Monday, October 18, 2010

Captain Ahab Krugman and the Great Yellow Whale

I might be mistaken, but I believe Paul Krugman has a real fetish about China, pursuing the "new Yellow Peril" with the tenacity of Captain Ahab himself. Yes, THAT China, the China where factories turn out vast quantities of goods that make it to the shelves of Wal-Mart. (Krugman doesn't like Wal-Mart, either, so the fact that the company purchases Chinese-made goods makes it complicit with China's apparent dastardly plan to take over the World!)

In today's column, Krugman writes about an incident involving a Chinese trawler colliding with Japanese coast guard vessels, and then turns it into yet another scare story involving trade that I would hope a Nobel Prize winner (for his trade material) would not be writing. We need some reasoned voices, and I would have hoped that Krugman would have been one of those, but apparently we have someone who thinks a trade war would be good for the country. Yes, and Smoot-Hawley brought prosperity to America.

According to Krugman, after the China-Japan incident, China refused for a time to sell rare earth materials to Japanese companies, which highlighted the vulnerability the rest of the world has regarding these materials, given their importance in manufacturing different components. He writes:
On one side, the affair highlights the fecklessness of U.S. policy makers, who did nothing while an unreliable regime acquired a stranglehold on key materials. On the other side, the incident shows a Chinese government that is dangerously trigger-happy, willing to wage economic warfare on the slightest provocation.

Some background: The rare earths are elements whose unique properties play a crucial role in applications ranging from hybrid motors to fiber optics. Until the mid-1980s the United States dominated production, but then China moved in.

“There is oil in the Middle East; there is rare earth in China,” declared Deng Xiaoping, the architect of China’s economic transformation, in 1992. Indeed, China has about a third of the world’s rare earth deposits. This relative abundance, combined with low extraction and processing costs — reflecting both low wages and weak environmental standards — allowed China’s producers to undercut the U.S. industry.
In answer to the obvious question - How did the USA allow its own rare earth industry to falter? - Krugman writes:
You really have to wonder why nobody raised an alarm while this was happening, if only on national security grounds. But policy makers simply stood by as the U.S. rare earth industry shut down. In at least one case, in 2003 — a time when, if you believed the Bush administration, considerations of national security governed every aspect of U.S. policy — the Chinese literally packed up all the equipment in a U.S. production facility and shipped it to China.
Did the Chinese take these materials by force? No, they purchased them because conditions in the United States made it too costly to mine these resources, but instead of dealing with that fact, Krugman makes it sound as though the Chinese were engaging in something nefarious.

The mining of rare earths - like a lot of mining - is dirty and has a lot of environmental issues. American environmental law makes it very difficult to do some mining with any cost-efficiency, so we should not be surprised that the Chinese have managed to undercut what once was a profitable industry in the USA.

While Krugman does not make any real suggestions - other than "punish" China for not valuing its currency as high as Krugman says it should be valued - he is vague about the "solution" to this problem. Do we subsidize rare earth mining in this country? In other words, do we engage in these operations, paying union wages and other environmental costs, and do so by cannibalizing those industries that still are profitable? This is not an idle nor spurious question.

Does Krugman believe we should have tariffs against rare earth materials from China? That would have the same effect as a subsidy, and Krugman then would have to defend his position that tariffs somehow would make us "safer."

Unfortunately, Krugman finishes with some of the most naked hypocrisy that I have read. First, his own words:
So what are the lessons of the rare earth fracas?

First, and most obviously, the world needs to develop non-Chinese sources of these materials. There are extensive rare earth deposits in the United States and elsewhere. However, developing these deposits and the facilities to process the raw materials will take both time and financial support. So will a prominent alternative: “urban mining,” a k a recycling of rare earths and other materials from used electronic devices.

Second, China’s response to the trawler incident is, I’m sorry to say, further evidence that the world’s newest economic superpower isn’t prepared to assume the responsibilities that go with that status.

Major economic powers, realizing that they have an important stake in the international system, are normally very hesitant about resorting to economic warfare, even in the face of severe provocation — witness the way U.S. policy makers have agonized and temporized over what to do about China’s grossly protectionist exchange-rate policy. China, however, showed no hesitation at all about using its trade muscle to get its way in a political dispute, in clear — if denied — violation of international trade law.

Couple the rare earth story with China’s behavior on other fronts — the state subsidies that help firms gain key contracts, the pressure on foreign companies to move production to China and, above all, that exchange-rate policy — and what you have is a portrait of a rogue economic superpower, unwilling to play by the rules. And the question is what the rest of us are going to do about it.
Yes, this is the same Paul Krugman who has written elsewhere that the formulation of an industry based upon state subsidies and rules forcing individuals and businesses to purchase higher-cost "environmental-friendly" items would be good for the economy. Don't think for a second that the U.S. government does not do many of the same things, and this country hardly is a bastion of free trade.

