpetuating the idea that winning here is all it takes.  (Tariffs are also an unreliable and inefficient way of producing jobs.)

As for what we can learn from China, we give a few examples

– Government-sponsored R&D pays big benefits.  That is the single biggest contributor to the Chinese success.   They have created a world-class technological empire out of almost nothing.  Even the much-lamented Chinese technology theft is a non-trivial (if nefarious) accomplishment.  How many companies do a good job managing transitions of responsibility even for their own software?

We used to care about the government role in research too.  It was assumed in the good old days of the 50’s and 60’s. Now we have not only cut back on government R&D (Trump’s latest budget is a recent example), but with the current anti-science nostalgia we’re not even sure we want much to do with scientific progress.

– Education is an imperative.  It’s people who make for national success and we need them to be prepared for the jobs that will defend our national standard of living.  China has been ready to spend the money to make it happen.

– We should want to drive up the value chain.  Despite past history, the Chinese understand perfectly that price-competitive businesses are not the way to go.   Real wealth comes from dominant industries with the power to sell on content instead of price.  That’s what technology can deliver.  It’s simply not in the cards to believe past successes will just revive.

– All businesses need to embrace technology for success.  Even in the cost-sensitive outsourcing business, ease of interworking was an important factor in Chinese success.

– Finally (and paradoxically) a dynamic, decentralized economy is a real plus.  This may seem surprising in a list of lessons from China, but it’s strangely true.  The major impetus that kicked off the Chinese economic miracle was an accidental liberalization.  As a small opening, Chinese municipalities were allowed to run independent businesses once they reached their nationally-set production goals.  As it happened, these independent businesses took off and eventually marginalized the state-run enterprises.  Many morphed into successful private companies.  (Xi is now attempting to put that genie back in the bottle, with reemphasized state enterprises.)

We should never underestimate the value of the dynamism of the US economy.  But we had better be careful to understand what has really worked for us.  There has always been an important government role, and diversity mattered too.  In the Chinese example, success was only possible because government provided the environment, particularly education and infrastructure, for the businesses to grow.  That’s precisely what worked for us establish US dominance in the post-war years.   In general, prosperity requires both the environment and the opportunity to achieve success.

 

All that being said, what can we say about dealing with China?  A few guidelines:

We are misled if we think “enemy” is all we need to know.  China is an important factor for both good and bad in the world economy.  They were an important help in the efforts that prevented a depression in 2008.  They can be a major locomotive in the world economy going forward.  They contribute to the worldwide development of science and technology—which makes us all richer.  They recognize the importance of climate change.  It is our task to make that all work for us.

To get there we need to treat the Chinese like any other adversary—we should deal with them from strength and look for mutual advantages.

It is not productive simply to dictate, with the idea that we can shut them down by denying them access to our market.  We represent 18% of their export market and much less of their total economy.  That’s plenty to cause trouble, but not enough to dictate, and in any case real pain would hurt us as well.  Further, if we want success in their market, there has to be ongoing mutual self-interest—no signed document will do it.   And there’s a historical side of this as well:  China endured some of the worst of western imperialism in the nineteenth and early twentieth centuries.  That memory lingers, and we are not served by recalling it with our behavior.  Mutual advantage is much better than antagonistic isolation.

We need to extend the rules for fairness in international commerce through the WTO.  As noted earlier all parties recognize this has to happen, and we have historically led such initiatives.  We have twice the leverage in cooperating with the EU (also 18% of Chinese exports), and we avoid the hypocrisy of endorsing protectionism in the argument for opening of their markets.

Matters such as intellectual property protection and theft should be solvable problems, in part because the Chinese now have much to defend as well.  It’s not for nothing that Huawei is well ahead of the curve in 5G development.   Chinese universities are now high on the list of international institutions (even though Western ones still have cachet in China!), and the Chinese are acquiring patents like everyone else.  It’s also true, if seldom noted, that Chinese computer hacking decreased significantly by the end of the Obama years and went way up when Trump declared economic war.

