Tag: China

Obama’s SOTU Export Promise: Bold and Unrealistic

In his State of the Union speech, President Obama vowed to double U.S. exports in five years to (all together now) “create jobs.”

Exports are dandy, and they do support higher-paying jobs, but the president’s pledge was unrealistic and raises false hopes that it will make any dent in the unemployment rate.

U.S. exports have not doubled in dollar terms during a five-year period since the inflation-plagued 1970s, not exactly a golden era for the U.S. economy. In real terms, according to the U.S. Bureau of Economic Analysis, exports have not come close to doubling during any five-year stretch in the past 40 years. The fastest growth in inflation-adjusted exports came in the second half of the 1980s, when they grew by two-thirds from 1985 to 1990. Other periods of robust growth were the mid-1990s, and during the second term of George W. Bush, when five-year export growth approached 50 percent.

Export growth is certainly enhanced by a weaker dollar and lower trade barriers abroad, but the primary driver of export growth is rising GDP and demand abroad, and that is something outside even this president’s direct control. The key to reducing U.S. unemployment is not primarily selling more to growing markets abroad, but selling more in a robustly growing market at home.

Other Obama policies will actually make it more difficult to achieve his export pledge. The president renewed his misguided pledge last night to raise taxes on U.S. multinational companies that “ship jobs overseas.” Yet, as I pointed out in a Free Trade Bulletin last year, U.S.-owned affiliates in other countries sold $4 trillion worth of U.S. branded goods and services in 2006. A large chunk of our exports go to those affiliates to help them make their final products for sale. Forcing U.S. firms to cut back their foreign operations will douse an important source of demand for U.S. exports.

The only major foreign market that has recently doubled its demand for U.S. exports in a five-year span is China. Yet President Obama has needlessly antagonized potential customers in our fourth-largest export market by imposing tariffs on Chinese tire imports and threatening other trade-reducing actions.

We can best promote more open markets abroad by setting a good example ourselves.

Madeleine Albright’s Confusion

Former secretary of state Madeleine K. Albright writes in Parade magazine that 20 years after the Berlin Wall, “We Must Keep Freedom Alive.” A commendable sentiment, but the article is a bit confused, notably in that it seems to use “freedom” and “democracy” interchangeably. But as Fareed Zakaria and Tom Palmer, among others, have demonstrated, they’re not the same thing. Freedom is the right and ability of individuals to make the important decisions about their lives. Democracy – especially constitutional democracy, with separation of powers, the rule of law, and constraints on government – can be the most effective way to protect liberty. But democracy isn’t liberty, and we shouldn’t confuse the relationship.

Albright writes:

democracy is a prerequisite to economic growth.

That seems clearly, spectacularly wrong. Consider some historical cases of great economic growth: Hong Kong, Singapore, and Taiwan grew rapidly in recent decades without being democracies. (And I would say that that growth led to Taiwan’s becoming a democracy.) Beyond that, look at the United States and Great Britain during the unprecedented growth of the 19th century; neither was a democracy by modern standards. And of course China has been experiencing rapid growth in the past 30 years without democracy.

But look at Albright’s complete sentence:

In fact, democracy is a prerequisite to economic growth, which only flourishes when minds are encouraged to produce, invent, and explore.

That is a much stronger hypothesis. Indeed economic growth flourishes “when minds are encouraged to produce, invent, and explore.” And the condition in which that happens is actually called freedom, not democracy. So perhaps the problem is just that Albright is using the terms “freedom” and “democracy” loosely. And if by democracy she means the modern Western conception of a system of individual rights, private property, and market exchange protected by a limited constitutional government featuring divided powers, an independent judiciary, and free and independent media, then it would be true that that kind of “democracy” is a solid foundation for economic growth – though not a prerequisite, as the examples above demonstrate.

The relationships between the rule of law, popular participation in government, constraints on government, protection of property, the market economy, and economic growth deserve serious study, and that study should start with conceptual clarity.

