Tag: China

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.

Beware of Americans Proselytizing the Chinese Economic Model

In a Cato paper released earlier this month, I argued that the glacial pace of America’s economic recovery and its growing public debt juxtaposed against China’s almost uninterrupted double-digit annual economic growth and its role as Congress’s sugar daddy have bred insecurity among U.S. opinion leaders, many of whom now advocate a more strident approach to China, or emulation of its top-down approach.

I cite, among others, Thomas Friedman of the New York Times, who is enamored of autocracy’s capacity to facilitate China’s singularity of purpose to dominate the industries of the future:

One-party autocracy certainly has its drawbacks. But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages. That one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century. It is not an accident that China is committed to overtaking us in electric cars, solar power, energy efficiency, batteries, nuclear power, and wind power. China’s leaders understand that in a world of exploding populations and rising emerging-market middle classes, demand for clean power and energy efficiency is going to soar. Beijing wants to make sure that it owns that industry and is ordering the policies to do that, including boosting gasoline prices, from the top down.

Friedman’s theme—but less googoo eyed and more all-hands-on-deck!—is echoed in an op-ed by China-expert James McGregor, which ran in yesterday’s Washington Post.  McGregor conveys what he describes as an emerging sentiment within the U.S. business community in China.  That is: the Chinese government is hell bent on creating national economic champions; is using its increasing leverage (as global financier and fastest-growing market) to impose its own interpretations of the global rules of economic engagement in support of its comprehensive industrial policy, and, ultimately; the United States must wake up and rise to the challenge by crafting some top-down industrial policy of its own.

I don’t dispute some of McGregor’s premises.  China’s long process of market liberalization has slowed down, halted, and even reversed in some areas.  Policies are proliferating that favor local companies (particularly state-owned enterprises), hamper the operations of foreign-owned firms, and impede market access for imports.  Indeed, many of these policies are likely the product of industrial planning. 

But McGregor’s conclusion is extreme:

The time has come for a White House-led, public-private, comprehensive examination of American competitiveness against a clear-eyed view of China’s very smart and comprehensive industrial development policies and plans…What technology do we protect? What do we share? What are our commercial strategic imperatives as a nation? How do we retool the U.S. government’s inadequate and outdated trade bureaucracy to provide thoughtful strategic focus and interagency coordination? How do we overcome the fundamental disconnect between our system of scattered bureaucratic responsibilities and almost no national economic planning vs. China’s top-down, disciplined and aggressive national economic development planning machine?

Central planning may be more en vogue in Washington than usual nowadays, but to even come close to reaching his conclusion requires disregarding many facts, which is how McGregor gets there sans tongue in cheek.

First, in an effort to preempt any suggestion that China’s protectionism is nothing exceptional and can be remedied through the World Trade Organization and other channels, McGregor offers this blanket statement: “Chinese policymakers are masters of creative initiatives that slide through the loopholes of WTO and other international trade rules.”  I realize that op-ed writing forces one to economize on words, but that statement, which serves as McGregor’s springboard to socialism, cannot suffice for an analysis of the facts.  One of those facts is that the United States has been successful in compelling changes in China’s protectionist practices in all of the formal WTO disputes it has lodged that have been resolved thus far (6 of 8 formal cases have been resolved).  If China violates the agreed rules of trade, and its actions impair benefits or impose costs on U.S. interests that are too large to ignore, pursuing a WTO case is a legitimate and proven channel of resolution. Chinese protectionism can be addressed without the radical changes McGregor counsels. 

But I think McGregor—sharing the tactics of other in the media and politics—exploits public angst over a rising China to promote his idea as the obvious and only solution to what he sells as a rapidly-metastasizing problem.  McGregor argues that China is aiming to create national champions through subsidies and other preferential policies, while charging foreign companies admission to its market in the form of technology transfer, joint-venturing requirements, and local content rules.  McGregor claims, that this appropriation of foreign technology will be used to “create Chinese ‘indigenous innovations’ that will come back at us globally.”  Ultimately, McGregor fears that “American technology companies could be coerced to plant the seeds of their destruction in the fertile China market.”

It is telling that McGregor doesn’t consider U.S. government expropriation of those companies’ technology assets as planting the seeds of their own destruction.  Indeed, it is nothing short of expropriation when technology that is owned by individual companies in the private sector, making unique decisions to improve their own bottom-lines on behalf of their own shareholders is suddenly subject to the questions McGregor wants answered: What technology do we protect? What do we share? What are our commercial strategic imperatives as a nation?  Those questions, let alone the answers, imply that the U.S. government should have at least de facto ownership and control over these privately-held technology assets.

