China Bashing

The US has an annual trade deficit of $186 Billion with China. The US cites the Yuan's low value as a major source of this deficit. The US criticizes China on human rights abuses as well as for building up their military and there are plenty of congressmen willing to jump on the anti-China bandwagon. And now to top it all off, there is criticism about China becoming the world's biggest emitter of CO2. Let's not get facts get in the way of hysteria.

Trade Deficit
The facts are as follows. Firstly, China is not the biggest source of imports for the US, Canada is. In 2005, China was responsible for 14.6% of US imports. Canada was responsible for 16.9%, Japan for 8.2% and Germany 5%. About 50% of the US imports from China were through US multinationals.
China has one of the lowest import barriers in Asia and is also one of the highest recipients of Foreign Direct Investment (FDI). Finally in areas where the US has been investing and is highly innovative, the US actually has a trade surplus - ; areas such as high-tech items, agriculture and aerospace. The dragon turns out not to be so fierce. It is also worth remembering that much of what China has earned from selling to the US has also been reinvested in US companies and assets.
This is not to say that a trade defecit is good but the reasons do not stem from an unfair China (in fact it is the US that keeps using thuggish state intervention to tame China such as Senators' Lindsey Graham (R-SC) and Chuck Schumer (D-NY) attempt to impose a 27.5 percent tariff on Chinese goods.) but a US that has become less efficient of late, suffering from lack of investment and innovation in key areas. Much of this can be blamed on excessive protection given to US firms, strong unions and heavy handed taxation and regulation of firms. If the US is bad, Europe is far worse (in case the Europeans feel like gloating).
Instead of pointing fingers at China, US legislators should be reminded that the massive trade deficit is only a symptom of far deeper issues in the world's largest economy.

Finally, if we look at the current account deficit (of which trade is a part), then we come to two blaringly obvious conclusions - US consumers should start saving more and borrowing less and the US government needs to start going on a spending diet.

Currency Issues
Another red herring. The US has a trade defecit with Germany even though the $ has been devalued several times during this period against the euro. At the same time, China has moved away from pegging the Yuan against the US$ and has adjusted it more in the direction of its proper world price. It is estimated that even if China were to completely float their currency, this would not eliminate the US trade deficit with China.
China should be persuaded to float their currency but this is just a red herring used by China bashers.

Human rights and arms spending
China is guilty of egregious violations of human rights. It has the world's highest execution rates, condones torture, limits free speech, the list goes on. It is right to condemn China for these abuses but it is wrong to use it as a crutch to justify setting up massive trade barriers with China. One of the encouraging signs from China in recent years is that dissent is more openly tolerated. This is logical - as people become wealthier, they demand more rights and more power. People tend to forget that S. Korea was once a dictatorship but is now a thriving democracy.
Prosperity leads to democracy. I am hard pressed to think of a counter-example (although the opposite is definitely not true - India has been a democracy for over 50 years but is one of the poorer countries in the world by per-capita GDP).
I'm inclined to believe that a richer China will have more in common with the West than it will with Iran, for example.
In terms of military spending. A quick look at the CIA world fact book should set things in perspective. China spends about 4.3% of its GDP on military spending, which works out to about $108 Billion based on the official exchange rate. The US spends about 4% of its GDP on the military, which amounts to $528 Billion. $ for $, the US spends over 5x as much as China on it's military. If one adjusts to purchasing power parity, the difference narrows. China, based on a PPP adjusted GDP, spends about $403 Billion while the US spends $519Billion. But as the US produces most of its own military hardware and China imports much of it's hardware so the non PPP adjusted GDP figures are probably closer to reality.
There is room for concern here; namely, a potential flashpoint over Taiwan. But I think that as the two sides become more interconnected through trade, such a flashpoint is unlikely to materialize into open war.

Global CO2 emitter
In absolute numbers China will probably overtake the US in CO2 emissions very soon but let's not talk about absolute numbers. China has 1 billion people while the US has 300 million. The US (2003) produced about 5.762 Billion tons of Carbon while China produced 3.473 billion tons. On a per capita basis (which is one of the fairest ways to calculate CO2 emissions), the US produced about 19.2 tons per person while China produced about 3.5 tons per person. The US produces over 5x the amount of CO2/person than China. This puts the US at 5th place and puts China at around 80th (Qatar is the worst emitter). Of course China's rate of CO2 production is growing much faster than the US, which is a point of concern but for now we can safely conclude that China is not a CO2 monster.
Finally on the subject of the environment, people should remember that every country that became industrialized went through a phase when the environment suffered in the name of economic growth. It is unfair to single out China in this respect. If anything, China will benefit from modern technology by having factories that pollute less and are considerably more efficient than their counterparts in the West 100 years ago.

Alan S. Blinder has gone soft

Alan Blinder is a brilliant economist but judging from this article in the WSJ opinion journal, I'm wondering what he's been drinking. He has missed out a very large part of the outsourcing issue and because of this, he is wrong.

