Tag: China

Can the United States, China and Russia Cooperate on Trade?

The 2016 G20 summit in Hangzhou is fast approaching and, similar to the pre-summit meetings hosted by China throughout the year, the focus will be the state of the global economy. Still contending with sluggish global economic growth, the summit’s theme of “Towards an Innovative, Invigorated, Interconnected and Inclusive World Economy” is especially timely. Under the umbrella of global economic growth, cultivating opportunities for trade and investment will become a major priority for G20 states, and three global powers—the United States, China, and Russia—are each developing their own multinational trade route projects. These major trade projects could serve as opportunities for cross-country cooperation and growth, but they could also become sources for future conflict.

China’s management of domestic markets, currency, and commitment to structural reforms was a cause for global concern at the first meeting of G20 Finance and Central Bank Governors in February. At next week’s summit, China’s President Xi Jinping will undoubtedly point out China’s efforts towards realizing supply-side structural reforms in the face of China’s “new normal” of slower economic growth. As part of these reforms aimed at rebalancing China’s economy, Beijing plans to cut industrial overcapacity, tackle overhanging debt, reform state-owned enterprises, and seek out new consumer markets. On the last point, Beijing is championing its New Silk Road Initiative (also known as “One Belt, One Road”), a major state project focused on opening up new markets. To accomplish this, Beijing is building vast trade networks spanning several countries and continents, by land and by sea. However, many countries are wary. The project, billed as purely an economic one, may evolve to include a political and/or military dimension as well.

The Economics of Trade: Wilbur Ross Is Mistaken

Billionaire investor Wilbur Ross, a supporter of Donald Trump, made the following comment in a letter to the Wall Street Journal (Aug 15): “It’s Econ 101 that GDP equals the sum of domestic economic activity plus “net exports,” i.e., exports minus imports.  Therefore, when we run massive and chronic trade deficits, it weakens our economy.”

In reality, the last sentence –beginning with “Therefore”– does not follow from the first.

Mr. Ross is alluding to the demand side of National Income Accounts, wherein Y=C+I+G+ (N-X). That is, National Income (Y) equals spending on Consumption (C) plus Investment (I) plus Government (G) plus Net Exports (Imports N minus Exports X).  

Taking such accounting too literally, a reduction in imports may appear to be mathematically equal to an increase in overall real GDP.  But that is dangerously incorrect, as the 1930s should have taught us.

The accounting is true by definition (a tautology). But economics is about behavior, not accounting identities.

If trade deficits “weaken our economy,” as Mr. Ross asserts, then we should expect to see real GDP slow down when trade deficits get larger and see real GDP speed up when trade deficits get smaller or become surpluses.  What the data show is much different – the exact opposite in fact.  


Missile Accident Reminds U.S. of Dangers of Taiwan Commitment

Taiwan long has been one of the globe’s most dangerous tripwires. Other than a brief period after World War II, the island has not been ruled by the mainland for more than a century. The 23 million people living on what was once called Formosa have made a nation.

However, the People’s Republic of China views Taiwan–also known as the Republic of China (ROC)–as part of the PRC. As China has grown wealthier, it has created a military increasingly capable of defeating Taiwan.

At the same time, economic ties between the two nations have grown, yet the Taiwanese population has steadily identified more with Taiwan than the PRC. The election of Tsai Ing-wen of the traditional pro-independence Democratic Progress Party as president in January greatly discomfited Beijing.

Modern Slavery, More Important than Who Built the White House

When Michelle Obama delivered her address at the Democratic National Convention (DNC) in Philadelphia, she created a stir when she cried out that America’s story was “the story that has brought me to this stage tonight, the story of generations of people who felt the lash of bondage, the shame of servitude, the sting of segregation, but who kept on striving and hoping and doing what needed to be done so that today I wake up every morning in a house that was built by slaves.”

That last line, “…I wake up every morning in a house that was built by slaves,” was the focus of much attention, with some conservative critics calling the claim false or misleading. The record was set straight in a New York Times article of July 26th, “Yes, Slaves Did Help Build the White House”.

While it important to address sins of the past, it is always wise to focus on today’s indiscretions too. Yes, a forward-looking perspective is always prudent. The slavery problem that is pressing today is modern slavery, and it’s a shockingly huge problem.

In 2013, the Walk Free Foundation, founded by Australian mining magnate Andrew Forrest, created the Global Slavery Index (GSI) to track and report modern slavery worldwide. The GSI defines modern slavery as “situations of exploitation that a person cannot refuse or leave because of threats, violence, coercion, abuse of power or deception, with treatment akin to a farm animal.” With data on 167 countries, the Global Slavery Index estimates that over 45.8 million people find themselves in some form of modern slavery today.

According to the Global Slavery Index, over 58 percent of slaves today live in just five countries. India’s embrace of slavery is astounding, with over 18 million Indians enslaved today – over 4.5 times more than the U.S. had during its peak decade of the 1860s.1  China, Pakistan, Bangladesh, and Uzbekistan round out the top five offenders. Seventeen countries have at least one percent of their populations living in modern slavery, with North Korea leading the pack, as the accompanying table shows.


