US Defeats China in WTO

The case revolves around US exports of creative property, especially digital media, that China had insisted be distributed through Chinese firms. US firms wanted to offer their products directly to Chinese consumers, and China was clearly in violation of WTO rules by preventing them from doing so. So while this ruling was not surprising, it does speak to a broader friction: China wants the benefits from global trade that membership in the WTO ensures, but does not want to be fully integrated into the global economy: they still want to be able to control what information is available to Chinese citizens. This is obviously more difficult in the internet age, and rulings like this one from the WTO explain why.

Now I'm not saying that giving Chinese citizens the freedom to buy the new Jay-Z/Kanye/Rihanna track direct from iTunes is going to bring down the Chinese regime. But increasing integration into the global economy will bring increasing exposure to outside ideals and influences. China worries that those influences will gradually mutate into popular reformist movements that challenge the Communist Party.

As expected, Emmanuel is already all over this.

The 'Asian Model' Is No Alternative

So says William Easterly:

Suppose we have a group of drivers leave New York at the same time to drive to Washington, and we interview the first 5 drivers who arrive in Washington. We find that they drove Lamborghinis at 150 mph, weaving in and out of traffic down the New Jersey Turnpike and I-95, out-running Highway Patrol cars who tried to stop them. Are they models for success getting from New York to Washington?

No, because since we only studied the “successful” first 5 drivers to arrive, we didn’t know about the vast majority of Lamborghini “failures” – the drivers who got into fatal accidents or were caught by the Highway Patrol and jailed for insanely reckless driving. On average, this approach was a disaster. On average, soccer moms driving mini-vans outperformed the Lamborghini drivers, if we study BOTH successes and failures.

So Asian success either happened in spite of statist industrial policy, not because of it, or industrial policy was an incredibly risky strategy that usually fails but occasionally has big successes, possibly in East Asia.

Either view would help explain why a huge amount of effort spent imitating East Asian success stories has NOT successfully replicated that success anywhere else.

One general problem with social sciences is that the counterfactuals aren't always obvious: everything we study has selection bias, because we can only analyze events that have actually occurred; we look into an alternate universe to see how things would be different if we tweaked this input or that structural alignment. So it's one thing to look at the meteoric economic rise of countries like China in recent decades and conclude that state-run economies present a viable alternative model for market-run economies. But we can't know the counterfactual: China may have grown faster without so much government interference*.

At least that's what Easterly is saying. For another view, Blattman suggests this essay by Dani Rodrik [pdf].

*In any case, one must only look at the economic degradation during Mao's reign to see how much an economy can collapse if a government gets it wrong.

Sino-American Fist-Clenching

Hillary Clinton will make her first diplomatic trip to Asia, including a stop in China. This break from tradition -- American diplomats typically visit Europe first -- is intended to signal America's willingness to engage China on a range of issues. China, however, is a bit reticent:

Mrs. Clinton is expected to build on the Bush administration's foundations in dealing with China. Under President George W. Bush, the U.S. established two formal engagement channels with Beijing in recent years -- the "senior dialogue" focused on security issues and a "strategic economic dialogue" led by former Treasury Secretary Henry Paulson.

Mrs. Clinton has said the Obama administration will seek "a more comprehensive approach" to engaging Beijing, without specifying the issues to be addressed. China analysts said these comments have piqued the interest of Chinese leaders who fear they could signal more U.S. attention to Chinese human rights, Tibet and Beijing's support for dictatorial governments in Myanmar and Sudan.

Trade is another potential flash point. During the campaign, President Barack Obama was critical of some Chinese trade practices, and his treasury secretary, Timothy Geithner, has accused China of manipulating its currency.

The discipline of international relations (including IPE) often boils down to studying difficulties in policy coordination between states. This is one example. The Bush administration was often derided for its strident tone and lack of diplomatic skills. Indeed, the Bush adminstration's diplomatic failures became a major issue for the Obama campaign in the last election. All Obama had to say was "I'm gonna do it differently than Bush did it" and that was enough.

