Wednesday, August 18, 2010

Is China the New "Predator"?

From about 1980 until the mid-1990s, Japan was the Great Peril to the United States, at least from what the politicians, the unions, and their supporters were telling us. Today, the Great Bogeyman is China which, according to Paul Krugman, is engaging in "predatory trade policy."

Why does he say predatory? Krugman explains:
Right now, China is following a policy that is, in effect, one of imposing high tariffs and providing large export subsidies — because that’s what an undervalued currency does. That should be a violation of trade rules; it might in fact be a violation, but the language of the law is vague on the subject. But leave aside the fine print of the law for a moment: what China is doing amounts to a seriously predatory trade policy, the kind of thing that is supposed to be prevented by the threat of sanctions.
I have no intention of debating Krugman on what China might be doing, and that would include "undervaluing" its currency. It seems to me that China is doing what the old Mercantilists advocated hundreds of years ago.

Furthermore, I don't doubt that producers around the world resent the Chinese trade strategy. Nonetheless, from an economic point of view, China is not making itself wealthier by pursuing these policies. If there are victims, they are the Chinese people themselves.

It is one thing to say that such a policy can be disruptive to world trade and certainly make life more difficult for manufacturers in other countries, but it is quite another to claim that the Chinese policies will make China better off any more than export subsidies given by the U.S. Government are good for the U.S. economy. In fact, the actual effect is to make U.S. consumers better off, but at the expense of Chinese workers.

Peter Schiff, in this speech given in 2009, laid out this point, noting that right now, the Chinese are working, but we Americans get the goods, paying for them with green pieces of paper. Obviously, this is not a relationship that will continue, and sooner or later, as Schiff notes, the Chinese are going to be able to "keep their stuff."

When I think of predatory actions, I think of one group of people taking something from others, and not paying for it. Think of the U.S. invasion of oil-rich Iraq or the police in this country committing literal highway robbery in the name of "asset forfeiture." Now, THOSE actions are predatory in every sense of the word.

However, China is not invading our country (sending goods here that we purchase voluntarily is NOT an "invasion"), nor is it engaging in anything close to acts of war, yet Krugman calls for economic sanctions against China. That is ridiculous. While I don't support what the Chinese Government is doing, I believe that its Mercantialism actually is more harmful to China than it is to other countries.

21 comments:

Another Anonymous said...

Have to agree 100% with Professor Anderson here. Krugman is completely wrong, and that is the mainstream MMT/Chartalist view. If we ran a sensible economic policy, we would just print more $ to use here and get more stuff for ourselves from China. China is only hurting itself and helping us with these policies; they are "malinvesting" entirely in the US's favor. Having some very large amount of $ is sensible for them as insurance, but they are beyond that. They could just "export to themselves", give the stuff they are sending over here randomly to their own people, and be better off.

Another Anonymous said...

And I also agree with the other things he said, like asset forfeiture - whether it's stealing fiat money or gold, theft is theft. And on Iraq, unprovoked invasion is invasion and aggression. Right on, dude!

Anonymous said...

Um, given high unemployment, isn't the thing that China is robbing us of (with the help of our multinational corporations) are jobs? We may be importing goods, but it's our goods building capability that we've exported in return.

Not a great or sustainable trade policy, from this non-economist's view.

jason h said...

Not literally robbing us, we choose to legally protect labor unions and their pensions. We also allow our gov't to set minimum wages and working conditions. The Chinese are willing to work harder in worse conditions for lower wages, and society benefits with a higher standard of living from cheaper goods (China included). Anyone in the U.S. who is willing to work for cheaper wages in a grueling factory is legally prevented from doing so. We have been printing money to buy Chinese goods for a while, in the meantime we have stop producing.

Eventually, they will want to exchange their greenbacks for actual goods and we won't have anything.

Because Keynesians only care about spending in an economy. Most economist see no problem with us 'outsourcing' our productive capacity as long as others are willing to subsidize our consumption.

Anonymous said...

you say "I have no intention of debating Krugman on what China might be doing, and that would include "undervaluing" its currency."

and "but it is quite another to claim that the Chinese policies will make China better off any more than export subsidies given by the U.S. Government are good for the U.S. economy. In fact, the actual effect is to make U.S. consumers better off, but at the expense of Chinese workers."

