Chinese Box

Paranoia over state capitalism

Right before whatever happened to China International Business happened (we still don't know), I was in America looking for China related books for the magazine to review. I asked my colleague what he thought of doing a scathing review of "The Beijing Consensus: How China's Authoritarian Model Will Dominate the Twenty-First Century" to which he pointed out that doing such a review would require going through the painful process of actually reading the book, so we shelved the idea (luckily otherwise I would have been stuck with it).

The Washington Post has done a review of it, and two slightly more interesting looking books. The End of the Free Market: Who Wins the War Between States and Corporations? by Ian Bremmer, and Freedom for Sale: Why the World Is Trading Democracy for Security by John Kampfner. While I haven't read any of these books, so can talk with zero authority about the actual content (I did watch the Daily Show interview of Ian Bremmer, which made the book sound much better than the review), I just want to say that I've always found the hand wringing over "State Capitalism" overwrought, for a few reasons.

First, most of the more severe authoritarianism out there isn't particularly popular, and such countries have been more successful at running their countries into the ground than satisfying the populace enough that they ignore human rights abuses. Iran is basically bankrupt, Venezula is not well off. Lets not talk about any of the various African and Southeast Asian crackpot states. The only real exception of a state-takeover that has been popular has been in Russia, and there are any number of caveats there. The reason why all these states aren't doing well is quite clear from China - China is held up by its large private sector, with state owned companies sustaining themselves by more or less stealing money from them. In China its slightly more controlled (SOEs have a secondary role managing inflation, and they are subject to some oversight), but in Iran and Venezuela its just a means to grab assets. 

Second, anyone who lives in China can see that the country is getting unequivocally better. The country is by no means a beacon of individual rights, but in general state intervention in people's life has shrunk every year for the past 30. In other words, human rights and capitalism have the draw they always did, and its largely Western countries that are worried they don't.

Third, my experience with countries that have various levels of state capitalism, ranging from Egypt (still mostly socialist) to China to Czech Republic (mostly capitalist, but with remnants), is that most state intervention is a lever to protect against wide-scale discontent. Government ministers I spoke to in Egypt were all quite enthusiastic about privatization (though some were obviously telling me what I wanted to hear), but with each privatization came protests from laid off workers. China seems to be roughly the same thing. They don't fully privatize the banks not just because they want to steal from them (though that's a factor too) but mostly because every time they have tried to use market based macro-economic controls it led to massive inflation. Such transitions are painful.

Which is why I think the lesson that can be learned from all three books is the one made directly in Freedom for Sale - that Western countries have been too eager to give up human rights in return for wealth or security. Its often pointed out in these discussions how inappropriate it is to call the US "the land of the free" when it has the world's highest percentage of the population that's incarcerated. And its fairly easy to see a degradation of human rights going on as we speak in America (if you don't believe me just read Radley Balko's work for a few days). All three books seem to be taking part in a discussion about "how much freedom is the right amount of freedom," and that isn't a conversation we should be having. We know the answer is as much as possible. Unfortunately we are content pointing fingers at other countries while the police are bashing in our door.

Obama and Trade: Looking bad

One of the reasons why I want to move this blog into covering more "America and the developing world" related subjects, is that America's involvement in the developing world is bad and getting worse, as can be seen by this recent article from the National Journal. (paywall)

 For those who can't get their hands on it, the author is making the point that Obama's trade policy hasn't yet shown itself, and that there is no reason to expect it will be a good one.

competitive liberalization was expected to persuade Brazil to agree to a Western Hemisphere free-trade area in the 1990s and, in this decade, to force an early conclusion to the Doha Round. In neither case did it work. Nor have trade agreements negotiated by rivals pushed Congress to finish the South Korea deal. Why should such pressure work in the future?

The other point he makes is that while the Republicans have traditionally been the most aggressively pro-trade party, with the tea-parties the party has been taken over more and more by the NAFTA hating Ron Paul followers, leaving a giant gap in political support for pro-trade moves.

Won’t a larger GOP contingent in Congress bode well for trade in 2011? Maybe. But if conservative Republicans owe their victories to tea party support, they may be as wary of trade deals as liberal Democrats are.

The 2011 optimism also presumes that Obama will want to move on trade deals to burnish his leadership image in the run-up to the 2012 presidential election. Why should Republicans, whatever their ideology, give candidate Obama those additions to his résumé?

This is bad for everyone, everywhere, but particularly for Americas place in the world.

America's increasing irrelevancy

I don't go back to America that much, and when I do I usually spend most of my time either shopping or trying to get in touch with greentech types (I'm from the Silicon Valley). During this trip I've spent a considerably amount of time just chatting with middle-class people about the economy and watching CNBC, and there's a few fairly concerning things I've noticed.

 1. China isn't scary anymore: This isn't concerning, but it does speak to a certain change in the US-China relationship. People are fairly clear now that the Chinese have far more rights then the North Koreans (which wasn't true 5 years ago), they vaguely understand the personality of the Chinese state, and that Chinese manufacturing is a great thing for the global economy. But at the same time its seen as something that they have little control over, and they think that it could fall apart at any time. Interestingly though the term "bubble" came up in conversation several times, while the currency never came up, which is very different than the sense the Chinese have about American concerns.

