Plus ça change, plus c'est la même chose

Dan Drezner is kicking Britain -- and the American foreign policy commentariat -- while they're down. The essay is mostly good, although regular readers of this blog probably won't find much of it new, but I must disagree with part of his conclusion:

There is no denying that the relative power of the United States is less now than it was a decade ago.

I think that is deniable. A decade ago the U.S. had alienated many of its allies, the United Nations, and all of the BRICs by invading Iraq with a "coalition of the willing" led by a president which half of the country believe did not actually win the 2000 election. Some suggested that American democracy was at risk at home, while its foreign partnerships -- especially NATO -- were similarly endangered. A decade ago the U.S. was still recoiling from the 9/11 attacks and was braced for a very dangerous future. A decade ago the European Union was resurgent, Iran was less isolated (and more recalcitrant), and China was building up its "Beijing Consensus". All of the talk in IR/FP circles was about decoupling, anti-American balancing, the end of legitimacy of American economic leadership via multilateral institutions like the IMF, WTO, and World Bank, and the end of security leadership via the UN and NATO. For all of George W. Bush's posturing, the U.S. faced some very severe challenges, and handled almost all of them pretty poorly.

Some of these persist, but Drezner is correct to note that at this point all of the potential challengers to U.S. primacy have faltered, while the U.S. is picking itself back up. We're talking about "relative" power, remember, so let's just ask who is on the other side of the U.S. in this equation. The E.U.? The BRICs?

Sean Starrs has a very interesting paper out on "early view" in International Studies Quarterly making the case that American economic superiority hasn't slipped at all since the crisis. Here's the abstract:

This paper argues that a fundamental failing in the debate on the decline of American economic power is not taking globalization seriously. With the rise of transnational corporations (TNCs), transnational modular production networks, and the globalization of corporate ownership, we can no longer give the same relevance to national accounts such as balance of trade and GDP in the twenty-first century as we did in the mid-twentieth. Rather, we must summon data on the TNCs themselves to encompass their transnational operations. This will reveal, for example, that despite the declining global share of United States GDP from 40% in 1960 to below a quarter from 2008 onward, American corporations continue to dominate sector after sector. In fact, in certain advanced sectors such as aerospace and software—even in financial services—American dominance has increased since 2008. There are no serious contenders, including China. By looking at the wrong data, many have failed to see that American economic power has not declined—it has globalized.

This paper is interesting in two ways. First, it recasts the discussion away from monadic attributes -- GDP share, say -- towards global categories -- market share of American multinational corporations. Second, it suggests that the old "relative power" discussions, which tend to be cast in dyadic terms, is also inappropriate. Instead we need to think globally. If China increases its GDP share relative to the U.S. but does so by importing American technology, adding a small amount of value, then exporting a finished product, the statistics will show a big GDP boost from exports but can we really say China has gained on the U.S. in any meaningful way? As Susan Strange once wrote, becoming a blue collar worker in service to American white collar management does not make you more powerful than the Americans. The old dependency theorists understood this quite well even if they got some other things wrong. Add to this Benjamin Cohen's recent work (with Tabitha Benney) showing that the US dollar has not slipped in importance in the monetary system (recent events have demonstrated this), and my dissertation (recently defended) showing that American prominence in global banking has increased since the crisis, and the overall picture looks clear: relative to recent history, the U.S.'s power position has not changed and has in some ways improved.

At the same time, China's immaturity has made many of its neighbors nervous. Japan, Korea, and Australia have increased security and economic ties with the U.S. which had slipped a bit a decade ago. The Transpacific Partnership will likely extend these gains. China's inability to encourage others to bandwagon with it is evidence that it has not gained much, if any, leverage on the United States. China's increasing reliance on the world's baddies -- which are increasingly under threat -- as sources of raw materials and markets for trade and FDI is not an indication that it is moving it into a position at the core of the global system. The inability of China to make ASEAN+3 a meaningful institution -- or develop any other -- is another weak spot, as is its recent growth slowdown, financial instability, and the fact that it faces 250-500 domestic protests per day.

Or perhaps I could put it another way. If, in 2003, I had told you that the Iraq and Afghanistan wars would be a disaster, the U.S. would propagate the worst global financial crisis since the 1930s, the Middle East would be in utter turmoil, the biggest development in American politics is the rise of right- and left-wing protest movements, China would grow at 10%/year over the course of the decade and that the net result of all of this is that the U.S. has become more prominent in the global economic and security systems... you'd probably think I was insane.

But that's what's happened.

The Tiananman Square Protests Weren't Liberal

One of my favorite blogs is Echoes, subtitle "Dispatches from Economic History", at Bloomberg. There isn't a unifying theme other than contextualizing current events by looking to past episodes. The authors are experts on each topic -- i.e. there aren't just one or several folks writing every day -- and I almost always learn something from the post.

For example, that the Tiananman Square protests weren't exactly liberal. The author of the piece is a sociologist as Kansas State who has studied Chinese development since 1949, and he says that the protesters were "radical reactionaries". This atypical conjunction means that they were anti-authoritarian but also anti-capitalism.

The story goes like so. The early reforms economic reforms in China benefited rural farmers and initially urban consumers as well, but after awhile industrialization efforts and a plateau in farm production increased price inflation. At the same time corruption increased. This hit urbanites particularly hard. They demanded more political access, but mostly so that they could reverse economic reforms. Thus, they urbanites were "radical reactionaries". I guess that means the rural farmers were "conservative revolutionaries".

