China, Leverage, and Values
stratechery.com
stratechery.com
What are the aspects of the current economic relationship with China that are beneficial to the US, and what are the aspects that are harmful.
What policies should it adopt to manage its relationships with China while maintaining its values. Whether it should act unilaterally to achieve those objectives, or coordinate with its allies.
What are the near-term and long-term consequences of Cooperating with China vs. Competing with China in a new cold war, considering China's power will likely rise in comparison with the US's.
China is rocking hard because of the wake we're leaving.
Key drivers of the economy, like housing, exist in their present form to due explicit and implicit subsidy. I think China is more like the US then we care to admit, except they think on a longer timescale.
If you add in the GDP component of the financial and defense industries, you are looking at a massive overhead of markets managed by implicit or explicit government enforcement (or lack of it) for the benefit of a small elite. This is similar to China, but the Chinese have strategic vision for their economy; in the US it is managed by random allocation of lobbyist dollars.
This is not true.
To construe 'finance' a just some arguably unnecessary or inefficient 'overhead' in the economy belies a basic lack understanding of what that industry actually does.
It's often opaque to outsiders, but banking is a real value creating part of the economy, and it's also right at the foundation of it.
Also, 'defence spending' is a normal part of every economy, and it has existential impact for all of us.
Consider for a moment that US forces keep most international waterways open for everyone to use, even economic rivals, and even military rivals (!) so long as there's no war. The Suez Canal, Panama Canal, and other critical areas would instantly be under the control of nefarious regional forces if there were a power vacuum.
Now, the US has an overt policy of controlling what interest rate is charged.
So the banking system is a free market in the sense that theoretically participants could choose to leave if they wanted to. However, there is also a very overt layer of government decision making and control. The government putting a finger on the scale in a very fundamental way.
Exactly how that compares to China is difficult to judge - whatever it is, I argue it isn't very capitalistic. Capitalists are supposed to go broke when they lose money and given how low interest rates are they are more likely to refinance themselves with a new loan. The damage that has been doing to wealth creation since the GFC in around '08 is profound.
It is hard to say how much worse China's approach is. It isn't as clear cut as China's Government vs 10,000s of Capitalists - in which case I'd favour capitalism by the numbers. The US government is hamstringing the ability of its own economy to organise around profitable ventures. Instead it is encouraging Ubers and Lyfts.
You say this as if China were innocent in manipulating banks to control their banking system. This is not true. [1]
>The US government is hamstringing the ability of its own economy to organise around profitable ventures. Instead it is encouraging Ubers and Lyfts.
I disagree with this. I believe the Ubers and Lyfts (and Teslas) are caused by investors wanting to get in on the ground floor of the next Apple. To support your argument, please explain how the US Government is preventing its own economy to organize around profitable ventures. You may use citations.
1. https://www.cnbc.com/2019/02/22/china-banks-record-lending-s...
My gosh man, healthcare is going to be 1/3 of the world's economy in 30 years anyhow, as we all get a little older.
Insurance is a financial product which we have a hard time thinking about in tangible terms, but it's generally very value creating.
And so is education, often. FYI US exports about $25B a year in Education to foreign students.
A world where we buy endless cheap junk from China and ship cash out of the country to pay for it is far richer one for everyone[1] than one in which we need to make all the junk at our labor rates. Why? Because all that cash is coming right back into the country as investments.
It's like shopping at a store which decides the best use of their income is to lend it right back to you so you can buy more stuff.
[1] Especially the chinese, of course, who have lifted their nation out of abject poverty in barely over half a century. But we win here too relative to the isolationist scenario.
This does not automatically follow--and, in fact, I would argue against it.
GE had to "insource" their hot water heater manufacturing to continue to wring out cost savings--and discovered that they had forgotten how to design and build hot water heaters.
That is fairly strong evidence that keeping this stuff in China benefits China to the detriment of other countries.
I am okay for paying a not insignificant amount extra on my goods to keep the knowledge of how to make them in the domestic area.
To what products does this logic not apply? What do you consider "domestic"? This sounds like an argument against the whole idea of trade in the abstract[1].
The basis of the theory of trade, frankly the whole point of trading at all, is that some people can make or get stuff more cheaply than other people, and that by "trading" those items with people who need them for stuff we want we all win.