Well, the Us consumer also works in the US. And at the moment he has a high risk of loosing his job because jobs go to China.

The Chinese economy is growing at 10% and higher but you claim their policy is more harmful to China than it is to other countries?

Do you think there is no other hostile action but invading a country? Couldn't stealing jobs and hindering economic growth by undervaluing your currency be considered a hostile action?

Are you suggesting that if China invaded the US, economic sanctions would be the proper response? How about sending in the army? Wouldn't that be more helpfull?
And wouldn't economic sanctions be the right response for the hostile economic policy the Chinese are following today?

Anonymous said...

@Jason h:

But isn't China's standard of living lower, and being held artificially there through protectionism, currency manipulation and a primarily export driven economy? Who in the US could afford to work at the .70/hour they work at? Their average annual salary is on the order of 3700 dollars. Are you willing, much less able, to do any kind of labor for that? Beyond their living expenses and what they're doing to their environment, would you want to?

AP Lerner said...

Hooray! Kudos to Prof. Anderson for getting this one right! Of course, he has to ruin a perfectly logical and thoughtful analysis by referencing Peter Schiff and sparring over the definition of predator, but hey, nobody is perfect. Frostburg can be less embarrassed after this post!

“from an economic point of view, China is not making itself wealthier by pursuing these policies”

Agreed!

“In fact, the actual effect is to make U.S. consumers better off, but at the expense of Chinese workers.”

Exactly. The trade deficit is a pretty good deal for the US. Except for the petro deficit, this is a great thing. Why would we want to export our output? And so with an external deficit, and demands from the private sector to run surpluses, it becomes clear a public deficit is required, as McCulley reminds of double entry bookkeeping:

http://www.creditwritedowns.com/wp-content/uploads/2010/07/Pimcos_double_entry_bookkeeping.gif

“Peter Schiff, in this speech given in 2009, laid out this point, noting that right now, the Chinese are working, but we Americans get the goods, paying for them with green pieces of paper”

Ugh, while Schiff is sort of right on this, why reference him? Schiff is a blabbering CNBC talking head. A ‘real’ economist that gets this stuff is Warren Mosler.

http://moslereconomics.com/mandatory-readings/the-innocent-fraud-of-the-trade-deficit-whos-funding-whom/

Prof. Anderson seems like a reasonable person with a PHD and teaches at a respectable school. Why degrade your work by referencing Schiff? Schiff’s is part of the ‘oh my God we are going bankrupt and hypinflation is around the corner’ crowd and frankly is part to the problem. His awful track record speaks for itself. Anyone that spends as much time as he does blabbing on CNBC should be ignored. And I truly hope nobody on this blog has taken his investment advice.

http://mikenormaneconomics.blogspot.com/2010/08/peter-schifffraud.html

“When I think of predatory actions, I think of one group of people taking something from others”

Ugh, this is silly…stop now. Please.

“However, China is not invading our country “

Ugh…why go there?

Score 1 for Anderson….

William L. Anderson said...

To the 9:54, The USA subsidizes exports, and especially agricultural exports. Now, if you are accusing the Chinese of an act of aggression against others, is not the U.S. Government doing the same?

What about when the Germans build a VW plant (as they are doing in Chattanooga) or when the Japanese build a Kia or Toyota plant here. Are we "stealing jobs" from the Japanese?

A job is not a good. It is a means by which we produce something, period. The U.S. Government is openly hostile to a lot of U.S. producers (and preferring to subsidize politically-favored firms), so why should we be surprised when manufacturing goes elsewhere?

I used to head up a manufacturing association and can tell you firsthand how the government screws producers all the time. And that was 20 years ago, with the situation being even worse today.

Anonymous said...

Mr. Anderson:

To your latest:

"
Now, if you are accusing the Chinese of an act of aggression against others, is not the U.S. Government doing the same?
"

Yes, but isn't it a matter of degree? The question should be are we doing it to the degree that agriculture disappears from the importer's country? (in some cases, I believe we do, so yes, in that area, I'd agree with you).

And yes, we are stealing jobs from the Japanese and the Germans: but their economies and wages are roughly comparable to ours, so there is a limit to how much "stealing" can go on.