Deng refused to yield, but had the protests been successful China might've ended up with the opposite of what they've had over the past generation: political reform without economic reform. Ironically this would have hurt urban dwellers in the long run, since the economic reforms Deng undertook eventually benefited them the most.

Anyway, it's certainly not the textbook version of the story. But elements of this still resonate, as this Dissent article about the contemporary anti-reform movement in China illustrates.

How the World Works, Redux

Michael Pettis has written "A brief history of the Chinese growth model" which reads quite a lot like James Fallows classic 1993 essay on Japan's growth model, "How the World Works". Pettis hits many of the same notes: it isn't new, it was advocated for by Alexander Hamilton in the US and Friedrich List in Japan Germany; it is focused on enhancing national capabilities as much as improving the actual standards of living of citizens; to that end it prioritizes investment and exports over consumption and imports. There are other similarities as well.

Anyway, I know that Fallows' essay gets assigned in undergrad IPE classes a lot. This could be an interesting/useful update or companion piece.

In other (related?) news, here's a right-up-to-date essay on the economic situation in China from Caixin (sort of a Financial Times of China). It's not very optimistic; the title is "Waiting for a Crisis".

FWIW, Fallows' article on Japan appeared about a year before that country's financial crisis in 1994.

Is There An Asian RMB Bloc?

Michael Pettis says "no". But that doesn't mean the RMB doesn't matter. It does. Just not so much for the US or EU or the broader currency reserve and exchange system. It matters more for China's competitors in global export markets.

Read the whole thing. I'm looking forward to Pettis' forthcoming book as much as any scheduled for next year.

A Trade Story IPE Folks Should Love

This NY Times article is over a month old now, but I'm highlighting it anyway because it is illustrative of trade politics dynamics that we often emphasize in IPE. It would make a good case study for an introductory class. Here's the issue:

The United States on Thursday announced the imposition of antidumping tariffs of more than 31 percent on solar panels from China.

Here's the ostensible policy process:

The American decision was made by civil servants in a quasi-judicial process that is heavily insulated by law from political interference and does not represent a deliberate attempt by the Obama administration to confront China on trade policy. But that distinction has been largely lost in China, where the solar panel issue has been one of many causes embraced online by the country’s vociferous ultranationalists, who put heavy pressure on Chinese officials to respond forcefully to perceived snubs to China.

Here's the materialist policy process:

SolarWorld Industries America, which led the coalition of manufacturers that filed the solar dumping case, welcomed the department’s ruling. The decision “is a very positive step in the process. It’s also in line with what we expected,” said Ben Santarris, a company spokesman. “We consider this a bellwether case. It underscores the importance of manufacturing to the U.S. economy.”

Here's the opposing domestic force:

Many solar panel installers in the United States have opposed tariffs on Chinese panels, contending that inexpensive imports have helped spur many homeowners and businesses to put solar panels on their rooftops. The new tariffs are likely to mean a substantial increase in the price of solar panels here.

Here's the opposing foreign force:

“This is really a surprise,” he said in a telephone interview. “It’s really dangerous.” Mr. Li said that Chinese companies would “certainly” retaliate by filing a trade case at China’s commerce ministry accusing big American chemical companies of dumping polysilicon, the main ingredient in solar panels, on the Chinese market.

Here's the supporting ideational force:

“China’s method is straightforward: it sets forth industry-specific Five-Year Plans and then uses all forms of national and local subsidies and other governmental support to quickly transfer jobs, supply chains, intellectual property and wealth, to the permanent detriment of U.S. and global manufacturers,” he said. “China’s ability to ramp up and overwhelm an industry is unique and particularly devastating with new and emerging technologies, where global competitors may be less established and can be knocked out more easily and quickly.”

Here's the opposing ideational force:

Chinese officials have been indignant at American criticism of their solar power industry, pointing out that the United States has urged China for years to embrace renewable energy as a way to reduce air pollution, combat climate change and limit the need for oil imports from politically volatile countries in the Mideast.

There's more good stuff at the link, including a bit of historical context. Pedagogically speaking, it would be nice if this ends up being settled at the WTO. Then we could bring in all of interests, ideas, and institutions into one nice, compact little story.

There Is No Technocracy: China Central Banking Edition

David Daokui Li -- former member of the Bank of China's Monetary Policy Committee -- has an op-ed in the FT in which he says that central bankers are subject to political constraints:

First, central bank independence is an unhelpful superstition. In theory, independence is a good defence against pressures from politicians facing re-election. The PBoC is under the control of the state council, and not run under by autonomous bank staff. This may suggest that Chinese officials are subject to strong political whims. ... 

Knowing this, I was nevertheless shocked when the Chinese premier recently said that only two factors had the potential to undermine his government: corruption and inflation. He does, of course, have some influence over these factors.

No surprise to regular readers of this blog, I hope, but this is even more interesting in light of the fact that China's government is supposedly comprised of wise bureaucrats whose insulation from political pressures allows them to pursue optimal policy.

Guess not.

The World Is Still Not a Dyad

At the risk of redundancy, I'm wading back into the discussion of China's relative power growth vis-a-vis the U.S. that continues to occupy the IR/FP blogosphere. (I covered the last go-round here.)

Michael Beckley comes back at Eric Voeten, arguing that the answer to "Is American power in decline?" depends on how you define "decline". Beckley says that even if the relative per capita income gap between the two countries is narrowing, the absolute gap is widening, a useful point which is often lost in these discussions. Dan Nexon makes the point that Beckley is almost surely defining decline too narrowly, which is true even though Nexon's characterization of Beckley's argument is less generous than it could be.