While it might be politically correct to exclusively spend time gazing into the rearview mirror and speaking only about the history of slavery in the U.S., it would be wise to speak of the 45.8 million who are enslaved today. It’s time to shine a light on today’s slave trade and the countries where slaves reside.

Financial Times Offers Wrong Response to China’s Steel Overcapacity

The Financial Times (FT) published a June 9, 2016, editorial titled, “Coping with a world of too much Chinese steel.”  (Link)  The editorial makes the case correctly that China’s steel overcapacity has spilled onto world markets and is having negative effects on steel makers in the European Union and United States.  It appropriately argues against Western governments nationalizing their steel industries or providing “other indefinite state support.” 

The editorial errs, however, in suggesting that “the best option is a judicious and limited use of trade remedies against subsidized imports.”  Economists have understood for decades that when a nation imposes trade restrictions, it always reduces its own economic welfare.  It is difficult to argue that imposing a policy measure that reduces a nation’s economic welfare is a good thing to do.  The country would have been better off simply by doing nothing.  (“Don’t do something, just stand there!”)

There are two easily understood reasons why imposing trade restrictions won’t help the situation.  The first is that the global overcapacity is so great that market prices for commodity grades of steel are low worldwide.  If imports of hot-rolled steel from China are limited by newly implemented antidumping or countervailing duty (AD/CVD) measures, relatively low-priced hot-rolled coil could easily be imported instead from countries such as South Korea, Brazil, or Turkey.  Curtailing imports from China is likely to provide relatively little relief to domestic steel manufacturers. 

The second reason is that restricting imports in an attempt to benefit steel producers will have the effect of increasing costs of production for manufacturers that use steel as an input.  These downstream users constitute a much larger segment of the economy.  In the United States, for example, data compiled by the Bureau of Economic Analysis (BEA) at the Department of Commerce indicate that economic value added by “primary metal manufacturing,” which includes steel, copper, aluminum, magnesium, etc., amounted to about $60 billion in 2014.  Downstream manufacturers that utilize steel as an input generated value added of $990 billion, more than 16 times larger.  Employment by primary metal manufacturers was 400,000, while downstream manufacturers employed 6.5 million, also 16 times greater.  Use of trade remedies against steel imports amounts to an attempt to benefit the few at the expense of the many.

To elaborate, the United States currently imposes some 150 AD or CVD orders against a large number of steel products from a large number of countries.  These restrictions have had the effect of making U.S. steel prices relatively high, while in the rest of the world they are relatively low.  Still, important portions of the American steel industry have not been sufficiently profitable.  United States Steel Corporation, the country’s largest producer, reported a 2015 loss of $1.5 billion.  So U.S. prices are somewhat high, but not high enough to cure the industry’s commercial problems.


Playing the China Card Wisely Is Obama’s Last Best Chance to Sell the Trans-Pacific Partnership

The Trans-Pacific Partnership is the economic centerpiece of the Obama administration’s much ballyhooed “strategic pivot” to Asia, which – in 2009 – heralded U.S. intentions to extricate itself from the messes in Iraq and Afghanistan and to reassert its interests in the world’s fastest-growing region. After six years of negotiations, the comprehensive trade deal was completed last year and signed by its 12 charter members earlier this year. But the TPP must be ratified before it can take effect – and prospects for that happening in 2016 grow dimmer with each passing day.

One would assume TPP ratification a policy priority of President Obama. After all, he took office promising to restore some of the U.S. foreign policy credibility that had been notoriously squandered by his predecessor. If Congress fails to ratify the agreement before Christmas, Obama will leave office with American commercial and strategic positions weakened in the Asia-Pacific, and U.S. credibility further diminished globally.  The specter of that outcome would keep most presidents awake at night.

In Newsweek today, I put most of the blame for this precarious situation on a president who, throughout his tenure, has remained unwilling to challenge the guardians of his party’s anti-trade orthodoxy by making the case for trade liberalization generally, or the TPP specifically:

Superficially, one could blame election-year politics and a metastasizing popular antipathy toward trade agreements for the situation, but the original sin is the president’s lackluster effort to sell the TPP to his trade-skeptical party and the American public. In the administration’s division of labor, those tasked with negotiating the TPP kept their noses to the grindstone and brought back an agreement that reduces taxes and other protectionist impediments to trade…

Emphasize Security in Dealing with North Korea

North Korea is a multilateral conundrum. Despite enduring decades of confrontation and isolation, the Democratic People’s Republic of Korea continues to accelerate nuclear development, miniaturize nuclear weapons, and produce intercontinental missiles.

Failure to restrain the DPRK, along with understandable horror at its mass violation of human rights, caused some analysts to urge Washington to emphasize improving human rights and overthrowing the Kim dynasty. For instance, Carl Gershman of the National Endowment for Democracy recently argued that “human rights must come first.” After the recent tightening of sanctions against the North, the Wall Street Journal declared: “Now is the time to squeeze even harder with a goal of regime change.”

The North Korean nuclear crisis has been raging for more than a quarter century. Unfortunately, dealing with Pyongyang requires choosing the least bad alternative.

So far negotiations have failed. Few observers believe the DPRK is prepared to trade away its nuclear arsenal.