I mean, fine. If you don't believe macroeconomics, I guess I can't do anything to convince you. Just recognize that, well, you sound absolutely crazy. This is flat earth scale nuttery.
[1] It's not, of course. And the "domestic" is the giveaway. You don't like foreigners getting uppity, and you're willing to comparatively impoverish yourself to keep them down. I, for one, am horrified at the oppressive antics of the PRC but still think that the last few decades of growth are a good trade relative to the literal famine of the 60's.
If your base assumptions are wrong you can be very wrong in very consequential ways for a very long time. Economic specialisation as an inherently positive process is in fact a higly dubious propostion[0].
> The more specialised a country is, the higher its welfare will be, and specialisation via free trade will promote growth in all countries... It is a beautiful story. Unfortunately, disinterested empirical research by data scientists strongly suggests that it is in fact a fantasy: the wealthiest countries are not the most specialised economies, but the most diversified.
[0] https://www.researchgate.net/publication/318021429_Trade_and...
Again, this is textbook macroeconomics that no one seriously argues with. It's possible to make an argument for a specific externality about a specific product or market (trade in Europe vis a vis UK exit from the EU, or the example above which was, hilariously, home appliances), it's absolutely insane to try to generalize that to "we shouldn't trade for anything we can make ourselves".
That is a strawman against the argument and not brought forward in good faith. And macroeconomics does include the reality of countries using taxes to create a disincentive for consumption. Just like they do for domestic markets. There are a lot of these taxes in place from both sides.
Not saying the employment of taxes is generally a good idea. I wouldn't think they are with the intention to limit technology transfer, but there are certainly valid reasons.
I'll bite that bullet. I don't believe macroeconomics. Microeconomics is pretty solid; that's the part of the field that's actually grounded in reality. Macroeconomics is like SETI; in the absence of the ability to carry out much in the way of meaningful experiments, it's mostly people just taking what we emotionally want to believe, and garnishing it with equations until it tastes like science.
That's video game logic.
My alternative point was that an authoritarian yet peaceful government is less a threat to humanity than Mao's genocide-scale famine. The chinese are oppressed, the PRC is an unfair dealer on the world stage, yet this is still a preferable situation to watching literally a billion people starve. The PRC government can be simultaneously the larges geopolitical "threat" to the world community and the architected of the single greatest improvement in the human condition of the last century.
The world is complicated, and not easily reduced to buckets of good guys and bad guys.
This is rich. In modern times, how often has China intervened in the affairs of a foreign state? I am writing this from America btw.
Often. North Korea on a regular basis, Vietnam, their relations with Taiwan are a mess that needs books to cover, and their relationship with Russia over Russia's eastern border is, at best, unpleasant. I'm sure a little google-fu would reveal more. They're a world power. Interfering with other countries is part of that package.
Moralising is a habit of those who lack the strength and/or will to get what they desire through other means. The West dethroned its warriors and elevated its priests; China is dethroning its priests and raising up its warriors. Time will tell which class of leader shall overcome, but history is pretty clear about what kind of societies rise or fall.
> Moralising is a habit of those who lack the strength and/or will to get what they desire through other means.
America isn't a very good world citizen in 2019. I honestly wouldn't take issue with a different world power taking the lead if its ruling party weren't even worse. But rest assured, the people in charge of China right now are indeed worse. And my own country's problems don't change the atrocities that they commit.
Socialism is a deeply religious belief. It has its priests (professors, journalists, entertainers), its churches (campuses, museums, protests and benefit rallies as outdoor/big tent revival analog), its core beliefs predicated on faith that unite the fervent and ostracize the skeptical (diversity is always beneficial, climate change is the fault of the successful, racism is original sin, privilege creates winners and losers in spite of actual value, religions of the oppressed are blameless, etc.), and its intangible and perpetually just beyond The horizon utopia. In every important way, socialism is a religion. It has a general hate for "gods" which functions as a smoke screen for the incorporation of American Protestantism into its modern day Progressive skin suit.