The substantive Obama campaign rhetoric on foreign policy basically boiled down to "we're going to talk to people, and we're going to listen to people, and we're gonna have diplomacy, and then everybody's gonna get along with us". Unfortunately, it's not that easy; you can ask as sweetly as you like, but states are still going to resist conforming to your preferred policy unless there is some benefit for them. It is absurd to think that the Chinese will strengthen their human rights policies, end support of the genocidal regime in the Sudan, or invest in tons of "green" infrastructure in the middle of a economic slowdown if we just ask nicely enough. Those sorts of movements, if they are possible at all, will require major concessions from the United States in exchange, or significant leverage. Right now, we don't have much leverage over China, and we're not in a position to make many concessions, so the U.S. and China will just have to live with an uneasy symbiosis in the short- to medium-run.

The Politics of Insourcing

A new proposal for stimulus, relayed by Friedman:

Leave it to a brainy Indian to come up with the cheapest and surest way to stimulate our economy: immigration.

“All you need to do is grant visas to two million Indians, Chinese and Koreans,” said Shekhar Gupta, editor of The Indian Express newspaper. “We will buy up all the subprime homes. We will work 18 hours a day to pay for them. We will immediately improve your savings rate — no Indian bank today has more than 2 percent nonperforming loans because not paying your mortgage is considered shameful here. And we will start new companies to create our own jobs and jobs for more Americans.”

From Alex Tabarrok, who adds:

Note that the multiplier on the "buy a house, get a visa" strategy would be much larger than any possible domestic multiplier since the money would come from outside the economy (and efficiency would improve as well.)

I think there would be considerable support among economists that immigration (buy a house, get a visa), a payroll tax cut and maintaining state and local funding would be reasonably good policies in this recession (albeit not necessarily sufficient) yet these policies seem to be the ones that the political system rejects out of hand. (See also Matt Yglesias here and here). Now, I can understand rejecting these policies as compared to doing nothing, ala a precautionary principle, but why these policies are rejected compared to taking a trillion dollar gamble is puzzling even to someone like myself schooled in public choice.

I recently praised public choice economists (relative to other macroeconomists), but if Tabarrok is really representative then I might have to take it back. Later in the same op-ed, Friedman writes "the U.S. Senate unfortunately voted on Feb. 6 to restrict banks and other financial institutions that receive taxpayer bailout money from hiring high-skilled immigrants on temporary work permits known as H-1B visas." Even worse, that sentence was quoted on Tabarrok's own blog yesterday. He seems surprised that we aren't encouraging immigration, but why should he be? The stimulus is being framed as an employment bill, and that employment is intended for Americans. No Congressperson wants to go back to their district and explain why they are giving 2 million jobs to Chinese and Indian immigrants while domestic unemployment is spiking.

Nevermind that those jobs (likely) wouldn't be going to Americans, or that those jobs would beget other jobs which would: that level of nuance isn't currently possible in the larger American political discussion. The median voter would respond to a bill that expands immigration like they always do: mumbling "Dey took our jerbs!" and voting the offending representative out of office. Ross Perot got 19% of the vote in 1992 almost entirely because of "Dey took our jerbs!" rhetoric. The biggest domestic policy battle of President Bush's second term was over what to do with immigrants already in the country. It is pretty much inconceivable that the Democratic Congress, after winning a large majority by campaigning on a vaguely-protectionist "support Main Street" platform, would make one of their first acts the passage of a bill allowing millions of immigrants to enter the country. Especially Chinese and Indian immigrants, since those two countries have been the target of many recent "Dey took our jerbs!" attacks.

And no, it doesn't matter that they'd buy our houses.

The fact that it may be a good idea is mostly academic. Given the political situation we're in, it would probably make more sense to push for a lowering of the payroll tax and expansion of payouts to state and local governments.

A Person Needs a Face; A Tree Needs Bark

Emmanuel from the mighty IPE Zone blasts me on two fronts: first for defending macroeconomists from Wilkinson, and second for not appreciating the importance of reputation to the Chinese (as recounted by Wikipedia, but two can play that game: the title of this post was taken from here). The first has nothing to do with second in my mind, but his combination of the two is intended to call my IPE chops into question. Emmanuel's argument sums up to, in Lolcatspeak, "Ur doin' it wrong".

