China’s Industrial Policy vs. US Random Behavior…Firedoglake
Rdan
Firedoglake presents a well written piece on US and Chinese trade policy:
China’s Industrial Policy vs. US Random Behavior
The U.S. China Economic and Security Review Commission has issued its annual report {giant .pdf}. Robert Borosage of the Campaign for America’s Future hosted a conference call for the Co-Chair of the Commission, Carolyn Bartholomew, and Clyde Presotwitz of the Economic Strategy Institute, who was U.S. Trade Representative under Reagan. The call offered these experts an opportunity to talk about China’s industrial policy.
Prestowitz said something that focused the entire issue for me. He pointed out that labor is not a significant factor in chip manufacture. Why then are so many chip manufacturing facilities located in China? He says it’s because the Chinese wanted these as part of their industrial policy, so they seized the land, built the infrastructure, provided low-cost loans, granted energy and water subsidies, trained a work force, and gave the manufacturers tax breaks. Now they offer more subtle incentives, funding for research and development, refunds of the value added tax and space in industrial parks. As Prestowitz said, the plants are there for financial reasons.
This is Chinese policy. They want to grow their economy by attracting foreign capital and foreign technology. They intend to maintain state control over crucial industries.
China’s overall industrial policy … is characterized by three main parts: (1) the creation of an export-led and foreign investment-led manufacturing sector; (2) an emphasis on fostering the growth of industries such as high-technology products that add maximum value to the Chinese economy; and (3) the creation of jobs sufficient to reliably employ the Chinese workforce, thereby allowing the Chinese Communist Party to maintain control.
Many Chinese subsidies violate the requirements of the World Trade Organization, and the US has sought sanctions, but the Commission says that the WTO rules are meant to deal with narrow issues, not the broad national practices of China. The WTO rules require consultations as well as litigation, and even after a victory, they are able to delay. By the time the US and Canada won a WTO ruling barring favoritism in manufacture of auto parts, many manufacturers had moved production to China, so those jobs were lost.
Don’t think that we will be able to compete with our high tech products. China uses industrial policy to achieve technology transfer. Here’s an example from the call. China had not mastered several crucial issues in the manufacture of jet propulsion blades.
Several thoughts come to mind:
1. Appeals to the notion that command economies fail is not re-assuring at best and grossly misleading at worst. Since 1992 Chinese leaders took a different turn from our old notions of ‘command’ economies of cold-war stories.
2. China is wrenching a pre-industrial economy into the 21st century, at a speed that is breathtaking. The US is struggling with shedding 20th century notions of what we think we are…
3. There is no reason to think that ‘green shoots’ industries are assured in the US as a jobs policy. Such industry building is already occurring in China (and Germany).
4. We insist China re-direct its drive to a domestic consumer orientation, and talk about how the government deliberately keeps the economy as an export platform, but if many times more money is made currently exporting due to high prices for exports than if sold domestically, would you change direction in a hurry? Who is getting the bargain overall? Many Chinese businesses are still learning new standards.
5. Chinese leaders are taking a big gamble. And Chinese society is taking a big hit overall, with great disruption in people’s lives. The US is also experiencing great change…slower perhaps, but we haven’t really accepted the fact nor figured out that we have change to no matter what.
6. Some of the unease on right and left is due to some sort of view of this change. Is it along the lines we are used to, and/or simply myopic?
http://www.guardian.co.uk/commentisfree/2009/nov/23/us-government-tax-reform-crisis
Good analysis of our predicament. Things started to go off the rails with Bush’s crazy response to 9/11. I am sure Al-Qaida is laughing.
Back in the days when Krugman was till a real economist he wrote the following column:
http://media.ft.com/cms/b8268ffe-7572-11db-aea1-0000779e2340.pdf
The newly industrializing countries of Asia, like the Soviet Union of the 1950s, have achieved rapid growth in large part through an astonishing mobilization of resources. Once one accounts for the role of rapidly growing inputs in these countries’ growth, one finds little left to explain. Asian growth, like that of the Soviet Union in its high-growth era, seems to be driven by extraordinary growth in inputs like labor and capital rather than by gains in efficiency.(5)
Its clear that China fell behind because they self destructed and now they are catching up by deploying resources that they previously wasted. There is no brilliant pick the winners industrial policy behind their growth, rather their success in allowing resources to be used to their potential.
