Monday, April 18, 2011

Chinese Industrial Policy, ctd.

Last week, I posted an amazing video of China's "ghost cities and malls" which unquestionably demonstrated the myriad problems with the country's centrally-planned economy, despite its eye-bugging growth.  Adding further empirical support to my anecdotal evidence is a great new paper from Heritage Foundation's Derek Scissors which compares the US and Chinese economies and asks "which is bigger [and] which is better."  If you've seen last week's video, Scissors' answer shouldn't surprise you in the least.

After thoroughly analyzing each country's GDP, employment, economic freedom, energy & environment, international trade position, fiscal policies, labor productivity and other factors (and be sure to check out the snazzy charts), Scissors rightly concludes:
The PRC’s rise from poverty due to the marvelously successful market reforms introduced in 1978 has obscured serious economic weaknesses compared to the U.S. These weaknesses have been exacerbated in important ways by renewed Chinese state intervention starting around 2003. America should not lose track of its advantages over China—in wealth but also in natural resources, and in surprising areas such as employment. Most important, the U.S. should not make the error of mimicking unwise Chinese policies, and should instead focus on getting the American house in order.
I couldn't agree more, and have said as much many times here.  Scissors then advises:
To compete successfully with China, the U.S. should:

Limit federal control of lands to defense needs and preservation of natural and cultural phenomena. The Department of the Interior should avoid resource management, shown to distort the economy and reduce prosperity;

Immediately and sharply cut the federal deficit. Congress must ignore claims that deficit spending somehow creates wealth, as it actually forces the nation’s capital toward low returns;
In particular, reduce subsidies of every kind. At this point, energy subsidies are especially damaging; and

Ensure a well-educated and growing labor force. The Departments of Education and Justice should stress immigration transparency and education diversity, where the U.S. has an edge over China.

To encourage mutually beneficial Chinese development, the U.S. should:

Focus on subsidies as the biggest Chinese trade distortion. The Department of the Treasury, the United States Trade Representative, and Department of Commerce should estimate Chinese subsidies for the purposes of reducing them through bilateral and multilateral negotiations; and

As part of these negotiations, should offer to welcome Chinese investment in natural resources in exchange for greater American access to the PRC market.
I agree with all of Scissor's analysis and recommendations, except for this last one.  Not to nitpick, but conditioning Chinese investment in American resource development (e.g., lumber, iron, oil, gas, etc.) on reciprocal access to the Chinese market strikes me as wrongheaded for two basic reasons.  First, such intervention is completely at odds with the paper's strong (and totally correct) free market message.  Indeed, one of the paper's primary conclusions is that the weaknesses in China's economy "have been exacerbated in important ways by renewed Chinese state intervention," yet it recommends American intervention in the US investment market by restricting China's access thereto.

Second, and as I've noted here many times, this kind of reciprocal trade and investment policy  needlessly (albeit implicitly) demonizes foreign investment by casting it as a "concession" that we must begrudgingly give up in order to win access to China's market.  In short, it makes Chinese (and other foreign) investment in the American economy seem like a bad thing, because it depicts China's giving us money (and American jobs and growth) is the price we have to pay to get that sweet, sweet export market.  This, of course, is totally incorrect from an economic perspective, but it's also wrongheaded from a messaging perspective because it teaches the American public to oppose foreign investment.  And I'm quite sure that there are other things that we could use - things we (or our politicians) actually don't want to give up like our agriculture or "green energy" subsidies - as a bargaining chip to gain more access to China's market.

But hey, like I said, that's nitpicking.  The paper's still an excellent effort overall, and well worth your time.

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