ChiMerica 1 10 July 2019.

There are real grounds for alarm over China.[1]  Many economists believe that the continuing growth of the Chinese economy will lead it to supplant that of the United States as the world’s largest by 2030 or 2035.  Moreover, China is a dictatorship with apparent ambitions to push the United States out of its dominating position in the Far East and perhaps to exert Chinese influence more broadly.  China has been imprisoning he numbers of Uighurs (Muslims) in Xinjiang province.  Some people suspect that, under Xi Jinping, China has chosen a new course.   Abandoning a “liberalizing” path, the Chinese want to spread modern authoritarianism to other countries in the same way that the United States has been trying to spread democratic capitalism.

The Obama Administration saw the challenge in China.  However, it became mired in peripheral issues (the Middle East, Ukraine).  It never managed to mount an effective response to the central problem of China.  The “Trans-Pacific [Trade] Partnership” treaty fell victim to the populism of the right and the left.  It would not have been implemented even if Hillary Clinton had won the election.

Since 2017, the Trump Administration has pursued a different course.  In December 2017, the White House issued a “National Security Strategy” paper that claimed that China and Russia “want to shape a world antithetical to U.S. values and interests.”  In June 2018, Secretary of State Mike Pompeo said that “China wants to be the dominant economic and military power of the world, spreading its authoritarian vision for society and its corrupt practices worldwide.”  The head of the State Department’s Policy Planning Staff[2] said “This is a fight with a really different civilization and a different ideology, and the United States hasn’t had that before.  The Soviet Union and that competition, in a way, it was a fight within the Western family.”

So far, the struggle has been waged purely on the trade front.  For many years, China has been running a huge trade surplus in trade with the United States.  That is, it sells far more to the United States than it buys from the United States.  However, much of that production is done by American companies who have off-shored factories to cut costs.  If they have to charge higher prices to their American consumers because of the tariffs, then why make the stuff in China?  There’s Vietnam, the Philippines, and Indonesia.  In 2018, President Trump began slamming tariffs (taxes on imports) on Chinese exports to the United States.  Then, Trump tightened the screws with sanctions on the Chinese tech giant Huawei.  It has urged other countries to boycott Huawei and to refuse to participate in China’s “Belt and Road” infrastructure project.  Supply chains are going to start to move.

Because of the huge trade imbalance, China can’t exert much direct pressure on the United States by imposing tariffs of its own.  It can look for substitute suppliers for American exports, like soy.  It has started running lots of old Korean War movies (in black and white) in which China battles American aggression.

At the same time, neither side has pulled out all the stops.  For example, the U.S. has not made much of a deal about China imprisoning many Uighirs

However, we are in the early days of a huge struggle.  It is difficult to see yet how it will shake out.  Weak ending, I know, but true.

[1] Edward Wong, “U.S. vs. China: Why This Power Struggle Is Different,” NYT, 27 June 2019.

[2] See: https://en.wikipedia.org/wiki/Kiron_Skinner

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The Buckle on the Rust Belt.

From the 1890s to the 1970, you could travel from Rochester to Buffalo to Pittsburgh to Cleveland to Dayton to Gary to Chicago to Milwaukee to Detroit, and see the beating heart of American industrial power.  It helped win two World Wars and helped keep the Cold War cold.  It provided lots of jobs at increasingly good wages to millions of workers.  American manufactured goods dominated world markets.

Then things went sour.[1]  Between 1979 and 1994, the U.S. lost half of its manufacturing jobs.  Improved technology and automation are part of the explanation.  The growth of international competition as foreign industry revived or started fresh after the Second World War offers another part of the explanation.  The domestic competition from new “mini-mills” in steel and other disruptive industries that targeted the low end of the market offers another part of the explanation.  JMO, and I come in peace, but the arthritic nature of much heavy industry offered another part of the explanation.  Bloated industrial bureaucracies and rigid work rules imposed by unions alike made American manufacturing slow to respond to challenges.

Then, in 1994, came the North American Free Trade Agreement (NAFTA); in 2001 China gained admission to the World Trade Organization (WTO).  Between 2000 and 2010, 5 million more manufacturing jobs disappeared.[2]

The human costs of successful business adaptation to changing conditions have been very high.  Old industrial cities and regions have lost jobs and incomes, and many of the businesses once supported by consumers.  Local and state governments have lost the tax revenues from these businesses, so they struggle to provide services to people in crisis.  Lots of people have lost hope.  Many younger people have moved away in search of a future that works.  Many of the displaced shifted into the ballooning service industries of health and education.  Not healing or teaching so much as filling out forms.  In some cases, however, the older people left behind with no future that works have turned to substance abuse.[3]  Much to the distress of the Democrats, the 2016 election demonstrated that these once-reliable voters could not be taken for granted.[4]

For reasons not immediately apparent to me, free trade, an open world economy, and “globalization” became the goat.  Free trade helps many American producers: 40 percent of corporate profits and 30 percent of agricultural revenue comes from foreign sales.  Also, the Gummint projects that 3.5 million jobs will be created in specialized manufacturing by 2025.  This means workers (presumably named Dave) who can run the robots.

There probably is no way of “saving” or “reviving” the “Rust Belt.”  Guys now in their 40s and 50s who walked off the high school graduation stage into a job at the plant aren’t likely to want to/be able to “retrain” as medical coders or McDonald’s imagineers.[5]  They’re close to the end of their working lives.  Soon enough, they’ll be on Social Security and Medicare.  Give them basic medical coverage and beer money.

That doesn’t mean that there isn’t room for improvement in the trade deals around the margins.  After an ugly early spat with Mexico, the NAFTA renegotiation has begun.  China is next, although there is the whole North Korea issue to tilt the scales.

[1] “Rescuing the Rust Belt,” The Week, 24 March 2017, p. 11.

[2] Economists estimate that 85 percent of these jobs were lost to automation of production.   It cuts labor costs: welders in the auto industry earn $25 an hour; spot-welding robots cost $8 an hour.  Take that coolies!

[3] Obviously, this latter issue is a much more complex story than is presented here.

[4] The recent passing of Norman Lear led to much revealing commentary in  the media.

[5] As in “imagine this is real food.”  Except, you know, those sausage biscuits (without egg) with a coffee and hash browns you get early on Sunday morning when you’re headed home?  Whole world feels fresh and new and clean.