And while I cannot heap praise on China for many of its oppressive domestic policies, nonetheless, the USA, with about a quarter of China's population, incarcerates many more people than does China. Yes, China, a country that had real death camps and gulags and summary executions does not imprison as many people, not to mention anything close to a percentage of its population, as the USA.

Furthermore, for all of the bellicosity that one may see in the trawler incident, China does not have troops scattered about the globe and other than Tibet, does not involve itself in "nation-building." I hate to say it, but China hardly poses a "threat" to the world economy and world peace. I wish I could say the same for my own country.


Tim Johnston said...

Your not worried at all about China, Professor?
Having lived in Africa I can tell you that China is engaged in plenty of nation-building on that continent, as well as taking steps to secure resources for itself. It also has Burma as a client state for the same reason.
While I don't argue that China is trying to 'take over the world' as you put it, people in the West ought to have some concerns about China's increasingly assertive role in world politics, a role which is being paid for by U.S. consumers.

Tim Johnston said...

- That should be "you're", darnit.

William L. Anderson said...

How many African countries has China invaded?

Anonymous said...

instead China just executes all its criminals. Is that what you are advocating the US do so its incarcation rates look lower?'s_Republic_of_China

Another Anonymous said...

In agreement with Professor A here. Free trade is the way to go. If rare earths were utterly essential, then it makes sense to subsidize the capacity to mine them, or have government stockpiles. This is the same point that no matter how cheap food it is to buy food elsewhere, a nation is crazy to not preserve the capacity to feed itself.

China's increasingly assertive role in world politics, a role which is being paid for by U.S. consumers

China's increasingly assertive role is usually positive - often being a roadblock to the US's endless rampages of homicidal psychosis and deranged threats. And it is emphatically being paid for the old fashioned way - by the hard work of its huge population - not by the American consumer.

Tim Johnston said...

China's role is positive?
China is the ringleader of the 'climate change' shakedown, acting as spokesman for the 'developing world'.

China has not invaded any African countries - yet - although it demands concessions from them in return for having "liberated" them in the past by supplying weapons. The likes of Robert Mugabe dodge censure for their actions by turning to China for support.

China's greater participation in world trade and its increasing openness are to be applauded and encouraged, but it has a long way to go yet.

Another Anonymous said...

it has a long way to go yet. Then the US has a much longer way to go. China is a much better international citizen the US.
Usually China relates to other nations on a good old fashioned capitalistic basis of mutual benefit. Mugabe is a stupid old man, hardly someone who deserves particular international censure.

Foremost, China does not start wars all over the world for no reason at all - actually just to give a bloated parasitic military industrial complex something to do and justify its worthless existence. The US could do worse than taking China as its role model. :)

James E. Miller said...

Once again Dr. A critique of Krugman is spot on. When I read the column this morning, I could not believe that for a man who won the Nobel Prize on world trade and certain countries being able to specialize in trading materials cause it may be cheaper to do would bash China for doing the same thing. Krugman indeed has a China fetish, along with his colleague Thomas Friedman.

Bala said...

Krugman is just building up the tempo to ultimately call for war, trade and military. After all, WW II got us out of the Great Depression, right?

Tim Johnston said...

"Mugabe is a stupid old man, hardly someone who deserves particular international censure. "

Tell that to the thousands he has starved and murdered, and the three million plus refugees who now live in South Africa!

I rarely agree with Krugman, but his criticism of China is, in this instance, accurate in at least one respect - the government (of any country) should not be flexing its muscles to interrupt trade in that way.

Bala said...

" but his criticism of China is, in this instance, accurate in at least one respect - the government (of any country) should not be flexing its muscles to interrupt trade in that way. "

But what is wrong is the objective of his criticism - that the US government should have flexed its muscles long ago to prevent this situation and that given that it has not done so, it should at least do so now.

William L. Anderson said...

But what does the U.S. Government have in the way of "muscles" to flex? Do we attack the Chinese militarily? We can't even beat ragtag Taliban in Afghanistan. In 1950, our armed forces were unable to withstand a human wave charge by Chinese in North Korea.

(A veteran of that campaign told me that a number of Chinese soldiers didn't even have rifles. He said that the U.S. forces were overwhelmed by sheer numbers of bodies.)

Furthermore, this notion that the USA is a "good guy" in world trade is nonsense. Our government has trade barriers, export subsidies, and uses outright strong-arm tactics. Furthermore, we are pretty much demanding that the rest of the world buy our debt, which this government is repudiating via inflation.

Don't think that the Chinese or people elsewhere are stupid. They see what is going on, even if our political leaders tell us that up is down.

Tim Johnston said...

no, please don't attack China!

But there is a valid issue raised, when it comes to State interference in business. You say,
"we should not be surprised that the Chinese have managed to undercut what once was a profitable industry in the USA."
But how do we know it is profitable in China? How would we know? China could be stockpiling what it knows is an essential resource so it can bully other countries that need it. I can't think of an example where America, for all its trade restrictions, does that.

It wouldn't be the first time that state-owned enterprises have used their wealth to force private companies out of business for strategic political reasons, as the Canadians have just found out with the Emirates airline.