Decide on what industries or areas are strategic, and subsidize the crap out of it, and be ready to deal with all the negatives (see farming and oil and gas subsidies) that come with that.
If it's important enough, then it's worth negotiating the pitfalls.
Yeah, as far as I can tell we only really have three options when dealing with a trading partner that will subsidize exports: either we ban importing from that country until they drop the subsidies or we levy duties and other taxes to offset the subsidies or we subsidize ourselves. “Free market” thinking won’t work because the market already has been interfered with by a foreign government.
Wait - wasn't it relatively free-markets and rule-of-law property rights that enabled the west to outcompete the USSR, spending just a small fraction of GDP on defense compared to the Soviet defense percentage of GDP? And didn't relatively free markets succeed while soviet communism collapsed under its own economic weight?
You could model economic systems as alternating layers of centralized and decentralized decision making. Individual teams in a company make decentralized decisions about how products should be made, but the centralized decision about what the company's strategic direction should be is made by company executives. Likewise, individual firms compete in a decentralized economy, but the government makes centralized decisions about what sectors are crucial to national security and are subsidized.
The USSR had no decentralized layer of decision making at the firm level, all firms produced according to quotas made by the central government, and were ultimately less efficient than the US's decentralized layer of competing firms. This does not mean that centralized layers aren't necessary. Both the US and the USSR had a layer of centralized decision making at the government level subsidizing key national industries during the cold war. Both kinds of layers are necessary, but after the cold war the US saw that their decentralized layer of firms made them more economically successful than the USSR, thought that was the whole formula, and tossed national economic strategy out the window to let the firms do whatever they liked. Now the pendulum's swinging back to correct this misconception with China growing quickly using a layer of centralized national economic strategy that the US discarded.
a) It's amazing Russia went from just out of feudalism to as industrial as it did.
b) If there even was a mistake, it is probably that more demand and nicely flexible demand (as the consumer economy can provide) would have helped. But that's not about free trade per se.
Pretty sure West-East trade was already pretty limited from both sides, and I don't think there were many intra-USSR limitations to trade. For example, the border between Russia and Ukraine has caused many economic issues in the years since.
> Wait - wasn't it relatively free-markets and rule-of-law property rights that enabled the west to outcompete the USSR, spending just a small fraction of GDP on defense compared to the Soviet defense percentage of GDP?
This worked when the US and USSR had approximately the same population size and the USSR was trying to keep up with US military spending. Probably not as well when China has three times the population of the US and doesn't care to install the number of troops in Cuba that we pay to maintain in Japan and South Korea.
> And didn't relatively free markets succeed while soviet communism collapsed under its own economic weight?
The USSR and China are both described as "communism" but they're not using the same system at all.
The USSR was a democracy and so its government was plagued by all the corruption and principal agent problems inherent in government spending by a large centralized elected government, except that in their case it was the whole economy.
China is basically operating a country like Rockefeller operated a monopolistic corporation. It's less centrally planned than the USSR. They use internal competition. The principle difference from the US economy is that it's not an elected constitutional government. There is no takings clause, no EPA or FTC, no National Association of Realtors, no free press. They call themselves communists but they're really fascists -- the merger of state and corporate power. What the robber barons would be if they were also kings.
Not exactly. Mussolini's "corporatism" was more encompassing -- not just industry but also guilds, clans, the military. But what hasn't been merged with the power of the state in China?
Alternatively, we can work inside the current political constraints on subsidies and try really hard to figure out how to make cutting-edge electronics out of corn.
You can't have trade deals and subsidize industries like that. Won't work with USMC and probably not with EU etc.. So it's complicated, even thought it's probably the right thing to do in certain areas.
Oh, it's hard work, but you can totally have trade deals and subsidize industries - you "just need to" get your trade partners to agree - Canada still has its dairy management system more or less intact for example.
Like ya, it'd be a lot of work (probably take years!) to get these deals going, but let's not lie to ourselves about what these subsidies are about - they're about trying to setup a more or less sustainable system in important industries that is supposed to last for decades. After years of "paperwork" it'll take years (maybe over a decade!) to actually come up to steam in production.
At least for the USMCA and EU, I think a lot of American interests are more or less aligned with partner interests. The obvious common ground is "let's work out ways to reduce our reliance in certain strategic areas from sources concentrated in China's sphere of influence". I think there's sufficient political AND popular backing of that that something could probably be figured out. Notably this might require that America itself "settle" for bringing back "western manufacturing" not "American manufacturing". That might be the hardest sell in this whole deal.
Would a USMCA/EU/JP/SK/AUS manufacturing partnership be that difficult politically? naively it seems that all parties have rough parity in standard of living, and each has leadership in a few industries and all share roughly the same environmental regulations/strategies.
The only rough patch that I could see would be in autos
and aircraft which are both relatively stable industries with a history of comebacks. I would imagine that there would need to be provisions for national protection of these types of industries.