While in our country we are playing with bottling up ours with new industrial regulation.
http://media.ft.com/cms/b8268ffe-7572-11db-aea1-0000779e2340.pdf
The newly industrializing countries of Asia, like the Soviet Union of the 1950s, have achieved rapid growth in large part through an astonishing mobilization of resources. Once one accounts for the role of rapidly growing inputs in these countries’ growth, one finds little left to explain. Asian growth, like that of the Soviet Union in its high-growth era, seems to be driven by extraordinary growth in inputs like labor and capital rather than by gains in efficiency.(5)
China’s growth is not from any brilliant pick the winners industrial policy but rather finally it’s because they have stopped self destructing and are deploying their resources the way they should have been doing all along. And in our country we are playing with bottling up our productive capacity with new regulation so we can be more like old China. 9/11? No, it started when the democrats took control at the end of the Bush administration.
More to the point, is that the change in China’s approach from Mao’s vision is that it incorporates some market strategies, but is still a ‘command’ economy to many in the US. Compared to us it is. We began to give away the store by thinking wages and salaries was the key to bargains, forgetting that wages were becoming (much earlier than Bush and Obama), less of the percentage of ‘overhead’.
We pulled the rug out from under Mexico in our rush to China. While a lower US standard of living is happening overall, it is sad to see our inability the question the wisdom of rewaRrding the 272 VP’s at Goldman so to speak, and an inability to keep tabs on the bottom levels of our own people as we lower their standards of living as well through our policies…how else does one influence multi-nationals?
Obama, of course, did not cause any of this to happen. Nor government actually. Multi-national companies made the choices and the Chinese took advantage, as it turns out, of a tactic thought to be ultimately smart by private companiees. It still might smart, but appears to be not so smart for wage and salary earners, nor shareholders, for the likes of Goldman for example.
Well if only we could get Palin to run with Glenn Beck in 2012 we could get things straightened out very quickly. Or if not Beck then Lou Dobbs. Either would be just wonderful.
Speaking of Lou Dobbs, he was on the Jon Stewart show recently. Boy did he make Stewart look like a fool. Dobbs is a really smart guy and 100% right about immigrants. We need to kick them all out. As soon as we can.
Fear not! The Chinese keep giving us our money back in exchange for treasuries. Unfortunately we do not use our money to enhance our economic situation.
The next step will be for the Chinese to “modernize” their finances in a cosmopolitan manner by eliminating capital controls and finally floating their currency. That will be necessary in order for the Chinese to finance continued growth at a fast enough pace to employ all those people constantly demanding work.
When that inevitably happens, the hyennas, sharks, and vultures of international finance will arrive for lunch, culminating in an inevitable “Asian Crisis” like all the other financial “crises” in developing countries that succumb to the blandishments of financiers.
Sounds vaguely familiar. Think post-War Japan and later Japan bashing. There are differences, but the main similarities that I see are an export driven economy and a close partnership between business and government.
“No, it started when the democrats took control at the end of the Bush administration.”
This has been going on for a while. It didn’t start with Bush or Obama.
Min’s likely got it right. There aren’t really many folks with a left-or-right perspective on China; there are a relative handful of Americans who think of China — probably a bit too hopefully — as a coming economic superpower and a big big majoritiy that thinks of China as a sprawling 1950-ish agrarian state doomed to longer in that position forever. Broad public arguments about US policy towards China, given such mindsets, are a total waste of time. Give this 20 or 30 years and let the facts emerge and folks will reconcile themselves to reality.