The military installations in the South China Sea are a serious problem, but the fact is that the great majority of Chinese imports and exports pass that way—so it’s not surprising they’re worried about it.  We make that worry all the greater by declaring that it is legitimate to use all resources at our disposal to get the Chinese to do what we want.  The only real solution is some kind of freedom of the seas regional agreement that all parties can have confidence in.

Human rights violations are also important, and we have to keep those issues alive.  It’s hard to know how far we’ll be able to get.  The one thing you can say is that we shouldn’t be too quick to use Xi a stand-in for China as a whole.  We’ve already noted Xi is a throw-back (a “princeling” heir to the Maoist past), so perhaps there is hope for better later.  There are many conclusions to be drawn about us if you take Trump as a stand-in for everything American.

In the end the point is to treat China like any other independent nation.  China as “enemy” has real roots, but also large doses of domestic politics (China has been a convenient excuse for our own misdeeds) and “yellow peril” racism.  China needs to work properly in the international system of trade and ideally also in international security agreements.  Any efforts to avoid a new set of arms races will have to involve them.

Vigilance is fine, but there is at least the potential of much to build on.

Post 9/11 Consequences to Remember

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It’s important to recall the legacy of our post-9/11 actions in the Middle East.

  1. After the invasion of Afghanistan, we couldn’t be bothered to pacify the country because we were in such a hurry to invade Iraq.

Consequences:  Years of bloody chaos in Afghanistan ending in retreat.

  1. After the invasion of Iraq we chose sides with the Shiites and couldn’t be bothered with their close associations with Shiite Iran.

Consequences:  Iran was the primary beneficiary of the Iraq war.

  1. After declaring Iran to be public enemy #1, we were so eager to impose sanctions that we couldn’t be bothered about their nuclear weapons program.

Consequences:  All sides in Iran are now united in hatred of the United States.  The nuclear weapons program has always had broad popular support.  The Europeans have forestalled it for a bit, but guess what?

Maybe they’ll get a nuclear club welcoming party like the one we threw for Kim Jong-Un.

An Israeli-Palestinian Fairy Tale

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It may be impossible to say anything useful about Israeli-Palestinian relations, but there’s so much pseudo-reasonable propaganda around (e.g. here and here) that it’s tempting to try.  It’s a hard problem, but sometimes hard problems do get solved.

First of all, we should address what seems to be in the offing from the confident Mr. Kushner.  By all reports we will hear that Palestinians should just suck up to Israelis, because they will be much better off.   That is at best an assumed-benevolent provision in an Israeli declaration of victory; at worst it is a justification for added repression when it fails.  The subject seems eerily reminiscent of the way the British talked about Ireland a hundred years ago.

There is in fact no alternative to a two-state solution with recognition by both sides of the other state’s right to exist.  Such a solution is a necessary condition for all parties involved.   It’s hard to imagine anything else stopping settlements or dealing effectively with right of return.  The fact that no one wants to talk about it now is a problem, not a fact of life.  There are of course many problems to be solved, but there is at least the potential of a way forward.

 

Out of sheer frustration it’s worth listing some of the mythology that’s getting in the way:

On the Palestinian side:

– Our land was stolen, so there is nothing more to say.

Both sides are going to have to admit the other has a claim, or there is no alternative to fighting to the death.

– They keep killing our people.  Any deal with them is treason.

Both sides believe that one.

– We’re the victims of ongoing Israeli oppression.  We have no obligation to live up to any deal.

The reason to have a deal is that it is better than not.  Trust is necessary to make any progress beyond the status quo.

– This is a religious war and/or a fight against Western imperialism.

It’s not.   It’s a fight over claims to the same land.

On the Israeli side:

– This is our land.  God gave it to us.

You can believe whatever you want for yourself, but you can’t expect anyone else to go along.

– This is our land, granted to us after the second world war as a continuation of a process that goes all the way back to the Balfour Declaration.  All further territory was rightfully won in battle.

For the other side that’s just a restatement of the Western imperialism story.

– They keep killing our people.  This will go on “until they love their children more than they hate us”.

Are you any less devoted to the cause?

– It’s just historical anti-Semitism

It’s not.   It’s a fight over claims to the same land.

– Things aren’t perfect today, but they’re mostly under control.  We just can’t take the risk.