But, again, all of this is quibbling over issues that, I think, are peripheral. Here's the question we need to answer before we can start really analyzing the roles of China and the U.S. in global politics: What are we referring to when we talk about American decline relative to China? I see two possibile answers:

1. The bilateral relationship: The ability of China to prevail in a conflict against the United States, or vice versa, or for one side to be able to significantly compel the other to take actions that they otherwise would not.

2. The systemic relationship: The ability of China to alter the geopolitical order that the U.S. has been cultivating since the end of WWII, or otherwise thwart the U.S.'s global ambitions, in a way that is different from the past.

It only makes sense to talk in circles about which statistic more accurately captures the relative bilateral gap between the U.S. and China if we're referring to the first of these. Yet I am quite sure that if I polled everyone involved in this discussion and asked them to offer up a subjective probability that the U.S. and China will war against each other in the next three to four decades, every single one of them would assign a probability very close to zero. This is true for several reasons. First, the presence of large nuclear arsenals in both countries which seem to have had, if anything, a pacifying effect on great power interactions since the Cuban missile crisis. Second, the U.S. and China are interdependent economically in large and growing ways, which also decreases the likelihood of conflict. Third, despite sharing many characteristics with previous imperial regimes the United States has no ambitions towards territorial expansion; neither, historically, has China. Neither have given any indication that this is likely to change. Nor is there any threat that a global Communist/anti-capitalist ideological movement, now more inconceivable than at any point since 1848, will re-emerge to challenge U.S. interests. Not even China wants that.

Therefore, it makes little sense to fret much about a traditional Sino-American conflict. Still, one might think that the ability of one side to coerce the other may be changing with the relative distribution of capabilities. This seems unlikely to me as well. The U.S. has been unable to compel China in a meaningful way for decades (if it ever had that ability); this has been obvious since the Korean War ended in a stand-off, and was codified when the mainland took China's seat on the U.N. Security Council in 1971. Similarly, China has not been able to compel the U.S. to take any significant actions that it otherwise would not. If whatever compellence power the U.S. might have been able to exert against China was defunct by the 1950s or 1960s -- despite the enormous disparity in capabilities between the two -- how long would it take for China to gain that ability over the U.S. even if current rates of growth were sustained indefinitely? Many decades, at least, and perhaps never. It would likely take some major technological break-through, or some other unforeseeable system-altering event. That is, it is inconceivable in the literal sense, and would likely require the destruction of the current geopolitical system as presently constituted. Deterrence capabilities have remained more or less unchanged over the past few decades, although the inclination to employ them may have lessened.

So what we're really talking about is the second of the two choices above. If that's the case, then why do we continue to employ monadic, or even dyadic, evidence to try to reach conclusions about a wider system? As should not surprise regular readers, I am skeptical that China's systemic power has increased very much at all over the past few decades. Yes, China is able to block U.N. resolutions that it doesn't like, but that's been true for forty years. Yes, China is expanding its trade and business networks globally, but mostly by going to places where the U.S. has few interests -- Africa and parts of Southeast Asia. While these investments have yielded some fruit, the process has not been seamless. Yes, China is collecting the world's malcontents -- Iran, Venezuela, Cuba, Burma, Sudan, North Korea -- but I'm not sure that's evidence in support of China's growing global clout. More like their desperation for friends of any sort. In any case the U.S. has done fine without close ties to these countries.

China has stockpiled trillions in financial reserves, but seems to have no purpose for them. They haven't been able to use them to buy much influence in the U.S.'s sphere. They haven't been able to employ them on investments that are likely to yield a high return, instead investing in U.S. Treasury bills and GSE securities. Any unwinding of those positions will impair China's growth model, which still depends on a dear dollar, and the erosion of the value of their remaining dollar assets. Those assets, in other words, are more an albatross than an opportunity. And if owning lots dollars makes one powerful, then the country that can create an unlimited supply of them must be very powerful indeed.

What China has not done, and not even attempted to do, is change or overthrow the key components of the post-WWII system: a global U.S. military presence, a series of international institutions, and a set of inter-locking alliance structures that facilitate international integration on security, trade, and finance. In each of these areas China has become more integrated into the existing system over the past few decades, which will make it harder to fundamentally alter that structure in the future. And while they have expressed some interest in marginal changes to the institutional apparatus, they've not pushed for qualitative changes nor have they been able to achieve many of their lesser aims. Nevertheless, China hopes to become more integrated into institutions like the WTO and IMF, not less. China wants more involvement with the other institutions from the G20 to the Basel Committee... this is the U.S.'s playground, and the games played there are played accordingly to the U.S.'s rules. At the same time that China's rise has attracted some countries, it has pushed other countries closer towards the U.S. Arguably the latter -- e.g. India, Japan, Indonesia -- are likely to be more important in the coming decades than those that have moved closer to China, which are mostly a collection of regimes in various states of collapse.

Does China's rise mean that nothing has changed, or will change in the future? Of course not. The rise of Japan and Germany changed some aspects of the international system, as did the waxing and waning of the USSR. It just didn't change the system itself. The question is whether China's rise will be accommodated by the existing system, or whether systemic transformation will take place. If the former is true then the influence of the U.S. is likely to surpass China for the foreseeable future. If the latter is true it may not.

All indications are that the former is true.

If China does continue to integrate into the current system, then that makes the system that much more durable. Which, in turn, further embeds the central position of the U.S. within the system. Which, in turn, could actually increase the power of the U.S. Put another way, the U.S. clearly has more influence over China's trade practices with China in the WTO than it had when China was outside of it.

