China’s Economy to Reap Benefits That Once Flowed to U.S
bloomberg.com
bloomberg.com
Naively, globalism seems to benefit the ultra wealthy but this seems to be at the cost of the middle class.
Also: globalism seems to benefit the Chinese middle glass at the cost of the American.
The way the US is expected to enjoy this trade surplus (in a world where it is a net importer) is through lower prices for goods. The benefit the US gains from this reduction in prices etc. is meant to on the whole offset the loss in jobs, exports etc that might come from globalism. Whether this happens or not is clearly a moot point.
I believe the issue might be that while the US has enjoyed the surpluses of globalism, it has not redistributed that surplus well. In a tariff world, the need for redistribution is less - factory workers get the money directly in the form of a paycheck etc through their protected jobs. In a non-tariff world, these jobs no longer exist but the government would ideally now offset that loss through investments in education, infrastructure, new job opportunities etc.
Hope this answers why globalism is supposed to work and where it may not be working.
Take two choices, you can either buy a 15$ tshirt in your local country, or a 10$ tshirt from another country. At an individual level it makes sense to buy the cheaper one.
But from a country's perspective, those 15$ spent in the economy are earned by someone in the economy to be spent again. On the other hand, the 10$ sent overseas have no effect of money circulation. Saving those 5$ over a t-shirt might cost 20$ in GDP. The calculations need to be done regarding velocity of money, taxation rate, and savings. But I do think that not all money is equal. 10$ spent overseas and 5$ spent domestically is less favorable than 15$ spent domestically.
I think protectionism and tariffs cannot be cast as inherently failures, and are necessary to build an economy.
If you buy the foreign t-shirt there's $5 more floating around in the economy for you to spend. Plus you have a t-shirt. Plus the local country is likely to stop making t-shirts (which it manifestly is not competitive at) and put that money into something that it is competitive at i.e. away from something that is not productive and into something that is productive which is to say efficient which is better for everyone - even better for the environment as resources are not wasted by inefficiently making goods.
The onus is on the other side which claims that free trade is always beneficial, and any tariffs or protectionism is harmful.
Their analysis seems to work with the assumption that every participant in the economy practices free trade. That the effect of 10$ spent in USA is equal to 10$ in china, so that they don't have to take money circulation in their model.
I find that assumption very false. 10$ that go to your local country is largely spent as tax to the country, rent, food, and healthcare services in the local economy. If you send 10$ to China, they won't be spending it on American restaurants, housing, or healthcare. Clearly USA should have some preference to say 10.1$ being spent in USA vs 10$ in china.
It is fairly easy to see what I mean, and why "free trade is always good" is only true for the whole system, not individuals or groups of individuals (countries).
To some extent the dollar is a reserve currency; people are willing to use it in place of their own currency so in some sense it will never come back to the U.S. To the degree this happens it's the equivalent of people taking paper from the U.S. and giving goods in return - which is to say, it's hard to understand how the U.S. loses on that deal.
If you still want to consider only usd and USA and China trade. Then usd is not just for purchasing us stuff. It is also a reserve currency that china holds.
It wasn't a question of currency at all, any wealth/money sent in a different economy is a loss to the original economy. A sizable gain in efficiency can offset that, but not every gain in free trade is of the required size, which is why tariffs should be desirable.
> I think protectionism and tariffs cannot be cast as inherently failures, and are necessary to build an economy[...]
I agree. There's a lot of cases to be made for bootstrapping an economy with central planning, protectionism and tariffs, e.g. post-WWII South Korea is a frequently cited example.
But this isn't the form tariffs tend to take in 1st world economies. They tend to take the form of concentrated benefits and higher diffuse costs to protect already failing industries that we mostly wouldn't have anymore if it wasn't for the tariffs propping them up.
Note that with respect to globalism, it has also allowed a significant amount of companies to dodge both environmental and worker safety policies by moving to a country who considers the bulk of their population expendable.
Tariffs against imports from countries like that make a lot of sense because we already take that into account for domestic production (which drives the costs of those goods up); having free trade with countries that do this severely undermines the environmental (and human rights) protection that Western countries have successfully implemented over the last 50 years.
