Tag: China

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.

Modern Slavery, More Important than Who Built the White House

When Michelle Obama delivered her address at the Democratic National Convention (DNC) in Philadelphia, she created a stir when she cried out that America’s story was “the story that has brought me to this stage tonight, the story of generations of people who felt the lash of bondage, the shame of servitude, the sting of segregation, but who kept on striving and hoping and doing what needed to be done so that today I wake up every morning in a house that was built by slaves.”

That last line, “…I wake up every morning in a house that was built by slaves,” was the focus of much attention, with some conservative critics calling the claim false or misleading. The record was set straight in a New York Times article of July 26th, “Yes, Slaves Did Help Build the White House”.

While it important to address sins of the past, it is always wise to focus on today’s indiscretions too. Yes, a forward-looking perspective is always prudent. The slavery problem that is pressing today is modern slavery, and it’s a shockingly huge problem.

In 2013, the Walk Free Foundation, founded by Australian mining magnate Andrew Forrest, created the Global Slavery Index (GSI) to track and report modern slavery worldwide. The GSI defines modern slavery as “situations of exploitation that a person cannot refuse or leave because of threats, violence, coercion, abuse of power or deception, with treatment akin to a farm animal.” With data on 167 countries, the Global Slavery Index estimates that over 45.8 million people find themselves in some form of modern slavery today.

According to the Global Slavery Index, over 58 percent of slaves today live in just five countries. India’s embrace of slavery is astounding, with over 18 million Indians enslaved today – over 4.5 times more than the U.S. had during its peak decade of the 1860s.1  China, Pakistan, Bangladesh, and Uzbekistan round out the top five offenders. Seventeen countries have at least one percent of their populations living in modern slavery, with North Korea leading the pack, as the accompanying table shows.

 

While it might be politically correct to exclusively spend time gazing into the rearview mirror and speaking only about the history of slavery in the U.S., it would be wise to speak of the 45.8 million who are enslaved today. It’s time to shine a light on today’s slave trade and the countries where slaves reside.