So it's not about whether GDP growth is a better comparative measure than GDP per capita, or about CINC scores or anything like that. It's about who is better able to influence, control, shape, and mold the global political and economic systems. In order to play game China has had to accept the U.S.'s rules. To the extent that that persists little else matters.

Slower Chinese Growth Could Be Good for the Global Economy

One thing that we hear a lot is that global economic performance increasingly depends on the BRICSAM countries, particularly China which is now the world's second largest economy. If China's astonishing growth slows, this thinking goes, then they can drag down the rest of the world.

That could be true, but it doesn't have to be. There is a scenario in which slower measured Chinese growth is actually good for the global economy, and also good for the Chinese. I do not refer to beggar-thy-neighbor mercantilism, in which the rest of the world expropriates from China, but to an arrangement that is Pareto-improving in aggregate. To see why we just need to remember our Econ 101 national accounting device:

GDP = C + I + G + (X - M)

See that minus sign in there? If China increases its imports without anything else changing then its measured GDP growth would be negative. Yet this would in no way be a bad thing... everyone agrees that Chinese citizens should be consuming more, some of which should probably be imported goods, and many also argue that the macroeconomic imbalances contributed to by China's large trade surplus increases financial instability. Meanwhile, many countries outside of China would like to increase the exports in order to boost job growth. Narrowing the gap between 'X' and 'M' would be a positive for China and for the rest of the world as well. Some of this might be happening. Chinese consumption has been growing faster than GDP, and imports had been growing faster than exports until last month. A prolonged, multi-year trend of this sort would be good for everyone... and would also show up in the data as a slowdown in Chinese GDP growth.  

A broader point is that we often pretend that GDP measures one thing -- the well-being of a society -- when it's really measuring something different -- the composition of economic activity in a society. Well-being can increase under a variety of scenarios including the increase of imports, which drags down the GDP measure. Or GDP could increase in a way that doesn't benefit society, if e.g. the government spends $100mn building a skyscraper then another $100mn knocking it down. Broad measures like GDP are often useful as proxies for other quantities we're interested in, but not always.

It's A System, Not a Dyad

There's a lot of discussion of China's rise and it's implications for the U.S. Michael Beckley published an article in International Security arguing that China's rise over the past two decades has been dramatically overstated. Phil Arena and Eric Voeten criticize Beckley's thinking -- although not conclusively, I don't think -- while Dan Drezner argues that things is looking up for the U.S., Roubini and Pettis argue that things is looking down for China, Chang (again) says China is gonna collapse, while Liu and Chen think China will democratize. Joffe thinks that the U.S. still has time to act to prevent its slide into "Just Another Country" status, while Subramanian thinks that China has already surpassed the U.S. and Rodrik demurs.

That's a lot of different views being espoused by a lot of different people, most of who are pretty smart, all from the past month or two (and most from the past week!). And while I could quibble with a lot of individual points being made by most of them, I'd like to instead shift the focus a little bit. All of these discussions have either been monadic -- focused on internal aspects of either the U.S. or China -- or dyadic -- the relationship between the two and/or the relative gap between them. While these examinations have their uses, in terms of importance for geopolitics we should think of the systemic as well as the monadic and dyadic.

Similar discussions were being had in the 1980s. Back then it wasn't China's rise that threatened the U.S.'s position, but the advance of Japan and other rapidly-industrializing countries. In response to the prognosticators of the day, Susan Strange wrote a series of articles (e.g. here and here) arguing that many folks were missing the point. In response to those complaining that the U.S. was losing its manufacturing base Strange wrote (second link, p. 5), "Is it more desirable that Americans should wear blue collars and mind the machines or that they should wear white collars and design, direct, and finance the whole operation?" To ask that question is to answer it, but then why has everyone lost their breath over the disclosure that Apple products are assembled in outside of the United States? As Strange noted, what it's important is controlling the information and collecting the profit. In fact, the spread of influence of American corporations outside of the U.S. borders and into other countries actually strengthened American power, according to Strange. Think of it as more fingers in more pies.

Rather than focusing on short-term trends in simple metrics like GDP, Strange was concerned with the "structural power" rather than "relational power". Structural power contained four metrics: the ability to exercise control over others' security; control the system of production and trade; determine the structure of global finance and credit; have the most influence over the global stock of knowledge.

Regarding the first, a forthcoming paper in Conflict Management and Peace Science by Cranmer, Desmarais, and Menninga (all UNC folks) analyzes "Complex Dependencies in the Alliance Network" and confirms what one Chinese official recently said (from memory; can't find the reference now), that China has "only one ally" and it's the one that no one would want: North Korea. The United States, by contrast, has robust ties to nearly every major power in the world and is a central member of NATO, perhaps the strongest defense relationship in the history of the world. (In the Cranmer et al paper, see Figure 4.) In terms of traditional capabilities the U.S. far out-paces everyone else too, but it's the structural relationships that really give the U.S. significant influence.

Regarding production and trade, a recent study looking at networks of corporate ownership found a highly-skewed distribution: 147 firms control nearly 40% of corporations worldwide. Of the top 50 firms in terms of "corporate control", nearly half (24/50) are U.S. firms; exactly one is from China, and it's the last on the list (#50). China is the world's largest exporter, but that is an indication of its dependence on the rest of the world for growth rather than the opposite. And remember that U.S. equities have out-performed China's during the past few years. Is China an important global actor in terms of production and trade? Yes of course. Have they become as embedded into knowledge and production as the U.S.? Not yet.