***This has been going on for a while. It didn’t start with Bush or Obama. *** Abdul
You’re right of course. Pay no attention to Cantab. He finds reality inconvenient so he reinvents it and creates histories that have no basis in actual events. It entertains him … and I think it is harmless … probably.
Regardless of whether China is breaking WTO rules, regardless of whether China is imposing costs on us or on its own people through its developement policies, China is big and focused on gaining in economic and political power, and we can only change China’s behavior is small ways.
By the way, China is also woefully underdeveloped, even now. The example of computer chips is an example of adopting already available technology. There is good reason to expect underdeveloped countries to catch up when they put policies in place aimed at doing so. Buying technology off the shelf is a pretty easy trick.
We have far more ability to change our own behavior than to change China’s, so the reasonable thing to do, having seen that a determined national policy can accomplish, is to decide what we want to accomplish and get to it.
Except that, we are already rich, so growing richer to the exclusion of all else seems a pretty poor goal. We are in the middle of an effort to improve the lives of millions of US citizens by making health care more available, but that effort has run into ferocious opposition. We have reduced pollution by large amounts, but the technology is there to do more, and we are large and rich, so we still pollute a lot. But that effort has run into ferocious opposition. We have a tradition of extending increasing liberty to our citizens, enfanchizing disenfranchized groups, but that effort has run into ferocious opposition.
China’s sudden development is possible because of China’s underdeveloped status, but also because China has a clear set of goals. We do not. I don’t expect that we will be able to develop a clear set of goals, either. We are too well off to want our fellow citizens to lead better lives.
The success of the Asian economies, Japan, Korea, singapore, etc., have demonstraed that government policy, by adopting technology from advanced countries, can change a countries comparative advantage is something that many economist clearly recognize. But the “freshwater” school and much of public policy seems to ignore this lesson from the last 50 years of the Asian economies.
Just think of what we now import from Asia that we once thought we had a comparative advantage in.
I notice that “increasing regulations and mandates on business” aren’t on the list of “Command Economy” things that China was doing. There is more then one way to skin a cat. Who says the U.S. isn’t becoming more of a “Command Economy” as well just through regulation instead of investment planning. In a world full of command economies, some will surely do better then others.
Look up command economy steve. It is not just a play on words.
Kharris has the right of it concerning goals for our own citizens and how to smooth transitions. There probably is little we can do as a nation to change much in China, but we can look to our own future.
Min and mike:
Given such mindsets, to not look carefully at our responses to the reality of China, and the priorities of multinational companies which is not about free trade as some leaders would have us believe, makes for a bumpier ride than necessary.
Our mindsets in public
Min,
I am not bashing China however. I am asking us to consider some way of talking about trade policy. Ch
Well if we got Palin in and some people as smart as she is, we could face down the Chinese in no time. They’d cave in in a jiffy. She could finish what MacArthur wasn’t able to do, because Truman wouldn’t let him.
Rdan,
Thanks for posting this piece. There has been good news coverage since the report was released, but the other major econ blogs blew it off. I’ve only found one major econ post and it wasn’t impressive. The econ blogs are doing a lousy job of covering international trade and China in particular.
There is much to be learned from this report. I doubt, though, that many AB or other econ blog readers will read this report or the supplement reports contracted for this latest effort by the Commission.
The growing lack of interest and analyses by econ blogs regarding international trade is a concern. Sound bites whether in comments or main posts are a poor substitute for understanding what reports like this actually state. This report and the accompanying supplemental reports provide enough material for 10-15 main posts.
Masaccio, the author of the piece, is an attorney with considerable experience in the financial industry. He is an avid reader and, thankfully, he took the time to do this piece.
