Arnold Kling  

China Menace?

The Long-term Budget Outlook... Steven Levitt...

The Washington Post's Steven Pearlstein warns about

China, now on the fast track to becoming a dominant player in the global economy and causing major disruptions along the way.

Here in the United States, entire industries are being quickly wiped out as production is shifted across the Pacific

Arguing differently is The Wall Street Journal's Hugo Restall.

China is using the hard-earned savings of its people, which could have been devoted to building globally competitive companies, and is instead throwing them down 100,000 state-owned ratholes so that Chinese workers can produce artificially cheap products for American consumers to enjoy.

...At the end of the day, China will be left with uncompetitive companies, depleted savings and a balance-sheet recession. It will have to sell off the distressed assets of its failed banking system, at which point Western companies can buy up even more of the economy at fire-sale prices.

Finally, Yasheng Huang and Tarun Khanna write,

In the early 1990s, when China was registering double-digit growth rates, Beijing invested massively in the state sector. Most of the investments were not commercially viable, leaving the banking sector with a huge number of nonperforming loans—possibly totaling as much as 50 percent of bank assets. At some point, the capitalization costs of these loans will have to be absorbed, either through write-downs (which means depositors bear the cost) or recapitalization of the banks by the government, which diverts money from other, more productive uses. This could well limit China’s future growth trajectory.

Huang and Khanna argue that India's development model is more durable, because it stimulates Indian entrepreneurs rather than relying on a combination of foreign investment and state-owned enterprises.

For Discussion. Journalists tend to write about foreign economic growth as if it were a threat to the United States. How do economists see it differently?

Comments and Sharing

CATEGORIES: International Trade

COMMENTS (9 to date)
Matt writes:

Must be a slow day, but I'll take a shot.

I think there are two pros to foreign growth for the United States.

First, if the average wages in a foreign country rise due to economic growth, then that will enable US companies to sell more goods to those people. For instance, more people in that country may want to travel abroad on vacation. This will force that nation's airline to buy more planes, which will then supposedly increase Boeing's revenue.

Second, and on a more humanitarian side, foreign economic growth will push other countries to adopt capitalism and democracy which will obviously be a great benefit to the US.

That's my view on it, please correct me if I'm wrong.

David Thomson writes:

“Journalists tend to write about foreign economic growth as if it were a threat to the United States. How do economists see it differently?”

Economists understand that the cruel price of creative destruction must be paid each and every time there is economic improvement. An economically stronger China will almost certainly be to our advantage. If nothing else, a more capitalistically successful China will be less likely to confront us militarily. Also, its businesses will increase trade with the United States.

Journalists get bent out of shape over unemployment. They interview some person who just lost their job and fail to see the big picture. Am I being overly simplistic? Nope, I don’t thinks so. It’s really that easy to understand. Am I a cold blooded jerk who feels nothing for the unemployed? No, but I realize that we can't run away from reality.

michael gordon writes:

It's important to distinguish between the short and long-run impact of China's rising trade surplus with us.

In the long-run, as Arnold notes about the difference between journalists and economists, China growing wealth and living standards will benefit the US economy: it will create a large and prosperous market for all the products --- good and services --- that we will likely to continue having a noticeable edge in . . . mainly high-tech, high-productive industries. That is what David is driving at when he refers to creative destruction: the need to let increasingly uncompetitive, low-productive industries shrink or disappear, precisely in order to free capital, managerial talent, and skilled labor (including scientists and engineers) move to more promising, more competitive industries . . . almost always, as it happens, more technologically advanced.

It's a term I myself have used in a lengthy reply to one of the visitors at my web site, (see the article for Sunday, July 27, 2003).

And, still in the long-run --- say, the next two or three decades (the maximum beyond which any half-way reasonable projecting is impossible, what with the speed of change these days and the uncertainties surrounding China's political stability and future) --- China will lucky to be much more advanced technologically than Taiwan or South Korea today. There are all sorts of constraints on its doing better --- not least the ungodly mess in its financial system (especially the banks), the social turmoil connected with further reductions in the bankrupt state-sector, the fragmentation within the domestic market, and the sheer wastage of much of the investment today and for two decades behind huge trade barriers in industries that won't prove competitive internationally. Another big constraint: lack of managerial talent, a large drawback. Yet another: the problems of intellectual property rights, which make technological innovation and entrepreneurial firms based on it all the less likely, what with the inability of start-ups and inventors to capture any of the initial profits as they're stolen away by others.

All this in the long run.

In the short run, China's swelling trade balance with us --- concentrated in certain industries like textiles and wood furniture, maybe in the future metal products, much of it fueled by the highest levels of foreign direct investment inflows in the world for a developing country --- does cause problems. In particular, no country's government can stand by while a massive surge of imports creates excessive pressures for adjustment on important industries, especially if they're regionally concentrated and have political clout. That's true of the industries being hurt directly.

