
America is blundering into a set of trade policies that lack any sort of coherent intellectual justification. Here’s the Financial Times, discussing recent US trade talks with the UK:
Other demands could also be highly problematic for London. On currency, the US wants to “ensure that the UK avoids manipulating exchange rates in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage”. Currency matters have traditionally been excluded from trade negotiations, but the Trump administration has injected them into talks, including with China and Japan.
Unfortunately, the US lacks any coherent definition of “currency manipulation”. Or any coherent definition of “effective balance of payments adjustment”. Or any coherent definition of “unfair competitive advantage”. By the way, the UK almost always runs large current account deficits, and will likely continue to do so in the future.
Nowhere is our trade policy more confused that with China. The Trump administration took office insisting that our current account deficit was a huge problem that cost lots of jobs, and also an indication that we had agreed to some horrible trade agreements. The administration then proceeded to adopt policies aimed at boosting investment and likely to reduce national saving rates. Because the current account balance is national saving minus national investment, Trump’s policies will make our current account deficit even bigger, if they are successful.
Once it became obvious that the administration’s policies would not reduce our trade deficit, pundits began looking for other justifications for a trade war with China. Thus the focus switched from reducing American imports from China to opening up China’s markets to US goods and services. And while that’s certainly a less bad objective, it raises another host of thorny issues.
Let’s start with the question of why China should be the focus of our market opening initiatives. What is special about China? Here are a few factors to consider:
1. Some would point to America’s large trade deficit with China. But economists almost universally agree that bilateral trade deficits are meaningless.
2. Some economists do worry about overall current account balances, but China’s overall current account balance (as a share of GDP) is closer to zero than any other major economy in the world. If current account deficits are your concern, then China’s the poster child of good behavior—a model global citizen.
3. Another argument is that China has trade restrictions on imports. Even if those don’t result in a big Chinese CA surplus, they reduce the amount of money that other countries can earn exporting goods to China.
Put aside the question of why that’s any of our business. For the moment, let’s assume it is. That still leaves unanswered the question of why we should focus on China, and not some other country. Consider:
A. China’s probably taken more market opening steps in recent decades than any other economy. Its imports have grown faster than those of any other economy.
B. Yes, China still has many trade barriers, but so does the US. Because these barriers take so many forms, there’s no objective way of measuring openness. But we do know that Chinese imports in 2017 were 14.14% of GDP, whereas the US imported 12.13% of GDP. While that partly reflects the fact that the US has a bigger service sector, it is hard for me to see how those data points are consistent with China being a far more closed economy than the US.
C. And even if China is far more closed than the US, why focus on China and not on other countries with even more barriers facing US firms? Consider India, a country with a population almost as large as China’s. In 2017, the US exported $130 billion in goods to China, but only $25.7 billion in goods to India. If the US government is concerned that foreign countries have trade and regulatory barriers that deprive US firms of potential exports, then India’s the far greater villain. If India adopted China economic policies then US exports to India would soar much higher.
I can guess how government officials would respond to this. They’d say, “China is a much bigger market than India.” Bingo! It’s a much bigger market partly because it is more open to foreign trade and investment. Or they’d say “China has a big bilateral CA surplus with the US”. But we’ve already established that bilateral deficits don’t matter, and in any case the US government is energetically enacting policies likely to make our CA deficit much worse. So if CA deficits do matter, our economic policies are on a disastrous course. (Fortunately they don’t matter, and our economic policies are not on a disastrous course.) Again, is it the CA deficits or the closed foreign markets? There is no coherent argument on either front.
Another argument is that we need to stop China from becoming a great power. But forcing China to further open its market to US investments is a policy almost tailor made to speed China toward great power status. So what are we trying to do?
Because the US does not have a coherent philosophy to justify its trade wars, it settled earlier disputes with Canada, Mexico, and South Korea with mostly cosmetic changes, which made the existing agreements slightly worse. Early reports are that something similar will happen with China. So I’m not claiming that current policy is on a disastrous course—it isn’t. Just that we are needlessly antagonizing our trading partners with no clear advantage to the US.
PS. I actually wrote this post 3 days ago. Ironically, today’s FT reports the Trump administration is now pressing India over trade issues, so perhaps the policy is not quite as incoherent as I had assumed when I wrote the post.
PPS. If you don’t trust Chinese import statistics, consider that Chinese imports can also be derived by adding up foreign exports to China.
READER COMMENTS
Airman Spry Shark
Mar 5 2019 at 2:44pm
Perhaps the reason to focus on China is its status as a seeming exemplar of an alternative to market democracy as a path to prosperity.