Weekend Links

Global Markets Keep U.S. Economy Afloat

Three items in the news this week remind us why we should be glad we live in a more global economy. While American consumers remain cautious, American companies and workers are finding increasing opportunities in markets abroad:

  • Sales of General Motors vehicles continue to slump in the United States, but they are surging in China. The company announced this week that sales in China of GM-branded cars and trucks were up 67 percent in 2009, to 1.8 million vehicles. If current trends continue, within a year or two GM will be selling more vehicles in China than in the United States.
  • James Cameron’s 3-D movie spectacular “Avatar” just surpassed $1 billion in global box-office sales. Two-thirds of its revenue has come from abroad, with France, Germany, and Russia the leading markets. This has been a growing pattern for U.S. films. Hollywood—which loves to skewer business and capitalism—is thriving in a global market.
  • Since 2003, the middle class in Brazil has grown by 32 million. As the Washington Post reports, “Once hobbled with high inflation and perennially susceptible to worldwide crises, Brazil now has a vibrant consumer market …” Brazil’s overall economy is bigger than either India or Russia, and its per-capita GDP is nearly double that of China.

As I note in my Cato book Mad about Trade, American companies and workers will find their best opportunities in the future by selling to the emerging global middle class in Brazil, China, India and elsewhere. Without access to more robust markets abroad, the Great Recession of 2008-09 would have been more like the Great Depression.

The Art of Foreign Policy Punditry

Foreign Policy magazine performs an important public service, publishing a compendium of the “top 10 worst predictions for 2009.” My favorite?

If we do nothing, I can guarantee you that within a decade, a communist Chinese regime that hates democracy and sees America as its primary enemy will dominate the tiny country of Panama, and thus dominate the Panama Canal, one of the worlds most important strategic points.

Rep. Dana Rohrabacher (R-Calif.), Dec. 7, 1999

Rohrabacher made this alarming prediction during a debate on the U.S. handover of the Panama Canal. His fellow hawk, retired Adm. Thomas Moorer, even warned that China could sneak missiles into Panama and use the country as a staging ground for an attack on the United States. Well, Rohrabacher’s decade ran out this December, and all remains quiet on the Panamanian front. As for China, the United States is now its largest trading partner.

Flowers and Chocolates?Flowers and Chocolates?

The point here isn’t to poke fun at Rohrabacher, or any of the other predictors featured on the FP list.  Rather, it’s to point out that predicting the future is really hard.  And as Ben Friedman and I have harped on, you just can’t aspire to any predictive competence without sound theory to guide you.  In order to judge that if we do (or don’t do) X, Y will happen, you need a theory connecting X to Y.  So looking back at our predictions, and comparing them to the results of our policies, is a useful way to test the theories on which we based our policies in the first place.

Putting falsifiable predictions out there is a collective action problem, though: If I start offering nothing but precise point-predictions about what will or won’t happen if we start a war with Iran, or how big the defense budget will get, or anything else, I’m going to get a lot of things wrong.  And if everyone else keeps offering vapid, non-falsifiable rhetoric, I stand to look like a real jackass while everyone can hide behind the fog of common-use language.  As I wrote in the National Interest a while back:

Foreign-policy analysts have an incredibly difficult task: to make predictions about the future based on particular policy choices in Washington. These difficulties extend into the world of intelligence, as well. The CIA issues reports with impossibly ambitious titles like “Mapping the Global Future”, as if anyone could actually do that. The father of American strategic analysis, Sherman Kent, grappled with these difficulties in his days at OSS and CIA. When Kent finally grew tired of the vapid language used for making predictions, such as “good chance of”, “real likelihood that” and the like, he ordered his analysts to start putting odds on their assessments. When a colleague complained that Kent was “turning us into the biggest bookie shop in town”, Kent replied that he’d “rather be a bookie than a [expletive] poet.”

Actually, though, it’s worse than this.  As I wrote in the American Conservative, there’s basically no endogenous mechanism to hold irresponsible predictors accountable:

In 1992, the Los Angeles Times ran an article outlining the dynamics of the “predictions” segment of the popular “McLaughlin Group” TV program.  Michael Kinsley, who had been a panelist on the program, admitted

“When I was doing the show, I was much more interested in coming up with an interesting prediction than in coming up with one that was true.  There’s no penalty for being wrong, but there is a penalty for being boring.  …Prognosticators have known for centuries that people only remember what you got right.  They don’t remember what you got wrong.”

Foreign-policy analysis works in much the same way.  Errant predictions are quickly forgotten.  It is the interesting predictions that the media want, and unfortunately interesting predictions in the context of foreign policy often mean predictions of unprovoked foreign attacks, geopolitical chaos, and a long queue of bogeymen waiting to threaten us.  (By contrast, after a given policy is enacted, its proponents have to spin it in a positive light, as in Iraq.)  Meanwhile, it is the person with the quickest wit and the pithiest one-liner–not the deepest understanding–who winds up with the responsibility of informing the American electorate about foreign-policy decisions.