It’s already a cancer on the state, and that will only get worse.

 

The first step in any negotiation has got to be an acknowledgement by both sides of the other’s right to exist.  Nothing else can go anywhere, so it might as well be confronted head-on.   Maybe the necessary transition in Palestinian leadership can help the process.   Maybe there will be a transition in Israel also.  Something is certainly out of whack when the Israeli leadership is making deals with terrorists and is most comfortable with Eastern European anti-Semites!

If you can get that far, then Kushner’s financial backing project takes on real meaning.  It is imperative that a Palestinian state be economically viable as a precondition for political stability.  Even given that, though, there are all kinds of detailed issues to be hashed out:  most fundamentally there is the problem of the map, plus other items such as water rights, and rights for Israelis and Palestinians in each other’s states.  The matter of Israeli settlements is of course difficult, but despite the famous Obama-era map shown at the start, I would like to believe this is not impossible.  Israel will have hard decisions, but the never-ending occupation can only be cured by a viable Palestinian state.

That brings up the matter of Israeli security.  Despite the scary ring of it, that seems less serious in practice than in theory.   Any Palestinian state would be risking its continued existence by preparing an attack.

For the economy, a possible solution could be something like a customs union, where the Palestinian state would both benefit from and be useful to the Israeli economy.  That’s not an impossibility; just lots of hard steps to get there.

 

And it has to be emphasized that the benefits to all parties would be incalculable.  If there is anything that can bring stability and economic growth to the Middle East, this is it.  There’s only so much we can do to make it happen, but blind support of Netanyahu, abandonment of the two-state solution, and uncritical reliance on MBS do not contribute to any recipe for peace.

Never-Never Land

You can’t turn around today without someone talking about how great the economy is.  Low unemployment and low inflation.  What could be better?

In fact you don’t have to look far to know something’s wrong.  For once this is less a matter of lies than of myopia.   We’re living in an artificially-created bubble, and while we don’t know exactly when it will end, this is never-never land.   We’ll go through it step-by-step:

– The bubble

We incurred $985 B of deficit this fiscal year as short-term stimulus to an economy already at full employment.  That’s a monumental $300 B over last year—in good times. As in every other such case, the tax cuts are NOT paying for themselves.  During the year we had a small reduction in unemployment from 4. 1% to 3.7%, but at no faster rate than last year and with no increase in inflation-adjusted wages (one-time bonuses from the tax cuts were negligible in the statistics).  You might ask why we would do such a thing—$1 T is a lot of money—but one thing the deficit certainly delivers is that much more economic activity in an election year.  The same people who starved recovery from the 2008 crisis to help with the 2016 election gave themselves a big boost for this one.

You might also ask how long we can continue doing it, and the following budget chart makes that unmistakably clear:

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We’re running up unimaginable deficits in good times, with consequences we’ll talk about in a minute.  And the chart actually understates the situation.  The underlying figures come from a CBO report written in April, when their estimate of the 2018 deficit was $805 B. With a final 2018 deficit of $985 B, the situation now looks considerably worse. The CBO report said that we would reach deficit = $1T by 2020 and then reach the sinister milestone of debt = total GDP by 2028.  With the current deficit, we have reached the $1 T value in 1/3 the time, so that second milestone looms sooner now too.

The stock market is a similar case. The corporate tax cuts went directly to company bottom lines, raising price/earning ratios and stock values. What’s more corporations turned around and used all that money for stock buybacks, increasing demand for stocks and further enhancing stock prices.

None of this is sustainable.

– The deficit

Much discussion of deficits seems theoretical, but the consequences of our current deficits are real.  Republicans are already talking about cuts to Medicare and Social Security as counterpart to last year’s tax cuts.  Just imagine now we’ve reached a downturn in the economy—not even necessarily as bad as 2008.  We’ll have the massive deficit-induced debts shown in the prior chart, and now—on top of that—tax receipts that have just collapsed with the economy.  In that case we’re not talking about changes around the edges of Medicare and Social Security, we’re talking about no money for it and “taking the hard choices we just have to do.”   That means dramatic change in what it means to be living in this country.