Scott Sumner
Mar 5 2019 at 4:36pm
Airman, I think it’s safe to say that punishing countries for not being democratic is not high on the agenda of President Trump. He says nicer things about Kim and Putin than he does about Trudeau and Merkel. 🙂
Mark
Mar 5 2019 at 7:46pm
China’s model is only appealing to poor countries that are never going to become market democracies anyway (especially if “market democracy” becomes a euphemism for “aligned with the United States”). China’s system is not as good as a market democracy, but it is leagues more free-market than what most poor countries have, so on the margin it is a win for liberalization if more poor countries adopt it.
Hazel Meade
Mar 7 2019 at 3:29pm
An exemplar to whom?
I have not recently seen or heard a lot of residents of Western Democracies admiring the lifestyle available in China and wishing they could move there. Indeed, I am not aware that it’s an example to anyone other than the leaders of other autocracies – as an example of how they can somehow transition their countries to capitalism without losing their heads in the process.
TMC
Mar 5 2019 at 4:33pm
I’ve heard complaints for the last 20+ years about China’s currency manipulation, specifically regarding trade. Maybe the topic if finally getting its proper place in trade negotiation. Like all trade topics, better to hash this out while we are negotiating, instead of after the fact.
If you find Trump’s trade policy confusing, just consider it a subset of foreign policy, and it makes more sense. An economic nudge to China sometimes results in something fruitful from North Korea.
Scott Sumner
Mar 5 2019 at 4:37pm
TMC, I’m equally confused by Trump’s North Korea policy!
Ahmed Fares
Mar 5 2019 at 11:50pm
TMC,
As regards currency manipulation…
You can fix a nominal exchange rate but the market sets the real exchange rate through price movements… —Tyler Cowen
Because currency manipulation does not exist as a coherent concept, I don’t see any evidence that the Chinese did it. But if I am wrong and it does exist, then it surely refers to the real exchange rate, not the nominal rate. Thus the fact that the nominal value of the Chinese yuan was pegged for a period of time has no relevance to whether the currency was being “manipulated”. The real value of the yuan was appreciating. —Scott Sumner
http://www.econlib.org/archives/2017/06/the_three_conce.html
Benjamin Cole
Mar 5 2019 at 7:00pm
http://www.econ.ucla.edu/pfajgelbaum/RTP.pdf
Tyler Cowan recently posted the above paper.
Despite the globalist credentials of some of the authors, the paper found that Trump’s trade tariffs are really a wash for the US economy with some benefits and some negatives.
In general, multinationals are the dominant force in US foreign, trade, and military policies. Trump may, or may not, be throwing a monkey wrench into US foreign policy in the China picture. Trump strikes me as a rogue, but he may only be reflecting the interests of multinationals who want access to the China market. One small example is that Visa and MasterCard want into the China market, but are kept out by Beijing.
Ian Bremmer of the Eurasian Group says that Beijing is not interested in any structural reforms of its economy. President Xi and the Communist Party of China like arrangements as they are. Given the tremendous success of the Sino economy in the last 40 years, it may be that Westerners should be a bit contrite on the advice they have two Beijing on how to improve its economy. It is worth noting that while Western economies nearly collapsed in 2008, China only experienced a modest decline in its growth rate.
Western multinationals badly want in on the Sino economy and to be influential in Beijing. Right now multinationals find themselves in the uncomfortable position of pandering to Beijing. Maybe that explains Trump.
Mark
Mar 5 2019 at 7:43pm
China only seems like a great success to some is that it was starting from a point of utter collapse, and even this growth owes to its partial liberalization. It is still a poor country. In fact, its GDP per capita today is less than the Soviet Union’s in 1990 in constant dollars.
Many people were also taken in by the Soviet Union’s rapid catch-up economic growth of the 1960s and declared that the Soviet system was superior, only to be totally discredited when the Soviet GDP per capita stalled out at 1/3rd of America’s and stopped converging. China’s is not even 1/6th of America’s yet.
I hope China continues to liberalize and catches up with the United States. But if it does not continue liberalizing, I would feel pretty safe betting that it will not catch up.
Scott Sumner
Mar 6 2019 at 12:31am
Ben, You said:
“Ian Bremmer of the Eurasian Group says that Beijing is not interested in any structural reforms of its economy.”
China does structural reform almost every month. Might I suggest that you start paying attention to people who discuss what’s actually going on in China?
Benjamin Cole
Mar 6 2019 at 1:30am
Scott Sumner— Ian Bremmer appears to be a well-regarded source on China, not an ideologue. He is hardly alone in suggesting that the Communist Party of China and President Xi cannot reform themselves.