So it’s very good to see that Foreign Policy has interest in holding everyone’s feet to the fire.  John Mueller does a similar service in The Atomic Obsession, pointing out the many predictions of doom, apocalypse and general disaster that have characterized both the hawkish establishment and the leftish arms-control clique.

If this sort of exercise becomes common, though, watch for foreign-policy commentators not to develop a growing sense of modesty about their predictive power, but rather to take greater care in avoiding falsifiable statements altogether.

A Trade Proposal Unworthy of an Economist

Just when you have a pretty good sense of who is dishing protectionist nonsense and from where, along comes Robert Aliber, who – according to the byline of his commentary in yesterday’s Financial Times – is professor emeritus of international economics and finance at the University of Chicago.  Et tu, Chicago?

Aliber considers the US-China trade imbalance unsustainable and, because the Chinese government continues to prevent the value of its currency from rising sufficiently, proposes that the United States impose an across-the-board duty of 10 percent on all Chinese imports, which (after 6 months) would ratchet up 1 percentage point per month every month until the Chinese trade surplus with the United States declines to $5 billion per month. 

We’ve heard this tune before – but from politicians who are presumably far less adept at economics than a University of Chicago economics professor ought to be.  Yet, even Chuck Schumer ultimately acknowledged the banality of his (and Lindsey Graham’s) thrice-introduced legislation to impose a 27.5 percent tariff on Chinese imports as a proxy and incentive for renminbi appreciation.

If Aliber limited his argument to the assertions that the bilateral imbalance is unsustainable and that the Chinese government should allow the value of the renminbi to be determined by supply and demand, I’d have much less to quibble with.  I’d still be plenty skeptical that bilateral trade accounting tells us anything meaningful in this age of cross-border investment and transnational production and supply chains.  I’d still break from the implication that balanced trade should be an objective of policy or that it is more important than economic growth. And I’d still remain unconvinced that an increase in the value of the renminbi alone would have much of an impact on bilateral trade flows.  But I’d agree that a market-determined exchange rate would increase the likelihood that investment, consumption, and production decisions would better reflect underlying conditions in labor, financial, and goods markets, and in that regard would be a more useful guidepost for informed decisionmaking.

But Aliber’s proposal – and the numerous fallacies upon which it is predicated – goes well beyond that point, and appears to be the product of something like acute tunnel vision.  He is so fixated on the bilateral trade account that nothing else – including the impact of his proposal on the economy broadly – commands his attention. 

Aliber utters all of the classic fallacies about the insidious impact of China’s currency on U.S. manufacturing; the leverage and sway China allegedly holds over U.S. policymakers, as our banker of last resort; and, how China caused our trade deficit by purchasing U.S. securities.  I disagree with all of those assertions, vehemently, and have explained why in various places, but I want to focus presently on his proposal, which is one of the worst ideas in circulation.

Consider this passage, which Aliber apparently considers evidence of the cleverness of his plan (but really exposes its inanity):

Because many Chinese exports contain large amouts of embedded imports, the 10 per cent import tariff in effect is a tax of more than 30 per cent on Chinese value added. With electronics and other high-tech exports, where the import content may be 70 or 80 percent of their value, the  10 per cent tariff might be equivalent to a tax of 60 or 80 per cent on Chinese content.

Neat.  But isn’t the fact that Chinese exports contain so much import content enough to soundly reject Aliber’s plan in the first place?  Has he forgotten that we don’t import dangling Chinese value added?  What we import are products, some of which comprise 20 percent Chinese value added, some 80 percent, and according to the most recent research, an average of about 50 percent Chinese value added.  And what does that mean?

It means that on average 50 percent of the value of components, raw materials, and labor embedded in the typical cargo container from China unloaded in Long Beach, California is other countries’ value added.  It means that slapping a duty on imports from China is the same as restricting imports from countries indiscriminately (I know, non-discrimination is what the GATT/WTO rules are all about, but you get my point). It means restricting our own exports to China, which are embedded in the “high-tech” products that we import from China. (High tech is in quotes because the category consists mostly of computers and electronics, like cell phones and iPods, but protectionists like to exaggerate the security angle of our alleged trade follies by pointing to a bilateral deficit in “high tech,” even though Chinese value-added in those goods is well below average, and our imports of them support high-paying U.S. jobs). 

