Tag: China

“The China Shock” Implicates Domestic Policies, Not Trade

A National Bureau of Economic Research working paper by David Autor, David Dorn and Gordon Hanson, titled “The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade,” has created Piketty-like buzz in U.S. trade policy circles this year.  Among the paper’s findings is that the growth of imports from China between 1999 and 2011 caused a U.S. employment decline of 2.4 million workers, and that wages and employment prospects for those who lost jobs remained depressed for many years after the initial effect. 

While commentators on the left have trumpeted these findings as some long-awaited refutation of Adam Smith and David Ricardo, the authors have distanced themselves from those conclusions, portraying their analysis as an indictment of a previously prevailing economic consensus that the costs of labor market adjustment to increased trade would be relatively subdued (although I’m skeptical that such a consensus ever existed). But in a year when trade has been scapegoated for nearly everything perceived to be wrong in society, the release of this paper no doubt reinforced fears – and fueled demagogic rants – about trade and globalization being scourges to contain, and even eradicate.

Last week, Alan Reynolds explained why we should take Autor, et. al.’s job-loss figures with a pinch of salt, but there is an even more fundamental point to make here. That is: Trade has one role to perform – to grow the economic pie. Trade fulfills that role by allowing us to specialize. By expanding the size of markets to enable more refined specialization and economies of scale, trade enables us to produce and, thus, consume more.  Nothing more is required of trade. Nothing!

Still, politicians, media, and other commentators blame trade for an allegedly unfair distribution of that pie and for the persistence of frictions in domestic labor markets. But reducing those frictions and managing distribution of the larger economic pie are not matters for trade policy.  They are matters for domestic policy. Trade does its job. Policymakers must do their jobs, too.

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State-Owned Enterprises and the TPP

My Cato trade policy colleagues and I recently released a Working Paper analyzing the Trans-Pacific Partnership (TPP). We find that the agreement is “net liberalizing,” and that despite its various flaws, the agreement will improve people’s lives and should be ratified. Some aspects of the agreement were obviously good (like lower tariffs) and others were easy to condemn (like labor regulations); but for many of the TPP’s 30 chapters, our opinion is more ambivalent. 

The TPP’s chapter on “state-owned enterprises” (SOEs) is one of those. The TPP’s SOE rules are good rules, but they’re not nearly as ambitious as we wish they’d be. We gave the chapter a minimally positive grade of 6 out of 10. Here’s some of what we had to say in our report:

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On the Oil-Gold Ratio: Why Oil’s Going Higher

A big story to come out of the last G-20 summit was that the Russians and Saudis were talking oil (read: an oil cooperation agreement). With that, everyone asked, again, where are oil prices headed? To answer that question, one has to have a model – a way of thinking about the problem. In this case, my starting point is Roy W. Jastram’s classic study, The Golden Constant: The English and American Experience 1560-2007. In that work, Jastram finds that gold maintains its purchasing power over long periods of time, with the prices of other commodities adapting to the price of gold. 

Taking a lead from Jastram, let’s use the price of gold as a long-term benchmark for the price of oil. The idea being that, if the price of oil changes dramatically, the oil-gold price ratio will change and move away from its long-term value. Forces will then be set in motion to shift supply of and demand for oil.  In consequence, the price of oil will change and the long-term oil-gold price ratio will be reestablished. Via this process, the oil-gold ratio will revert, with changes in the price of oil doing most of the work.

For example, if the price of oil slumps, the oil-gold price ratio will collapse. In consequence, exploration for and development of oil reserves will become less attractive and marginal production will become uneconomic. In addition to the forces squeezing the supply side of the market, low prices will give the demand side a boost. These supply-demand dynamics will, over time, move oil prices and the oil-gold price ratio up. This is what’s behind the old adage, there is nothing like low prices to cure low prices.

The Global Poor, the Great Enrichment, and the American Working Class

Americans have lately been debating the tradeoffs we face as the global poor rise. Their gains have been enormous and unprecedented. And yet the American working class has struggled to better itself even as conditions have improved for most others:

Image source.

Percentiles 80-95 contain many from the relatively rich countries’ lower-income classes; there are a lot of Americans in there. Other factors may be at work, but let’s say for the sake of argument that the gains by the global poor have on balance harmed at least some of them.

So why is this happening? Is it part of some other nation’s malicious plan? Is it China, perhaps? Or India? Or did we inadvertently do it to ourselves, through bad trade agreements or “soft” foreign policy?

It’s natural to want to make the story about us, or our actions, or a villain who threatens us. Those sorts of explanations are politically useful; they suggest that the right leader can get us out of the mess we’re in.

But maybe the correct explanation isn’t about us at all. One way to see this is to ask a slightly different question: Why is the Great Global Enrichment happening right now? Why didn’t it happen in the 1960s? It happened in the 1960s in Japan, after all. It presumably could have happened elsewhere too. So why not?

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.  

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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.