Couple that with the fact that when your country loses a critical mass of manufacturing capability the supply chain goes with it, and the fact that a government needs to provide the people who just plain aren't smart enough to benefit from higher education (which arguably comprises a significant fraction of people in Western universities today because they're stuck in jobs that don't make enough to pay down student loans, which means their degrees were worthless) with something to do or face significant instability later.
It also follows that tariffs are wealth-redistribution in disguise. Therefore Trump's actions benefit the working class, at the expense of the overall lesser economic efficiency, sort of the opposite of what you would expect from a republican president...
If tariffs really were the best way to help the working class at some expense to the wealthy and upper middle-class like most of us on this board, they would be worth it. But they're not.
"When it gets down to it — talking trade balances here — once we've brain-drained all our technology into other countries, once things have evened out, they're making cars in Bolivia and microwave ovens in Tadzhikistan and selling them here — once our edge in natural resources has been made irrelevant by giant Hong Kong ships and dirigibles that can ship North Dakota all the way to New Zealand for a nickel — once the Invisible Hand has taken away all those historical inequities and smeared them out into a broad global layer of what a Pakistani brickmaker would consider to be prosperity — y'know what? There's only four things we do better than anyone else: music movies microcode (software) high-speed pizza delivery”
They'll strap an inexpensive meal to the back of a motorcycle and deliver it wherever you are standing. Sometimes they'll return in an hour to pick up the real plates and silverware they left with you.
With the way they have industrialized pop music, and given the movie industry there, it is almost like Korea read Snow Crash and took it as a challenge.
How much is that motorcycle deliveryman making?
The primary effect of a tariff is a price increase. Price increases are rarely a great thing for the economy--businesses buy less stuff or build less stuff, and people lose jobs because of that.
The second effect is that you get retaliatory tariffs. I live in North Carolina--big pork and soybean country, with a lot of exporting to China. With Chinese tariffs, our farmers lose out on tons of sales to China. We've now reached a point where the government is taxing US citizens to pay farmers who can't sell goods to China, to avoid a political backlash. Its insanity.
Worse than insanity, it's basically bribery, so that the politician who caused this damage can try to avoid losing an election in two years.
How does this follow? A legitimate business that when left alone has no problem doing perfectly fine that becomes unsustainable after heavy handed attempts by politicians screw things up for them is fat that needs to be trimmed?
And that's just retaliatory tariffs. Let's look at the ones we've done to ourselves: Steel. So, now steel from China is a lot more expensive. Encourages domestic creation of steel, right? Cool. It's still more expensive. And that means a lot of businesses that actually make something with steel are starting to hurt. So, the businesses that actually build stuff instead of the businesses that dealt with a commodity are in danger of going under or laying off people. There's far more people already hurting from the steel tariffs in the US than the most possible that could benefit under the theoretical best case scenario for steel manufacturing in the US.
None of this makes any sense whatsoever.
There's a hidden assumption here: they're doing fine when doing business with China is cheap. That comes with a cost (especially when China is not willing to play fair w.r.t. IP law and gov intervention). I'm not worried about soybeans, I'm worried about the cost in terms of American jobs of keeping soybean farmers in business.
If curbing China's loose interpretation of intellection property rights was a goal, then withdrawing from the TPP makes zero sense, because a huge portion of the deal was limiting Chinese trade influence in the rest of Asia and providing a coalition to combat Chinese IP theft.
We passed up a strategy that had a good chance of resulting in a checkmate for one where we're sacrificing knights and bishops to take pawns. Or at this point, maybe we've enabled friendly fire for chess somehow and are now taking our own pawns. Like I said before: None of this makes sense. Actual economists are baffled.
Not true. Unemployment is low at the peak of the longest bull run in history, sure. The problem is wage growth is static, or even dropping: http://www.pewresearch.org/fact-tank/2018/08/07/for-most-us-...
https://www.sciencedirect.com/science/article/pii/S104900780...
When economists do the full analysis, the cost per job saved usually ends up being many multiples of the yearly salary:
http://www.aei.org/wp-content/uploads/2017/01/MFG-1.png
If you really want to understand the impact of tariffs, start by learning how to calculate "deadweight loss" and consumer and producer surpluses. There are a million YouTube videos on the subject, I think Kahn has one.
It's not something most people can grok in the time it takes to read a comment. Might take thirty minutes, or learning and thinking about it over the course of a week.