In terms of the structure of global finance and credit, I have a paper (with Thomas, Sarah, and Andy Pennock) that deals with some of this, currently in the revise and resubmit stage. We've blogged about this before too, so I'll refer you to those rather than re-write the whole thing. (Some other relevant past posts are here.) The gist is that China has surprisingly little presence in the global financial system -- as in, almost none at all -- while the structural position of the U.S. is unparalleled. That's one lesson from Eichengreen's Exorbitant Privilege as well, applied to the monetary/currency systems.

Regarding the fourth of Strange criteria -- control of the global stock of knowledge -- it is true that China has been churning out many more students than the U.S. in STEM majors, and that the quality of Chinese education has improved dramatically, but China remains well behind more developed economies in terms of innovation: Of the 100 most innovative firms in a recent study, 40% are in the U.S.; none are in China. In terms of military technology, the U.S. has a lead of decades on China, and continues to dramatically out-spend China in military R&D. That, coupled with the embeddedness of the U.S. within the global security system, provides a huge structural advantage over China.

I could go on, but this should be enough to give you the gist. It's not enough to just look at recent trends in GDP growth rates and conclude that China will eclipse the U.S. within the next decade. The U.S. has spent decades deeply integrating itself into the global economy, financial system, security apparatus, and knowledge networks. Those positions will likely privilege the U.S. for the foreseeable future. It seems likely that China recognizes this, which is why it hasn't begun challenging the U.S. on any significant dimension yet.

I Would Not Have Guessed This China-US FOTD

Another way to gauge China's problem is that its gross domestic product (GDP) quintupled over the decade through 2010, while its stock market doubled - so that market capitalization has fallen sharply relative to GDP. 

Via. I don't agree with everything else in the article, but this is another data point indicating that the rise of China may not yet be as impressive as many have thought.

Also this (which I would have guessed): "U.S. Leadership Approval Ratings Top China's in Asia". (ht: Phil Arena.)

Links

Some of these I may blog properly later, but time is scarce these days.

-- Ikenberry responds to Walt.

-- Good discussion of Herbert Simon and complex social systems.

-- Bernanke on how central banking has changed post-crisis, including on the interplay between regulatory and monetary policies.

-- Problems with Basel III implementation. This is what Jamie Dimon is referring to when he says Basel is "anti-American".

-- Vladislav Surkov, "Putin's Rasputin".

-- Interactive description of the eurozone crisis, as a series of weighted, directed networks. (ht Alex)

-- US attacks China's "Great Firewall" at WTO.

-- Ambrose Evans-Pritchard says world power is swinging back to the US. I hadn't realized it had gone.

Trade Developments

Some of this is already old news, but there were some developments on trade over the past week.

-- The US looks set to ratify FTAs with Columbia, South Korea, and Panama. I've been pondering a longer post about the value of FTAs, which I'll try to get to in the future. For now it's just worth noting that these deals are pretty small beer.

-- Russia's going to try to get into the WTO. Again. This is potentially important for Europe (and Russia); not so much for the US.

-- Obama's going after China on violating WTO rules by not reporting subsidies -- 200 of them, apparently -- some of which are probably WTO-illegal. I think this is important. China's trade policies are incredibly distorting, and the global economy needs a rebalancing. Adjustment is occurring, but perhaps not quickly enough. Going through the WTO is much better than risking a trade war by unilaterally imposing tariffs in response to currency manipulation.

-- So, of course, Congress is also risking a trade war by considering unilateral tariffs in response to Chinese currency manipulation.

And some new research:

Why Do Some Countries Get Better WTO Accession Terms Than Others? 

Krzysztof J. Pelc

International Organization 65 (4)

The process by which countries accede to the World Trade Organization (WTO) has become the subject of considerable debate. This article takes a closer look at what determines the concessions the institution requires of an entrant. In other words, who gets a good deal, and who does not? I argue that given the institutional design of accession proceedings and the resulting suspension of reciprocity, accession terms are driven by the domestic export interests of existing members. As a result, relatively greater liberalization will be imposed on those entrants that have more valuable market access to offer upon accession, something that appears to be in opposition to expectations during multilateral trade rounds, where market access functions as a bargaining chit. The empirical evidence supports these assertions. Looking at eighteen recent entrants at the six-digit product level, I find that controlling for a host of country-specific variables, as well as the applied protection rates on a given product prior to accession, the more a country has to offer, the more it is required to give. Moreover, I show how more democratic countries, in spite of their greater overall depth of integration, exhibit greater resistance to adjustment in key industries than do nondemocracies. Finally, I demonstrate that wealth exhibits a curvilinear effect. On the one hand, institutionalized norms lead members to exercise observable restraint vis-à-vis the poorest countries. On the other hand, the richest countries have the greatest bargaining expertise, and thus obtain better terms. The outcome, as I show using a semi-parametric analysis, is that middle-income countries end up with the most stringent terms, and have to make the greatest relative adjustments to their trade regimes.

A Few Links in Lieu of Actual Post

-- Phil Arena has a great post on selectorate theory as applied by Bueno de Mesquita and Smith in this Foreign Policy article. Gist: if selectorate theory generates useful advice for leaders like Obama, then it isn't much good as theory.

-- John Quiggin on China.

-- Erik Voeten on the UN and a potential General Assembly vote on Palestinian statehood.

-- Hayek: *Monetary Nationalism and International Stability*, from 1937. Haven't finished this yet. Hoping it provides some impetus for a research project or at least a substantive blog post or two.

