Tag: China

The Rumors of Manufacturing’s Death Have Been Greatly Exaggerated

“US manufacturing grows for 13th straight month” is the headline of an AP newswire story posted around noon today.  This statistic doesn’t surprise me, since I’ve been following developments in U.S. manufacturing for many years now, and have published analyses of public data that refute the myth of deindustrialization and manufacturing decline

With the exception of the recession of 08-09, when all U.S. economic sectors took a hit, U.S. manufacturing has been breaking its own record, year after year, with respect to output, value-added, profits, returns on investment, exports, and imports. U.S. factories are the world’s most prolific, accounting for 21.4% of global manufacturing value added in 2008 (China accounted for 13.4%).

But I bring the AP headline to your attention for one reason: so that you can judge for yourself who has any credibility on Capitol Hill, within the executive branch, in the media, among organized labor, in industry, in the think tank world, and within the international trade bar, as Nancy Pelosi tries to stuff a ruinous anti-China trade bill down our throats in the name of supporting our floundering manufacturing base.  Look for the columns, the op-eds, the press releases, and the floor statements between next week and November.

Who among them will continue to cite our suffering manufacturing sector as the justification for protectionism?  They should never again have any credibility.

Obama on Human Rights in America

I’ve just sent a short post to ”The Corner” at NRO on the Obama State Department’s new report to the U.N. Human Rights Council on human rights conditions in the U.S.  In a word, we’ve got problems, especially concerning women, minorities, etc., but we’re trying to live up to the expectations of other human rights exemplars on the council – Russia, China, Saudi Arabia, Cuba.

Read and weep.

Don’t Be Afraid of the Chinese Economic Tiger

The news that China has surpassed Japan as the world’s second-largest economy has generated a lot of attention. It shouldn’t. There are roughly 10 times as many people in China as there are in Japan, so the fact that total gross domestic product in China is now bigger than total gross domestic product in Japan is hardly a sign of Chinese economic supremacy.

Yes, China has been growing in recent decades, but it’s almost impossible not to grow when you start at the bottom — which is where China was in the late 1970s thanks to decades of communist oppression and mismanagement. And the growth they have experienced certainly has not been enough to overtake other nations based on measures that compare living standards. According to the World Bank, per-capita GDP (adjusted for purchasing power parity) was $6,710 for China in 2009, compared to $33,280 for Japan (and $46,730 for the U.S.). If I got to choose where to be a middle-class person, China certainly wouldn’t be my first pick.

This is not to sneer at the positive changes in China. Hundreds of millions of people have experienced big increases in living standards. Better to have $6,710 of per-capita GDP than $3,710. But China still has a long way to go if the goal is a vibrant and rich free-market economy. The country’s nominal communist leadership has allowed economic liberalization, but China is still an economically repressed nation. Scores have improved, but the Economic Freedom of the World report ranks China 82 out of 141 nations, just one spot above Russia, and the Index of Economic Freedom has an even lower score, 140 out of 179 nations.

Hopefully, China will continue to move in the right direction. That would be good for the Chinese people. And since rich neighbors are better than poor neighbors, it also would be good for America.

China Now World’s 2nd Largest Economy: Ho Hum

China is now officially the world’s second largest economy, overtaking Japan in the quarter that ended in June and likely for all of 2010. While the story has been widely reported (more than 1,500 articles on Google News this morning), it is less significant than it first appears.

The news will probably ruffle the feathers of the China hawks, who will see in it a threat to America’s influence in the world, but China’s rise to no. 2 is really another sign of the world returning to normal.

China is home, after all, to one-fifth of mankind. Its population of 1,330 million is more than 10 times that of Japan (127 million) and more than four times that of the United States (310 million), according to the CIA Factbook. So even though China’s gross domestic product is now larger than Japan’s, its GDP per capita is still only one tenth that of its east Asian neighbor.

If China sticks to its path of market liberalization, it’s close to inevitable that its GDP economy will eventually surpass that of the United States in overall size. That news event is likely to grab headlines in 15 to 20 years based on current rates of growth. Even then, China’s per capita GDP will only be a quarter of what we enjoy in the United States.

China’s rank as no. 1 will be nothing new in history. According to the late British economic historian Angus Maddison, China’s economy had been the largest in the world for most of the past two millennia. In his magisterial 2001 book The World Economy: A Millennial Perspective, Maddison estimated that as recently as 1820 China’s GDP was 30 percent larger than the economies of Western Europe and the United States combined (p. 117).

After centuries of war, civil strife, and self-imposed isolation, China is only now rightfully reclaiming its rank as one of the world’s largest economies. That development is nothing to be feared.

U.S. Military Power: Preeminence for What Purpose?