You can see the energy of the faithful when technical questions are provided emotional responses, when differing opinions about generalities are met with personal assertions regarding psychological well being ('burn the hetetic' transmogrified into 'you need medical attention because you have (x)-pathy), and, always everpresent in Leftward arguments,appeals to authority that the one appealing doesn't recognize.
US-style “democratic socialism” isn't consistently, except perhaps from a cladistic viewpoint; a lot of it is substantively social democracy which is more of an ideological commitment to the modern mixed economy then an actual socialism.
> and socialism always finds a way to murder people and increase poverty in the name of equality.
I think (assuming you are arguing in good faith) you are falsely generalizing from Leninism and it's descendants with socialism. While at least cladistically a subset of socialism, Leninism and it's offshoots is a narrower and particular subset from which generalizations about the broader set cannot validly be drawn.
> Socialism is a deeply religious belief
No more or less than capitalism is.
>isn't consistently This is the beautiful thing about socialism. It need not be perfect, or even dominant. It just needs a foothold. From there, it is purely a game of time. Put another way, socialists wait for other viewpoints to come around to theirs (Christianity, Academe, Business) or disappear. They do not become Less Left.
>cladistic Ah. See you too are a person of depth. Yarvin's work on the neo-Protestant clade is exceptional but not for the faint of heart. I recommend Spandrell's Bioleninism piece.
>falsely generalizing A salient point. Where are the gulags of the social democrats? Where are the legions of thought police? Where are the desperate informers turning in their neighbors? I know this will be an ugly statement, but I believe the mass murder inclination of socialists is more than saitiated by rampant abortion. It fulfills the same methods and motivations of Holdomer and any other incident of mass death from Lenin or Stalin or Pot or Mao; the greater good. People often forget that the motivations behind the mass death perpetrated by these men and, more importantly, their regimes always had a logical source, for some definition of logic. Socialism doesn't cause mass murder; it justifies it. And to the socialist society, the justification is always good.
>socialist religiosity So what? Capitalism is faith in the selfishness of man. Socialism is faith in the rightness of good. Cargo Cults use the same parts of their brains for reasoning as Catholics. The question, for me, is not the How, but the What. More directly, To What End and For What Purpose. Objectively, the merit of capitalism vs. the merits of socialism a matter of historical record. Put another way, the same god concept that causes a genocide can also cause, quite literally, science. Equivocation has its value, but in the frame of your chosen context it is relatively valueless.
I point out the religiosity of socialism not to say it is singular, rather to demonstrate that it is typical.
Disagree. Capitalism is faith in the fairness of man. Each person in a capitalistic society has the same opportunity to take advantage of the free market and create their own wealth in a way that doesn't infringe upon the rights of the rest of the people in that society. These rights are guaranteed by the society, regardless of person.
Socialism (such as that in China) does not afford its citizens such equal rights. In fact, the Chinese government has very recently instituted controls which allow them to have a high degree of control over the rights a particular Chinese citizen can exercise. These rights are allowed, regarding person.
> In 2014, former CIA and NSA director Michael Hayden said in a public debate, “We kill people based on metadata.”
> According to multiple reports and leaks, death-by-metadata could be triggered, without even knowing the target’s name, if too many derogatory checks appear on their profile. “Armed military aged males” exhibiting suspicious behavior in the wrong place can become targets, as can someone “seen to be giving out orders.” Such mathematics-based assassinations have come to be known as “signature strikes.”
1. https://www.rollingstone.com/politics/politics-features/how-...
Right now the US administration is limiting the trade talk within trade talk, avoiding politics. However, if the trade talk really falls apart, I have no doubt the conflict will escalate and politics will be openly involved.
Sanctioning china for "values" is as absurd as china sanctioning the US for "values". How would everyone react to china sanctioning the US or Europe for invading much of the middle east and north africa. Everyone would laugh.
Also, sanctions are acts of war at best and war crimes at worst. Economic sanctions exist to starve and hurt the population to punish the government. By any objective measure, it is a war crime and crime against humanity. "Luckily", rules and laws don't apply those with the greatest weapons.
Also, I highly doubt most of china's people would side with the US against their own government. No more than we'd side with China over the US government. That's not how people work. Especially if foreign government are attacking your own government.