But it lead to a pretty profound eureka moment for me, I think it's worth understanding.
Americans got fat, dumb and happy which is what allowed this to happen. As a result to wealthy pillaged the country and handed it to foreign adversaries. Americans have seen their standard of living go down while some people in other countries see theirs go up.
Both parties in the US have been responsible for this because they are both for sale to the highest bidder. What is amazing about the discussion today is that for many, talking negatively about globalism is akin to a disrespecting the God of a deeply religious person.
Tariffs will impact average consumers harder than the wealthy by raising the costs of everyday goods.
Tariffs cause us to spend money sheltering uncompetitive companies. It’s not sustainable in the long term and distracts us from doing what we should be doing — making companies competitive and starting new companies in areas where we have comparative advantages.
This has all been done before and we know it didn’t work out.
All of these things are true even if China is breaking some free trade rules.
It's no coincidence that long term economic growth these past two centuries has occurred as countries gradually, slowly used tarrifs less and less. (yes, of course there was more to it than just that)
Tarrifs hurt all classes except the very wealthy who can purchase goods regardless of cost. For everyone else they raise the cost of living, reduce purchasing power, and thereby reduce the velocity of capital throughout the whole system.
Also there’s more than just economics at play. China has recently become a brutal, oppressive dictatorship. Xi is doing the opposite of what allowed China’s economy to growth at an incredible pace (the growth is thanks to Deng’s policies), but Xi looks like a genius due to recency bias. He will not look like such a genius in ten years.
I feel sorry for the Chinese people. They deserve better.
True free trade benefits the ultra wealthy and the middle class as well everyone else. Everyone has more buying power as the cost of goods and services are lower. Others make money by trading with new partners and markets.
Our free trade deals are not true free trade as they just establish new kinds of winners and losers through government control.
In fact, you don't need any kind of deal for free trade to work, just let people trade what they want to trade without restriction.
> Could somebody explain to me why trying to effect the US's stance as an economic leader using tariffs is a bad idea?
As the article mentions, this is what TPP was intended to do by strengthening non-chinese trading partners in Asian region.
IMO, tariffs to protect US economy are more like tariffs or other government rules that protect any other industry - they make the pain less in the moment, but ultimately weaken the subject of the protection as they are not forced to compete on merit. This leads to a more dramatic crash when competition finally comes.. there is analogy to this in theory of disruptive innovation in tech.
That benefits the ultra wealthy and large corporations the most. It also benefits the very poor to some extent, but that benefit is capped since as soon as wages start to rise even a little bit capital starts looking elsewhere.
It benefits China so much because China is effectively one mega-corporation. Its like Amazon, Wal-Mart, GE, Honda, etc. all vertically integrated with control of a sovereign currency.
People meanwhile are stuck subject to nations and local governments just like always.
There is also no global democracy or system of representation of any kind.
I think you are wrong that "globalism seems to benefit the ultra wealthy but this seems to be at the cost of the middle class." The key points that I think are wrong is that it's not just globalism but free markets and capitalism and also not just the middle class but everyone other than the upper classes.
I don't have a strong opinion about tariffs in general but they are a terrible tool for attempting to control a well established business. It tends to have a negative effect for all parties involved, at least in the short term and potentially long term as well.
Regarding the class dynamics, I think globalism would have been fine (in the US at least) if it hadn't also coincided with massive tax cuts on the wealthy. The US benefits from being the world reserve currency, having a strong legal and IP system, and massive military, which is what allows the concept behind globalism to potentially work. But most of those benefits accrue to big corporations and the wealthy. Coupled with a strong social safety net and investments in jobs programs and education, I think it could have worked. But the wealthy led an unprecedented effort to convince half the electorate that big government is bad and tax cuts were the solution. So instead of a wide spread prosperity, we have a system that is mostly benefiting the wealthy.
The history of using tariffs (taxes) to protect local industries is bad, but it would take decades of protectionist policies to make us realize exactly how badly we'd fucked up, and by then it would be far too late. The classic example here are soviet or developing nations using tariffs or import restrictions to protect local industries, often automobiles. The result is expensive and subpar products that become locally mocked & detested. Eventually the need for open trade will become too much, politically and economically, and when that happens the free market typically destroys the inferior local products.