Over at National Journal’s National Security Experts blog, this week’s question focuses on the recently released Hadley-Perry “alternative QDR.”

Sydney J. Freedberg Jr. of NationalJournal.com asks:

The U.S. military is already unaffordable – and yet it needs to be larger to sustain America’s global leadership, especially in the face of a rising China. That’s the bottom line from a congressionally chartered bipartisan panel, co-chaired by Stephen Hadley, George W. Bush’s national security adviser, and William Perry, Bill Clinton’s Defense secretary. The report, released July 29, is the independent panel’s assessment of and commentary on the Pentagon’s own Quadrennial Defense Review, released earlier this year.

Frequent expert blog contributor Gordon Adams, among others, has already blasted the Hadley-Perry report for making the underlying assumption that the U.S. can and should continue to invest heavily in being a “global policeman.” Is Adams right that the Hadley-Perry report calls for an unaffordable answer to the wrong question? Or are the report’s authors correct when they argue that the U.S. must be the leading guarantor of global security? And if the U.S. must lead, has the Hadley-Perry panel laid out the right path to doing so?

My response:

Dan Goure says that U.S. military preeminence is not unaffordable. That is probably correct. Even though we spend in excess of $800 billion annually on national security (including the cost of the wars in Iraq and Afghanistan, and the Departments of Homeland Security and Veterans Affairs) we could choose to spend as much, or more, for a while longer. We could choose to shift money out of other government programs; we could raise taxes; or we could continue to finance the whole thing on debt, and stick our children and grandchildren with the bill.

But what is the point? Why do Americans spend so much more on our military than does any other country, or any other combination of countries?

Goure and the Hadley-Perry commissioners who produced the alternate QDR argue that the purpose of American military power is to provide global public goods, to defend other countries so that they don’t have to defend themselves, and otherwise shape the international order to suit our ends. In other words, the same justifications offered for American military dominance since the end of the Cold War.

Most in Washington still embraces the notion that America is, and forever will be, the world’s indispensable nation. Some scholars, however, questioned the logic of hegemonic stability theory from the very beginning. A number continue to do so today. They advance arguments diametrically at odds with the primacist consensus. Trade routes need not be policed by a single dominant power; the international economy is complex and resilient. Supply disruptions are likely to be temporary, and the costs of mitigating their effects should be borne by those who stand to lose – or gain – the most. Islamic extremists are scary, but hardly comparable to the threat posed by a globe-straddling Soviet Union armed with thousands of nuclear weapons. It is frankly absurd that we spend more today to fight Osama bin Laden and his tiny band of murderous thugs than we spent to face down Joseph Stalin and Chairman Mao. Many factors have contributed to the dramatic decline in the number of wars between nation-states; it is unrealistic to expect that a new spasm of global conflict would erupt if the United States were to modestly refocus its efforts, draw down its military power, and call on other countries to play a larger role in their own defense, and in the security of their respective regions.

But while there are credible alternatives to the United States serving in its current dual role as world policeman / armed social worker, the foreign policy establishment in Washington has no interest in exploring them. The people here have grown accustomed to living at the center of the earth, and indeed, of the universe. The tangible benefits of all this military spending flow disproportionately to this tiny corner of the United States while the schlubs in fly-over country pick up the tab.

In short, we shouldn’t have expected that a group of Washington insiders would seek to overturn the judgments of another group of Washington insiders. A genuinely independent assessment of U.S. military spending, and of the strategy the military is designed to implement, must come from other quarters.

Eradicating Social Evils

The goal of a new Chinese government campaign is to “eradicate all social evils” and “advocate a healthy, civilized and high-minded lifestyle,” according to the Washington Post. Some elements of the state just don’t like the way the Chinese people are using their newfound freedom.

On a different level, we face the same arguments here in the United States. Both the Hillarys and the Huckabees in our world seek to fight “social evils” and lead us to “a healthy, civilized and high-minded lifestyle.” The Huckabees focus on our souls, urging the government to stamp out sin and push us to do God’s will (as they see it). The Hillarys often focus on our bodies, with campaigns against smoking, popcorn, sodas, salt, and all manner of “unhealthy lifestyles.” Then again, the Hillarys do want to save our souls, as well, with campaigns to eradicate racism and sexism and spread the environmentalist gospel.

In China, economic freedom is giving people an opportunity to throw off old social rules and restrictions and to experiment with living their lives as they choose. Economic freedom has the same impact here, and in both countries there are powerful people who don’t like the choices free people make.

Facts That Lack Currency

In Washington, everybody seems to have an opinion about the Chinese currency these days.  But too often those opinions show contempt for the facts.

