After learning witches are made of wood, peasants in Monty Python and the Holy Grail, are asked what, besides wood, floats. One peasants asks hopefully: “tiny rocks”? Well there are ways for rocks and other heavy cargo to float, and floating across the world’s oceans today are millions of tons of steel and aluminum forged and smelted in China.
By ship is by far the least expensive way for steel to travel from producers to consumers. Shipping costs from China to California are lower than shipping by rail from steel mills in Pennsylvania, Ohio, and Indiana. So coastal Chinese steel and aluminum producers can have a significant cost advantage along America’s west coast, and can be competitive in markets in other coastal cities.
High taxes (tariffs) on imported aluminum and steel can save companies and jobs in domestic steel and aluminum industries, but are costly and job-destroying for U.S. manufacturers who depend upon these raw materials for their production processes.
The November 8, 2016 Wall Street Journal article “U.S. Says Aluminum Exports From Chinese Firm Evaded Restrictions” reports:
U.S. officials said a Chinese aluminum magnate is sidestepping U.S. trade sanctions, the latest development in federal attempts to rein in a flood of cheap metal imports that have overwhelmed U.S. producers.
The reporters uses says “cheap metal imports” are “flooding” the U.S. Here though is an InvestmentMine chart showing 25 years of aluminum prices. Looks like aluminum prices have been going up and down over the years, with a surge in 2006-2008, followed a steep fall in prices with the financial crisis of 2008-2009, and prices surging after, then falling again.
When aluminum prices are high, producers make huge profits and tend to invest some of those profits in expanding output. As new capacity boosts supply, prices are pushed down, leading aluminum companies to reduce production but also to complain to Congress and the Department of Commerce about “dumping” by foreign firms.
Two points to keep in mind about imports of aluminum, steel, copper and other metals. First, as key raw materials to U.S. manufacturing, lower metals prices help U.S. manufacturers stay competitive. With steel prices up 70% so far in 2016, U.S. manufacturers face higher costs and often raise prices, making their goods less attractive to consumers. Firms trying to absorb much higher raw materials costs have less margin for raising wages, capital investment, and dividends.
U.S. Steel’s campaign to exclude Chinese steel imports would make U.S. companies that manufacture products from steel less competitive, steel users told a federal agency. They also said domestic steelmakers either don’t want to make some of the steel they need or can’t make it as reliably as Chinese suppliers do.
It is not the case that steel (or aluminum) are monolithic products and few U.S. manufacturing firms want to purchase lumps of raw steel or aluminum. The article quotes various U.S. steel users who emphasize the benefits to them of access to specialized steel producers in China:
Michael Papera, who purchases steel for Allstate Can in Parsippany, N.J., told the agency that the steel his company buys from Baosteel of China “is by far superior to anything purchased domestically in the way of shape and performance.”
Baosteel is one of the Chinese producers targeted by U.S. Steel.
Neal Lux, president of Global Tubing, said the Dayton, Texas, company worked with an unnamed U.S. steelmaker to provide steel used to make tubing for the energy industry.
“The results were disastrous,” he wrote.
So it is interesting that with the media and think tank concern the Trump Administration might launch a damaging trade war with China, U.S. manufacturers are already suffering from ongoing trade disputes launched by U.S. steel and aluminum producers, and their associations, working through Department of Commerce Anti-Dumping (AD) and Countervailing Duties (CFD) operations:
The Antidumping and Countervailing Duty Operations Unit is responsible for enforcing U.S. antidumping duty (AD) and countervailing duty (CVD) laws. AD/CVD Operations conducts investigations in response to petitions received by the Department from domestic industries and/or labor unions. AD/CVD Operations also conducts subsequent proceedings known as administrative reviews in which importers’ actual duty liability is assessed.
The Wall Street Journal reports on continued efforts to keep aluminum import costs high:
The Commerce Department in 2010 had punished China Zhongwang and other Chinese producers with tariffs as high as 374.15% after finding they were receiving illegal subsidies and dumping, or selling products in the U.S. below market prices.
Chinese firms receive subsidies from local, regional, and national governments in China. But so do many U.S. firms. General Motors and Chrysler were bankrupt in the financial crisis and bailed out by the U.S. government (along with various insurance and investment firms). U.S. aluminum production benefits from inexpensive electricity from federally-funded dams in the Pacific Northwest. State governments provide tens of millions in subsidies for new auto plants and other factories, plus spend millions on road and rail infrastructure to help these goods reach international markets.