Of course, none of this ever comes to a head if you decide that you will never trade with another country. Which ... good luck with that.
But this isn't a dichotomy, isn't it? The USA is big, we could have had Silicon Valley and Detroit at the same time.
> The result is expensive and subpar products that become locally mocked & detested
But we're still designing better products, we're just building them in China and in the process giving away a cut that used to go to American workers. I don't think this analogy fits.
While that may be true, something that's often overlooked is that US-based manufacturing can be cost-neutral within the domestic US market (prices rise, but wages rise enough to cover the former) but not globally (other countries have lower purchasing power, so if prices of American-designed product rise, non-US markets shrink)
That is exactly what comparative advantage implies. The US cannot be great at Silicon Valley and Detroit (well, the manufacturing bits) at once.
> But we're still designing better products, we're just building them in China and in the process giving away a cut that used to go to American workers. I don't think this analogy fits.
We are designing better products because of globalism. If we cut off free trade with the rest of the world (protectionism), either our designs or our manufacturing quality would stagnate compared to the rest of the world.
Why not? On another continent, Silicon Valley and Detroit would be in entirely different countries.
Labor arbitrage doesn't reflect a real comparative advantage.
What advanced economy will want to purchase Chinese aerospace or semiconductor products knowing all that we know regarding backdoors and their reputation for spying? Now of course, the US traffics in the same sorts of tactics but once China and the US are on level playing fields there will be other factors that determine whether or not you invest in China or the US: an alignment of political systems seems to me as an important factor.
As an analogy, as a renter I've furnished my apartment with Ikea almost exclusively: it's cheap, good enough, and I have no problem throwing it all away when I have to move. But once I settle down into a home, I'll want a product that is more stable, and has more built in quality to it. China is great for low to mid level manufacturing, but are you really going to trust the current regime for investment in mission critical systems?
Ain’t nobody gonna use the Yuan as a reserve currency when the rule of law there is so tenuous.
At least China is relatively stable and predictable. Which coincidentally are important qualities of a reserve currency.
Furthermore, most "tax havens" are hardly known for their strong goverments and legal systems. Quite the opposite. Not that it matters, since this discussion is really about the reserve currencies of nations.
Or however the quote goes. China is not the majority debt holder for any country that I know of, even though they might be substantial ones. I don't see this strategy working if they tried it.
IMO, looking like a good time to start buying US stocks if you have the cash via dollar cost averaging.
The only potential salvation here is China's debt. There is a possibility that China is sitting on a massive load of unmaintainable debt in their municipalities, with authoritarian regimes more capable of cooking the books on debt & growth than a democracy. They might flame out in the next decade, which would let the US retain its leadership.
Isn't the US sitting the same level? We raise the ceiling of what we feel is allowable debt every year or so to kick the can down the road?
Yes, the US has a ton of debt, and we definitely need to reduce our accumulation of it soon. No in that the US debt is out in the open, as is our growth numbers.
The important thing with debt is the growth rate in interest payments. Those can go up by changing rates, and by changing levels of debt. As long as your GDP out-grows your interest payments, there is no reason to stop. It's once your interest payments start outgrowing your economy (and thus your ability to tax & cover the payments) then you end up in a world of hurt.
With China, there are two distinct possibilities:
1. They're lying about their GDP growth.
2. They're lying about their debt.
They're been accused of 1 for a long time. There are some researchers using light emission to estimate GDP, who claim that China's GDP might be 25% lower than they claim [0]. Meanwhile they might have up to $5.8 trillion in debt tied up in their local government. This doubles the "official" debt level of the Chinese government, a massive level of fraud if true.
Combined, the Chinese debt to GDP ratio might be as high as 150%. This is alarmingly high, much much higher than the US has ever reached. Keep in mind that China currently is paying a higher interest rate on its federal debt too compared to the US.
[0] https://www.investors.com/politics/editorials/new-study-shin... [1] https://www.reuters.com/article/us-china-economy-debt/china-...
The municipal debt being referred to is estimated to be ~6 trillion.
Neither are particularly meaningful at current. The fear with the Chinese municipal debt is that it's being used to subsidize growth in a way that will flame out and cause their economy to slow. And both countries have more to lose trying to strong arm each other over the US debt than they stand to gain from using it as political leverage.