In China's case, wages are held artificially low so that multinationals can prosper on low wage work / high profit goods, at the expense of both our own and their working class.

Eventually, this may correct itself, but people in this country don't eat eventually: they eat every day (and in the long run ...)

"
A job is not a good. It is a means by which we produce something, period.
"

To those that have one, it is also a means to afford food, shelter, and familial support. The literal life, liberty, and the pursuit of happiness. It's not a good, correct. It's more than a good, and we've traded them en masse for goods. Not an especially astute bargain in the long term, or so it looks to me.

I think all Krugman is saying that this is a mercantilist problem that would respond to a mercantilist solution. Of course, protectionism is how we built our own country, so we should recognize the tactic. But by the same token, should we stand by and have the same thing done to us in return and watch the rest of the productive economy hollowed out?

Perhaps we would all be better off trading into real estate / stock market bubbles or building ever better financial instruments of mass destruction, but somehow, I don't think so.

Would your opinion at all change if economics courses could be effectively taught over the Web by Chinese or Indian PhDs making 3700 dollars a year? Or would you be thrilled for the opportunity to compete with them? How far does 3700 dollars go in Maryland these days?

(PS: found this blog a few days ago, enjoying the back and forth between you and AP Lerner immensely. Great learning opportunity, thanks for hosting it!)

jason h said...

@ 10:40

Lower than it would be without protectionism and currency manipulation, but contra-Krugman, this hurts the Chinese workers more than anyone else. However, they are running trade surpluses so the standard of living is trending up.

No one in the US could live on Chinese wages in the US, our purchasing power has been confiscated by inflationary monetary policy, but you could live on Chinese wages in China. Personally, I got an degree so I wouldn't have to make widgets, but I'd rather be an engineer in China than the US, again, the standard of lending is going up. Remember when you could support family on a single income in the US, not anymore, our standard of living is going down.

Is China damaging the environment any worse than the US did during the industrial revolution? This is symptom of a State that doesn't respect private property rights. When air and water become public goods you can legally pollute within state defined parameters, no matter who you harm.

Bob Roddis said...

As long as you Chartalists are going to be hanging around here permanently, please answer my questions from a few days ago.

Anonymous said...

@jason circa 12:15pm

"
this hurts the Chinese workers more than anyone else.
"

"
No one in the US could live on Chinese wages in the US ... but you could live on Chinese wages in China.
"

Do you see the inherent flaw in your argument?

You admit that there is no way under current policy for US workers to do what they do and live, and yet it hurts Chinese workers more than anyone else?

"
Personally, I got an degree so I wouldn't have to make widgets
"

I know a lot of unemployed people with degrees. Bachelors, masters, even PhDs. All in disciplines just like yours. The central message is that a shiny degree just like yours is no longer a ticket to prosperity.

But by all means, if you are young and adventurous, move to Asia (speaking as someone with an engineering degree also). Bring a mask to filter the particulates in the air, though, it will shorten your lifespan somewhat as though you smoked a couple of packs a day.

jason h said...

Anon 5:21

"You admit that there is no way under current policy for US workers to do what they do and live, and yet it hurts Chinese workers more than anyone else?

Under current policy many jobs do not produce enough economic value to be based in the US. This is the fault of the US gov't not the Chinese gov't. The US is hostile to business, its why major productive industries are leaving.

Eliminate minimum wage laws, eliminate nanny state regulations, stop printing money, and wages and prices will adjust.

The market has determined that lots of jobs are not worth $7.25/hr. When you include corporate taxes, mandated health insurance coverage, and all the bureaucratic red tape, lots more jobs are not worth all of that either. So China's gov't keeping Chinese wages low through monetary policy (hmm sounds familiar) is a minor factor contributing to unemployment in the US.

But hey let's take Krugman's advice and watch the price of everything "Made in China" go through the roof.

jason h said...

I agree with you regarding degrees. IMHO, engineering degrees are one of the few pieces of paper actually worth their inflated price tag.

The US and China have similar approaches to environmentalism. Both have traded clean, air and water for manufacturing jobs. Both have made a collective decision for their citizens on what the standards will be. Ideally, it would be a private transaction between property owners.

If your only skill was manual labor, would you be willing to sacrifice life expectancy for a job to feed your family? Who knows? but its not the State's decision to make.

G H said...