You may not know Alcoa by name, but there’s probably at least one product with Alcoa aluminum in it somewhere in your home. As the world’s third largest producer of aluminum, Alcoa has an extensive history dating back to 1886 when it was first founded in Pittsburgh, Pennsylvania. The company has received $5.64 billion across 99 subsidies according to Find Good Jobs‘ report, which have helped the company go on to secure lucrative contracts for projects, like building jet engine parts.
As of the past few years, Alcoa has really been picking up steam. Production has increased at its numerous plants and stock prices have jumped as investors have taken notice. As the company continues to ramp things up, look for subsidy levels to remain high in coming years.
The federal government has spend billions on solar and wind power as well (though these subsidies, combined with renewable energy mandates, tend to raise energy prices and costs for U.S. firms and consumers). (This 2016 article disagrees, with study showing no statistical increase.)
Businesses and industries often turn to government both for subsidies for their operations and for trade restrictions hampering foreign competitors. Chinese firms lobby for subsidies and trade restrictions much as U.S. firms do.
Which firms receive the largest subsidies and the most effective/damaging trade restrictions, is a question for economists (and debaters) to research. But in all cases other manufacturing firms must deal with the challenge of higher prices and limited access to supplies needed for their operations. Firms in developed countries have integrated supply chains and Department of Commerce AD and CVD regulations throw wrenches in these supply chains.
The next Administration has the option reduce or remove disruptive and costly trade barriers, as well as to set up new ones.
Update: This November 14, 2016 Foreign Affairs article, “Will China Trump Trump? Antagonizing Beijing for Short-Term Gain,” provides useful overview of problems neo-mercantilist policies would cause with current US/China/Mexico supply chains:
Overall industrial output in the United States is at a historical high, while manufacturing employment is at a historical low. As it happened with agriculture more than a century ago, technological progress, which leads to productivity gains, is to be blamed for the dearth of blue-collar jobs in the United States. Globalization only reinforces the underlying dynamics. Moreover, in a world of global value chains, where production is sliced and diced across the world, several imports from China, such as auto parts, steel, semiconductors, and plastics, are actually intermediate goods or raw material for U.S. exporters, meaning that they contribute to the value of the final good.
Previous posts have reviewed arguments both for and against additional trade restrictions with China.
The Nov/Dec, 2016 Lincoln-Douglas Debate topic is controversial: “Resolved: The United States ought to limit qualified immunity for police officers.”
Lincoln-Douglas debaters should read widely on the police/citizen clashes over the last year, and consider values including, of course, justice and safety.
Police working in high-crime neighborhoods are under pressure and deal with many difficult situations. But life can be difficult and tense too for the people who live day-to-day in high-crime neighborhoods.
But just as most property crime and violence in high-crime neighborhoods is caused by a small minority of young men, most incidents of police misbehavior is caused by a small minority. (Link to 2015 Brooking Institution post.)
Shikha Dalmia in “How police unions actually hurt police officers,” (The Week, July 18, 2016) argues these “bad apples” are protected by union procedures designed for other purposes. Part of the challenge, Dalmia writes is lack of reported data on police/citizen incidents:
The Crime Control Act of 1994 asked the FBI to annually compile and publish data about the use of police force in all instances so that the country could keep track of trends of police violence, identify problematic precincts, or catch enforcement bias. But union representatives of law enforcement agencies successfully lobbied the feds to make reporting optional. So most departments now simply plead poverty and refuse to comply.
This is a huge problem. In the absence of good data, it is impossible to say definitively if racism is driving police abuse in black communities. And because it is impossible to identify the size and scope of this problem, it is impossible to craft and enact a solution to it — a solution, mind you, that would not only better serve and protect minority communities, but also keep police safer, too.
This is but one example of police unions going to eye-popping lengths to protect rogue cops at the expense of citizens (and the many decent cops who are tainted as well). Consider the binding arbitration that has become a standard feature of virtually all police contracts, which are often negotiated in secrecy. Binding arbitration allows cops to appeal any disciplinary action taken by their superiors to outside arbitrators such as retired judges. In theory, these folks are supposed to be neutral third parties. In reality, they are usually in the pockets of unions and dismiss or roll back a striking two-thirds of all actions, even against cops with a history of abuse and excessive violence. The upshot is that police chiefs are powerless to clean house, even as community complaints pile up. This is exactly what was happening in Baltimore when Freddie Gray died during his ride to the police station last year.
Students are encouraged to read the article for more on Dalmia’s argument on the role police unions play in protecting the minority of police involved in violent or aggressive incidents with the public that appear unjustified after review.