Either we go to war with them or we decide to live with them. China has 1.4 billion people. The idea that we'd pressure them to act a certain way is ludicrous. More than anything, it'd probably have the opposite effect.
Every week there's another article about a new way Chinese citizens are circumventing their government's censorship. Nobody likes being kept under heel. And I seriously doubt the concentration camps would have widespread support - most likely their existence is censored from the rest of the population altogether.
They wouldn't be siding against their own government, they'd be siding against the authoritarian communist party. They'd be choosing things they really want (economic growth) in exchange for the ending of actions they either don't care about or dislike. The CP is already in a precarious balance, trying to maintain strength without turning the general population against them. Some in China already wish it would bend to the sanctions. The above kind of deal would raise the pressure on the party, weakening the tumor sitting on top of a major new contributor to the world economy.
But I agree with you about nobody wanting to be kept under anyone's heel. Do you know any chinese history? Do you know whose heel's they think they've been under for 200 years? The west's heel. Nationalism and economic growth is how the chinese government maintains power and I don't see that changing anytime soon.
As for the "concentration camps", I'm guessing the support depends on how it is framed. If the chinese government frames it as punishing separatist terrorists, I'm betting it will have as much support as japanese internment had in the US.
Also, the authoritarian communist party is their government whether you like it or not. Considering the economic growth that china has experienced, I'm betting the party and the government has enormous support amongst the population. And in any confrontation with a foreign government, the people almost always rally around their government - authoritarian or not.
Finally, "some" in china might want their government to "bend to the sanctions", but I'm guessing the vast majority of chinese don't. Also, historically, governments tend to fall when they appear weak, especially in relation to a foreign power. Also, you are conveniently ignoring the fact that there are "some" in the US who think we should "bend to their sanctions".
If you think that chinese people are going to side with a foreign government against their own ( authoritarian or not ), then you really don't know history or human nature.
I don't know what you're talking about; the US is the least-censored country on earth. You can't even pull provable, inflammatory falsehoods off of Facebook without people crying censorship here (which is its own problem).
> there have been articles of china's demise for decades now
I'm not talking about its demise. Quite the opposite. I'm talking about its people being smarter and more worldly than they get credit for, despite president Xi's very best efforts to the contrary. It has academics who are regularly imprisoned for criticizing the government and advocating for personal liberty. Scores of people cheat around the latest propaganda app (https://www.nytimes.com/2019/04/07/world/asia/china-xi-jinpi...). People use GitHub, for lack of better options, to exercise some small amount of free speech (https://www.npr.org/2019/04/10/709490855/github-has-become-a...).
There's a will. Chinese people don't want this kind of country. Many of them have just given up fighting it. We could help.
> I'm betting it will have as much support as japanese internment had in the US
Japanese internment has been looked back upon as one of the greatest human rights transgressions the U.S. has ever committed. It wasn't at the time, of course, but that can't be helped. It's also beside the point. I'm not saying "America is good and China is bad". I'm only saying, Xi's ruling party is bad. America has done some bad things too. It's still doing some bad things, like what's happening at the southern border.
Maybe what you don't grasp is that Americans are free to criticize their own government. We can have our own sets of values. I have a pretty low view of my own country right now. That doesn't mean I can't also point out China's problems and America's opportunity to do something about them. Of course, I also have very little faith in my government to take that kind of opportunity right now.
Once again, you harp on censorship. I'm against it too. But what does that have to do with what we are talking about? I don't like censorship in the US but that doesn't mean I'm going to support the chinese government over the US government. For some strange reason, you seem to believe that just because people don't like their own government, they'll support foreign governments. That's not how life works. Every citizen in every country has gripes against their government, but that doesn't mean they would welcome foreign intervention in their own country.
And if the chinese people don't like their government then let them deal with it. Not sure who you are or what your agenda is that you think "we could help". Who are "we" that we have to interfere in other countries?
I'm american. I complain about the government, the establishment press and censorship all the time. What are you? You seem to claim to be american but want to "help" the chinese people overthrow their government. And for someone who claims to be american, you seem to claim to know how the chinese think and want. I suspect chinese people know what chinese people think and want. It's as strange as a chinese person saying they know what americans think and want. How would they know?
