Tuesday , December 18 2018

Summers on China

Summary:
(Continues from my last post on China trade)Larry Summers has a good Financial Times oped on the same subject, titled "Washington may bluster but cannot stifle the Chinese economy."  He puts well the point of my previous post:At the heart of the US’s problem in defining an economic strategy towards China is the following awkward fact. Suppose ...

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(Continues from my last post on China trade)

Larry Summers has a good Financial Times oped on the same subject, titled "Washington may bluster but cannot stifle the Chinese economy."  He puts well the point of my previous post:
At the heart of the US’s problem in defining an economic strategy towards China is the following awkward fact. Suppose China had been fully compliant with every trade and investment rule and had been as open to the world as the most open countries at its income level. China might have grown faster because it reformed more rapidly or it might have grown more slowly because of reduced subsidies or more foreign competition. But it is highly unlikely that its growth rate would have been altered by as much as 1 percentage point.
Equally, while some US companies might earn more profits operating in China [IP sharing requirements] and some job displacement in American manufacturing due to Chinese state subsidies may have occurred, it cannot be argued seriously that unfair Chinese trade practices have affected US growth by even 0.1 per cent a year.
Larry gives more voice to China critiques than I do, which is excellent. One should listen to what people are saying, understand their objectives, and if one disagrees on outcomes -- tariffs -- usually it is because one believes a common objective has a preferable means of achievement. 

Yes, China misbehaves, to the annoyance mostly of producers in other countries and their mercantilist governments:
Few observers doubt that China needs to make significant changes in areas such as intellectual property, the rights of foreign investors and subsidies to state-owned companies if it is to meet international norms....When foreign governments get past their frustrations with the Trump administration, they acknowledge that they, too, are frustrated with Chinese commercial practices.
Yet it is also easy to sympathize with Chinese leaders who insist that China’s political system is for it to choose, and that economic negotiations should focus on the pragmatic identification of win-win opportunities, rather than on questions of ideology. 
As above, China's misbehavior mostly hurts China -- just as India's and Venezuela's poor economic policies (to choose middle of the road and bottom of the barrel examples) mostly hurt them, not us, facts which the US thereby mostly ignores. Why bother with China? Well, really, only because it's big. 
At the same time, it is hard to see how anyone with a modicum of historical knowledge could fail to be concerned by a combination of increased domestic repression, centralization of power in one man, rapidly increased military spending and rhetoric about enlarging China’s role in the world.
Yes, but again most of the world is like that. China is only a worry because it's big and still growing.

China is still a poor country. And, as long as China keeps its current economic system, it is doomed to middle income status.  But if you multiply even $20,000 per capita GDP (compared to US $60,000 per capita) -- a doubling of China -- by a billion capitas, you get a lot of GDP. That's a lot of total weight to throw around on the world stage.

Summers:
This is not to say that China is not a threat to the international order. It is a seismic event for the United States to be overtaken after a century as the world’s largest economy. If, as is plausible though far from certain, the United States loses its lead over the next decade in information technology, artificial intelligence and biotech, the trauma will be magnified.
On the latter, let us continue to remember the hysteria about Japan taking over circa 1990, and the USSR taking over circa 1935 until 1960. Large government directed industrial policy has never worked. (Perhaps unless the competitor (the US) squashed its own dynamism.) We have enough problems on the table today to worry about the vague future.

The former is the interesting question. What does the world look like with China middle income per capita but larger overall than the US?
Can the United States imagine a viable global economic system in 2050 in which its economy is half the size of the world’s largest? Could a political leader acknowledge that reality in a way that permits negotiation over what such a world would look like? While it might be unacceptable to the United States to be so greatly surpassed in economic scale, does it have the means to stop it? Can China be held down without inviting conflict?
These are hard questions without obvious answers. But that is no excuse for ignoring them and focusing only on short-run frustrations. China appears to be willing to accommodate the United States on specific trade issues as long as the United States accepts its right to flourish and grow, knowing that sheer weight of numbers will make it the clear world’s largest economy before long.
"Questions without obvious answers" is a very polite way of saying that trade warriors have not explained any answers to these questions either.

I have one. If you're worried about China growing in might, so that on total GDP it can afford more aircraft carriers than we have, even though each individual Chinese is poor; if you're worried that China's state-run system can surpass our mixed state and big company military development system in quality of its forces; if you're worried that China develops past ambitions to flex its' muscles in its backyard, a sort of Monroe doctrine; then there is only one answer: get US growth back on track and in a hurry. Let international competition spur us to greater things, not to a desire to keep the average Chinese person to $9,000 of GDP per capita and filthy air so we can continue to be the Big Guy in Town. Which tariffs cannot do, by the way, as Larry points out.

Let us remember that the EU has more total GDP than the US. And we want them to spend more on their military. Getting China to want to live like the EU seems like a much better long-term strategy  than stoking a cold-war III competition with China.

Summers
Trump, for all his failings, has China’s attention on economic issues in a way that eluded his predecessors. The question is whether he will be able to use his leverage to accomplish something important. That will depend on his ability to convince the Chinese that the United States is capable of taking yes for an answer, and on his willingness to go beyond small-bore commercialism. 
Earlier
A workable approach would involve feasible objectives clearly conveyed and supported by carrots and sticks, along with a willingness to define and accept success.
And:
We can hope, but we should not hold our breath. 
Indeed. And for good reason. A successful half-century geopolitical strategy is  unlikely to spring from the mind of one President or to be accomplished by his force of will alone.   
John H. Cochrane
In real life I'm a Senior Fellow of the Hoover Institution at Stanford. I was formerly a professor at the University of Chicago Booth School of Business. I'm also an adjunct scholar of the Cato Institute. I'm not really grumpy by the way!

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