Having obviously not read my new paper, Aliber still sees global commerce as a competition between “Us” and “Them.”  He writes: “It should not take long for the Chinese to learn that they are much more dependent on access to the US market than Americans are dependent on Chinese goods,” and goes on to say that Americans can make those product here or buy them elsewhere.  Of course we could get them elsewhere, but the fact that we prefer to get them from China means that there would be costs associated with switching sources. 

Aliber is a fixed-pie-kinda-guy who fails to recognize the enormous wealth that has been generated by the elimination of political, trade, communications, and transportation barriers, and the highly stratified division of labor this barrier erosion unleashed.  He fails to recognize that Chinese labor and American labor are more often complementary than competing, and that the factory floor has broken through its walls and now spans oceans and borders. 

Imposing 10 percent duties on products invented and designed in the United States, consisting of components produced in Japan, Singapore, Thailand, and the United States,  consuming Australian minerals in the production process and Chinese labor in the assembly process is akin to taking a sledge hammer to a random station along a traditional production-assembly line.  It impedes the production process and raises the cost of bringing products to consumers, inflicting damage that is felt at all nodes in the design/production/assembly/supply chain, including those in the United States.

It means making it more difficult to support higher value-added U.S. manufacturing and service activities because with uncertain or compromised access to lower cost component production and assembly operations in China, it will be more difficult for ideas hatched in American labs to come to fruition in the form of the next gadget or convenience or life-saving device.

China’s position as the final point of assembly in so many different supply chains, as evidenced by the fact that 50 percent of the value of its exports to the United States consists of Chinese material, labor, and overhead, means that the impact of currency appreciation on the bilateral trade account is uncertain.  A stronger renminbi vis-a-vis the dollar means that Americans should pay more for imports from China, but a stronger renminbi also means that Chinese-based producers/assemblers will pay less for imported raw materials and components, lowering their cost of production/assembly.  That cost savings should enable Chinese exporters to lower their prices to American consumers, possibly compensating entirely for the higher renminbi-dollar exchange rate.

Of course, there are plenty of other reasons to eschew Aliber’s proposal, not the least of which is the fact that it certainly would be found WTO-illegal and would invite discrimination against U.S. exporters.  Considering that increased U.S. exports – and not just reduced imports – can help reduce the bilateral deficit, it is curious that Aliber would propose a remedy that would likely curtail U.S. exports.  It would also raise costs throughout the supply chain directly, and by introducing enormous uncertainty into the trading system.

Now that he’s seen the light, maybe Chuck Schumer should give Aliber a call.

Copenhagen: Let the Games Begin!

25,000 bureaucrats, factota, hangers on, and representatives of various environmental organizations have just converged on Copenhagen for the UN’s latest “Conference of the Parties (COP) to its infamous 1992 climate treaty. Expect a lot of heat, not much light, and a punt right into our next election.

President Obama says that the US will agree to a “politically binding” reduction of our emissions of carbon dioxide to a mere 17% of 2005 levels by 2050. This will allow the average American the carbon dioxide emission of the average citizen in 1867. Obama’s pronouncement has stepped all over the toes of the US Senate, which really doesn’t want to vote on similar legislation this election year. Jim Webb, a democrat heretofore very loyal to the President recently wrote Obama a very tersely worded note reminding him that the power to commit the nation to such a regulation lies with the Senate, not with the Commander-in-Chief.

The UN’s own climate models show that even if every nation that has obligations under the failed Kyoto Protocol (which is supposed to be replaced by the Copenhagen Protocol) did what Obama wants, that only 7% of prospective warming would be prevented by 2100. The world’s largest emitter—China—was exempt then, and won’t agree to these reductions now.

Instead they will agree to reduce “carbon intensity”—the amount of carbon dioxide emitted per unit GDP—by 20% per decade. This is nothing but business as usual for a developing or robust economy. In fact, when President George W. Bush said that was our global warming policy, he was roundly booed. The Chinese announcement—already telegraphed, is being greeted with unmitigated praise by the same environmentalists who beat on Bush for the exact same policy. India has just announced that there is no way that they will agree to any emission reductions unless we pay them lotsa money. Obama thinks that’s a good idea, too. Polling data, anyone?

Since there’s no way that India and China will agree to large reductions, the real result of Copenhagen is that the climate can will be kicked down the road to the next COP, which begins on November 8, 2010, right down the road in Mexico City. That’s six days after our Congressional election, guaranteeing that cap-and-tax will be on the voters’ minds when they close the curtain on the current Congress.