It seems to me that the rate of scientific progress has vastly outpaced that of the humanities (or, whatever is the appropriate "balancing" field to science) for so long that humans have become a danger to ourselves, for a very long time now, on several different fronts. We are simply not mature and responsible enough to be wielding this much power, yet here we are. And there's very little reason to feel very optimistic, that I see anyways.
My opinion is that there is no such field, that there never has been such a field, and that we are therefore screwed.
Apart from scientific progress, what has changed? Humans gonna human.
I'd never thought of this balancing of progress perspective, thanks for such a thought provoking comment!
For all the insane crap happening in the U.S., it has healthiest demography among all (large that is, not counting say Israel) developed countries.
Granted, it's better than in China, yes. But life expectancy is declining in the U.S. And France has a healthy demography and a stable population.
What I don't get, is what specifically will be achieved by doing this? How is the US coming out "on top"? I get that China has different values than the US, but I don't understand how restricting components fixes that.
I'm just speculating, but it could perhaps hurt the desirability of their advanced exports on the world market, and create space for other countries to fill the void. One of China's current political advantages is that it's the current "workshop of the world," and if that's reduced they may end up being less influential.
It's unlikely to affect the domestic political situation there, but that may be a lost cause for this generation.
That seems plausible, but also pretty speculative and it seems like there could be negative consequences too. For example, if the Chinese market switches over to Chinese chips, a lot more money will be invested in Chinese chips and they will probably develop more quickly. Normally the US complains about China blocking US products, the US blocking US products seems a bit less usual.
The article points out that there a problems with China, and points out that there is a policy available that will hurt US companies and Chinese companies. I feel like I am missing the part though, where this policy fixes the problems with China. I feel like I need to understand that part before I am convinced that this is a good idea.
Those negative consequences presume that the Chinese won't have the goal of switching over to domestic chips if they have access to American chips, but I think that's false. They've shown a strong desire to pursue import substitution and then turn those companies into international competitors. Denying the American supplies forces them to switch before they're ready, rather than when they're fully ready.
It's also not guaranteed that the Chinese investments will bear fruit. For instance, China has been trying to acquire modern jet engine technology for decades and decades, and still hasn't succeeded. IIRC, jet engines and microchips have a major characteristic in common: most of the magic is in the manufacturing techniques and those are difficult to reverse engineer from finished products.
The other scenario is that Trade War will lead to real war (possibly by proxy). The situation is quite similar to pre WWI with China being in a role of Imperial Germany with fast growing economy, teritorial demands and unstable ruler. That war could also stimulate the US economy.
These are pretty dim scenarios but surely someone in Washington is thinking in terms or real-politik. In Bejing they do.
Its all in the Art of the Deal. You should read it.
TLDR: They are negotiating points that Trump is using to advance the US position in the trade talks.
We can say the entire West started it during the Opium Wars, and China is merely trying to get back what it once had.
pretty much any projection, from consevative to optimistic implies that China will replace / supplement the United States on a 'several decades+' timeframe, so the aggressive stance taken by the US on a election cycle basis strikes me as unwise. At the end of the century Asia will be the center of the world.
This is one advantage that China always had over the US, politicians in the country are able to think in 40 instead of 4 year intervals. And given that broadened context, poking the bear now simply to delay their capabilities by a few years seems like not such a good idea.
China talks long-term, that's it. The USSR used to talk long-term in their propaganda too, it was a fraud. Watch their actions instead. There is a mountain of evidence that they aren't actually acting long-term. See: their taking on the greatest-fastest pile of debt in world history over the last 10-15 years. They did that to satisfy extremely short-term thinking about social instability. There can be no greater example of short-term thinking for such a system, than to trade extreme debt to fake faster growth for a bit longer, rather than plotting longer term in a financially healthy manner and accepting slower growth.
In terms of being unwise. The US doesn't need foreign countries, including on trade, nearly to the extent that China desperately needs foreign trade. When ranked globally, the US is among the least trade dependent major nations, and that provides an enormous bargaining position. China derives roughly 10x the growth impulse from each dollar of US economic growth, as compared to what the US derives from China.
It is in fact wise for the US to confront China right now, precisely because the US does not need China. There are dozens of countries that net can replace much of the manufacturing that China handles for the US today. China knows this, it's why they've responded very carefully to US tariffs, they recognize there is a vast imbalance.
