United States Engagement with the People’s Republic of China

Gregory Rehmke www.EconomicThinking.org • [email protected] EconomicsinaCloud.org

http://debate-central.ncpa.org/ U.S./China Development Economics • First challenges for any society: food, clothing, shelter. • United States started 1800s as mostly family farms, over decades people migrated to cities for jobs in booming textile and other industries. Huge European immigration... • China’s communist govt. after WWII: land shifted from landlords to family farms, but then in early1960s farms collectivized and top-down industrialization in “Great Leap Forward.” Tens of millions starved to death. • 1979 under Deng Xiaoping, 99-year leases for family farms, and Hong Kong model for free enterprise SEZs (Special Economic Zones). Shenzhen: 40% growth annually!

U.S./China Policy Overview/Timeline China’s Economic Success • U.S./China policy over last 35 years: astonishing progress! • Market reforms: private family farms (99-year leases), retained earnings (profits!) foreign direct investment. • China average income up from $1,516/year in 1990, to [$8,655]/yr in 2015. [$673/yr in 1986, $312/yr in 1980] • Asian Tiger model: Hong Kong, S. Korea, Taiwan, Singapore. • Nixon visits China in 1972 (U.S. “two China policy). • Lots of hard work by hundreds of millions of Chinese people, • 1978: Chinese government broke the communes migrating to cities and working 9am to 9pm, 6 days a week. down into small “family farms” such that every • High savings rate 30% to 50%. [Spend $7/day vs. $97/day in US] rural resident was allocated a small parcel of land. • Private property and companies in market economy create • Deng Xiaoping: 1980: SEZs (Special Economic Zones), new incentives. Market prices mobilize information. inspired by free-market Hong Kong and Taiwan prosperity. • But is China a “market economy”? (central govt. owns banks) • 1994 President Bill Clinton: MFN status for China. • Role of China’s central, regional, and local governments • December 11, 2001, China officially joins WTO. http://www.bloomberg.com/news/articles/2016-03-09/ here-s-what-china-s-middle-class-really-earn-and-spend

China's average annual wage was 56,360 yuan ($8,655) in 2014, and Goldman Sachs estimates that 387 million rural workers Food and clothing make up nearly half of all personal — half the working spending, with 9.2 percent allocated to recreational activities like travel, dining out, sports and video games. The average population — earn http://www.cato.org/blog/dramatic-decline-world-poverty American spends $97 a day, 17.3 percent of it on recreation. about $2,000 a year.

Why Post-Communist Success of China? Europe, North America, China Five people dropped in jungle, one with... U.S. and China are many things: places on map, people Deng Xiaoping’s reforms 1980s. on streets, in homes, on farms, and institutions that • shape relations and provide governance. Deng’s 1992 “trip to the • People in Europe: 500 million, US/Canada/Mexico: 450 south” (cats and windows). million. China: 1.4 billion people. So 3X E.U. or NAFTA. •Initial investment by the Terrible ideologies from the west shaped modern China: overseas Chinese (sea turtles) -- Communism from Europe and USSR •Foreign direct investment: -- Overpopulation fears from Europe and U.S. supply chain integration with In modern China: no siblings, no aunts, uncles, or cousins. HK, SK, Japan, Taiwan, US, EU. Then economic reform and China finds the path: Five people dropped in the jungle, one has a machete... http://www.freetochoose.tv/program.php?id=

U.S./China Policy Reform • Today they would find History • Economics • Politics • Special Interests out if she had been admitted to the college Resolved: The United States Federal Government should of her dreams, Wellesley, substantially reform its policies toward the People’s Republic of China. in far-off Massachusetts. Trade policy (tariffs, “dumping,” non-tariff barriers) • Scenes like this are playing out across China Trade/Social policies (labor, environment, climate...) with growing frequency. Investment policy (Foreign Direct Investment) This fall [2015] more than 275,000 Chinese Is China a “free-market economy”? (WTO upgrade) students will start classes Diplomatic/Military (South China Sea status) on American campuses, nearly triple the number Migration, education, work visas, policy reform. from any other country.

• China’s economy has been fast expanding, with annual growth rates averaging near 10 percent. • It’s economically destructive to identify the world’s best and • When Anne graduated from university, brightest students, equip them with valuable skills at in 1992, she made just 106 yuan, or American universities, and then disallow them from using less than $20, a month. ... those skills to energize the U.S. economy. Lawmakers should extend the grace period for all graduating foreign students to • Today she is a poised and polished find jobs and opportunities. executive with a Chinese company that hopes to compete with the ridesharing • Each year, more than 800,000 foreign students attend American universities. China, India, and South service Uber on Beijing’s ... streets. Korea send the most students. Foreign graduates • Her husband works in satellite have spent four years at American universities ... communications. Together they can • In fact, the U.S. Dept. of Commerce finds that in the comfortably afford to spend about a third 2013-14 school year, international students contributed over of their salaries on Abby’s education. $27 billion to the U.S. economy. But immigration policy... http://astoundingideaschinatrade.blogspot.com http://astoundingideaschinatrade.blogspot.com