Donald Trump put Bombardier basically out of business with the stroke of the pen.
The EU is trying hard to legislate FAANGS for anti-competitive issues and more money.
I don't see a lot of goodwill on these things.
Unless there is a clear and obvious path for some specific kind of industry ... I can see everyone getting along on a specific issue, but I don't see what that is.
It's not so straight forward because China is not a centrally planned economy, and very few products prices are as priced in a straightforward way as are 'rare earths'.
Imagine telling Huawei to stop selling a massively profitable product overseas for example.
I don't really see this strategy being carried out other than in the most general sense. Where are these supply chains popping up and getting swamped?
And remember, this is very costly to China as well - selling at a loss, so they can then sell 'very cheaply'?
The problem with the above thesis is that all of this is a 'secondary economy strategy' i.e. it's good for catching up, it's not very good for surpassing. You need domestic consumption, and the ability to export goods at the highest end of the value chain, both things China will struggle with.
The problem with the above thesis is that all of this is a 'secondary economy strategy' i.e. it's good for catching up, it's not very good for surpassing.
China is past the "catching up stage" in the industrialized areas. Median income in Shenzhen is comparable to US median income. Current policy is to increase domestic consumption and have an internal economy which is less dependent on exports, while still dominating key international markets. This is called "Dual Circulation".
Here's a summary of the 14th Five Year Plan.[1] "President Xi called for building “independent, controllable,
secure, and reliable supply chains to ensure industrial and
national security with access to at least one alternative
source for important products.” President Xi said China
should “use existing global dependencies on China as a
counterweight to pressures to shift manufacturing out of
China” and “use the pull of China’s market to attract global
resources and deepen global dependence on China.”"
The "Made in China 2025" plan, issued in 2015, listed 10 sectors where China wanted to be self-sufficient by 2025.
- New information technology
- High-end numerically controlled machine tools and robots
- Aerospace equipment
- Ocean engineering equipment and high-end vessels
- High-end rail transportation equipment
- Energy-saving cars and new energy cars
- Electrical equipment
- Farming machines
- New materials, such as polymers.
- Bio-medicine and high-end medical equipment.
Most of those goals have already been achieved.
Again, none of this is a secret. It's stated policy of the PRC.
Trying to convince the US government to do something about this seems quite difficult. I feel like the easier tactic perhaps is trying to get international trade to be less dollar-oriented. Indirect doesn't necessarily mean harder.
If there are frequent shortages but it's a different part every time, then flexible manufacturing techniques like 3d printing that can adapt to the market and print expensive parts.
3D printed parts lack stability and precision for like 99% of all use cases. Especially for expensive parts. Precision is mostly what makes them expensive.
The market solves this problem. If China makes things too hard on intl businesses, the businesses will invest to go around China. That’s what the rare Earth mine example shows.
China needs big intl businesses. The Chinese domestic market is not big enough to support their current pace of economic growth, and the government relies on that growth for social stability.
>The market solves this problem. If China makes things too hard on intl businesses, the businesses will invest to go around China. That’s what the rare Earth mine example shows.
What the rare Earth mineral example shows is that China is willing to incur environmental and human rights costs that the West is not, in order to carve out a seat at the table for negotiating future power projection.
>China needs big intl businesses. The Chinese domestic market is not big enough to support their current pace of economic growth, and the government relies on that growth for social stability.
Really not following this point. If anything, this is evidence that elites in the west - who get rich off of the kinds of "market solves everything" solutions you may or may not be alluding to - will continue to ignore the problem as long as the stock market goes up. I also don't understand your point about the size of the domestic market in China. It's well over a billion people. International business looks at those demographics and see nothing but dollar signs. The difference here is that China's government will only let in that business insofar as they see it as enriching their country, and they make this point explicit. Size alone here is an advantage.
In simple terms, the current growth of the Chinese economy is not yet economically self-sustaining in the absence of foreign investment. They have a lot of people, sure, but most of them are still poor.
So the Chinese government does not hold all the cards in their relationship with foreign investors. They need each other, which creates a balance that they both have to carefully negotiate.
> The World Bank Group suggests that the percentage of the population living below the international poverty line of $1.9 (2011 PPP) fall to 0.7 percent in 2015, and poverty line of $3.2 (2011 PPP) to 7% in 2015.[4] At the end of 2018, the number of people living below China's national poverty line of ￥2,300 (CNY) per year (in 2010 constant prices) was 16.6 million, which translated to 1.7% of the population at the time.
https://en.wikipedia.org/wiki/Poverty_in_China
Agree about free markets and time. Adam Smith's invisible hand moves slowly. The free market might solve all our problems (including pollution) over time, but our generation (and maybe even the next) may not be alive to see it. And the human casualties may be high. Which is why regulation and subsidies are a practical necessity.
If it's important enough, then it's worth negotiating the pitfalls.