For more, see Conor Friedersdorf, “How Police Unions and Arbitrators Keep Abusive Cops on the Street,” in The Atlantic (December 2, 2014)
Police institutional procedures like binding arbitration clauses and procedures in union contracts should allow fair evaluation of complaints about violent incidents between police officers and the public.
And more directly on the LD topic, Evan Bernick, Assistant Director of the Center for Judicial Engagement at the Institute for Justice, has this May 6, 2015 article in The Freeman, “To Hold Police Accountable, Don’t Give Them Immunity,” drawn from his April, 2015 remarks to the US Commission on Civil Rights.
Critics of these reform proposal and the focus on police misconduct point to dramatically increasing violence in many inner-cities, and police pull back. (Murder Rates Rising Sharply in Many U.S. Cities (New York Times, August 31, 2015.) Murders have increased through 2016 in Chicago and other cities.
Economist Thomas Sowell draws from The War on Cops for his National Review article: “The Race War No One Can Win” (National Review, July 13, 2016)
Reason magazine’s critical review of the book: “There Is No War on Cops: A new book from a prominent right-wing commentator fails to make the case.”
And New York Times review article of “The Problem With Modern Policing, as Seen From the Right and From the Left” (June 27, 2016).
Economists Tyler Cowen & Noah Smith at Bloomberg are “Debating Free Trade and the Populist Backlash” (November 1, 2016 1:16 PM EDT).
For NSDA (and NCFCA) debaters, the benefits, costs, and pushback on U.S./China trade is at the center of economic and diplomatic relations with China. Alan Reynolds in the Wall Street Journal “What the China Trade Warriors Get Wrong” (Oct. 26, 2016 7:21 p.m. ET) says Trump advisor Peter Navarro is wrong in claiming the “U.S. and Europe in particular got the short end of that stick” after China joined the WTO in 2001:
… China joining the WTO had zero effect on U.S. tariffs against Chinese imports. But it did force China to cut weighted-average tariffs to 19.8% in 1996, down from 32.2% in 1992, according to World Bank estimates. They shrunk further to 14.6% in 2000 and 3.2% by 2014. Yet U.S. tariffs remained unchanged by China’s entry into WTO, staying between 2% and 3% on a weighted average.
Reynolds notes however, that joining the WTO did have a big short-term impact in China:
They found that China’s “aggressive restructuring led to the layoffs of 45 million workers between 1995 and 2002, including 36 million from the state sector.” If China’s entrance to the WTO was about “stealing jobs,” it certainly got off to a bad start. Even in the world’s most populous country, those tens of millions of lost jobs had a big effect.
Did U.S. imports surge after China joined the WTO? Reynolds quotes a recent front-page WSJ story: “Imports from China as a percentage of U.S. economic output doubled within four years of China joining the World Trade Organization in 2001. . . . By last year, imports from China equaled 2.7% of U.S. gross domestic product.” (How the China Shock, Deep and Swift, Spurred the Rise of Trump). But Reynolds says this is misleading and instead U.S. exports to China surged:
Those numbers might appear to suggest U.S. imports surged after 2001, but it was actually Chinese imports that exploded. China’s global imports jumped to 29.2% of GDP in 2005, according to the World Bank, up from 18.3% in 2001. Meantime, U.S. exports of goods to China quickly rose from $19.2 billion in 2001 to $69.7 billion in 2008, according to the Bureau of Economic Analysis. With services added, the U.S. exported $169.2 billion worth of goods and services to China by 2014.
U.S. imports were 15.5% of GDP in 2005 and the main shift was reduced imports from Japan as imports from China rose:
A decade later, U.S. imports were still 15.5% of GDP—the same as 2005. The fact that China’s share of U.S. imports was up and Japan’s down did not mean the U.S. was importing more.
Japan shifted manufacturing to mainland China, building factories and training Chinese workers. So more goods flowed to the U.S. from these factories as imports of goods decreased from Japan.
Since 1990, media and special interest fears of Asian imports shifted from Japanese factories to Chinese factories. Consider this 1990 New York Times story: “Japanese Still Fear Trade Tensions With U.S.” (April 28, 1990):
Indeed, although American exports to Japan have risen in recent years, American imports – particularly automobiles, consumer electronics and machinery – have risen twice as fast.
Japanese officials say they feel lingering bitterness at the way they had to negotiate with the United States under the threat of sanctions, a principal tool of the Super 301 clause.
Japan viewed the Super 301 action as coercive, unilateral and illegal. Mrs. Hills was understood to have been advised by many American negotiators not to use it again this year.