China is in a precarious position today. They have all the debt of the US, with barely any social safety net (which will make their debt, tax and budget situation far worse), bad demographics, twin deficits (trade and budget), a smaller economy that is extremely rigid and one that is prone to frequent wrecks that must be constantly corrected by the central government with large stimulus programs. The system is clearly not working very well. There's zero proof thus far that Xi's new, highly regressive system will continue on the path of long-term economic expansion and success, now that Deng's system is formally dead. They may very well crash into a wall of stagnation under the new anti-Deng, anti-liberalization approach. It'll take many years yet to find out either way. I happen to not believe the new Xi system is compatible with furthering the success that the old system produced.
So to characterise a system as rigid that has shown the ability to absorb more shocks than just about any other political system on earth and still come out intact and relatively, if not highly functional is probably a huge mistake.
And it's true that all this thought control stuff and the Xi smartphone apps aren't serious long term politics, but they're also not really evidence for the opposite. Politically China has still a lot of old cadre who thinks they can brainwash the population with Soviet era propaganda, but in contrast to the USSR I'm not sure how seriously the leadership itself takes this or merely runs with it because it's the motions you go through in these authoritarian systems.
And concerning the last part about stagnation, how often have we heard this now? China is always five years away from being five years away of succumbing to its politics. It's almost an unfalsifiable belief at this point. You say that it'll take many years to find out, but is there a point in time at which you're open to change your outlook? The issue I have with this view is that it almost feels like the roles have reversed. People in liberal democracies want to exercise foreign pressure and maintain the system solely on belief in the system itself, rather than admit that we're in a phase of competition between political systems (which ironically was supposed to be the arena where liberalism wins on merits)
Edit: I got downvoted but what part of my statement about China incorrect?
It’s what Tesla has done.
Twitter, Google, YouTube, Github, The New York Times, Facebook, Instagram, Whatsapp, Bloomberg, Tumblr, Signal, Reddit, Netflix, Le Monde, Wikipedia, Reuters, Dropbox, Bing, Discord, etc., etc., etc.
Who started this trade war after all?
The US finally decided to bring a knife to a gun fight.
note that, not talking about Apple's data center partner or Microsoft's cloud partner, just talking about Apple/Microsoft's core business (iphone, mbp, windows, office etc) here.
If they're gaining an advantage that's one thing. I don't want to just take that assumption for granted though. If China is actually harming themselves, I think it might not make sense for the US to copy them because "they did it first".
This is how they gain advantage from that: they develop their own domestic services that their government has total control over. Eventually those services may become good enough to become competitive exports.
You're looking at the companies themselves but I think it's also worth considering the users too. If the rest of the world uses Github but China uses a Notgithub that otherwise couldn't compete, that's good for Notgithub but probably bad for the rest of the Chinese tech industry. Just like in Brazil's case, their computer tariffs are good for their domestic computer industry (if it exists), but bad for any other industry that uses computers.
It's certainly not obvious to me that protectionism is an overall win. Even if that were the case, the proposal is actually to block US components from China, so it seems like it should support any Chinese competitors for those components since they don't have to compete against Qualcomm etc anymore.
Of course. Back 15 years ago, no one was developing any serious systems in China, US companies obviously refused to take any real tech to China from day one, what they offer was just some local sales/support jobs, on top of that, you might see a few app dev jobs which are always kept arm's length distance from the know how. By developing all those Chinese domestic services, local developers got the chance to actually working on some state of the art techs.
Not blocked in China: Microsoft, Yahoo, Apple, Tesla, Nike, Adidas, Polo, Gucci, Coach, Channel, Armani, General Motors, Ford, BMW, Mercedes, etc., etc., etc.,
They are absolutely blocked (with the possible exception of Github).
> refuse to comply with Chinese censorship laws
And Huawei refuses to comply with US economic sanctions laws.
> Not blocked in China ...
The fact that some US companies do business in China is not evidence of anything.
It should be obvious that China denied access to their markets and severely restricted the operations of far more US companies than the US has of Chinese companies.
China's attempt to portray itself as a victim in a trade war is transparent bullshit.