Tag: China

Is Buying an iPod Un-American?

We own three iPods at my house, including a recently purchased iPod Touch. Since many of the iPod parts are made abroad, is my family guilty of allowing our consumer spending to “leak” abroad, depriving the American economy of the consumer stimulus we are told it so desperately needs? If you believe the “Buy American” lectures and legislation coming out of Washington, the answer must be yes.

Our friends at ReasonTV have just posted a brilliant video short, “Is Your iPod Unpatriotic?” With government requiring its contractors to buy American-made steel, iron, and manufactured products, is it only a matter of time before the iPod—“Assembled in China,” of all places—comes under scrutiny? You can view the video here:

In my upcoming Cato book, Mad about Trade: Why Main Street America Should Embrace Globalization, I talk about how American companies are moving to the upper regions of the “smiley curve.” The smiley curve is a way of thinking about global supply chains where Americans reap the most value at the beginning and the end of the production process while China and other low-wage countries perform the low-value assembly in the middle. In the book, I hold up our family’s iPods as an example of the unappreciated benefits of a more globalized American economy:

The lesson of the smiley curve was brought home to me after a recent Christmas when I was admiring my two teen-age sons’ new iPod Nanos. Inscribed on the back was the telling label, “Designed by Apple in California. Assembled in China.” To the skeptics of trade, an imported Nano only adds to our disturbingly large bilateral trade deficit with China in “advanced technology products,” but here in the palm of a teenager’s hand was a perfect symbol of the win-win nature of our trade with China.

Assembling iPods obviously creates jobs for Chinese workers, jobs that probably pay higher-than-average wages in that country even though they labor in the lowest regions of the smiley curve. But Americans benefit even more from the deal. A team of economists from the Paul Merage School of Business at the University of California-Irvine applied the smiley curve to a typical $299 iPod and found just what you might suspect: Americans reap most of the value from its production. Although assembled in China, an American company supplies the processing chips, a Korean company the memory chip, and Japanese companies the hard drive and display screen. According to the authors, “The value added to the product through assembly in China is probably a few dollars at most.”

The biggest winner? Apple and its distributors. Standing atop the value chain, Apple reaps $80 in profit for each unit sold—an amount higher than the cost of any single component. Its distributors, on the opposite high end of the smiley curve, make another $75. And of course, American owners of the more than 100 million iPods sold since 2001—my teen-age sons included—pocket far more enjoyment from the devices than the Chinese workers who assembled them.

To learn a whole lot more about how American middle-class families benefit from trade and globalization, you can now pre-order the book at Amazon.com.

Other Countries as Ends-in-Themselves

Here in Babylon on the Potomac, most foreign policy discussions begin and end with the United States: How can we extend our control of the world?  Who is challenging us?  What problems might, say, a rising China, pose to American primacy?  We are, as Madeleine Albright asserted, the “indispensable nation.”  One popular scholar recently advanced the theory that the U.S. government is, and should be, the world’s government.  There’s a real refusal to recognize that we are, as a simple matter of fact, isolated by the blessings of geography and power.  We’re just not a 19th century continental European power, no matter how much we threat-inflate and conceive of ourselves as the only source of order in a disorderly world.

You’d think we’d be inclined to recognize the luxury that our isolation affords us, but you’d be wrong.  Consequently, in discussions about the rise of China, for example, U.S. analysts generally pose the question as a simple U.S. vs. China confrontation: How quickly can they challenge us?  Where should our “red lines” be?  Which allies will support us?  If our strategists were smart, they’d be thinking more creatively about offloading responsibility to countries that live more closely to China, and waiting to see how things progress.  While the ChiCom menace tends to get represented as ten feet tall in these discussions, the Chinese have a host of significant problems, including the internal unrest that has been on display recently, among others.

china-india-exerciseHigh on the list of “other problems” is China’s relationship with countries like India.  Much more so than the United States, countries like India and Japan have a lot to lose, potentially, from China’s rise.  Liberal international relations thinkers are right to point out the positive-sumness of economic relations between potential adversaries.  Economic ties between China and Taiwan, China and the U.S., China and Japan, are also positive forces that can help to moderate security competition.  That said, security itself is zero-sum.  Either you control your sea lines of communication or else another country does.  If another country does, bad things can happen to you, as, for example, Japan remembers all too well.