2. The middle class is hugely concerned that they can't compete with the Chinese: I've written before about the upgrading of China's market abilities, and my recent visit to Vanceinfo (an engineering outsourcing company) brought home the message that the level of skills needed for an American to be competitive in the market is getting higher and higher, and a number of people have said as much to me. My Uncle, who used to work in Semi-conductors, simply said that in the future you won't be able to find a job unless you have skills that can't be found elsewhere.

3. Americans are missing the boat on globalization: The pattern of globalization has quite clearly changed in the past few years. Previously America produced a few extremely high value goods for the world, but put most of their economy towards supporting their own consumption, most of the world supported US consumption as well. The message they seemed to have missed with the financial crisis is that consumption is moving elsewhere - there is growing upper-middle class consumption in Asia, middle class consumption in the middle-east, and lower-middle class consumption in Africa, which can more than make up for the slow down in US consumption. The US should be involved in serving these markets, but all the people on CNBC are talking about investing in companies serving the US market (Cosco - the bulk goods store, not the Chinese shipper - came up a lot). The exception here is Domino's, which I learned today is huge in India.

4. The political differences aren't as big as the politicians make them seem, but there is an odd sense of discontent on the right which is translating into more aggressive action about rather small policy differences. I was talking to someone who was defending the new Arizona border law, and his point was basically that you should arrest people who are driving without ID and enforce deportation when illegal immigrants are caught... That's quite a bit less controversial than what the law actually states. Then I went to his house and saw that he had tea party signs in his doorway saying "give me liberty not debt"... My father, I think quite insightfully said, that he's just not really sure what they want. 

The overall picture this has painted for me is of a country that knows there is a problem, but is unsure, or unwilling, to take the steps to deal with it. And whose prized separation from the rest of the world is becoming more of a liability as globalization drives the economy further forward. 

I'm going to be writing up what I consider to be the policy platform that America needs to take on to continue to succeed in the 21st century. If anyone wants to suggest their own ideas please do so in the comments.

Obama and Laozi

Two quotes: 

From the Economist: 

Some of China’s rulers, it is true, see no benefit to China from a stronger yuan. But they are also the ones most determined to resist foreign pressure. They would, therefore, back down only if American tariffs inflicted real pain. And theirs are not the only voices in the government. The PBOC recently appointed three scholars to advise it, two of whom, David Daokui Li and Xia Bin, have advocated currency reform. Whether they can overcome the Commerce Ministry and its allies remains to be seen. But their efforts to sell their ideas will come to nought if they are crowded out by imported arguments from America. 

From the Dao De Qing:

A leader is best when people barely know that he exists, not so good when people obey and acclaim him, worst when they despise him. Fail to honor people, They fail to honor you. But of a good leader, who talks little, when his work is done, his aims fulfilled, they will all say, "We did this ourselves."

 Not sure what I'm trying to say here. Other than it would be fairly consistant with Obama's foreign policy efforts before.

America very much needs this

I'm sure a mess will be made of it, but there's nothing America needs more than immigration reform.

Sens. Charles E. Schumer (D-N.Y.) and Lindsey O. Graham (R-S.C.) announced the building blocks Thursday for a new push in Congress to overhaul the nation's immigration laws, outlining a plan to require U.S. citizens and legal immigrants to obtain a new high-tech Social Security card tied to their fingerprints or other biometric identifiers and to create a system to bring in temporary workers as the U.S. economy demands.

I mean, seriously.

Quick thoughts on Obama in China

I'm in the middle of a heavy work load at the moment, so I want to keep this quick, but still say something while the iron's hot.

I don't really follow news from any sources I don't like (I read the Economist, the FT, the WSJ, and a smattering of economics blogs for news), and so I never really get much of the discussion around "the media's" opinion that often comes up when I'm talking to people back in the US, whether that's anger at how much they trash Sarah Palin, or anger at the resurgent evangelical right (which I always thought of as an unimportant fringe group), or whatever... I'm also fairly convinced that "the media" is diverse, and filtering bad news sources from good is fairly easy... which most people seem to disagree with me on.

The point being, when someone in the US told me "They're covering it over here like we used to have the upper hand, and now China has the upper hand," it really confused me. I asked "The upper hand over what?" and the person didn't seem to know.

My favorite coverage of Obama's trip has been, as per usual, from the Economist. This week here and here, and blogged about here. They're coverage of Obama has been extremely good, because they treat him as competent and soft-spoken, which I don't think is an easy thing for a cable news channel to do with a brilliant orator, but I think describes him rather well (though I don't think they've been aggressive enough in attacking his trade record). In these particular articles they make the good points that:

A. Standing around smiling politely is REALLY IMPORTANT in Asia, despite the fact it might not seem like much to the rest of the world.