Back to the present, this New York Times and Seattle Times article looks at overall international trade: “A little-noticed fact about trade: It’s no longer rising” (Originally published October 30, 2016 at 3:47 pm Updated October 30, 2016 at 7:41 pm) Global trade is flat and:
The United States is no exception to the broader trend. The total value of U.S. imports and exports fell more than $200 billion last year. Through the first nine months of 2016, trade fell an additional $470 billion.
For all the complaints about “free trade” by U.S. and E.U. politicians and industry associations, many new trade barriers are being thrown up by U.S. and E.U. governments:
Meanwhile, new barriers are rising. Britain is leaving the European Union. The WTO said in July its members had put in place more than 2,100 new restrictions on trade since 2008.
One example is a new Iron Curtain lobbied for by U.S. steel manufacturers. See “U.S. Imposes 266% Duty on Some Chinese Steel Imports” (March 1, 2016 7:23 p.m. ET), and “U.S. Steel Tariffs Create a Double-Edged Sword” which notes:
New tariffs on imports are boosting steel prices in the U.S., offering a lifeline to beleaguered American steelmakers but raising costs for manufacturers of goods ranging from oil pipes to factory equipment to cars.
So how much of the global slowdown in trade is due to falling construction and commodity prices, and how much is due to new U.S. and E.U. trade restrictions?
Binyamin Appelbaum’s NYT/Seattle Times article also claims:
The benefits of globalization have accrued disproportionately to the wealthy, while the costs have fallen on displaced workers, and governments have failed to ease their pain.
Appelbaum claim certainly doesn’t apply to everyday people in China and other East Asian countries. According to the World Bank “benefits of globalization” (international trade and investment) shifted billions out of extreme poverty.
East Asia’s population grew from 1.821 billion in 1990 to 2.279 billion by 2015, yet the percentage of East Asians in extreme poverty (earning less than $1.9 a day) fell from 60.8% of the population in 1990 down to 4.1% by 2015.
Maybe he just wanted to focus instead on the hundreds of East Asian business leaders now billionaires, and the tens of thousands millionaires.
Inequality of income increased as economic and political entrepreneurs built tens of thousands of enterprises from small to large, and some to very, very large. We could research further the income gains Chinese workers enjoyed over the last 25 years vs. gains to Chinese and foreign company founders and stockholders. Still, everyday people saw stunning gains in income and living standards thanks to relatively open trade with the U.S., E.U., and the rest of the world.
East Asian gains are discussed here too: “In 1990, more than 60% of people in East Asia were in extreme poverty. Now only 3.5% are.” (Vox Oct 2, 2016, 4:00pm)
It’s hard to overstate how astonishing and rapid the decline in extreme poverty in the past couple of decades has been. In 1990, more than a third of people on Earth lived on less than $1.90 a day, adjusted for local prices (this is the line the World Bank uses as its main metric). By 2013, barely 10 percent of people did; the rate had been cut by more than two-thirds. That’s one of the biggest and fastest improvements in human well-being in the history of the planet.
Appelbaum is maybe thinking more about how globalization impacts low and middle income American:
During the 1990s, global trade grew more than twice as fast as the economy. Europe united. China became a factory town. Tariffs came down. Transportation costs plummeted. It was the Wal-Mart Era.
Wal-Mart is of course a store where millions of low and middle income Americans have purchased billions of dollars worth of clothes, gadgets, and other goods made by Chinese workers. Did buying these goods hurt or benefit American consumers? Did purchasing less expensive goods from China hurt American manufacturers, “hollowing out” America’s middle class? (An earlier post noted the 40% gain in U.S. manufacturing output since 2000, and research showing most job losses were from automation.)
Well, this is an overlong post already. But, in addition to the Cowen/Smith above, here are a additional responses to populist “Death by China” claims. Bryan Riley of the Heritage Foundation’s argues “Trade With China Is a Net Plus for Americans” (August 31, 2016). This Cato Institute Commentary “The Truth about Trade” (April 11, 2016) adds more support for the gains from trade.
For a more in-depth discussion, see Dartmouth economist Doug Irwin’s “The Truth About Trade:What Critics Get Wrong About the Global Economy” in the July/August issue of Foreign Affairs,
The most important point is that the US China Trade War is expanding and has now become a universal trade war. - Bill Perry, US/China Trade War
I’ve been reading Thucydides’ The History of the Peloponnesian War (431 B.C.E.) and researching the U.S./China debate topic. Thucydides mentions trade issues between Greek city-states, along with escalating passions following political and military disputes.