All of which is a long-winded way of introducing this excellent article by James Lamont and Amy Kazmin in the Financial Times.  Lamont and Kazmin highlight the growing unease in New Delhi about China.  Unease tends to crop up when a big powerful neighbor does things like claim whole provinces of your country as its own territory, as China does with the Indian province of Arunachal Pradesh.  (For more on this subject, see my talk on Capitol Hill from May 2008: video here.)

In fairness, the Bush administration did some smart things on this front, like trying to improve ties with India.  For years, U.S.-India relations had been tainted by a cold war mindset where we resented their association with the Non-aligned Movement.  (I think the India nuclear deal has a lot of downsides, but the intentions underpinning it were smart ones.)  Similarly, the Bush administration signed a joint agreement with Japan stating that a peaceful resolution of the Taiwan dispute is a “common strategic objective.”

But the important part will be beyond getting other countries to accept our goodies (the India nuclear deal) or sign a statement of interest (the joint Japan-US statement on Taiwan).  Those countries would rather, ceteris paribus, stand tall against China from over the shoulder of the United States.  The only way that we will get to a point where the countries with the most to lose pay the most for a hedge against China is for the United States to credibly commit to do less.  And on that front, there is a lot more work to be done.

Finally, an Ally That Doesn’t Wait for America

Washington’s willingness to toss security guarantees about the globe like party favors has encouraged other nations to do little for their own defense.  From the European, Japanese, and South Korean standpoint, why spend more when the Americans will take care of you?

But it looks like Australia takes a different view, and is willing to do more to defend itself and its region.  Reports the Daily Telegraph:

The latest defence White Paper recommends buying 100 advanced F-35 jet fighters and 12 powerful submarines equipped with cruise missiles, a capability which no other country in the region is believed to possess.

The “potential instability” caused by the emergence of China and India as major world powers was cited as the most pressing reason for this military build-up. In particular, Australian defence planners are believed to be concerned about China’s growing naval strength and America’s possible retreat as a global power in the decades ahead.

Chinese officials say their country’s growing power threatens no-one. Behind the scenes, Beijing is thought to be unhappy about Australia’s White Paper, with one Chinese academic saying it was “typical of a Western Cold War mentality”.

But the Chinese navy has almost doubled the number of secret, long-distance patrols conducted by its submarines in the past year. The reach of its navy is extending into Australian waters. China is also acquiring new amphibious assault ships that can transport a battalion of troops.

So instead of calling Washington to deal with Beijing, the Australians are building up their own navy.  Novel approach!  Now, how can we implant a bit of the Aussie character in America’s other friends around the globe?

High Noon for U.S. Trade Policy

This morning, the U.S. International Trade Commission issued an affirmative determination in a so-called “Section 421” or “China-Specific Safeguard” case that imports of consumer tires from China are causing market disruption in the United States. That may sound like just another day in Washington, but the decision could very well be the catalyst for the most consequential event in trade policy since the Bush steel tariffs of 2002. It will certainly force a defining moment for a president who has preferred obfuscation to clear direction on trade policy.

Under the statute (which became U.S. law as a condition of China’s accession to the World Trade Organization in 2001), the ITC has 20 days to provide remedial recommendations to the president and the U.S. trade representative. Those recommendations are likely to include quotas, tariffs, or some combination that will ultimately curtail the supply and raise the prices of all tires in the United States – not just those imported from China. However, the president has the discretion to deny import “relief” if he determines that such restrictions would have an adverse impact on the U.S. economy that is clearly greater than its benefits, or if he determines that such relief would cause serious harm to the national security of the United States.

I will forego my own explanation as to why restrictions would have an adverse impact that is clearly greater than its benefits, and instead give you the statement of the U.S. Tire Industry Association, which represents “all segments of the tire industry, including those that manufacture, repair, recycle, sell, service or use new or retreaded tires, and also those suppliers or individuals who furnish equipment, material or services to the industry.” Suffice it to say that no producers of tires in the United States supported this petition, so it is not a matter of U.S. tire producers against Chinese tire producers. It is really nothing more than a matter of a U.S. union objecting to management’s decision to produce its lowest grade (lowest quality, lowest priced, lowest profit margin) tires abroad. Yet the consequences of trade restraints could affect interests across and throughout the economy, particularly if China responds in kind.

During the Bush administration, there were six Section 421 cases filed by domestic parties, four of which were found by the ITC to warrant import relief. In each of those four cases, President Bush exercised his discretion to deny relief. The tires case is a test case for President Obama. Will 421 fly under this president? Or will it remain the dead letter that petitioners considered it to be under President Bush?