What is wrong with allowing each of these companies to decide for themselves whether they want to license or transfer some of their technology to Chinese companies, as the price of doing business in China?  Some will, some won’t, but the presupposition that those who do are selling the golden goose is not based on fact.  Let companies decide for themselves how to use their resources, and don’t treat industry as a monolith, as in “What are our commercial strategic imperatives as a nation?” 

Had we tried to answer and implement the answer to that question in the face the Japanese “threat” two decade ago, we’d be bereft of some of the most ingenious technological breakthroughs and the hundreds of industries and thousands of products that “our system of almost no national economic planning” has yielded.

When we peel away the chicken-little rhetoric, when we dispense with neo-Rahm Emanualism (“Never manufacture a good crisis and then let it go to waste”), when cooler heads and analytical minds prevail, the economic question boils down to this: What has been more successful at creating growth, central planning or decentralized dynamism?  For both China and the United States, it has been the latter. 

My bet is that China’s re-embrace of greater central planning will be brief, as it wastes resources, yields few -if any- national champions, and limits innovation.  For similar reasons, U.S. opinion leaders will eschew central planning, as well.

Seven (Free-Market) Ways to Boost U.S. Exports

President Obama has committed his administration to the ambitious goal of doubling U.S. exports in the next five years. I don’t believe the government should be setting such targets—the rate of growth of U.S. exports should be left to the marketplace—but I am all for the administration seeking ways to expand the freedom of U.S. companies to sell in global markets.

In the “Economic Watch” column of the Washington Times today, I suggest six policy changes that will help American producers sell more of their goods and services abroad. None of them involve subsidies, threats of sanctions, or other government involvement.

Among my suggestions: enact into law the three free-trade agreements that have already been negotiated, repeal the trade embargo against Cuba, keep trade peace with China, and set a good example by keeping the U.S. market open.

If I could have added another suggestion (alas, space in a real newspaper is limited), it would be to issue more visas for trade delegations visiting the United States. Under misguided notions of national security, we make it more difficult than it should be for delegations from China and other  markets to visit the United States to inspect U.S. goods offered for sale. But like the other suggestions, this one is politically challenging as well.

If the president wants to boost exports, he will need to show the necessary leadership to remove the government-imposed barriers that still remain.

Fact-Checking “Cyberwar”

Wired’s Ryan Singel has given a read to Cyberwar, the new cybersecurity book by Richard Clarke and Robert Knake. (I picked out a potential example of actual cyberwarfare in a Glenn Reynolds review of the book last week.)

Singel—a journalist who has been a sophisticated reporter of computer security issues for years now—is not impressed with the book or the reviews it has gotten. In his review, Richard Clarke’s Cyberwar: File Under Fiction, he writes:

So much of Clarke’s evidence is either easily debunked with a Google search, or so defies common sense, that you’d think reviewers of the book would dismiss it outright. Instead, they seem content to quote the book liberally and accept his premise that cyberwar could flatten the United States, and no one in power cares at all. Of course, the debunking would be easier if the book had footnotes or endnotes, but neither are included — Revelation doesn’t need sources.

It’s brief enough, and refreshing enough. I say read the whole thing.

Sober assessments of computer, network, and data security are far less interesting than the thrillers that would drive Washington policymakers to overreact. This report in Government Computer News, for example, relates the findings of a recent Symantec report on threats to government systems and gives reason to settle down about cyberthreats from China.

China was the top country of origin for attacks against the government sector in 2009, accounting for 14 percent of the total, but too much should not be read into that statistic. The apparent country of origin says little about who actually is behind an attack, said Dean Turner, director of Symantec’s Global Intelligence Network.

China’s ranking is due primarily to the large number of computers in the country, Turner said. Less than a quarter of attacks originating in China were directed at government targets, while more than 48 percent of attacks from Brazil — No. 3 on the hit list — were directed at government. This makes it unlikely that China is specifically targeting government systems.

Compromised computers that are the apparent source of attacks often are controlled from elsewhere, and an attack apparently emanating from China does not necessarily mean that the Chinese government, or even anyone in China, is behind it. Attribution of attacks is notoriously difficult, and statistics do not necessarily indicate that the United States is under cyberattack by China. In fact, the United States ranked second in origin of government attacks in 2009, accounting for 11 percent.

(Symantec is a vendor to governments, so naturally prone to threat inflation itself. GCN reporter William Jackson deserves credit for the sobriety of the story.)

Cybersecurity-related fearmongering could drive unnecessary dischord between the United States and China, leading to actual conflict where none is warranted. Singel again:

[A]rtists of exaggeration … seem to think spinning tall tales is the only way to make bureaucracies move in the right direction. But yelling “Cyberwar” in a crowded internet is not without consequence. Not only does it promote unnecessary fear, it feeds the forces of parochial nationalism and militarism — undermining a communications system that has arguably done more to connect the world’s citizens than the last 50 years of diplomacy.