Graham Allison’s article “The Thucydides Trap: Are the U.S. and China Headed for War?” (The Atlantic, September 24, 2015) features an ominous subtitle: “In 12 of 16 past cases in which a rising power has confronted a ruling power, the result has been bloodshed.” Allison argues:
The defining question about global order for this generation is whether China and the United States can escape Thucydides’s Trap. The Greek historian’s metaphor reminds us of the attendant dangers when a rising power rivals a ruling power—as Athens challenged Sparta in ancient Greece, or as Germany did Britain a century ago. Most such contests have ended badly, often for both nations, a team of mine at the Harvard Belfer Center for Science and International Affairs has concluded after analyzing the historical record. In 12 of 16 cases over the past 500 years, the result was war. When the parties avoided war, it required huge, painful adjustments in attitudes and actions on the part not just of the challenger but also the challenged.
In “Thucydides’s trap has been sprung in the Pacific” (Financial Times, August 21, 2012), Graham Allison made a similar claim:
The defining question about global order in the decades ahead will be: can China and the US escape Thucydides’s trap? The historian’s metaphor reminds us of the dangers two parties face when a rising power rivals a ruling power – as Athens did in 5th century BC and Germany did at the end of the 19th century. Most such challenges have ended in war. Peaceful cases required huge adjustments in the attitudes and actions of the governments and the societies of both countries involved.
Classical Athens was the centre of civilisation. Philosophy, history, drama, architecture, democracy – all beyond anything previously imagined. This dramatic rise shocked Sparta, the established land power on the Peloponnese. Fear compelled its leaders to respond. Threat and counter-threat produced competition, then confrontation and finally conflict. At the end of 30 years of war, both states had been destroyed.
In “Superpower and Upstart: Sometimes It Ends Well,” (New York Times, January 22, 2011), David Sanger compares the U.K. to U.S. global power transition (peaceful) to the predicted U.S./ China power transition in the Pacific:
Just ask the British, who a century ago were struggling to come to terms with the erosion of their status as the world’s No. 1 empire. It didn’t help that they were being upstaged by a former colony that had turned into an upstart sea-power…
Or ask Thucydides… “What made war inevitable was the growth of Athenian power and the fear which this caused in Sparta.”…
Both Mr. Hu and President Obama seemed desperate to avoid what Graham Allison of Harvard University has labeled “the Thucydides Trap” – that deadly combination of calculation and emotion that, over the years, can turn healthy rivalry into antagonism or worse.
After discussing events surrounding Chinese President Hu Jintao’s meetings during a 2011 visit to the U.S., Sanger concludes:
Meanwhile, Thucydides might be appalled at the nationalistic talk that resounds in both countries. In Chinese newspapers these days, it’s hard to avoid accounts of “American decline.” Meanwhile, some new members of Congress talk lightly of cutting off Chinese access to the American market — as if that could happen in today’s global economy.
In both languages, that’s fear talking.
Mostly open markets, trade, and international investment explains why America’s rise to global economic power in the 19th Century helped rather than endangered UK and European companies, investors, or consumers. British and other European firms and investors earned profits from supplying capital for expanding U.S. railroads, manufacturing, nature resource extraction, and agriculture (for example, see this history of Balfour-Guthrie: “A British Firm on the American West Coast, 1869-1914* The Business History Review, Vol. 37, No. 4 (Winter, 1963), pp. 392-415)
Through the primaries and Presidential campaign, anti-China claims and threats seem everywhere. Yet the reality, as previous posts have noted, shows U.S. manufacturing is robust, with output expanding 40% over the last 20 years, the period of the North American Free Trade Agreement (NAFTA) and China joining the World Trade Organization (WTO). (See also: Globalization isn’t killing factory jobs. Trade is actually why manufacturing is up 40%)
Automation is the major reason the number of U.S. manufacturing jobs dropped over this period. And far from challenging the U.S., manufacturers and workers in China have been integrated into complex and cost-effective supply-chain networks, benefiting U.S., other Asian, and European manufacturers as well as consumers.
Still, not everyone benefits from rising global trade and investment. Some labor unions and domestic firms and industries have declined, and blame China. With the slow recovery since the 2008-2009 “great recession” some manufacturers and trade associations have pushed their governments for domestic subsidies and restrictions on imports.
For an overview of recent trade U.S./China trade disputes see Bill Perry’s “UNIVERSAL TRADE WAR, TPP IN LAME DUCK, SPOTTING POTENTIAL AD CASES, CUSTOMS, FALSE CLAIMS ACT, VITAMIN C ANTITRUST, IP AND 337″ (US/China Trade War, October 7, 2016), which spells out the downward spiral:
The most important point is that the US China Trade War is expanding and has now become a universal trade war. Although the US continues to bring numerous antidumping (AD) and countervailing duty (CVD) cases against China, the Chinese government is now bringing and will bring numerous AD and CVD cases against the US.