-- Michael Pettis is a must-read on balance of payments dynamics and currency issues, especially related to China. I've started a post on this, which I hope to finish soon.

This Is What Adjustment Looks Like (an ongoing series)

Martin Feldstein:

China’s government may be about to let the renminbi-dollar exchange rate rise more rapidly in the coming months than it did during the past year. The exchange rate was actually frozen during the financial crisis, but has been allowed to increase since the summer of 2010. In the past 12 months, the renminbi strengthened by 6% against the dollar, its reference currency. ...

There are two fundamental reasons why the Chinese government might choose such a policy: reducing its portfolio risk and containing domestic inflation.

Consider, first, the authorities’ concern about the risks implied by its portfolio of foreign securities. China’s existing portfolio of some $3 trillion worth of dollar bonds and other foreign securities exposes it to two distinct risks: inflation in the United States and Europe, and a rapid devaluation of the dollar relative to the euro and other currencies. ...

Looking back on the past year, the 6% rise in the renminbi-dollar exchange rate might understate the increase in the relative cost of Chinese goods to American buyers because of differences in domestic inflation rates. Chinese consumer prices rose about 6.5% over the past year, while US consumer prices rose only about 3.5%. The three-percentage-point difference implies that the “real” inflation-adjusted renminbi-dollar exchange rate rose 9% over the past year (i.e., 6% nominal appreciation plus the 3% inflation difference.)

There are obviously political interests in China for keeping the RMB's value low, but the most recent Five-Year Plan calls for increasing households' purchasing power above the rate of economic growth. We may start to see (more) political cleavages in China pitting consumers and against producers. Remember: politics exists even in authoritarian regimes.

This Can't Be True

Hannah Kuchler at FT Tilt:

China is celebrating its first ever victory at the World Trade Organisation after the European Union was found to be discriminating against Chinese nuts and bolts.

China has won WTO cases before. Perhaps the author means that this is the first victory for China against the EU:

And it marks a victory for China -- the main target of anti-dumping measures, or duties on imports judged to be sold for less than they cost at home -- in its first trade dispute against the European Union since joining the WTO in 2001.

But even that can't be true... China and the EU have had numerous trade disputes.

I'm confused. Is this the first time that China has won an anti-dumping case against the EU? Is this a first anything? I have no idea what these articles are trying to say.

Would A Yuan Appreciation Narrow the Trade Imbalance?

Probably not:

Moreover, the impact of higher dollar prices for Chinese goods might well be to raise the U.S. import bill. In particular, U.S. spending on Chinese goods would rise unless higher prices induced a proportionately larger decline in import volumes. For example, if a 10 percent rise in the price of Chinese products resulted in only a 7 percent decline in the volume purchased, spending would rise by roughly 3 percent. Significantly, empirical studies have been as likely to find that higher prices raise U.S. import spending as lower it. Regardless of the direction of the spending impact, these offsetting price and volume effects imply that the impact of a Chinese currency appreciation on U.S. import spending would be small.

Finally, the impact of a stronger renminbi on U.S. imports would be limited by the fact that most goods purchased from China come from industries in which U.S. producers no longer have a substantial presence. Indeed, out of more than 400 detailed production categories, 60 categories account for some 80 percent of U.S. purchases from China. The same 60 categories account for less than 15 percent of U.S. manufacturing shipments. With little U.S. capacity at the ready, higher Chinese import prices might be more likely to spur increased imports from Korea or Vietnam than increased U.S. production. If so, a smaller U.S. trade deficit with China would be offset by larger deficits with other countries.

The last point is key, I think. I'm not as concerned about the short-run elasticities as the long-run structural issues.

The Next Trade Spat?

This has been brewing:

"The trade war between China and Europe will not break out over manufacturing industry, customs duties, dumping or the yuan exchange rate, but on a front that no one expected: in the sky," writes La Stampa, in the wake of a threat voiced by the Beijing representative at the IATA (International Air Transport Association) Conference to simply close Chinese air space "if the EU, as it has already decided, introduces an emissions tax on all intercontinental flights leaving the EU on 1st January." The European Commission plans to grant a "license to pollute" similar to those already esablished for other industrial sectors to every airline operating in Europe, explains Le Monde: 82% of emissions rights will be free, but a 18% will have to be purchased on "carbon credits market."

My understanding is that so long as the EU rules are applied non-discriminatorily, such an emissions tax is WTO-legal.

China's Growing Pains

Jon Western goes to China, and comes away impressed. Not impressed with China's improvements, although that too, but with its challenges. In a way, they are the same problems the US faces, but magnified:

1. ... In many ways, America's challenges with the future of Social Security pale in comparison to what China faces in the coming decades...

2. ... This has led to rising inequality in housing consumption as well as a new homeless population. Furthermore, while the financial industry is largely protected because of strict regulations and high downpayment requriements (a problem that ironically exacerbates the challenges to reduce domestic savings rates and jump start domestic consumption among young males), the housing prices -- especially in urban cities -- are at all-time speculative highs and many analysts now anticipate major price corrections that could well send significant shock waves through the economy. ...

3. Though China's domestic industry has grown more competitive throughout the world, there is some question about the degree and magnitude of technology upgrades in its domestic industries -- a key requirement for future development and growth. ...

For us IR scholars, we tend to focus on the data points that suggest American decline -- the US budget deficit, its military over-commitments, and the dysfunctional national politics and such. Yet, if we look closer at the internal issues within China, despite its impressive levels of economic growth over the past two decades, it's not at all clear that we are on the verge of some kind of global power transition -- at least not any time soon.

