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.

ECIPE: Umm, Yeah, About that Scary "China Trade Surplus"

The free market European Centre for International Political Economy (ECIPE) has just published a new report which reinforces a lot of the things I've been saying here about China's currency, those "dangerous" global imbalances, and the effects of multinational supply chains on the global economy (and conventional trade statistics):

Alarmed by the persistent and large US trade deficit vis-à-vis China and the rapidly swelling Chinese foreign exchange reserves, influential US policymakers are urging the Chinese authorities to allow a substantial appreciation of the Renminbi (RMB).  This paper establishes that the arguments advanced to this effect are quite weak, as they overlook salient features of the present international economy and of China’s financial system.  Indeed, the record growth of China’s exports to the US stems largely from joint ventures and affiliates of multinational enterprises; exports attributed to China usually contain a large percentage of imported components with modest value-added attributed to China itself and – indeed, the Chinese export portfolio is in the process of being significantly upgraded.  Neither are the gigantic foreign exchange reserves primarily linked to the modest surpluses of exports over imports of China, but they are fed by these large net inward direct investments; and, in recent years, by ‘hot money’ which sneaks into China, notwithstanding the non-convertibility of capital flows. Thus, a moderate appreciation of the RMB would not equilibrate the bilateral trade flows or remedy current account imbalances. On the other hand, the shift in China’s growth strategy – away from export maximisation towards strengthening consumption in the vast interior – is likely to gradually bring about more balance, while appreciating the RMB in the process.  There are also recent signs of easing of Chinese restrictions on international financial transactions.

Good stuff.  Be sure to read the whole thing here.  It provides another much-needed counterweight to the seemingly endless supply of misinformation and misunderstanding out there about China and trade deficits.

Speaking of which, today's news that the US-China trade deficit reached an all-time high in 2010 was met with the usual (and ridiculous) media and politico frothing.  As I've noted here innumerable times, all of that froth relies on the same old - and repeatedly debunked - conventional wisdom that a trade deficit is some sort of harbinger of economic doom, and that bilateral trade balances are accurate barometers of national and international trade policies.  (Dan Griswold adds a little more commentary on these points today.)  And, of course, it doesn't take a brilliant economist - or even a dumb trade lawyer like me - to notice that the significant expansion of the US trade deficit between 2009 and 2010 coincided quite nicely with - hey, look at that! - the significant increase in annual GDP growth between those same years (2009 at 0.2% vs. 2010 at 2.8%).

So here's a crazy idea.  Maybe it's time for media frothers to drop the obviously-wrong conventional wisdom and open their eyes for a change.  Heck, maybe they could, oh I don't know, read stuff like the new ECIPE study - or any of the myriad others like it - and actually learn something about our fascinating 21st century global economy and the silly politicians who can't - or choose not to - comprehend it.

Monday Quick Hits

Here are a few headlines to quell your Super Bowl / Reagan birthday hangovers:

• In a great new op-ed, the Boston Globe's Jeff Jacoby explains the current dominance of American manufacturing.  He concludes: "A vast amount of 'stuff' is still made in the USA, albeit not the inexpensive consumer goods that fill the shelves in Target or Walgreens. American factories make fighter jets and air conditioners, automobiles and pharmaceuticals, industrial lathes and semiconductors. Not the sort of things on your weekly shopping list? Maybe not. But that doesn’t change economic reality. They may have 'clos[ed] down the textile mill across the railroad tracks.' But America’s manufacturing glory is far from a thing of the past." Mark Perry has more here.

• Tim Carney reports on yet another highly-subsidized green energy bankruptcy.  As I've noted repeatedly, the United States is absolutely awesome at producing green energy debacles.  Carney reports: "To turn wood chips into ethanol fuel, George W. Bush's Department of Energy in February 2007 announced a $76 million grant to Range Fuels for a cutting-edge refinery.  A few months later, the refinery opened in the piney woods of Treutlen County, Ga., as the taxpayers of Georgia piled on another $6 million.  In 2008, the ethanol plant was the first beneficiary of the Biorefinery Assistance Program, pocketing a loan for $80 million guaranteed by the U.S. taxpayers.  Last month, the refinery closed down, having failed to squeeze even a drop of ethanol out of its pine chips.  The Soperton, Ga., ethanol plant is another blemish on ethanol's already tarnished image, but more broadly, it is cautionary tale about the elusive nature of 'green jobs' and the folly of the government's efforts at 'investing' -- as President Obama puts it -- in new technologies."

• WTO Director General Pascal Lamy continues to beat the trade statistics drum:  "Another significant change in the international trade landscape is the spread of globally-integrated production chains — in effect, global factories — as firms locate various stages of the production process in the most cost-efficient markets.... The sports equipment industry is another example that typifies the new global production network pattern. For instance, the blueprint of a sport shoe is designed and conceived in a research lab in the United States, but manufactured in factories located in China, Vietnam or Indonesia, using raw materials such as leather, rubber and plastic from neighbouring Asian countries. You locate the different stages of your activities from creation to production, marketing and distribution in order to maximise efficiencies and optimise your value addition chain."