The problem of effective adjustment is complicated by the sluggish job market nationally, with unemployment rising from around 4.7% or so in mid-2001 to 6.4% this last spring. The reasons for this unfortunate trend --- which may have peaked this last two months --- are also set out in a mini-series on the short-term prospects of the US economy that you'll find at the buggy prof site. So far, four lengthy articles have appeared on the topic, with two or three more to come. (I should add that a professor of political science at UC Santa Barbara, I've a Ph.D. in both that discipline and economics.)

So, politically and for humane reasons, some relief is needed for textiles and some other US industries being swamped by the ballooning surge in Chinese imports. What's to be done.

First, outright protection shouldn't be used except as temporary relief or as a credible threat to pressure Beijing into letting the Yuan float (it will go upward against the dollar), or at least revalue. And if the threat fails, temporary relief is allowed under WTO rules, provided it goes along with a scheme to make the industry or industries affected more competitive. (Forcing Beijing to revalue or float might be part of this. Note, though, that there are limits to our ability to achieve this --- not least the diplomatic need to win Chinese support for dealing with the North Korean nuclear threat.)

We can also increase our trade-adjustment assistance to beleaguered industries and the laid-off workers affected. Fortunately --- as the articles at the buggy prof note --- we've learned some things since the origins of this policy back in the mid-1970s to make it more efficient: above all, instead of pressganging laid-off workers into government-sponsored or government-subsidized training programs that go nowhere, paying for 18-24 months the difference between new wages for the formerly laid-off workers in new jobs and what they were earning before. A large number opt for their own retraining and upgraded education, with beneficial results.

There may be other forms of relief besides these: pressures on Beijing to adjust upward its undervalued Yuan, temporary quotas on Chinese imports with a clear scheme to make textiles more streamlined and competitive here, and trade-adjustment assistance. Above all, the need --- it can't be exaggerated --- to boost Aggregate Demand to increase GDP growth and bring unemployment down to somewhere around 5.0% in the next 18 months. A booming economy and booming job-market are, in the end, indispensable antidotes to job-pessimism and growing pressures for protection.

-- Michael Gordon
The Buggy Professor

Eric Krieg writes:

I see things almost completely different than this commentary. I see China forging ahead, while I see India stagnating.

It isn't the state owned businesses that are generating the trade surpluses. It is the new, often foreign owned ones that are selling abroad.

I also see China developing infrastructure (divided highways and a modern rail system) in a far sighted attempt to bring economic growth to the hinterlands.

India, on the other hand, continues to be protectionist and non-export oriented. Infrastucture spending is no where near Chinese levels. Foreign investment is not encouraged.

Perhaps the optimism stems from the fact that India is a democracy, and China is nominally Communist? If so, again I disagree. China has transcended Communism. It has advanced to mere authoritarianism. This is no joke, its the difference between Mao and Chang Kai Shek. Say what you want about the Nationalists, they didn't murder 20 million people simply because they were landowners.

The Chicoms are now indistinguishable from the Chinese Nationalists. That's progress.

Of course, Taiwan has progressed too. And as has been said, if in 30 years China has progressed to the level of Taiwan or South Korea today, the Chinese will have done just about as good as they could do. China is still a desperately backward nation, but improving fast.

Also, from what I've seen in engineering school, both China and India are developing some truly brilliant engineers. Most were way smarter than me, and from what I've heard, only the dumb ones that can't get into the Indian Institute of Technology (and I assume, its Chinese equivalent) come here. I hope someday that both countries become innovators, rather than lowballing copycats.

Matt writes:

Like Eric I have seen a lot of Indian and Chinese student engineers, but they all have one thing in common. They all want to stay in the US after graduation for the simple fact of earning a higher salary here than what they could back home.

If economic growth in China and India increases, I am sure those students will think twice on whether to go back home or not, and maybe that will create an engineering shortage in the US in a few decades.

Too add some perspective on this subject, I just graduated from Purdue University, and we had more Indian students than African American students.

Matt Young writes:

I'll wait and see, but in the meantime, I wall gladly take the days off work if China agrees to supply my material needs. Sounds fair to me.

Brian writes:

The profit motive and trade and technology (not Moore's Law) are driving a greatly increased quality of life for more of the poor countries like China.

All we have to do is intimidate and kill would be terrorists and terrorist supporters and everything will work out fine for everybody: rich and poor.

wangpeng writes:

i am chinese university student,my major is business administration..once i want to go to us for higher educatuation,but now i think if no scholarship ,i will not depend on my family"s help.i do not think freedom and democracy is necessary for me ..i only believe in gdp,and i believe i could come to your country to get my smartness and money.
taiwan is a part of china.we should we get what we lost the i9th and 20th century.that is waht we believe.
thank you for your teacher ,western civilization.

Jonathan Wilde writes:

>>>>>>>>>>>Journalists tend to write about foreign economic growth as if it were a threat to the United States. How do economists see it differently?

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