The prevailing wisdom—undergirded by theories and equations that may need updating in this age of global production sharing and transnational supply chains—is that an appreciating yuan will reduce the bilateral trade deficit, as U.S. imports from China become relatively more expensive for Americans using dollars, and U.S. exports to China become relatively less expensive for Chinese using yuan.

The lead article in Sunday’s Washington Post presents this point of view unquestioningly, and in the process foregoes an opportunity to explain to its readers that the relationship between currency values and trade balances, and between trade balances and jobs, is not as straightforward as many proponents of Chinese revaluation argue.

In the fourth paragraph, the authors write:

“Whether Saturday’s announcement [from the Chinese government that it will allow its currency to appreciate gradually] will help the U.S. economy depends on how much Beijing lets its currency rise.  A jump of 20 percent, for example, could cut as much as $150 billion off the U.S. trade deficit with China and create as many as 1 million U.S. jobs by making American exports more competitive, according to estimates by C. Fred Bergsten of the Peterson Institute of International Economics.  From 2005 to 2008, China let the yuan appreciate 20 percent against the dollar before it stopped the process while it confronted the global financial crisis.”  (My emphasis, primarily for what is absent from this sentence).

No doubt Fred Bergsten and his colleagues at the Peterson Institute know something about economics, but Bergsten’s projection should raise some red flags for anyone who’s been following this subject.   The authors cite Bergsten’s estimation that a 20 percent appreciation of the yuan could lead to a $150 billion decline in the U.S. trade deficit with China, and they even indicate that China has allowed that kind of appreciation before—from 2005 to 2008.  But then, inexplicably, the authors abandon what should be the next logical question in reporting this story: what happened to the bilateral trade deficit during that recent period of 20 percent yuan appreciation?  After all, if the authors are going to acknowledge that period of appreciation, then surely it should serve as support for Bergsten’s current projections of trade deficit reduction and job creation—unless, of course, it doesn’t.  And it doesn’t.

That recent period of Yuan appreciation (21 percent between July 2005 and July 2008) is associated with a U.S. bilateral trade deficit that increased by $66 billion from $202 to $268 billion between 2005 and 2008, and incidentally, the number of jobs in the U.S. economy increased by 3.5 million between July 2005 and July 2008 (the precise period of appreciation), from 142.0 million to 145.5 million.  It is confounding to me that reporters are still adhering, seemingly unquestioningly, to the pre-financial crisis, pre-recession fallacy that a trade deficit hurts the economy?  Didn’t our huge economic hiccup put that myth the bed for good?

Between the end of 2007 and the end of 2009, deficit hawks got their wish.  The U.S. trade deficit declined, and substantially, by $327 billion, from $702 billion to $375 billion.  But the huge payoff they promised never materialized.  Instead, U.S. employment fell from 146 million workers in 2007 to 138 million workers in 2009.  The unemployment rate increased from an average of 4.7 percent in 2007 to 10.1 percent in 2009.  What was that about currency values and trade balances?  And between trade balances and employment?

A review of Federal Reserve exchange rate data and Commerce Department trade data reveals that the textbook characterizations of an inverse relationship between currency value and the trade account does not hold for many of America’s largest trading partners.  Between 2002 and 2008 (before trade flows dropped dramatically across the globe on account of the recession), the dollar declined considerably against the Chinese yuan, the Canadian dollar, the euro, the Japanese yen the Korean won, the Indian rupee, and the Malaysian ringgit, yet the U.S. bilateral trade deficit with all of those countries (and the Eurozone collectively) increased, in some cases substantially.

As I suggested in this paper and in this op-ed a couple months ago, many factors, including income, the availability of substitutes, and perhaps most significantly, globalized production and supply chains influence trade flows.  Since somewhere between one-half to two-thirds of the value of Chinese exports to the United States comprise of value that was first imported into China (as components, raw materials, and the labor and overhead embedded therein), an appreciating yuan produces mitigating effects.  The appreciating yuan makes the price tag higher to Americans than before the appreciation, if all else were equal.  But all else isn’t equal.  The rising yuan also reduces the cost of production in China — the cost of imported inputs, which accounts for up to two-thirds of the U.S. price tag, on average (but far more for devices like the Apple iPod)–thereby enabling Chinese exporters to lower their price tags to American consumers.

The evidence, as presented in this paper, suggests that this dynamic played a big role in preventing the trade deficit from declining.  I wonder how these transnational production processes factor into Fred Bergsten’s economic models or whether the 2005 to 2008 period can be explained away as some anomaly.  Nevertheless, at the very least those data, that recent evidence, should be acknowledged and understood by economists, who in turn can help reporters provide a more complete picture to the public.