U.S. – China Trade Numbers Bottom Line
2009 Report to Congress
U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION
http://www.uscc.gov/annual_report/2009/09_annual_report.php
Report page 21
U.S.-China Trade in Goods ($ billion), 2000–2008
Year Imports Exports Balance
2000 $100.0 $16.3 -$83.7
2001 $102.3 $19.2 -$83.1
2002 $125.2 $22.1 -$103.1
2003 $152.4 $28.4 -$124.1
2004 $196.7 $34.7 -$162.1
2005 $243.5 $41.8 -$201.6
2006 $287.8 $55.2 -$232.5
2007 $321.5 $65.2 -$256.3
2008 $337.8 $69.7 -$268.0
—–
Report page 76
China’s Growing Share of the Overall U.S. Trade Deficit
2000 to May 2009 (non-oil goods)
Year Share
2000 26%
2001 27%
2002 28%
2003 31%
2004 35%
2005 40%
2006 45%
2007 54%
2008 69%
2009 83% (YTD May 2009)
.
The following research paper is among the supporting papers prepared for the Commission in support of the final 2009 government report.
There are many excellent statistics provided in this paper. I recommend its usage when challenging or refuting the standard downplay efforts one encounters when discussing trade with China. A number of excellent blog posts could be prepared using the charts and information in this report. The author of this paper lays it on the line. The paper is a heavy hitter.
China’s Soaring Commercial and Financial Power:
How it is Affecting the U.S. and the World
By Charles W. McMillion
MBG Information Services
Washington, DC
June 2009
http://www.uscc.gov/researchpapers/2009/MBG%20Info%20Svs%20US-China%20Trade%20Report%20–%20FINAL%20June%202009.pdf
Other papers can be found here:
Research Papers
U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION
http://www.uscc.gov/researchpapers/comm_research_archive.php
and
http://www.uscc.gov/researchpapers/papers.php
.
kharris: “Except that, we are already rich, so growing richer to the exclusion of all else seems a pretty poor goal.”
Well worth repeating. 🙂
Rdan: “Min and mike:
Given such mindsets, to not look carefully at our responses to the reality of China, and the priorities of multinational companies which is not about free trade as some leaders would have us believe, makes for a bumpier ride than necessary.”
What mindset is that, rdan? 😉
Multinationals are for neither free trade nor free markets, and neither are China and Japan.
You are boring.
” Broad public arguments about US policy towards China, given such mindsets, are a total waste of time. ” mike
“Multinationals are for neither free trade nor free markets, and neither are China and Japan.” Min
Let’s start there…how does the argument run, that free trade is the key to US success. Who is selling this idea, and why?
I forget to sign out sometimes, but the star comes in handy if I speak as moderator.
Worth the read and at least synopsis. Why do econblogs not discuss trade more??
You are vacuous
Spencer:
Was it direct labor cost for chip manufacture or was it other things that gave China the comparative advantage? I suspect it was other things as opposed to the cost of Direct Labor in the chip production.
***The success of the Asian economies …***
Exactly. It would be very useful if we better understood which kinds of government policies work and which don’t. The East Asians and National Socialist Germany (e.g innumerable weapons systems, the VW Beetle) seem to have a great deal of success at using industrial policy to cause their economies to produce excellent products at competetitve prices. The communist governents of the USSR and the European Soviet satellites seem to have failed pretty much universally at the same thing. No one seems to know why.
Frankly, I don’t think the freshwater economists could find their way anywhere even if the path were painted in day-glow green paint. The saltwater economists are better, but they really don’t have much in the way of useful answers in the area of industrial policy.
By the way, China is also woefully underdeveloped, even now. The example of computer chips is an example of adopting already available technology. There is good reason to expect underdeveloped countries to catch up when they put policies in place aimed at doing so. Buying technology off the shelf is a pretty easy trick.’
xactly – but, as use of relatively less labor intensive technologies, is double edged within a context of massive labor surplus.
Rdan,
Excellent question. One good read of this report and some of the supporting papers would open a few eyes.
It appears that some would prefer to remain asleep at the wheel. I suppose when individuals have supported something that turned into a monster, they might not want to face the reality of it. Even while it eats them alive.
The problem doesn’t go away because one pretends it doesn’t exist.
This is tangential, but there is one disturbing point that is rarely mentioned wrt to China.