Further (as noted in the CBO report) the deficit is a time bomb.  As interest rates rise in good times, the yearly cost of financing the deficit rises accordingly.  We’re already talking about deficit finance costs higher than the defense budget.  And it will just continue up, eating into available money for healthcare, education, opioid crisis even before a downturn.  There are good reasons not to incur deficits in good times!

– Our economy

With all Trump’s talk about the private sector and relief from regulation you might think that the country has been liberated from misguided government meddling with private enterprise.  But you’d be wrong.  The current executive-imposed tariffs and trade wars constitute the most extreme government intervention in the economy within memory.

The steel tariffs hit anyone building anything out of steel—basically forcing export-directed activities off shore.   The new USMCA regulations have already caused layoffs at Ford (and the touted benefits to labor are so far from clear that the unions can only wait and see).  The trade war with China disrupts values chains of any corporations not sufficiently well-connected to get exemptions.  The government is choosing winners and losers in the economy based on impulse (coal and steel sound good) or lobbying (the Apple watch).  And established companies have been winning out over newer, innovative ones (net neutrality) any time the issue comes up.

All of that, together with xenophobia and lack of support for education, augurs poorly for the state of our economy going forward.  And we’re even waging economic war with the largest, most rapidly growing economy in the world—in the name of protectionism!

– Our population

Since the subject is the economy, we’re talking here about the related topics of personal and national economic success.  It is of course a truism that the world economy is changing.  Good jobs, and the jobs that maintain our national standard of living, are changing.  Very many of them require more and different training.  (One list of the top ten growing job categories is given here.)  Economists going back to Adam Smith have recognized the responsibility of government to educate the population.

However with the tax cuts we took a very different tack, essentially trusting private sector prosperity to raise all boats.  There is no evidence that works.  The tax cuts went primarily to stock buybacks (see the mind-boggling level of buybacks below), leaving issues such as education (including the student loans crisis), infrastructure, and healthcare up for grabs.

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For now, protectionism is the solution to job retraining, consequences of automation are unaddressed, and instead of preparing people for good jobs we’re busy fantasizing about the past.

– Climate Change

Climate change belongs on this list, because inaction will just make the economic effects worse.  Climate change may have morphed into a partisan issue, but nature isn’t fooled.

Consequences will be in many forms—severe weather, changes of temperature and rainfall, sea-level rise.   Turning around today’s carbon-based economies takes time, so if we don’t start acting now, we’re talking many trillions of dollars of expenses for repair and to forestall truly disastrous consequences.  The recent IPCC report found more serious effects than previously recognized by 2040.   As the following chart shows, the US currently generates twice the per-capita CO2 of any other major player, so we have a long way to go.

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For now we are doing worse than nothing.  Climate change is an issue where international unity of purpose is extremely important, because cheaters—with cheap coal—can prosper.   We have not only endorsed coal for ourselves but actively encouraged cheating.  Further our departure from the Paris Agreement process—and in particular our disavowal of the whole idea of rich countries helping poorer ones act in our common interest—leads directly to dangers such as Brazil abandoning protection for the Amazon.

Ignoring climate change means more damaging effects of warming, and more drastic (and expensive) action in the end.   Furthermore, as a purely economic issue, by denying the issue we are sidelining our own companies’ participation in this necessary multi-trillion-dollar enterprise.  The day will soon come (we’re now talking just 20 years to get off coal, oil, and gas) when this moves to page 1 of the news, and stays there.

 

Our never-never land economy is good only so long as we keep our eyes closed.  But if we don’t open them soon, we won’t recognize what we’ll find later.

Losses of War

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The current trade war with China is so ill-conceived and damaging to the US that one hardly knows where to start.

As one point of departure, it’s worth pointing out that the rhetoric around the trade war sounds like the kind of propaganda campaign used to pump up public support for a real war.  It’s all about “winning” and vilification of the Chinese, as if we’re going to knock them down, so that they’ll never threaten our dominance again.

Given that rhetoric it’s worth pointing out a few basic facts:

– China has been overall good for the American economy.   Much of Chinese manufacture is done for American supply chains.  Low prices and high quality of Chinese exports have helped American companies to sell value-add products worldwide, and has also benefited American consumers.  American businesses, with few exceptions, are not pushing for the tariffs.