• Behold, the depressing state of trade policy/politics in the Democratic Party. "The Democratic Leadership Council, the iconic centrist organization of the Clinton years, is out of money and could close its doors as soon as next week, a person familiar with the plans said Monday." As you may recall, the DLC has in recent years often been the lone Democratic voice in favor of trade liberalization.  So how many columns will be written about "epistemic closure" on the Left?  (Obvious answer: none.)

• Big free market think tanks oppose extension of Trade Adjustment Assistance (which Congress is mulling this week).  First, Heritage's David Mulhausen shows that "TAA is ineffective in raising the wages of participants" and thus should die.  His colleague James Skerk adds more, arguing that Congress should let the program expire because "very few workers lose their jobs because of foreign trade, and the Department of Labor’s Dislocated Workers Program already provides basic services to laid-off workers."  Finally, Cato's Sallie James provides three good reasons why TAA deserves the axe: (i) very few people lose their jobs due to import competition; (ii) it costs a fortune ($2.4 billion in 2011!); and (iii) as the trade stagnation/regression of 2006-2010 proves, TAA has done nothing to convince trade skeptics to support liberalization initiatives.  I'd only add - as Sallie's 2007 paper on TAA notes - one more big reason why TAA stinks: it reinforces the (false) idea that imports are bad, and that trade is zero sum. For more on that point, I highly recommend this classic NYT op-ed by economist Steven Landsburg on the subject.  He notes: "One way to think about [TAA] is to ask what your moral instincts tell you in analogous situations.  Suppose, after years of buying shampoo at your local pharmacy, you discover you can order the same shampoo for less money on the Web.  Do you have an obligation to compensate your pharmacist?  If you move to a cheaper apartment, should you compensate your landlord?  When you eat at McDonald’s, should you compensate the owners of the diner next door?  Public policy should not be designed to advance moral instincts that we all reject every day of our lives."  Amen.

• Via the Kauffman Foundation's Tim Kane comes today's Chart of the Day on real GDP per capita.  Kane notes, "It shows international comparisons of real GDP per person which come from the Penn World Tables (mark 6.3, chain weighted), relative to the United States level. Notice how developing countries tend to converge toward the U.S. level, then crash back to the European norm of a 70-80 percent ratio.... I find that this chart is especially useful for keeping China fever in perspective.... To be fair, China is big, so it can have an immature economy and still throw a lot of weight around. But history says it, too, will have a very hard time making the transition to a mature economy, let alone an entrepreneurial one."

Monday Quick Hits

Lots of headlines and cools stuff over the last few days, so let's get right to it:

• Obama Administration: We'll increase exports by, err, attacking Chinese imports.  Last week, the US Department of Commerce announced a bevy of new trade remedies policies aimed at achieving the President's export-expansion goals by increasingenhancing the accuracy of antidumping and countervailing duties on imports from "non-market economies" (essentially Vietnam and China).  With almost 60% of all imports into the United States capital goods and equipment - things that American companies (including exporters) need to remain globally competitive - I'm at loss as to how making Chinese and Vietnamese imports more expensive will expand US exports, and the WSJ agrees: "President Obama has been making some encouraging pro-trade noises recently, after a protectionist first year. So it's troubling to see him veering off course again with a new proposal to boost American exports by cracking down on imports from China."

• A funny thing happened on the way to attacking Chinese imports...  So while DOC is plotting to "get tougher" on hypercompetitive Chinese imports, more news arrives showing that China's labor cost advantages - and thus its global competitiveness - appear to be rapidly shrinking: "China’s rising wages are cutting the country’s cost advantage over other manufacturing centers such as Mexico, according to Flextronics International Ltd., the world’s second-largest custom electronics maker.... Flextronics, which supplies to Hewlett-Packard Co. and Cisco Systems Inc., has been forced to increase wages in China in line with government regulations and growing affluence in the fastest-growing major economy. Larger rival Foxconn Technology Group said this month it will move production away from China’s coastal regions after announcing a doubling of wages at its largest production bases in the south east." So if you needed any more evidence that government is just really, really bad at keeping up with the market, well, there you go.

• United States in 2009 was the most energy-efficient economy in the history of the world.  Ever.  From Mark Perry: "Since 1990, the energy consumption per unit for five of the most common household appliances has fallen so consistently over the last twenty years that today's household appliances use between 20% (air conditioner) and 73% less energy (clothes washer) than in 1990."  Very, very cool.