I, too, am familiar with Cohen's writings on the US/UK IPE divide. And I, too, am fully aware of what he means by the "economism" of some American IPE types. Indeed, the primary reason why I am in IPE instead of economics proper is because I think that the utility of modern Econ is lessened by its, er, "stylization" of the world, and I'm sympathetic to arguments that make that point (that's not what Wilkinson was doing, however, and not really what Emmanuel is doing either). Anyway, I've got no horse in the UK vs. US debate, so I'm not hashing that out here. Emmanuel is surely right to point out that an economist might look at Geithner's quotes and conclude that he is merely restating the obvious. A political economist should look deeper, if she can. Geithner's statements were clearly intentional, so let's do what Emmanuel hasn't and read the subtext while considering the context.

James Fallows, a man with a hundred times more awareness of Chinese culture than Emmanuel or I (or Wikipedia), says that the Chinese aren't "manipulating" the yuan, they are "managing" it. Emmanuel pointed out Paulson's recent similar semantic two-steps. Well, you say "po-TAY-to" and I say "po-TAH-to" but Geithner's point isn't substantively refuted. In fact, nobody is arguing that Geithner is wrong, only that he would have done better to keep his trap shut.

But who was Geithner's audience? Whose reputation was Geithner concerned with? Given the fact that he was speaking during his confirmation hearing in the U.S. Senate, his first audience was clearly domestic: he was speaking to the U.S. Congress and their constituents, and vague quasi-protectionism was a pretty major aspect of the recent election. Geithner was trying to indicate that Obama is committed to helping American workers, and considers Chinese jiggering of the RMB to boost (Chinese) domestic employment at the expense of US employment to be "unfair" to American workers. As I mentioned in my last post, this is a long-running theme in the US. The Obama administration has more direct lines of communication with the Chinese than a Senate confirmation hearing, so Geithner's rhetoric was clearly intended for domestic consumption. Felix Salmon fleshes the point out more clearly here.

Despite all that, surely Geither knew that the Chinese would be listening, which is probably why he said things like "the immediate goal should be for us to convince China to adopt a more aggressive stimulus package as we do our part to try to pass a stimulus package here at home." In other words, the first priority is to boost domestic demand in China, not to duel over currency valuations. Once again, this is a pretty noncontroversial statement: everyone agrees that Chinese domestic demand needs to grow with the rest of the economy. Geithner also strongly indicated that the Obama wants to work with, and not against, the Chinese. More than once, Geithner mentioned that Obama seeks more policy coordination and cooperation with the Chinese rather than less. In any case, neither Geithner nor Obama have indicated that they are prepared to take any retaliatory action against the Chinese (much to Emmanuel's chagrin, I'm sure!), so Geithner's comments are best read as cheap talk for the benefit of domestic audiences.

Were some Chinese feathers ruffled by the bluntness of Geithner's comments? Surely. Were Chinese policymakers aware of the proper context, meaning, and intent of Geithner's remarks? Undoubtedly. Are both governments using the incident to shore up domestic support? Unquestionably. Are more reasonable and substantive discussions between Chinese and American policymakers occurring behind closed doors? Indubitably. Does this represent any sort of change in the US/China relationship? I see no economic, political, sociological, or anthropological reason to think so.

Yawn.

Image created using the LOLcat builder.

Foggy Thoughts on Decoupling

Daniel Drezner on the "known unknowns" of the impact of the financial crisis on international relations:

The tight coupling of the global economy caused export-dependent economies to face significant downturns because of the collapse in demand from the OECD nations. These governments will respond to the current crisis by creating the trade equivalent of currency reserves - that is to say, creating a protected space of demand for national champions. The most direct way to do this will be to boost domestic demand while restricting competition from foreign producers. As states plan to expand their fiscal policy, it should be relatively easy - via procurement rules and concentrating expenditures on non-tradable goods - to target new government spending towards domestic firms.

This kind of decoupling would contribute to the unwinding of the macroeconomic imbalances caused by the Bretton Woods II arrangements. It would also, however, be sure to reduce overall economic growth even further. It would also reduce whatever constraints economic interdependence has placed on aggressive action in world politics.

This is, essentially, what Emmanuel and I have been arguing about. He sees decoupling-through-protectionism as a net positive because it would correct imbalances. I see it as a net negative because it seems sure to reduce overall economic growth. In any case, I don't see that decoupling is inevitable, or even especially likely. It certainly has not occurred to this point in the crisis.