– There is of course no question about the decline in good, well-paying jobs for people without specific skills.  The Chinese have contributed to that by making good, cheap stuff, in part through undervaluing their currency.   They perfected outsourcing from spec to such a degree that they have made themselves suppliers of choice, leading to declines in manufacturing jobs in the US. While all of that is true, it is also true that they are scapegoats as much as perpetrators for the consequences.   The Chinese are not the source of growing inequality in the US—we did it to ourselves.  And that, as much as the Chinese, caused the pain frequently blamed on globalization.

– The rhetoric around the trade war is remarkably vague over exactly who or what is being defended.  When the subject is the deficit, that makes it sound like the Chinese are stealing from our economy.  But businesses are not tariff supporters, and the deficit is just plain not measuring the right things.  The iPhone is a good example.  It is a fantastically profitable product for Apple—sold at 300% markup over the imported hardware–but it counts as a big loss for the deficit, because the profits are declared in Ireland and Luxemburg for tax purposes.

So maybe we’re doing it for employment.  But the same people who are pushing this are fighting unions, so it pays to look closer.  There’s no guarantee that the tariff-protection will be positive for jobs, particularly good jobs.  Tariffs are a tax, and a very expensive and unsure way to protect a few jobs while putting many more at risk.  To emphasize this point, it should be noted that the new tariffs on China are much like the previous steel tariffs in that they are assessed on basic commodities rather than finished goods—which means that they put all businesses that make the finished goods at risk.   This is obvious in the case of steel, but many of the new tariffs affect hardware which American companies use as platforms for their software—as in the iPhone example.  So the result is much the same as for steel.

– Finally the specific evils attributed to the Chinese—theft of intellectual property, currency manipulation, unfair competition in China and elsewhere—are resolvable issues, as we will discuss shortly.  The trade wars guarantee that those resolvable issues will now be sacrificed to the raw emotions of war.

 

To understand where we stand with China, it helps to think a little bit about recent history.  Over the past twenty years the Chinese economy has come from nowhere to now surpass the US in total volume.  (However, the Chinese population is so large that per capita income is still well-below Mexico.)

The result is that China has transitioned from a country with no capacity to absorb imports and an economy 100% based on export-driven growth—to a country with a middle-class market comparable to the US.  One indication of the transition is the sudden appearance of Chinese tourists everywhere in the West.

That change has many consequences.  For growth, it means that the Chinese are acutely dependent on prosperity in the West for continuing growth of such a huge economy.  For intellectual property, it means that the Chinese have as much to defend as we do.  For imports, it means that the Chinese middle-class has as much interest in western goods as it does in western travel.  And the Chinese are now supporting their currency rather than undervaluing it.

All of that means that—though negotiation with China will certainly not be easy—there is a common interest recognized by all parties.  This is already happening in particular domains, such as financial services.  The world is ready for a historic step—international trade agreements opening China as a major economy and preparing for an era of worldwide growth to the benefit of all parties.  That’s what we are torpedoing with the trade wars, undermining the necessary trust between participants.

Regardless of what we think we’re negotiating, the trade wars mean we’re giving up on access to the biggest economy in the world, growing at 6%, in favor of protected industries at home.  Trade wars are not like real wars in one important respect—we have limited control of the results from the agreement we reach.  People will still have to buy the stuff, and industries have many ways of avoiding a result that no one wants.   An agreement reached (as the Chinese have said) with a knife at the throat is unlikely to bear fruit.  “Winning” in Trump’s sense has little to do with this situation.  And the “it’s no fun winning unless everyone else loses” attitude is a proven recipe for disaster—for us.

If we look toward the future, we are not going to make China go away as a world power—and it’s not to our advantage to do so.  And it’s certainly delusional to think they are just a bunch of cheats whose only talent is in stealing from us.  If we want to be successful, we need to build upon our strengths.  China is a legitimate challenger technologically, and we will fall behind if we don’t recognize what those strengths actually are.  There was one such list of strengths in the NYTimes today;  here we’ve also given a more technology-oriented list.  Many of those items are at-risk in the current anti-science and xenophobic environment.