Conventional wisdom is that the Chinese have a problem. They can continue to loan money to the US and US consumers then loose much of the value of those loans when the dollar/yuan exchange rate eventually adjusts to reality. Or they can try to unload their dollar holdings while the dollar has decent purchasing power and thus trigger the defacto revaluation of their currency.
But they have another option. Seems to me that they can, if they choose, use their dollar assets to go on a shopping spree in the US buying up US real estate and companies. I suspect, if done on any substantial scale, this would be a humiliating and unpleasant experience for Americans. Whether it would actually teach Americans any long term lessons about the virtues of savings vs borrowing is doubtful.
The issue in my opinion is us adding new unprecedented regulation on business and government control and even government going into and displacing private industries. This is new. Bush #43 never did this, Clinton promised the age of big government was over, Reagan and Bush #41 promoted the private sector, and even Jimmy Carter was into deregulation in industries such as interstate trucking and airlines. To find an administration willing to impose the government into the private sector as much as Obama you have to go back to Nixon. Oh yeah, next tuesday Obama will introduce his Afghanistaniization plan. To bad Nixon is no longer her to kick around his protege.
Aside: VtCodger, being a cantab critic is no way to go through life.
The issue in my opinion is us adding new unprecedented regulation on business and government control and even government going into and displacing private industries. This is new. Bush #43 never did this, Clinton promised the age of big government was over, Reagan and Bush #41 promoted the private sector, and even Jimmy Carter was into deregulation in industries such as interstate trucking and airlines. To find an administration willing to impose the government into the private sector as much as Obama you have to go back to Nixon. Oh yeah, next tuesday Obama will introduce his Afghanistaniization plan. To bad Nixon is no longer her to kick around his protege.
Aside: VtCodger, being a cantab critic is no way to go through life.
Sure, my mother has called me worse, but you are boring because anyone who has read three of your comments can write your posts for you. That is, and do not be offended, you do not add any value to the general ideological position you espouse. It is a position in the intellectual division of labour I suppose but it reads like, and again do not take offence, a recantation of the official dogma from a centralized propaganda organ. Have you ever thought that maybe your markets vs state dichotomy is limited, that it misses something essential. Does not the past 10 years tell you that something more than putative markets vs states is going on? Any inclination on your part that all you have is 5 lb sledge hammer to set finishing nails?
VtCodger,
It is not that easy. The CFIUS committee review and approval comes into play. China only had three authorized purchases in 2008. That’s out of a total of 313 foreign major purchases approved by CFIUS in 2008.
A more viable option would be to set up sub plants in the U.S. and establish retail operations once they gain more experience in global product marketing. That appears to be underway on some green industry projects, notably those receiving U.S. stimulus monies through DOE awards.
http://www.treas.gov/offices/international-affairs/cfius/
http://www.treas.gov/offices/international-affairs/cfius/docs/CFIUS-Annual-Rpt-2008.pdf
VtCodger,
Here’s an example of what I mentioned regarding the green industry.
China Builds High Wall to Guard Energy Industry
July 13, 2009
http://www.nytimes.com/2009/07/14/business/energy-environment/14energy.html?_r=2
Overseas firms collecting most green energy money [84% of U.S. green stimulus]
October 29th, 2009
http://investigativereportingworkshop.org/investigations/wind-energy-funds-going-overseas/story/overseas-firms-collecting-most-green-energy-money/
Chinese Involvement in Proposed Texas Wind Farm Stirs Passions
November 1, 2009
http://www.nytimes.com/2009/11/02/business/energy-environment/02iht-green02.html
Schumer Seeks to Block Stimulus Money for Chinese-Backed Texas Wind Farm
November 5, 2009
http://greeninc.blogs.nytimes.com/2009/11/05/schumer-seeks-to-block-stimulus-funds-for-chinese-backed-texas-wind-farm/
Hell No! We Won’t Send Our Tax Dollars to China
November 9, 2009
http://www.ourfuture.org/blog-entry/2009114609/hell-no-we-wont-send-our-tax-dollars-china
Hell if D.C. Didn’t Offshore $849 Million in Stimulus for Windmills Already
November 19, 2009
http://www.ourfuture.org/blog-entry/2009114719/hell-if-dc-didnt-offshore-849-million-stimulus-windmills-already
Why won’t U.S. corporations invest in U.S. workers? (wind and solar sector)
November 24, 2009
http://www.southernstudies.org/2009/11/blown-away-why-wont-us-corporations-invest-in-us-workers.html
.