B. China seemed to be quite scared by how charismatic Obama is, and how appealing American ideas are

C. It wasn't directly stated, but I think implied in these articles, and should be directly stated here, that Obama is playing for a big climate change deal in 2010. Its clear both in how he talked in China "as equals, co-operation, etc." and the fact that a binding agreement in Copenhagen has been delayed a year, because the current economic climate would be just horrible for setting binding resolutions. Other countries matter, but China and the US make or break any climate deal, and their bilateral relations need to be the best they've ever been by whenever the deal is made. (it should also be noted that Obama put a wrench in their bilateral relations with the duty he put on tires earlier in the year)

That said, I haven't been following the healthcare bills and the cap and trade bills that closely, and while I may think Obama is intelligent, his first term will be judged by whether those two bills are successful. That's to say, judged by history, not judged by voters, who will probably be looking at unemployment numbers

Is there ever a greentech subsidy that isn't protectionist?

Suntech Power <3's subsidies

From JLM McGregor:

Solar cell and module manufacturer Suntech Power Holdings (NYSE:STP) said Monday that it plans to begin manufacturing solar products in the U.S. and will choose a location for a new production and distribution center within the next six months. The initiative aims to take advantage of U.S. demand for large-scale wholesale solar projects, state incentive programs for customer-owned systems and the U.S. government's recent stimulus package, said Suntech Chairman and CEO Dr. Zhengrong Shi.

One of the consequences of countries not having free trade agreements, is that there ends up being a lot of companies founded in low rent areas of the protected countries purely for the purpose of getting a foreign company's products around tariff barriers. The prime example is any Chinese investment in Eastern Europe, which gives them access to European markets at low cost.

What's exceptionally ridiculous about this investment is that a large portion of the cost of solar cells involves production costs. All the people in a factory soldering plates together in fact requires a lot of time and money. So Suntech is actually raising the cost of their production in order to get access to preferential subsides from the US.

Of course the purpose of greentech subsidies is supposed to make it cheaper to cut down on pollution, not more expensive. Suntech is obviously getting a profit margin out of it, but if America was really interesting in helping the environment they would stop caring the residency of the technology that does so.

There's no such thing as the Chinese growth model

I'm really really sick of the following type of claims:

I RECENTLY heard a well-known capitalist make a shocking claim. He speculated that the Chinese economic model has been proven more effective than the American laissez-faire model. Do recent events and the extraordinary growth of China prove quasi-capitalism with lots of government manipulation work best?

There's no such thing as the Chinese economic model. China has a dysfunctional financial system and a lack of rule of law, which places undue importance on central government intervention during China's step-by-step reforms

Interestingly, the reason for a lot of China's success has to do with governmental accountability (which I know isn't usually what one expects from a non-democracy). Chinese leaders know they must help their people if they want to stay in power, which keeps them pushing further to American style capitalism. It also means that they generally promote talented individuals... as though their career depends on it. 

Americans need to learn that China in the 2000s is not Japan in the 80s.

Why I voted for Hillary

Obama just released a paper detailing his positions on trade in depressing depth. And for those hoping that he'd back away from protectionism when in power it isn't looking like a good sign. From the NYT:

Mr. Obama’s annual trade report to Congress is similarly worrisome. It suggested opening a “discourse with the public” on whether the trade agreements awaiting ratification — with Colombia, South Korea and Panama — are a good idea. It committed the administration to “improving” the North American Free Trade Agreement, without saying how. And it poured cold water on efforts to restart the World Trade Organization’s round of international negotiations.

And Ron Kirk, Obama's trade representative has been quoted saying:

“that not all Americans are winning from it and that our trading partners are not always playing by the rules.”

Oh, and also that he doesn't like the South Korean free trade agreement.

From a China perspective this is all bad, particularly this bit:

Other provisions would reverse changes the Bush administration made to U.S. antidumping and countervailing laws in response to adverse rulings at the World Trade Organization and would bar the Commerce Department from granting "market economy" status to China without congressional approval.

The point is that one of the biggest drivers of world growth, increased efficiency through allocating labor where it is most easily done, i.e. growing globalization, is being taken off the table by politicians. Which is perhaps one of the reasons things like this are being said.

About time

In the 2 weeks of this blogs existence I've been fairly critical of Obama's trade rhetoric (despite having voted for him). The line was always that Obama was free trader at heart, who had to talk up protectionism in order to win the election. I've been waiting for hard concrete evidence of this, and I think it might have finally come:

Q    You mentioned NAFTA.  A year ago you were pretty critical of NAFTA; in fact, you even suggested at one point that the U.S. opt out if it couldn't renegotiate.  Do you think that's the time now to be making that case, or is it something that's set aside now?
THE PRESIDENT:  I think there are a lot of sensitivities right now because of the huge decline in world trade.  As I've said before, NAFTA, the basic framework of the agreement has environmental and labor protections as side agreements -- my argument has always been that we might as well incorporate them into the full agreement so that they're fully enforceable.
But what I've also said is that Canada is one of our most important trading partners, we rely on them heavily, there's $1.5 billion worth of trade going back and forth every day between the two countries and that it is not in anybody's interest to see that trade diminish.

It's about goddamn time.