We should recognize that if we play our cards right, the value of our openness and democratic structures cannot be overestimated, compared with China’s authoritarian regime.   (One can even argue that China’s enormous growth was largely in spite of, rather than because of, its central authority, and that Xi is tightening the screws.)  I’m old enough to remember when we worried about Japan overtaking us, through their disciplined, top-down economy.  There was even a moment where they too had a central technology plan that was going to leave us far behind.   That never happened, and the dynamism of what we represent continued to reinvent itself in the many decades that followed.

And the whole world got richer.  That should be our future also.

It’s Always the Elites and the Foreigners

6778135275_62a99f3616_z Surian Soosay

A recent book serves as a reminder of what happened in the economic collapse of 2008.  Lessons from 1929 were learned, and the world pulled itself back a few inches from the brink.  Major economies, principally the US and China, pushed enough money into the world financial system to keep it going.   We didn’t have a depression, and ten years later we’re doing well enough that we seem ready to forget.

Who were our friends in 2008?  The Chinese and the competent people who knew what they were doing.  Who won out?  Opportunists of various stripes who saw the near-depression as an opening.   And their villains were the usual suspects:  elites and foreigners.

Elites and foreigners are always convenient scapegoats, but scapegoating these days seems to dominate all political discourse.  That is a problem for both the left and the right.  Let’s start with “elites”.

On one side there is multi-millionaire Trump, who has never wanted for anything or hidden his blatant self-interest, but who has nonetheless successfully portrayed himself as a warrior against elites!  From his inaugural address: “a small group in our nation’s Capital has reaped the rewards of government while the people have borne the cost.”  On the other side I’ll quote a recent email article from Robert Kuttner admiring Trump’s trade war against China and decrying how “the corruption of ruling U.S. elites created a vacuum that opened the door to Trumpism.”

When you come down to it, in both cases the elites are charged with the crime of turning the US into something that doesn’t look like a rose-colored picture of the 1950’s and 60’s, when America was “great.”  It’s convenient to find someone to blame for those changes, but the world is not the same.

You can argue about trade policy (and why it happened), but you can’t wave away the accelerating effects of technology and globalization (itself fueled by technology) with scapegoating.  No nation today can isolate itself behind tariff walls or anything else and maintain its standard of living.  We’ve done a bad job of solving problems of transition for the current real world, but trivializing those problems doesn’t help.  In Trump’s case we have the craziness of reducing support for education and research while promoting coal mining instead.  His trade wars are more a publicity stunt than a solution to the problems of the working class.

There’s another issue too.  As a nation we are in desperate need of elites:  the people who make our economy go and who understand how things work.  Who kept us out of depression following 2008.  But those aren’t the only elites in the picture.  There’s Trump. There are the ultra-rich behind the Koch organization who want to maximize their profits and bring back the not-so-great gilded age.  There are the politicians and lobbyists in Washington.  There are even the sinister invisible elites we keep hearing about behind the scenes.  Accusing “elites” mixes up the picture.  It creates innocent targets as a mask for not solving real problems such as education, wages, economic dislocation, racism, financial and geographic inequality…

With “foreigners” the problem is if anything worse.  It is worth remembering our common interest with the Chinese in 2008.  Despite the current trade war propaganda, China is neither friend nor enemy.  China is a major partner in worldwide, technology-fueled growth that has made the world and us richer.  They are a major player with a common interest in dealing with climate change.  You can’t deny their effect on the domestic economy, but we also contributed to the pain.

We have specific issues that need to be addressed—e.g. intellectual property, opening of markets in a now richer China—however the main challenge from the Chinese is that they are good at what they do.  American high-tech companies have had trouble making headway in China largely because of real competition.  As China grows, we need to remain at the top of our game and to adapt to a world where we are not the largest and richest market (already true).  That could be quite a good future with new products and new markets, or we could all strangle in trade (and possibly real) wars.

The divisions in this country are deep, but it is perhaps encouraging that it is less about issues than about scapegoats.  If we could just remember that it is NOT all about ill-defined elites and foreigners, we could get quite a lot done.