I also remain skeptical that it is "obvious," as Drezner says, that the free market model is in peril and that China will benefit (in relative terms) from the financial crisis. I keep hearing that mantra a lot, but I've to hear a strong, persuasive theoretical case as to how (or even why) this shift will occur. As far as I can tell, the new economic order looks a lot like the old economic order: the international community (esp. Europe) waits for the U.S. to make the first move, the old international institutions (e.g. IMF) get back some of the importance they'd lost in the wake of the Asian financial crisis, the global recession knocks down the petrostates by a peg or two, and China steps back a bit to focus on domestic pressures. Most commentators agree on these points even as they say that the old economic order is over, and the new economic order will be massively different. When asked about details of the new order, or the mechanism by which the world economy will move to it, they generally "don't have the foggiest idea" despite being certain of the inevitability of the shift.

Emmanuel may be correct in saying that the only way to get the needed adjustment is through renewed protectionism; Drezner may be correct in saying that renewed protectionism is somewhat likely, but not profitable; Rodrik may be right that a new world economic order is inevitable. All these things remain to be seen. But for my money, the new economic order is going to look a lot like the old economic order, and the needed structural adjustments will come in spite of, not because of, targeted government interventions into the economy. I'll try to say more about that last point later.

On the (De)Merits of Liberal Illiberalism

Economic infidel Emmanuel (hey, he asked for it) fulfilled his promise to further explain his support for a low-level trade war between the U.S. and China. It's a long post, summoning Adam Smith and Jesus Christ among other luminaries, but I feel it is short on persuasion. For one thing, in my last post I proposed two scenarios for achieving a re-balancing of accounts: the first is Emmanuel's trade war; the second, a mix of currency revaluations (i.e. the RMB strengthening against the dollar) and domestic policies to encourage domestic spending in China (e.g. social welfare spending). If the real problem is as Emmanuel sees it, then the second scenario attacks the problem head-on by addressing the factors causing the account imbalance; instigating a trade war doesn't address the problem at all except by slowing overall economic activity. This proposed cure seems much worse than the actual disease, especially from the Chinese point of view. Emmanuel didn't speak to my question directly, but his post indicates that he prefers the war nonetheless. I remain unconvinced, as I hope to explain below.

I certainly agree that the current trade regime between the U.S. and China is not "free". But Emmanuel points out several ways in which the trade policies are illiberal, complains about them, and then proposes more illiberalism as a counterweight! He's proposing illiberalism as a liberalism-in-disguise. It's a sort of Wouldn't it make more sense to advocate for China to allow the RMB to appreciate, the U.S. to let the dollar depreciate (we've been trying our damnedest!), and for China to weaken its system of export subsidies in favor of policies likely to stimulate domestic spending (e.g. some version of an EITC or something)? In past posts (and later in the one under discussion), Emmanuel has been sympathetic to those views, so why has he jumped on the protectionist bandwagon now?

Emmanuel correctly points out that there is a social justice aspect to this. But it's not clear that it cuts always and only in the direction that he intends. If a trade war ensues, the first thing to happen will be a somewhat major rise in unemployment (above and beyond the jobs lost to opportunity costs), especially among the already-poor in China. And if employment drops, it will be difficult for China to boost domestic consumption. The necessity of boosting Chinese domestic consumption is the central issue here, as I think Emmanuel and I both agree. So if Obama starts a trade war with China, the Chinese people lose jobs and become poorer, domestic consumption falls further, and Chinese welfare has dropped. Where's the social justice in that? Perhaps the statistical account imbalance has lessened, but at great cost in welfare.

Emmanuel similarly complains about zombie corporations, and cites the Japanese experiences of the past decade or so. I have that experience in mind as well, but I don't understand how propping up inefficient local industries through mercantilism is supposed to decrease the number of zombie firms. Indeed, the opposite is likely to be true, as the U.S. has already seen (viz.: the Big Three automakers, and the U.S. steel industry). Creating more domestic protections -- through subsidy or import tax -- will further soften the underbelly of American industry, and prolong the adjustment Emmanuel is seeking.