In the recent Chinese antidumping case against Distiller Grains from the US, the Chinese government has levied a 33% rate against $1.6 billion in US exports to China. There are rumors that the Chinese government may soon bring AD and CVD cases targeting $15 billion in US exports of soybeans to China.
Meanwhile numerous countries have adopted their own AD and CVD laws modeled on the US and EU and are bringing cases not only against China, but also against the US.
The only recent trade developments that would break the retaliation cycle are the Trans Pacific Partnership (TPP) and the TTIP deal with Europe and both trade agreements are in serious trouble.
Debaters should be familiar with arguments for increasing as well as reducing trade restrictions with China. Economist Don Boudreaux explains the case for more open trade in this April 20 2015 Mercatus Center post “The Benefits of Free Trade: Addressing Key Myths.”
Economist Peter Navarro (an advisor to Donald Trump), advocates increased trade barriers with China. See “Trump Economic Advisers Denounce Trade Deals in Theory, Practice,” (Bloomberg, August 3, 2016).
“Spend a few hours every week studying American history, human nature, and economic theory. Start with “Economics in One Lesson.” Then try Keynes. Then Hayek. Then Marx. Then Hegel. Develop a worldview that you can articulate as well as defend. Test your theory with people who disagree with you. Debate. Argue. Adjust your philosophy as necessary. Then, when the next election comes around, cast a vote for the candidate whose worldview seems most in line with your own.”
Henry Hazlitt’s Economics in One Lesson, long popular in high school debate classes, is online here from the Foundation for Economic Education.
Henry Hazlitt, probably this century’s greatest journalistic expositor of the economic way of thinking wrote: “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”
He went on to say that nine-tenths of the economic fallacies that work harm in the world today are the result of ignoring this lesson. While Hazlitt’s Lesson is not exactly a separate economic principle, it is a form of mental discipline that must be exercised when constructing or analyzing policy…. protective tariffs and quotas harm American consumers and workers… In each case the counter-intuitive result is found by consistent application of Hazlitt’s Lesson: look not just to the immediate effects on one group, but the long run effects on all groups.
So, lots for debaters to ponder. — Greg Rehmke, Debate Central
Chinese firms marketing goods and services in the United States focus on customers and the cities they live in, rather than Congress, the President, or the Department of Commerce.
Both Americans and foreign businesses benefit from known and predictable legal institutions protecting property rights and contracts. Both the Chinese and U.S. central governments disrupt and distort trade relations between U.S. and Chinese firms and consumers.
U.S. firms investing in and marketing goods and services in China work with provincial and cities leaders and with local businesses. If local government officials have a reputation for corruption or incompetence, international businesses invest instead in other regions with better governance.
Similarly, economic growth is strongest in those U.S. cities and states with less corrupt and heavy-handed government.
Though many politicians and pundits blame China for America’s slow recovery since the 2008-2009 “Great Recession,” Texas and other states with lower taxes and lighter regulation have flourished. It is the high-tax states where the recovery has been unusually slow.
Texas, Florida, and other states across the south have seen steady economic growth, seemingly unhampered by imports from China. (This April 29, 2015 Brookings Institution article and paper looks at recent research on the influence of tax policy and state-level economic growth.)
In “The Texas Miracle Isn’t All About Oil” (The Federalist, June 9, 2016), Vance Ginn writes:
Since the last national recession started in December 2007, Texas has created 36 percent of all civilian jobs added nationwide in a state with less than 10 percent of the country’s population.
Just as Dallas/Ft. Worth, Houston, Austin, and San Antonio lead the robust Texas economy (see “Fastest growing U.S. cities: Texas is king“), so in China it is dynamic major cities, not the central government, that are engaging the world economy.
In “China’s Key Cities: From Local Places to Global Players” (December 1, 2015), Xiangming Chen notes Shanghai (population estimate: 24 million!) is “the country’s financial and trade centre, largest port… and gateway to China’s huge domestic market.” Xiangming continues:
Besides Shanghai, a variety of other cities have become more important for China, and the world economy, for that matter. A number of these cities are well known for their significant historic and contemporary economic and cultural roles such as Guangzhou and Xi’an. Other cities have risen from unknown origins to prominent economic centres like Shenzhen.
In “Globalization Goes National,” (BloombergView, September 15, 2016) economist Tyler Cowen writes:
The Chinese economy has had a tendency to cluster around megacities, such as the Beijing-Tianjen-Hebei, Shanghai-Nanjing, or Guangzhou/Shenzhen/Hong Kong clusters. In the past, a Chinese port might have had better trade connections to Korea or California than to many parts of the Chinese interior. But these days the story in China is the rise and extension of national brands. The internet is bringing the whole country’s economy together through Alibaba, WeChat, and other services that ease the online purchase, shipping, and advertising of goods at the national level.