http://arrivalcity.net/video/

Gao and his team U.S. Economic Engagement make up Imlab, Resolved: The United States Federal Government should substantially increase it’s one startup economic and/or diplomatic engagement with the People’s Republic of China. amongst over a million small and Trade policy (tariffs, “dumping,” non-tariff barriers) medium-sized companies in Trade/Social policies (labor, environment, climate...) Shenzhen. Investment policy (Foreign Direct Investment) Hardware startups across the city can Is China a “free-market economy”? (WTO upgrade) readily pull together a working Diplomatic/Military (South China Sea status) prototype in a day, test it, and quickly Migration, education, work visas, policy reform. figure out where to History of U.S. “engagement” with China? go next. http://uschinatradewar.com/ The Trade Debate History • Economics • Politics • Special Interests Resolved: The United States Federal Government should substantially increase it’s economic and/or diplomatic engagement with the People’s Republic of China. • The US Importer of Record is liable for antidumping and countervailing duties. The Importer of Record is the company listed in Block 26 of the U.S. Customs 7501 form. • If AD or CVD rates go up in a subsequent review investigation, the Importer of Record is retroactively liable for the difference.... • Retroactive liability for AD and CVD cases is a particular problem involving goods imported from China, because the Commerce Department treats China as a nonmarket economy (“NME”)...

http://uschinatradewar.com/ http://uschinatradewar.com/

• Since China is a NME, Commerce refuses to use actual China prices and costs to determine whether a company is dumping. • ... because Commerce used India as the surrogate... country. But when in 2012 Commerce switched from India to Columbia as the surrogate • It instead uses complicated consumption factors for raw materials country, the Antidumping rates went from less than 10% to more and other inputs and multiplies the factors by surrogate values from than 200% because of surrogate values for straw and cow manure in five to ten constantly changing countries to calculate a cost of Columbian import statistics. The Importers of Record then became production for the Chinese company. liable for the difference in the duty rates, plus interest. • All this makes it impossible for the Chinese manufacturer/exporter to • [another example] In the initial investigation, the Chinese furniture know whether it is dumping, never mind the US importer. company received an AD rate of 16%. • In the Mushrooms from China antidumping case, from the time the • In the first review investigation, however, Commerce determined that antidumping order was issued in 1999 through numerous the questionnaire data did not verify and issued the Chinese furniture subsequent yearly review investigations, many antidumping rates were company an AD rate of 216%. in the single digits because Commerce used India as the surrogate...

http://astoundingideaschinatrade.blogspot.com/ China Trade & WTO Problems : Spurring Two Centuries of Innovative • 1994 President Bill Clinton: MFN status for China. -- During Cold War to split China from USSR Protectionist Arguments • China was very poor country: $1,516/year in 1990 • December 11, 2001, China officially joins WTO.

Doug Irwin's July/August, 2016 Foreign Policy article, "The Truth About Trade." http://news.mit.edu/2016/united- http://foreignpolicy.com/2016/05/08/did-china- Against China Trade states-lost-millions-jobs-china-0309 trade-cost-the-united-states-2-4-million-jobs/ • Claim: globalization is “hollowing out” U.S. middle class. • U.S. losing manufacturing jobs to China. • China unfair trade practices (IP, force partnerships to operate in China, vast subsidies of steel, shipping, solar panels, various restrictions on tech.) • Limits to U.S. movies and television and news media. • China pollution, CO2 emissions (coal), labor lawyers all locked up, political prisoner labor, repression of ethnic • research by three distinguished economists: David Autor, David Dorn, minorities (Tibet), political repression of media and dissent. and Gordon Hanson. They argue that import growth from China cost the United States about 2.4 million jobs over a dozen years.

http://AstoundingIdeasChinaTrade.blogspot.com/

Special Interests and Trade Policy •Which interest groups that lobby for trade barriers? (steel, furniture, automobiles, airplanes, appliances...) •Who are the interest groups that lobby for reduced trade barriers? •Who benefits from expanded ? Who benefits from ? Globalization isn’t killing factory jobs. Trade is actually Investment policy (Foreign Direct Inv.) why manufacturing is up 40% Daniel Griswold • Aug. 1, 2016 LA Times the Center for Automotive Research estimates that, of the 20 years since NAFTA and China entry into WTO... $18.25 billion in additional • North American investments that U.S. car companies U.S. manufacturing up 40% to $2.4 trillion announced in 2014, $10.5 • billion was earmarked for Due mostly to automation, more production with fewer projects in the United States, • while $7 billion and $750 workers. Total mfg. payroll up, even with fewer workers. million was planned for Mexico and Canada, respectively.