As for liberalizing, I think the picture is very large and complex . For example, I have recently come across reports from Fitch ratings and IHS Markit that China is increasing subsidies to its flat-panel display industry and to aluminum and steel manufacturing facilities.
As there is a near total news blackout from mainland China, and only propaganda is allowed, how anyone can determine whether China is liberalizing or not is beyond me
In addition, if anyone can explain the Chinese financial system I would like to read their reports. From what I gather, the People’s Bank of China has effectively enabled loan forgiveness to the tune of trillions of dollars over the decades.
In other words in modern China neither the price signal nor moral hazard has much standing.
Even private sector companies, if large enough, are controlled by the Chinese Party of China through board seats or voting stock.
And of course, from all signs, China is not liberalizing in the areas of human rights, civil rights, legal rights, religious freedoms, or free-speech.
Scott Sumner
Mar 7 2019 at 1:04am
You said:
“As there is a near total news blackout from mainland China, and only propaganda is allowed, how anyone can determine whether China is liberalizing or not is beyond me”
That’s an odd comment coming from someone who just claimed to do exactly that. Are you saying I should disregard your comments?
Benjamin Cole
Mar 6 2019 at 6:48am
China Mobile leadership change: What does it portend?
As China Mobile gears up for launch of 5G services, Beijing has appointed a new leader for the nation’s biggest mobile operator, fueling fresh speculation in the market about the government’s plans for the telecom sector.
According to an announcement Monday, China Telecom chairman Yang Jie has stepped down from his post to take the top job at the larger state-owned wireless carrier China Mobile.
China Mobile’s erstwhile chairman, Shang Bing, is leaving his position due to age, as per a regulatory filing from the telecoms giant.
Interestingly, there was no word from Beijing on who would replace Yang at China Telecom, meaning that the position has been left vacant for now.
Not surprisingly, the latest developments have sparked chatter among industry observers as to whether Beijing is laying the ground for another restructuring of the nation’s telecom assets.
—30—
Really, does this sound like a liberalized nation? What if telecom management and leadership in the US was selected by the Republican National Committee (or worse, the DNC). Headlines like this are everyday. This headline is not even unusual. The Communist Party of China selects top management of every large company.
Mark
Mar 6 2019 at 8:02am
Telecoms are state-owned in many countries; this is not unusual. The largest Chinese state-owned enterprises are mostly in sectors that are nationalized in many other (particularly developing) countries, such as utilities, energy companies, and banks. Also, most Chinese state-owned enterprises are owned by local governments. These should arguably be considered private companies; there is a long history of local government investment in China predating Communism; the Chinese Revolution of 1911 was sparked by an attempt to nationalize a rail company mostly owned by local governments. China was historically a very poor country with an undeveloped financial sectors so only local governments could pool the resources to invest in companies. Local government-backed firms compete with each other much as private firms do.
Many large companies in China are also publicly traded and not owned by the government. China’s most famous company is probably Alibaba and you can look at the financial disclosures for its New York listing to see that it is primarily owned by foreign investors and is not controlled by the Communist Party. Many other Chinese companies are listed in New York or Hong Kong as well. They have to be transparent about their ownership and control as there is no way they are fooling multi-billion dollar international investment funds.
Also, it is absurd to suggest that there is a news blackout from China. Thousands of foreigners travel to and from China every day; it would be impossible to enforce a blackout against them. You can also read the Hong Kong press; the South China Morning Post (owned by Alibaba) can be as critical of Chinese leadership as the Washington Post is of Trump.
I would measure liberalization by the growing extent to which foreign businesses are doing business in China. Although the Chinese government does favor Chinese state-owned enterprises to an extent, the fact is that the playing field is level enough that foreign companies still get to make huge profits and don’t have to worry about the government expropriating their investments like they would in many other developing countries. I would also look at things like how many visas are issued to foreigners. If growing numbers of foreigners trust the Chinese government enough to vacation or work in China, that is stronger evidence of liberalization than what a commentator outside China says.
Scott Sumner
Mar 7 2019 at 1:07am
Mark, Very good comment, but you won’t find it has any impact on Ben’s thinking.
Warren Platts
Mar 9 2019 at 5:14am
What about concentration camps in Xinjiang? The illegal occupation of Tibet? The flouting of international law in the South China Sea? The enabling of North Korea’s nuclear program? Continual threats against Taiwan? Forced organ “donations” for profit? Widespread religious persecution? Social credit scores? Total 1984-style surveillance state? State sanctioned fentanyl exports that kill 30,000 Americans every year?
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