He is similarly wrong about America's debt obligations. While American debt is certainly not negligible, it's also not extreme. American debt levels as a percentage of GDP are somewhat middle-of-the-road for OECD countries. Japan, Italy, France, Greece, Belgium, even Germany (!) all have higher debt-to-GDP ratios than the U.S., which is right around the OECD mean. Of course, the U.S. debt level is sure to go up in the next few years, but the point is that there is still some wiggle room before the debt burden becomes unmanageable. One other not-insignificant point is that all of the U.S. debt is dollar-denominated, which makes servicing that debt much easier, especially over long time horizons.

So we agree on the need for structural adjustments in both the U.S. and China, but we disagree on the mechanism. Emmanuel seems to think that adjustment is best achieved through a trade war, whereas I think that a trade war will prolong the adjustment period by propping up national champions and zombie firms. And, as Bhagwati is fond of saying, it's much easier to enact protectionist measures in bad times than it is to retract them in good times: once interests are entrenched, they tend to stay entrenched (see, e.g., the U.S. Farm Bill). To me, a better policy would be keep trade open, lower the existing barriers to trade, make the playing field equal for producers of Chinese domestic goods, and boost the American export sector through greater currency parity. This could lessen the pain of the transition by not killing aggregate economic activity.

Is my option politically feasible? Emmanuel seems to think not; that only a trade war can force the Chinese and American governments to take the necessary steps. This is not obvious to me, and in fact it seems more likely that the opposite is true: if the U.S. puts up tariffs, the Chinese may respond with even greater export subsidies, or even greater currency manipulation. In fact, the recent pattern of Chinese behavior indicates this as the most likely outcome. And if that happens, then what? I'd rather work for actual liberal policies rather than illiberal liberal ones, even if the changes are incremental rather than drastic. In my view, a small positive change is preferred to a large negative change any day of the week. I fear that Emmanuel's approach is one step forward, two steps back.

Should We Hope For More Protectionism?

Emmanuel at IPE Zone says that a trade war between China and the U.S. might not be such a bad thing after all:

I will have more on why a trade war could be a potentially welcome development as the US and China wage a tit-for-tat strategy of faulting each others' trade practices and launching sanctions. Unlike conventional economists who view protectionism as an unambiguous bad or anti-globalization types who view trade as little more than the work of Satan, there is more to it than that. As always, the IPE Zone is less about pleasing either crowd than about forging ahead with fresh thinking on various problematiques. Yes, a trade war may just be the thing to remedy global economic imbalances currently roiling globalization. All we need is an Obama-induced escalation. Watch this space.

I will, but color me skeptical. There's a reason "conventional economists" are frightened of a trade war: it distorts economic activity, increases inefficiencies, carries the deadweight loss of the tax and of the lost scale returns, and so reduces output. In the midst of the worst global economy since the Great Depression, that seems to be the last thing we should be seeking. Additionally, the Chinese economy is heavily dependent on exports; if that system collapses suddenly rather than gradually, then it seems inevitable that social welfare will decrease sharply, and the brunt of it will be felt by the Chinese.

Emmanuel seems to think that these negative prospects will be out-weighed by an improvement in "global economic imbalances". But will they? Let's go through the logic. Suppose the Chinese government -- now facing a potentially severe domestic recession -- is facing two policy choices: attempting to rebalance their economy by boosting domestic consumption, or instigating a trade war with the U.S. to protect local industries. In the first scenario, the Chinese government could let the value of the RMB rise relative to the dollar; this will hurt exporting producers, but will make imports relatively cheaper. If coupled with a shift in subsidies from export industries to domestic consumption programs (e.g. direct subsidies to Chinese consumers, through unemployment insurance or some other social welfare plan) then domestic consumption might be boosted while the balance-of-payments gap narrows. The shift from an extremely export-biased economic model to a more balanced model would not be without some pain, of course, but that adjustment is going to have to happen eventually anyway.

In the second scenario, the Chinese and Americans end up in a trade war. Because 40% of the Chinese economy is in exporting industries, national income falls precipitously while unemployment rises. This lessens domestic demand for goods in China, and the Chinese economy slips into a deep recession. The value of the RMB slips further, making imports even more expensive and diminishing local demand further. The current account surplus narrows, but only because overall economic activity has decreased. In this scenario, spiraling is a very real danger.