The stakes are much higher for Obama than they were for Bush because the unions (the United Steel Workers union is the petitioner in the tires case) and the Chinese both feel more emboldened in their positions now. Bush didn’t win the near-unanimous support of organized labor in his elections, nor did he promise to get tough on Chinese trade practices, as Obama did.

Instead, Bush set the precedent of denying relief. And he did it four times. So, the Chinese see this firmly as a matter of presidential discretion – unlike antidumping or countervailing duties, which run on statutory auto pilot without requiring the president’s attention or consent. In other words, although there are over 50 outstanding U.S. antidumping and countervailing duty orders against various Chinese products, none of them is considered to reflect the direct wishes of the U.S. president, and thus don’t rise to the level of a potentially explosive trade dispute. But trade restraints under the 421 will no doubt be considered by the Chinese to be a directive of the U.S. president, thus the offense taken and the consequences wrought could be profound.

The good news is that President Obama will finally be forced to take a stand – to match his words and deeds. After a campaign in which trade was disparaged, President Obama’s first 100 days were characterized by a conciliatory tone and some enlightened actions. He told the Mexican president and the Canadian prime minister that he no longer wanted to reopen NAFTA. He spoke out against the most protectionist provisions of the Buy American language in the so-called stimulus bill. He repudiated protectionism and pledged to avoid new protectionist measures at the G-20 and before other international gatherings. His Treasury Department declined to label China a currency manipulator. And his trade representative set about articulating a pro-trade agenda, including support for a push to pass pending bilateral trade agreements and concluding the Doha Round.

But there’s been very little follow through and trade partners are beginning to doubt his sincerity. Efforts to schedule votes on pending trade agreements have been shunted aside as too controversial to happen before health care reform legislation. In the meantime, imports are being turned away from U.S. procurement projects on account of some mindless Buy American caveats and overzealous interpretation of other Buy American rules by project administrators, which is inciting copycat rules in Canada and China.

The time has come for the president to stop wavering and to take decisive actions on trade policy. Of course, he will have until September 17 to render his decision about whether to grant or deny relief in the tires case. Between now and then he should conclude that trade restrictions are not the appropriate course – that among other problems, they will also undermine his economic and diplomatic objectives. And while he’s denying relief, he should take some advice from Scott Lincicome and me to speak the truth about trade to those constituencies who will feel betrayed. Directly and honestly making the case for trade to those who doubt is more durable than rationalizing each pro-trade decision, which has been the norm for too long in Washington. Besides, the polls show that Americans have already turned the corner and are moving away from their misguided flirtation with protectionism. That may help inspire an uncommitted president to take the baton.

New Media, New Repression: China Blocks Social Networking Sites

Today marks the 20th anniversary of the massacre of students and other anti-authoritarian protests in Tiananmen square.

If you want background info, including causes and the wider political context, check Wikipedia.

You can also see stirring videos on Youtube.

There are incredible photos on Flickr.

And of course Twitter has a wealth of real-time information and thinking about the anniversary.  Just search using the hash tag #Tiananmen.

But for those 1.5 billion people trapped behind the Great Firewall of China, absolutely none of those links are accessible.  To mark the event that the government assures never happened, the Chinese government has blocked most social networking sites.

In 1989, when a nascent pro-democracy movement wanted to communicate its vitality and prepare to take on the state, meeting en masse was vital. But that made it fairly easy for the CCP to roll in and crush the dream of democracy.

Twenty years later, the Internet is the place where mass movements for liberty can take root. While the CCP is attempting to use the electronic equivalent of an armored division to prevent change, reform today is a question of when, not if.  Shutting down open dialogue will only slow the democratic transition to freedom, which the Chinese government cannot ultimately prevent.

The leadership of today’s Chinese government should allow that country’s citizens and journalists to communicate openly. The alternative is to suffer eternal loss of face as history records them occupying its wrong side.

Tiananmen Square: 20 Years Later

tsAfter 20 years China has made substantial economic progress, but the ghosts of Tiananmen are restless and will continue to be so until the Goddess of Liberty is restored.

The Chinese Communist Party’s “Human Rights Action Plan” (2009–10) addresses several human rights abuses, but it fails to establish a well-defined boundary between the individual and the state that protects rights to life, liberty, and property.

Until China limits the power of the CCP and allows people to exercise their natural rights, there will be corruption, and the goal of “social harmony” will be elusive. The lesson of Tiananmen is that the principle of nonintervention (wu wei) is superior to the heavy hand of the state as a way to bring about true harmony.

More on the Tiananmen Square massacre below.