• "Glass City" museum buys Chinese glass, unintentionally demonstrates the complexity of US-China trade and the global economy.  The WSJ has an excellent article today on why construction of the Toledo Museum of Art's $30 million Glass Pavilion required some specialized Chinese glass: "No one in the U.S. had the capability to satisfy cutting-edge architectural specifications for the curving pavilion, even though the 2006 job involved techniques advanced decades ago by Toledo inventors: bending and laminating glass. The pavilion features 360 thick glass panels, each up to 13.5 feet tall, eight feet wide and weighing over 1,300 pounds." Of course, it's actually not that simple, so be sure to read the whole article.  My favorite part: American politicians and unions blaming unfairly subsidized Chinese imports for destroying the US glass industry (as opposed to their own economy-killing fiscal policies and labor contracts), despite the fact that (i) although China makes about 45% of the world's glass, it exports almost none of that production and (ii) the little that China does export to the United States is really, really bad: "Most of China's glass output is such low quality, it has no market other than China. And much of the Chinese glass now hitting U.S. shores is chiseling into market extremities where profit margins are thinnest: the cheapest salt shakers, table tops and replacement windshields."  Exit question: if Toledo had been forced to follow "Buy American" policies, would their snazzy museum have been built as designed?  Hmmm.

• Speaking of manufacturing, guess what part of the country's getting a brand new Toyota plant and a couple thousand jobs?  If you guessed a part that has less regulation, lower taxes and isn't controlled by labor unions, you'd be right: "  Toyota began taking applications Monday for 1,350 production and maintenance workers at its Blue Springs, Miss., plant that had been stalled while the Japanese automaker waited for the worldwide recession to end.... Starting pay is $15 per hour, ranging up to $21, for production workers and $18 to $21.25 hourly for maintenance workers. Maintenance salaries will top out at $25 an hour.... The company has said it would create 2,000 jobs at the Blue Springs plant. New auto plants such as this also spin off about 2,000 supplier jobs."  Import-blaming governors Jennifer Granholm (MI) and Ted Strickland (OH) were unavailable for comment.

• Skepticism about US-Korea FTA is well-grounded.  NRO's Stephen Spruiell reports on the administration's, ahem, revived efforts to advance the KORUS FTA and - based on the White House's complete lack of effort on the pending US-Colombia FTA despite amazing improvements in Colombian labor union violence - is very, very skeptical (be sure to check out the great charts).  And based on the latest reports out of Korea, it appears that Spruiell's skepticism is well-deserved: "'The Korean government has not promised any kind of concessions concerning the Korea-United States free trade agreement,” said Choi [Seok-young, Korean deputy minister for trade]. 'The U.S. Congress is currently in recess, and we have not yet been offered anything from the U.S. government concerning the FTA.'  He added that since the U.S. government has not offered anything yet, it is not the right time to talk about the Korean government’s plans on disputes over imports of U.S. autos and beef."  Awesome.

• Cato wages an all-out assault on fallacies surrounding last week's revised GDP figures and the US trade deficit.  First, Alan Reynolds provides an eye-opening look at "what everyone missed" in last week's revised GDP numbers (hint: rising domestic consumption, real disposable personal income, and business fixed investment).  Then, Dan Griswold calmly corrects the Washington Post's misreporting that the trade deficit harmed GDP growth: "The fatal flaw of the [Post's] story line... is that it assumes that rising imports slow economic growth.  That assumption, in turn, rests on a simplistic Keynesian view that if a portion of domestic demand is satisfied by spending on imports, that means less demand for domestically produced goods, thus less output and lower employment.  That view neglects the supply-side role of imports.  More than half of what we import consists of goods consumed by producers—capital machinery, raw materials, parts and other intermediate inputs. Those imports help us produce more, not less.  The Keynesian view also confuses cause and effect: Imports usually grow in response to RISING domestic demand. Consumers more eager to spend 'swelling sums' on imports typically buy more domestically produced goods as well."  Finally, Dan Ikenson piggybacks off Griswold's post with our charts-of-the-day, which clearly demonstrate that "neither imports nor trade deficits cause U.S. job loss or slower economic growth.   If anything... imports and the trade deficit rise when the economy is growing and creating jobs, and they both fall when the economy is contracting and shedding jobs":

• Feel free to judge the President by the company he keeps.  From the Hill: "President Obama will spend Labor Day alongside AFL-CIO President Richard Trumka, the union announced Monday. Obama, Secretary of Labor Hilda Solis and Trumka will all participate in a Labor Day "celebration and rally" in Milwaukee on Monday, an appearance confirmed by the White House this afternoon, which separately announced the president would travel to Wisconsin for the Laborfest. The appearance is another recent sign of unity between Obama and Trumka — the pair had sometimes had an adversarial relationship over the past year on issues like stimulating the economy and healthcare reform...."  Woo hoo! Laborfest!

And on that happy note, folks, let's call it a night.