A bridge over troubled Investment policy (Foreign Direct Inv.) waters: Taiwan, Japan and South Korea employ huge numbers of mainland Chinese Nov 8th 2014 88,000 firms from Taiwan employ 15.6m Chinese workers. About 11m are employed at 23,000 Japanese firms or their Foreign Direct Investment in China suppliers. Throw in 2m more Taiwan: 88,000 firms employ 15.6m workers for South Korean enterprises, and companies from Japan: 23,000 firms employ 11m around the troubled East China South Korean firms employ 2m Sea have approaching 30m U.S. firms: McDonalds employs 1.9m Chinese on their payrolls. YUM/KFC: 4,500 stores; Starbucks: 1,500

50 million (2013)

127.3 million (2013)

China Taiwan 1.36 billion 23 million (2013) United States: 319 million Thinking About South China Sea Conflict •Economic value of islands? -- Fishing? -- Undersea oil, gas, minerals? -- Nationalism? •Shipping... •What would be the consequences if China’s military could not protect shipping lanes in some kind of trade embargo pressed by U.S.?

2015 Year-to-Date Total Data are goods only, on a Census Basis, in billions of dollars, unrevised.

https:// www.census.gov/ foreign-trade/statistics/ highlights/top/ top1501yr.html Trade Organizations & Globalization • GATT - General Agreement on Tariffs and Trade • WTO - World Trade Organization • After WWII, dramatic increase in international trade • 1999 WTO • The global trade agenda stalled at the Riots in Seattle beginning of the twenty-first century (after 1999 WTO riots in Seattle) • [So] United States turned to regional and bilateral free trade agreements (FTAs)

Trans-Pacific Partnership (w/o China) Regional Comprehensive Economic Partnership

Australia, Brunei Darussalam, Canada, Chile, Japan,Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam o Comprehensive market access: to eliminate tariffs and other barriers to goods and services trade and investment, so as to create new opportunities for our workers and businesses and immediate benefits for our consumers.

w.cfr.org/trade/future-us-trade-policy/p36422 He writes that FTAs make global The effects of multilateral globalization, however, agreements more, have increased not less, difficult. resistance to further "The current tide of trade liberalization. preferences has Many in the U.S. labor been a result of movement, as well as politicians • After WWII, dramatic increase in some economists, mistakenly, and in international trade argue that trade an uncoordinated agreements in their fashion, pursuing • The global trade agenda stalled at the current form hurt free trade beginning of the twenty-first century (after workers, degrade FTA - Free Trade Agreement agreements because 1999 WTO riots in Seattle) the U.S. manufact- PTA - Preferential Trade Agreement they think (erroneously) that [So] United States turned to regional and uring base, and Bilateral Trade Agreements • exacerbate income they are pursuing a bilateral free trade agreements (FTAs) inequality. Multilateral Trade Agreements free trade agenda." Benefits from trade “Costs of Trade” with China? Increasing scope of trade (across regions and •“Dependence” on imported goods. • Auto parts, electronics, computer chips, clothing... countries), enables... More consumer choice, and more ... Richard Nixon's decision in 1973 to restrict soy exports from the United States. This greatly upset the potential consumers (larger markets) for producers Japanese, who were quite dependent on U.S. soybeans and therefore turned to Brazil for soy. •Increasing division of labor, increasing specialization, •Loss of manufacturing jobs. increasing productivity. Consider production of iPhones... By Katherine Peralta • Dec. 11, 2014 | 4:57 p.m. •Absolute and Comparative Advantage. •Pollution & environmental harm in and from China. •Breaking domestic monopolies, cartels, guilds, Sweatshops: Lack of control/influence over labor law. political unions, and interest groups. •

Trade, Globalization & Sweatshops... http://astoundingideaschinatrade.blogspot.com/2015/06/arrival-cities-in-china-and.html

Campaign ad in favor of higher tariffs on steel from China

• ...China's trading partners ... Dec 10th 2011 | From the print edition have a variety of complaints: --- that China exports too much, [with] cheap manufactured goods, subsidised by an undervalued currency; --- that it hoards essential inputs, such as rare earths, for its own firms; --- it still skews its own market against foreign companies, --- slow to implement WTO rules (notably on piracy), --- suddenly imposing unwritten rules unfavourable or unknowable to foreigners. ---The meddling state lets multinationals in, only to squeeze them dry of their valuable technologies and then push them out. U.S. Steel’s campaign to “Losing” jobs to Asia exclude Chinese steel imports would make U.S. companies that manufacture products from steel less competitive, steel users told a federal agency. They also said domestic steelmakers either don’t want to make some of the steel they need or can’t make it as reliably as Chinese suppliers do.

Adam Smith in Scotland: Free Trade Agreements

Trade vs. Mercantilism China has intensified its efforts recently to deepen diplomatic and trade relationships with international partners and secure its rapidly expanding interests globally. This new dynamic presents both challenges and opportunities for the United States. ...

• Chinese officials have long said that the TPP is a ploy to contain the middle kingdom’s rise (article in Chinese)—a kind of economic complement to America’s increased military presence in the region. Former US trade representative Susan Schwab, who initiated America’s participation in the talks in 2008, said “containing China” had nothing to do with the deal (pdf, p. 3) while other officials have said it’s really more of a matter of “constraining China” (pdf, p. 4).