Right you are, Cantab. If Cheney and Bush were still around they’d settle China’s insolence in a jiffy. A nice little war might be a good thing. Show ’em who’s boss. There are many things we could do but Obama is too supine to do them. Raise our tarrifs so China can’t export to us and they’d cave in in a matter of months.
Travis,
Would you like to provide a criticism of Paul Krugman’s 1994 Foreign Affairs article that I linked to? I tend to agree with alot of what he said in the column. It seems to me you should have read it before making your post. Do you know this article already, and if not I don’t see how you could have wrote my post. Ths gist of the article is to show that previously under-developed countries can have rapid growth as they deploy inputs that they have at their disposal but previously squandered. This is the case with China. The column was to the point.
Bye the way, I must be losing my touch if it took you three posts to come to the conclusion that following Brook’s dichotomy I favor vitality over security and that most from the “Slightly left of center” opt for more security over vitality.
http://www.nytimes.com/2009/11/24/opinion/24brooks.html
Just a quick look around, in order to assess whether there may be some confirmation bias at work, uncovers that over the past couple of months, these economic blogs carried at least this many posts on international trade or international economic policy:
Economist View – 4
Krugman – 5
DeLong – 3
Setzer – nearly to the exlusion of anything else
Roubini – constantly
Kwak, et al – none I could see
And, if you take a gander at the foot of the Firedoglake piece, you’ll see a list of earlier posts on China. Now, FDL may well have a bunch of other posts on other countries – I didn’t wanna work that hard. My initial impression is that trade is often discussed, often in a strident way, repeating the same old stuff, but still often. Rather than there being a shortage of blog interest in trade, I think the evidence shows that some do and some don’t, but those who do cover trade do so fairly regularly.
I see being cute gets you points in some circles. Eww 1994 Krugman wherein we learn that the conversion of peasants to prols gets you boost on the GDP scale. Who would ever thought about that before Krugman? Uh I dunno who could it be? Christ it is like I need a lobotomy and a vacation down the memory hole to find you informative. But none of 1994 Krugman is the question. It is all just a deflection. I get it…states are bad markets are good. In your world markets = liberty and democracy = tyranny.
And for the record I am not slightly but definitely on the left of centre. So you will find your security vs vitality aesthetic (futurism) a mere presentation of two sides of the same coin. In fact your reference to security and vitality suggests a historical comprise that has already come to pass: fascism.
Last thing you wanted hey?
I see being cute gets you points in some circles. Eww 1994 Krugman wherein we learn that the conversion of peasants to prols gets you boost on the GDP scale. Who would ever thought about that before Krugman?
Apparently a billion chinese never thought of it before, else they would not have been so screwed up 25 years ago. You can add India in as a bonus. Left leaning small mindedness is the bane of the underdeveloped world.
Cantab, do not be so cheap. As you well know and by your own ontological starting point a billion Chinese never thought anything together. How could they? This puzzle should be of some interest to you: how is it that China pushed policies which involved a billion people? Which actor could be responsible for this? What is the nation state? When was it invented and why? Be specific in your answers and refer to history and sociology when doing so…Alas you can not. Why? Because for you there is just the market and the mysterious history and origin of the state. You talk as though the state is a left conspiracy. You do know it (the state) precedes the left don’t you?
I do not lean left, I stand left. The historical state is not my friend but for very different reasons from yourself.
The bane of the underdeveloped world is that having followed the ideology of states and markets they are still underdeveloped.
So agreed in that sense you are equally as boring to your left leaning counterparts.