@jason h, 5:21

"Eliminate minimum wage laws, eliminate nanny state regulations, stop printing money, and wages and prices will adjust. "

So you recommend we bring back 1920's America: factory towns, child labor, sweat shops, 12x7 work weeks, pollution, etc. Yes, that will create conditions similar to and somewhat competitive with China circa 2005. But - oops - those conditions are rapidly disappearing in China because (1) the Chinese labor force is mobile and (2) they have enough of the internet to see that in the more-developed world, the labor force has cars, roomy places to live, time off to relax, and in general a better quality of life.

Currently the Chinese graduate students coming here greatly outnumber ours going there. By moving America 90 years backward, you would negate America's quality-of-life advantage. Then starts the brain drain, and you'll have put the finishing touch on China's goal of out-competing the U.S. in every way. (Sadly, I doubt they will reward your generous help).

Apparently you failed to notice: your so-called "free market" ideas were demonstrated to be obsolete bunk by the 2007 crash, and rejected by the voters in 2008.

burkll13 said...

"Apparently you failed to notice: your so-called "free market" ideas were demonstrated to be obsolete bunk by the 2007 crash, and rejected by the voters in 2008."

wow. this gets my vote for "Absurd Statement of the Month", and thats saying something!

so GH, just what exactly was "free market" about the 07 crash? how about the events leading up to it? and how would rejecting john mccain be rejecting free market ideals? its amazing how people can get so politically bound up that they lose grasp of basic definitions and their applications.

jason h said...

@ G H

Well, burkll13 has already commented on your credibility. Also, you note the conditions you mention are disappearing, interestingly enough not from Chinese regulations but from a relatively free market in labor.

So you'd rather a factory town be built in China than the US?

Say some poor kid's parents don't earn much or can't work for some reason, you'd legally deny him the right to earn a wage and help his family or even pull himself out of poverty?

Also, you prefer to legally prevent people from working more than 40 hours a week, even if it would help them increase their living standard.

Yes, the Chinese are producing things that we buy, then educating their kids here with the money we sent them, who then do the smart thing and return to where entrepreneurs can be most successful.

Our 'quality of life' has been purchased on a credit card subsidized by foreign laborers, it will not last forever.

Another Anonymous said...

Jason h: You seem to support burkll13's so GH, just what exactly was "free market" about the 07 crash?

But how does that square with The market has determined that lots of jobs are not worth $7.25/hr. Why is it not a real free market crash, but a real free market decision about labor?

To give the chartalist/MMT view on trade deficits like the USA's - the idea is that the government's budget deficit should be at least as large as the trade deficit. Otherwise demand would be suppressed and unemployment will rise. There would be too few $ floating around the US. In effect, we should pay the Chinese in newly printed dollars. Seems to me even an (maybe especially an) Austrian economist would support this policy as an overall good for the USA (but not China). If you find a grocery store that will accept your photocopies of dollar bills as money, you would be crazy not to go wild shopping there with them, and keep the real ones for other uses.

Richard said...

Another Anonymous,

You wrote "There would be too few $ floating around the US. In effect, we should pay the Chinese in newly printed dollars. Seems to me even an (maybe especially an) Austrian economist would support this policy as an overall good for the USA (but not China)"

I don't believe an Austrian economist would support printing dollars in order to pay off US debt. According to the Austrian Theory artificial credit expansion leads to the business cycle. Better to default on the debt, return to sound money and get the government out of running the monetary system in the first place. I believe this would be the first priority for many Austrian economists (can't speak for all of course; but if Austrian economics stresses anything, it is that the state should not be involved in the supply and management of money - especially debt based money).

jason h said...

I didn't imply there was a free market in labor. The market still works with gov't interference, albeit inefficiently.

In intro microecon, we learned that price fixing causes inefficiency. When you set a price floor on the cost of labor, you move away from equilibrium and get a surplus of labor (i.e. unemployment)

Anonymous said...

@ AP Lerner

Your criticism of Schiff is misguided. He doesn't lose money for his investors. He does quite well for us, i should know i am one.

Secondly, this CNBC talking head got it right and predicted the economic downturn while most economists thought everything was rosy and dismissively laughed at him. I'll put Peter Schiff's economic forecasts up against anyone's especially yours.