We've sounded similar notes before here, and I think it is important to remind people that growth is a long, uneven process. Over the past three decades China has shown a lot of resilience and agility, but the challenges continue to mount. I'm not a China doomsayer -- I think they'll continue to grow and modernize -- but it won't necessarily be at a linear pace. And in terms of global power, there is too much space, and too many intervening variables, to be talking in terms of "power transition" yet. China has quite a lot of maturing to do before then.

Actually, Let's Not Start a Trade War With China Just Now

(click for larger image)

Brad DeLong links to Jared Bernstein, who suggests some policies that Obama could pursue (without deficit spending) to help the U.S. employment malaise. Many of them are fine, but this one isn't:

Currency Management: this would be a very bad time to let up on countries who subsidize their exports by suppressing their currency values in foreign exchange markets, most notably China. I’d push the Levin bill on this. And it’s bipartisan: the darn thing got 99 R votes in the last Congress!

The Levin bill proposes slapping tariffs on goods coming from countries that manipulate their exchange rates to boost exports. Levin has proposed a variant of it for years (here's one from 2006), but finally got traction during the recession. Krugman agrees that this is a good idea, but I think there are a number of problems with it.

1. It's most likely illegal. If China is violating trade rules with its exchange rate policies, then the USTR should take them to the WTO. The fact that that hasn't been done at any point over the past decade, despite the fact that it would have been politically popular, indicates to me that the USTR believes it would lose such a case. There's a reason why exchange rate policy has been referred to the IMF (which conducts monitoring and surveillance but has no authority) rather than the WTO. It's also not clear that China is violating any WTO rules. For one thing, the WTO doesn't have a lot to say about which exchange rate regimes are legal and which aren't. And although using the exchange rate to subsidize exports could be illegal, there's a fairly high bar to clear. This (several years old) thread on the excellent International Economic Law and Policy blog describes the three simultaneous conditions under which currency manipulation could be WTO-illegal: 1. It must entail a "financial contribution"; 2. It must be specific; 3. It must confer a benefit on exporters. The comments to that post get into specifics, but according to IELP, "If [currency policy] is contingent in law or de facto upon export performance, it is then prohibited and deemed specific automatically".

The graph above shows the nominal dollar-yuan exchange rate over the past five years. Does it look like the exchange rate is contingent upon export performance? The yuan has appreciated against the dollar by nearly 25% over the past five years, and I'm not sure the trend clearly indicates responsiveness to changes in Chinese export performance.

2. There are growing concerns about inflation in the U.S. These concerns may be misguided, but they play well in Republican circles and among certain Governors at the Federal Reserve. Slapping an import tariff on China would cause immediate price spikes across a wide range of consumer goods, which would likely lead to increased calls for the Fed to tighten monetary policy. That, of course, would not be good for economic recovery. Nor would it be good for standards of living. A Chinese undervaluation of the yuan is equivalent to the Chinese giving us free money. Let me say that again: a Chinese undervaluation of the yuan is equivalent to them giving us free money. It's not clear to me that trading lower standards of living for more jobs is a net win. Jobs are certainly important, but they're not the only important thing.

Moreover, as we've discussed on this blog repeatedly, the nominal exchange rate is less significant than the real exchange rate, and the real exchange rate is shifting faster than the nominal rate as inflation in China out-paces inflation in the U.S.

3. It's not at all clear that a tariff targeted specifically at China's exchange rates would have any effect on U.S. jobs. Not only would importers suffer, but there is no reason to believe that manufacturing jobs would come back to the U.S. en masse. Manufacturing employment was collapsing before the recession (see also here), and even if China lost some jobs via a U.S. tariff those jobs would likely go to Vietnam and Taiwan and South Korea and any number of other places before coming back here. A tariff would make U.S.-produced goods cheaper relative to Chinese goods (in U.S. markets), but would not affect the price of Vietnamese goods at all. The magnitude of this shift, and the timing of it, isn't obvious to me, and to some extent it offsets #2 above, but the world is dynamic.

4. Those dynamics are not limited to economics; they also involve politics. The Chinese would not simply accept tariffs as the new cost of doing business. They would fight back. First, they would take the U.S. to the WTO. Second, they would likely enact retaliatory tariffs. The WTO cases would take years to be resolved (i.e. hopefully after the recovery from the recession), but the tariffs would immediately damage U.S. exporters. Obama's stated policy goal is to double American exports over the next several years. It's going to be hard to do that if you can't sell into the world's fastest-growing major market, now the second-largest economy on the globe.

5. The U.S. runs the risk of pot-meets-kettle reactions from the rest of the globe. The world already believes that U.S. monetary policy, with interest rates at 0% and two rounds of quantitative easing already conducted, constitute "currency manipulation" of a different sort. Putin called it "hooliganism", Brazil imposed capital controls, S. Korea has expressed concern about exchange rates at the G20, etc. I agree with Krugman and others that this criticism is over-blown; the U.S. is in a deep recession and should be using monetary expansion to help get out of it. But a round of tariffs targeting exchange rate policy will leave the U.S. open to a dose of its own medicine. Other countries are already wary of U.S. policy, and more aggressive measures could quickly lead to a cycle of more prevalent beggar-thy-neighbor policies. Right now it is critical that international economic cooperation move forward, not back. We've seen from the Japan crisis how badly economies are damaged when global supply chains are disrupted.