Cowen argues that as Chinese brands improve, Chinese consumers purchase more locally and this may register as a decrease in globalization:
The more economically integrated China becomes, the more it may retreat from some kinds of global trade. If a Chinese customer can buy a smartphone or pharmaceutical from the domestic market, she may stop looking for foreign imports. That will register statistically as a decline in globalization, but actually it is an increase in efficient economic integration. Some parts of the Chinese economy were prematurely hyper-globalized at the same time domestic economic integration lagged, and now that state of affairs is being remedied.
As people in China continue to prosper, demand for name-brand U.S. goods and services will also continue to grow. Americans might not think of McDonald’s or Pizza Hut as high-end dining, for hundreds of millions of Chinese just joining middle income levels, these American restaurants will long be popular.
By 2022, our research suggests, more than 75 percent of China’s urban consumers will earn 60,000 to 229,000 renminbi ($9,000 to $34,000) a year.
In purchasing-power-parity terms, that range is between the average income of Brazil and Italy. Just 4 percent of urban Chinese households were within it in 2000—but 68 percent were in 2012.
China’s middle class is already bigger than the U.S. middle class (“China has a bigger middle class than America,” (CNN Money, October 14, 2015)
Still, China has a long way to go, and is still both a developed and developing economy. “Here’s What China’s Middle Classes Really Earn — and Spend,” (Bloomberg, March 9, 2016), reports:
China’s average annual wage was 56,360 yuan ($8,655) in 2014, and Goldman Sachs estimates that 387 million rural workers — half the working population — earn about $2,000 a year.
The average Chinese consumer spends $7 a day, according to Goldman Sachs. Food and clothing make up nearly half of all personal spending, with 9.2 percent allocated to recreational activities like travel, dining out, sports and video games. The average American spends $97 a day, 17.3 percent of it on recreation.
Though U.S. politicians often blame Chinese firms for U.S. job losses and income stagnation, and paint China as an opponent of the U.S., Chinese consumers with fast-growing disposable income mean surging sales of international goods and services.
New trade barriers on Chinese goods would not only disrupt global supply chains key to U.S. manufacturing, but would also disrupt demand of U.S. goods and services in China.
Christopher Lingle’s article in the South China Post, “China must stop its destructive market interventions while it can,” (September 27 2016), highlights the damage caused by the Chinese government’s continuing interventions in renminbi exchange markets. Lingle says:
China’s authorities can promote the health of its own economy by abandoning an exchange-rate obsession over the value of the renminbi against the dollar and intervening less, not more. It turns out the primary villain in the tale is China’s dependence on export-led development that is the basis for continuing controls over exchange rates and capital flows.
Lingle disagrees with the claim that government interventions in industry, banking and exchange rates contribute to China’s economic development:
It turns out that China’s self-proclaimed “market socialism” is in fact a poisonous cocktail of neo-mercantilism (that is, export-led growth) and Keynesian stimulus policies. Alas, the resulting hangover is set to bring a painful end to the “Beijing consensus” as well as President Xi Jinping’s (習近平) “Chinese Dream”.
For a background on International Finance, floating exchange rates, and China’s currency manipulation, both Khan Academy and Marginal Revolution University offer a series of video lectures.
Khan Academy’s Review of China US Currency Situation is here.
Marginal Revolution University’s Chinese Currency Manipulation video is here.
MRU’s Tyler Cowen has a separate recent video, The Rise and Fall of the Chinese Economy, here. Text on page with video notes:
A turning point for the Chinese economy came in 2009. With the recession affecting many other countries, China’s government took steps to avoid the recession and keep the economy afloat, but at a cost. Debt skyrocketed during the period, which is proving less sustainable as China’s rate of growth declines.
Who cares whether the United States federal government substantially increases its economic and/or diplomatic engagement with the People’s Republic of China? Well, NSDA policy debaters do, or will, as they research and debate proposed policy reforms. But most people are less interested. People have limited time and lots to do, and realize time spent researching trade policy likely won’t be rewarded. Most people have little influence on public policy, and without reforms they will be stuck under whatever trade regulations are in the status quo
The people and organizations who do care enough to be active are those who benefit from current trade regulations, or expect to benefit from new regulations. So U.S. Furniture manufacturers lobby for and file “dumping” charges with the Commerce Department against Chinese furniture companies. U.S. shrimpers lobby to restrictions on frozen shrimp imported from China (and Chinese shrimp industry fights back). U.S. Steel companies care, and lobby to restrict steel imports from China (though higher steel prices raise costs for most U.S. manufacturers, whose products become competitive on world markets).