Both scenarios lead to the re-balancing Emmanuel seeks, but the second seems to entail much more pain. And this pain wouldn't remain local; it would trickle down throughout all the export-biased economies in Asia. All to say, I have no idea what Emmanuel has in mind, although I'm very interested in finding out.

The Break-Up of Chimerica

Niall Ferguson, with all kinds of good stuff:

We are living through a challenge to a phenomenon Moritz Schularick and I have christened “Chimerica.”1 In this view, the most important thing to understand about the world economy over the past decade has been the relationship between China and America. If you think of it as one economy called Chimerica, that relationship accounts for around 13 percent of the world’s land surface, a quarter of its population, about a third of its gross domestic product, and somewhere over half of the global economic growth of the past six years.

For a time, it was a symbiotic relationship that seemed like a marriage made in heaven. Put simply, one half did the saving, the other half the spending. Comparing net national savings as a proportion of Gross National Income, American savings declined from above 5 percent in the mid 1990s to virtually zero by 2005, while Chinese savings surged from below 30 percent to nearly 45 percent. This divergence in saving patterns allowed a tremendous explosion of debt in the United States, for one effect of the Asian “savings glut” was to make it much cheaper for households to borrow money than would otherwise have been the case.

Of course that "arrangement" is unraveling, as the Great Adjustment progresses. There is more:

Among the other developed economies, both the Eurozone and Japan are already officially in recession, ahead of the United States. The European situation is especially precarious because, contrary to popular belief, European banks are in worse shape than their American counterparts. Average bank leverage in the United States is around 12:1. In Germany the figure is 52:1. Short-term bank liabilities are equivalent to 15 percent of U.S. GDP; the British figure is 156 percent. Indeed, the United Kingdom runs a real risk of being Greater Iceland—an economy crushed by a super-sized financial sector.

Emerging markets, too, have been hammered harder by the crisis than the “decoupling” thesis promised. In the year to the end of October 2008, the U.S. stock market declined by 34 percent. But Brazil’s was down 54 percent, China’s 58 percent, India’s 64 percent and Russia’s 66 percent. When Goldman Sachs christened these four countries the BRICs, they little realized that their equity markets would one day be dropping like bricks. These figures are scarcely good advertisements for the more regulated, state-led economic models favored in Beijing and Moscow.

The financial crisis is especially bad news for energy exporters: not only belligerent Russia, whose leaders yearn for a reconstituted Soviet empire, but also those other thorns in the side of the United States, Iran and Venezuela. Any oil price below $94 a barrel is bad news for Venezuela’s fragile finances; any price below $55 spells trouble for Iran.

What does it mean? The U.S. is actually remarkably well-positioned to ride out this storm compared almost every other country; whether developed or emerging, more or less regulated, net importer or exporter. Remember that when you hear that
The American Century is over, or capitalism is dead, or any other similar sentiment.

The Great Adjustment (a continuing series)

China's exports dropped significantly in November, but their imports fell by an even greater margin, so their current account surplus expanded. This is likely due to the fact that many of China's imports are inputs for production rather than finished goods for consumption. This was reflected by a sharp drop in China's producer price index.

Who Adjusts, II

Update (Back date?): This post by Brad Setser nicely links the current mess to the broader current imbalance and exchange rate arrangements in Asia.

Somehow I missed Paulson's last trip to China in connection with the Strategic Economic Dialogue. While achieving little, it did reveal a bit of information about how the Chinese government is thinking about the global recession and global imbalances. When asked about the appropriate policy response, Zhou Xiaochuan, governor of China's central bank, said "The United States should speed up domestic adjustment, raise its savings rate and reduce its trade and fiscal deficits." (HT to Kaylan).

Discouraging but not surprising news, really. Discouraging because adjusting global current account imbalance is less painful if China expands than if the US contracts. Thus, the Chinese position implies a more-painful-than-necessary adjustment path. Unsurprising because China's position reflects its interests as a large creditor. As Wang Qishan, China's deputy prime minister, put it, the United States should stabilize its economy as soon as possible to "ensure the safety of China's assets and investments in the U.S." This sounds somewhat like the advice another large country often offers emerging market governments, though that country rarely is so brash as to admit that the advice is offered to safeguard American assets.