6. The U.S. needs to know its role. The global economy is still terribly damaged. 1937 isn't the worst analogue. Right now the U.S. needs to do everything it can to keep markets open, maintain international cooperation, provide liquidity into the global system, and maintain a market for goods. In other words, it needs to live up to Kindleberger's charge. That involves allowing some free-riding. It involves setting policy based on global, not domestic, circumstances. Myopically trying to get back every lost job as quickly as possible runs the risk of damaging global economic relations over the medium- and long-run, which could easily have adverse effects on growth and prosperity. Letting China sell us goods at below-market prices seems like a very small price to pay for averting a seriously negative outcome.

Ferguson + Kissinger = Mush

This has to be the worst thing I'll read this week. Niall Ferguson slobbering over Henry Kissinger for discovering... wait for it... the security dilemma:

Such fundamental cultural differences may give rise to conflict with China in the future, Kissinger warns: “When the Chinese view of preemption encounters the Western concept of deterrence, a vicious circle can result: acts conceived as defensive in China may be treated as aggressive by the outside world; deterrent moves by the West may be interpreted in China as encirclement. The United States and China wrestled with this dilemma repeatedly during the Cold War; to some extent they have not yet found a way to transcend it.”

Could the United States and the People’s Republic come to blows again? The possibility cannot be excluded. As Kissinger reminds us, war was the result when Germany rose to challenge Britain economically and geopolitically 100 years ago. Moreover, the key factor that brought America and China together in the 1970s—the common Soviet enemy the Chinese called “the polar bear”—has vanished from the scene. Old, intractable differences persist over Taiwan and North Korea. What remains is “Chimerica,” a less-than-happy marriage of economic convenience in which one partner does all the saving and the other does all the spending.

This is the most basic principle in IR, and remains the orthodox story for how major power conflicts occur. Of course there are big problems with it -- Germany challenged Britain, but the U.S. did not -- but it's the basic story. For this staggeringly simple insight, which any of my Poli 150 students should be able to regurgitate in their sleep, Ferguson writes that Kissinger "remains without equal as a strategic thinker". I sure hope not.

The worst part is that Kissinger hasn't appropriately internalized his own lesson. The bulk of his new book On China (per Ferguson's description) seems to focus on cultural and psychological explanations of China's behavior and the possibility of Sino-US conflict. The Korean War happened because of a "cultural gap"; China entered into it to "change the psychological balance" by changing the US's "calculus of risk". In other words, China was signaling resolve. But there's nothing cultural or even psychological about that. It's pure information revelation, of the sort Schelling (and plenty of others) described.

And cultural explanations are notoriously fraught; why would cultural differences cause conflict with China, but not other Asian (or non-Asian) countries? Why have major European countries, about as culturally similar as nations will be, historically been antagonists? Why would the US get along with India in the future, but not China?

How about this sophistry:

The Chinese value patience; as Mao explained to Kissinger, they measure time in millennia.

I recall being told that the most notable thing about China's rise was its rapid pace. I remember hearing that China's advantage was that its authoritarian government was able to more quickly adapt to new circumstances, and more perfectly practice mercantilism. This was how they'd win the future. These cultural "explanations" sure get confusing... forgive me if I continue to think that conflicts occur because power shifts are not accommodated by governance structures, and bargaining under anarchy is perilous.

I'm not sure how much of this is Kissinger and how much is Ferguson. After all, Kissinger does pick up on the fairly important fact that China has no intention of challenging the US' order:

Yet Kissinger remains hopeful that cooler heads will prevail in Beijing: thinkers like Zheng Bijian, who urges China to “transcend the traditional ways for great powers to emerge” and “not [to] follow the path of Germany leading up to World War I.” Rather than attempting to “organize Asia on the basis of containing China or creating a bloc of democratic states for an ideological crusade,” the United States would do better, Kissinger suggests, to work with China to build a new “Pacific Community.”

In fact, it seems like the opposite is of the nightmare scenario is true, as China seems perfectly happy to integrate more fully into the US-led system:

China’s economic rise has been facilitated by the regional security provided for by the United States since the end of Cold War hostilities in the region. Ashely J. Tellis, former advisor to the Undersecretary of State for Political Affairs and senior policy analyst at the RAND Corporation, similarly states that American protection provided a “stable security environment” which allowed Asian states to “mitigate the most acute tradeoffs between guns and butter.” U.S. hegemony has allowed China to benefit from globalized trade without having to incur costs for maintaining the necessary stable environment. In a 2008 diplomatic cable from the Beijing Embassy, U.S. Ambassador Clark T. Randt recalls a conversation with an unnamed Chinese party: “when it comes to the basic Chinese interest in securing energy supplies and raw materials for our economic growth, free-riderism works for us right now.”

Free-riderism will continue to work for China for the foreseeable future. China is still a poor country, facing a number of internal adjustments that will test the new political leadership in the coming years. Moreover, China's economy has grown faster than its political capital. China has a lot of business partners, but not a lot of allies. Certainly not many allies that would take its side against the US in an attempt to overturn the post-WWII order. China will continue to build up goodwill in Asia, Europe, and elsewhere, but it will be quite a long time before China has a set of allies that rival the US's. During that period, China may become one of the US's allies, as other formerly antagonistic regional powers have done.

I haven't read Kissinger's book, but based on Ferguson's recommendation it doesn't sound like there's anything new or profound in it. I know the man has plenty of disciples, and it may be good for some of them to read this stuff, but for people who study IR in an academic context this is pretty weak sauce. This take, by Princeton political science Prof. Aaron Friedberg, is better. Still too pessimistic, I think, but greater clarity of thought and all the appropriate caveats.