Jeff Henderson, president of the Aluminum Extruders Council cared enough to charter a plane to investigate transshipped aluminum stockpiles in Mexico (see September 9, 2016 front page WSJ story).
Union leadership lobbies for trade barriers they believe will protect union jobs here. Environmental groups concerned about CO2 emissions from China’s heavy use of coal in manufacturing look for ways to add a carbon-tax to imports from China.
Each trade barrier increases the prices U.S. consumers pay for imported goods. These price increases are rarely enough for most consumers to notice, much less spur them to protest. But the gains from protectionism to U.S. producers can be substantial, and through trade associations they invest millions of dollars to advocate new and protect existing trade restrictions.
The benefits of trade restrictions are concentrated to a handful of producers, but the costs are diffused across thousands of companies and consumers. (Over half of goods imported from China are in supply chains and integrated into U.S. manufactured goods, often for export. Raw and extruded steel and aluminum parts, for example.)
NSDA (and NCFCA) debaters will stand almost alone as motivated enough to research, sort through, and speak out on the various claims, regulations, trade agreements, and protectionist arguments.
Brink Lindsey’s Low-Hanging Fruit Guarded by Dragons: Reforming Regressive Regulation to Boost U.S. Economic Growth makes the case for first repealing “regressive regulations” in the U.S.
However, Lindsey’ Low-Hanging Fruit study focuses on domestic regulations rather than U.S./China engagement.
This October 2013 article in The Diplomat, American Protectionism Threatens US-China Trade looks at current “bilateral” U.S./China protectionist policies.
The United States and China have one of the largest trading relationships in the world, at over $550 billion per year. U.S. policymakers are right to cry foul when the Chinese government distorts that trade to protect domestic interests. Unfortunately, U.S. policymakers do the same thing and, in the process, harm the U.S.-China relationship.
One example is Washington’s continued use of so-called “non-market economy methodology” when deciding whether Chinese goods are being “dumped” into the U.S. market at unfairly low prices. The designation is a holdover from the Cold War that exists today only because its mystical formula enables U.S. officials to impose higher punitive tariffs to protect inefficient domestic industries.
The practice is actually illegal under World Trade Organization rules. But when China joined the organization in 2001, the United States insisted that an exception be created, allowing it to continue discriminating against Chinese imports for 15 years. Time has passed, and unless the United States government changes its practice by the end of 2016, it will be in flagrant violation of U.S. trade obligations.
A key inherency point for debaters looking at “non-market economy methodology”:
Unfortunately, the United States is almost certainly not going to comply. There is a shameful history of law-breaking by U.S. trade officials abusing the non-market economy methodology. Both U.S. law and international trade rules have been consistently stretched or outright ignored for decades, and there is little indication that this trend will change.
Commerce, enterprise and voluntary exchange help make the world a more peaceful and prosperous place. Trade and trade policy are at the center of economic theory and political economy. As consumers we benefit from exchange, from trade. As producers we benefit when people in other places purchase the goods and services we produce. But local producers don’t benefit at first from foreign producers offering competitive goods and services here.
Foreign competition can stimulate local producers to innovate and improve their offerings, drawing from better knowledge of local markets and opportunities. Background article by Alan Blinder on “Free Trade.”
On international trade policy, Douglas Irwin writes (from EconLib article A Brief History of International Trade Policy):
The theory of international trade and commercial policy is one of the oldest branches of economic thought. From the ancient Greeks to the present, government officials, intellectuals, and economists have pondered the determinants of trade between countries, have asked whether trade bring benefits or harms the nation, and, more importantly, have tried to determine what trade policy is best for any particular country.
On Amazon.com debaters can “Look Inside” Douglas Irwin’s 2015 book Free Trade Under Fire.
America’s founders tried to limit Congressional and Executive power to intervene in the economy. Modest tariffs on imported goods were for decades the federal government’s major source of revenue, along with land sales. America’s founders believed economic interventions would excite factions, that is, special interest groups who gain from economic legislation. Trade policy through American history has been just that. Domestic producers, from farmers to manufacturers, lobby each generation for new or continued restrictions on imported agricultural and manufactured goods.
An earlier Debate Central post, China Trade: Hollowing Out or Filling In the U.S. Economy? discussed this ongoing free trade /managed trade/protectionism debate over U.S. China policy, linking to various recent studies and articles.