One of the determinants of price is productivity. If Lineland can produce 3 widgets per worker while Flatland can produce 9 widgets per worker then all things being equal, a worker in Flatland will earn 3x as much (if he earns more than 3x then it is more economical to produce in Lineland). Now because of comparitive advantage if a worker in Lineland can produce either 3 widgets or 1 blob and a worker in Flatland can produce 9 widgets and 15 blobs then even though Flatland has a considerable productivity advantage for both widgets and blobs, Flatland will tend to specialize in blobs and Lineland will specialize in widgets as this will yield the biggest advantage to both nations.
China fits into this classic mould - China produces widgets (manufactured goods) with relative efficiency while the US produces blobs (services) with relative efficiency. The end result is that the US is still a net exporter of services. That there is a huge trade deficit stems from other issues that we can discuss later (clue: a huge source of the US trade defecit is not China...).


It gets murkier when both Flatland and Lineland have specialized in the same area.
India is one of these anomalies. Blessed by a decent higher education system, and the fact that the manufacturing section was tied down by red tape, their services sector took off. This is not a sustainable model. India has hundreds of millions of poor people who don't have a hope of ever getting a high school education let alone a university education - many these people are unemployed because the traditional route up through manufacturing is blocked to them. This will be a source of major social instability in the future.

This anomaly in India is manifested in some pretty obvious ways. Witness the airport in Delhi compared to Shanghai. Shanghai is a modern, efficient airport where it is clear where to go and how to get there while Delhi is a total mess. If you're not careful in Delhi, you could easily get into some serious trouble. Other differences are also apparent - bad roads, terrible train transportation, awful telephone system, unbelievable amount of red tape - the list goes on. The services sector is booming but everything else in India seems to be struggling. Already their infrastructure deficiencies are having an impact on their growth.

Are there productivity differences between an information worker in the US vs. an information worker in India (for example)? While I am not questioning the talented young men and women in India, the answer is clear. An IT worker in India has to contend with: poor communications networks, bad roads (to go to and from work), inefficient retail networks (and logistics), less powerful machines (though the cost of a PC has been going down steadily while becoming more powerful, the cost of the most powerful machines at the time has remained high), less efficient financial markets to produce venture capital and less effective management. Were all of these factors equalized, the cost of an IT resource in India would be the same as that in the West.

It is almost surprising that we are able to outsource to India given the fact that the West has the same relative efficiencies as India. But this is not surprising when we start to break down the numbers. Where India has excelled is in the low margin, high volume sort of work. In sheer quality of research and product development, most of the innovation still happens in the West (with some notable exceptions). This does not mean that the West should be complacent. Protected industries are ripe for outsourcing as the price far exceeds the productivity of the resources. Restrictive immigration laws also works as a form of industry protectionsim by reducing the supply of workers. Old controls need to break down - unions and professional bodies need to accept that the market must determine wages not committees. And in the end, it is better to have workers come and work in your country than having the firm move away in search of workers.

Returning to Mr. Blinder, a professional in the West does not have anything to worry about if they keep their productivity advantage and if their industry has a relative productivity advantage to the rest of the economy of their country.

As good as it gets...

Indur Goklany has written an excellent essay about the state of the world, which can be found here. No surprise really - we are healthier, wealthier and dare I say it, happier. Of course too much of a good thing can be a bad thing witness all those angst ridden teenagers at anti-globalization marches.
On the topic of globalization, few years ago, an excellent book by Martin Wolf called Why Globalization Works, looked at trade as the panacea for the world's poor. Indeed the percentage of people living on less than $1/day has more than halved in the last 20 years, global literacy levels have increased from 52% to 82%, and infant mortality rates have decreased almost everywhere. All this at a time of unprecedented increases in trade and freer movements of people and goods. It's almost painfully obvious that increasing trade is better for everyone. We wouldn't give the time of day to someone who would suggest increasing tariff barriers between the State of New York and the Commonwealth of Pennsylvania to protect jobs in New York and yet these are exactly the same sorts of arguments we are making on an international level.
Of course some people argue that a wealthy country trading with a poor country is not the same thing as two wealthy countries trading. Complete tosh. We haven't seen a drop in living standards in the US as a result of increased globalization. True average family incomes have not really increased but on the other hand, people's net wealth has, which is more important. More importantly, globalization has led to a stabilization in prices. Never have Americans looked so good dressed in low cost clothing from China.
The other thing that people forget is that the US economy has transformed itself in the last 40 years from manufacturing to services. Services now make up nearly 80% of the US economy. The US is the recognized leader in the services industry.
Indeed that "Great sucking noise" failed to materialize. Instead the US has gained massive benefits from free trade with Mexico. That Mexico hasn't benefited to the same degree is largely due to the inherent inefficiencies in the Mexican Economy.
The developing world has also benefited from globalization - witness India and China. Two economic basket cases 40 years ago are now poised to become the biggest economies this century.
Things are getting better with time. Increased globalization has led to greater innovation, more productivity, and increased trade. Increased competition keeps prices down while at the same time encouraging increased diversity of products and services. Consumers benefit from this and we are all, at the end, consumers.