The IHT article also contains a terrific non sequitur: "During his campaign for president, Barack Obama often accused China of manipulating its currency, but ... his choice for Treasury secretary, Timothy Geithner, has lived in China and speaks Mandarin."

Department of Ut-Oh (a continuing series)

Back in April, Peter Thiel said "there is no good scenario for the world in which China fails". He got a bit hysterical thinking about the possibility, concluding that a massive world war that effectively destroys human civilization is not outside the realm of possibility. I hope that scenario is too extreme, but the initial point stands: what is bad for China is bad for the rest of the world.

Presently we find that many things are bad for China:

Exports constitute nearly 40 percent of China's GDP--far too high a figure. (By comparison, in the U.S., exports account for about 10 percent of GDP most years.) And the global financial slowdown is already taking a terrible toll. Some 10,000 factories in southern China's Pearl River Delta area had closed by the summer of 2008. Gordon Chang, a leading China analyst, estimates that 20,000 more will shutter by the end of this year. In the third quarter of 2008, Beijing also reported its fifth consecutive quarterly drop in growth, and several private research firms expect a sharper slowdown next year. Additionally, unemployment is skyrocketing; in Wenzhou, one of the main exporting cities, about 20 percent of workers have lost their jobs, Reuters recently reported.

Don't forget the $586bn stimulus that China announced last week, which represents ~ 16% of 2007 GDP at the official exchange rate (less in PPP), and the fact that Chinese inflation and real growth rates are falling off. It now appears that if there is a global Great Depression, it may begin in China.

Krugman on Stolper Samuelson Effects in US Trade

In case you missed it, Paul Krugman's Friday column focused on the distributional consequences of international trade. He argues that as imports from developing countries have risen during the last fifteen years, trade flows have begun to follow the expectations of standard comparative advantage. Consequently, trade has a more pronounced impact on wage inequality in the US today than it did fifteen years ago.

I am predisposed to the general argument, but am puzzled by the magnitude he claims. He asserts that "it’s hard to avoid the conclusion that growing U.S. trade with third world countries reduces the real wages of many and perhaps most workers in this country...The highly educated workers who clearly benefit from growing trade with third-world economies are a minority, greatly outnumbered by those who probably lose."

He draws on textbook Stolper-Samuelson logic to make the argument: "workers with less formal education either see their jobs shipped overseas or find their wages driven down by the ripple effect as other workers with similar qualifications crowd into their industries and look for employment to replace the jobs they lost to foreign competition. And lower prices at Wal-Mart aren’t sufficient compensation.

Yet, exactly how many workers have lost jobs to "foreign competition?" The competition Krugman emphasizes comes from imports of manufactured goods. The Bureau of Labor Statistics reports that manufacturing employment fell from roughly 17 million in 1997 to 14 million in 2006. That's a reduction of 3 million manufacturing jobs over ten years--300,000 per year on average--in a total labor force of 136 million people. To assert that this displacement imposed a substantial wage reduction on others seems a bold claim to make without providing any evidence to support it.

I look forward to seeing Krugman's research on this question develop. He has posted a few short pieces about the paper he is writing on his blog, here, here, and here. If you want to read what appears to be the state of the art on trade and income distribution, see Robert Lawrence's paper here.

Protectionism by Other Means

As the Democrats in Congress fret and fuss about "globalization," the Bush administration responds by moving to increase barriers to Chinese imports. The U.S. Court of International Trade released an important opinion yesterday concerning how the Commerce Department handles "unfair trade" complaints against China. This morning, "The administration of George W. Bush, escalating its trade dispute with China, announced ... that it would impose potentially steep tariffs on Chinese manufactured goods, with a move to protect American paper producers from unfair Chinese government subsidies.

The action reverses 23 years of U.S. trade policy by treating China, which is classified as a "nonmarket economy," in the same way that other U.S. trading partners are treated in disputes involving government subsidies."

The ability to treat China "like other U.S. trading partners" also implies that we can look forward to rising tariffs on a lot of the manufactured goods we import from China.

U.S.-China Trade

Political Calculations has an interesting discussion of the growth of U.S. exports to China and Chinese exports to the U.S. They suggest that each country's exports are growing by about 22 percent per year, therefore doubling every three years or so.