I can’t believe the Economist would allow such a half-baked and circumstantial article on such an important topic and frame trends in global trade all on Biden’s trade policies! One can be critical of Biden’s lack of a free trade push with allies (TPP + EU, etc) without being naive about China. Decoupling might be less ideally efficient in the short-term, but it will be more secure and eventually supply chains like Vietnam and India will become more efficient as they industrialize further.
Unfortunately, The Economist generally produces lightweight articles full of emotively derived conclusions without a solid foundation. I find it useful as a mirror to what a certain segment of the world population would like to believe and a starting point to dig much deeper into the topics that interest me. Just another data point in a sea of conflicting declarative statements to be considered but not taken as absolute.
I can. The Economist famously doesn't publish bylines, which allows it to hire (cheap) fresh-out-of-college/uni no-one's to churn out a lot of words for it (And they often do). The Economist perfectly suits someone in HS or college looking to see what topics important people find interesting. But not for any sort of serious fact-based research or insight.
I can believe it. They have long tried to take positions on world topics. but shoddy articles based on speculative research has all but shot their credibility.
Many "illustrious" publications seem to start with the conclusion and then wing the "data" to support it. The Economist seems to be joining that category. The premise of the article i.e expecting impact of decoupling to show in data in 3 years (assuming start from Trump tariffs and really accelerating post Covid) is in itself highly unrealistic.
China has built its industrial base over 35-40 years - Schenzhen SEZ started in 1980 and i suppose it would have taken another 4-5 years to gather momentum - replicating even a portion of China's manufacturing base would take atleast a decade because China is today the only country that has an ecosystem at huge scale not just for the final product but all the base materials that go into it, any competitor would only have a part of that chain today. Further one can never discount how businesses might respond if China policy were to veer back to pre Xi days. Nevertheless one can be optimistic that the once bitten businesses and governments would want a plan B in all scenarios and diligent work towards friend shoring should eventually show results thet even The Economist will have to grudgingly acknowledge.
Bloomberg was reporting that Xi and his advisers don’t believe in household stimulus because they think people will get fat and lazy if they have some kind of government safety net. I read this as doubling down on mercantilism. If he wants China to just produce more and more but not consume more, it will create a surplus of goods that will have to be dumped somewhere or be written off.
For at least a decade, policy analysts in and outside of China have agreed that China needs to 're-balance' her economy towards less investment and more consumption. There are three main reasons for this
1) China's exports markets are pretty saturated at this point. Not much more room to grow by exporting more.
2) Foreign demand for Chinese imports are fickle, making Chinese economic activity unnecessarily volatile.
3) Investment is always subject to diminishing returns, and there just aren't enough profitable investment opportunities lying around to meet China's growth goals.
The natural solution to these problems is to put more money in the hands of Chinese consumers, which can, in turn, fuel growth in demand for Chinese production.
Like virtually all other historically Marxist-Leninist parties, the CCP is deeply skeptical that, left to their own devices, consumers will make the "right" decisions when they spend their money. Basically, they will buy whimsical crap and not do enough to support strategically important sectors of the economy.
As you noted, Xi has been critical of the welfare state, which he believes breeds laziness. So it's unlikely that China will just be cutting bigger checks to her citizens directly to achieve the desired re-balancing.
China could instead aim to increase wages for workers. This avoids the laziness breeding problem. China could achieve this with various tools
* raise wages at state-owned enterprises
* introduce laws to empower workers to unionize and collectively bargain for higher wages
* reduce income taxes
* introduce tax credits with a work requirement (a la EITC)
The reason China isn't plowing forward with these is as stated above-- China doesn't trust consumers.
China wants to re-balance to more domestic consumption, but is reluctant to give up party control over how the bulk of money gets spent. It's not going to happen..
"People in China can consume more by earning more income in the market through production."
Sure, that is one way. The other way is by increasing the share of production captured by labor. This is what people mean by re-balancing.
No one is claiming that Chinese consumption isn't huge, it's a huge country. The issue is that it is small relative to China's GDP, which makes further GDP growth deeply dependent on investments and exports, which China is finding increasingly difficult to achieve.
If Chinese consumption were higher, that would expand the market for Chinese production and make further economic growth easier to achieve. The issues, as I pointed out in my other comment, are political and ideological.
Well, after 'competing' against the Economist for about 25 years while at Time, it is hardly surprising that it would get a bit slapdash with its research. Once when I complained to a friend who was working at the Economist about a particularly egregious story, she said that their unofficial motto was
A big part of the story is not manufactured end goods, it is critical raw materials. Looking at source diagrams of rare Earths and other strategic materials is a scary prospect.
The reason we hemorrhaged manufacturing jobs to China in the first place is because we were in an energy and China was willing to poison its citizens with coal and diesel pollution AND displace millions with hydro dams. So it makes sense that China would jump into mining head first and not care about the damage it does to its citizens and land. But just keep in mind once metals and minerals are on North American soil they can be recycled in perpetuity—Google “Redwood Materials”.
Chinese exports hit records during 2021 because of unnecessary Covid over-stimulus in combo with lockdowns shifting consumption toward goods rather than services. Of course Chinese exports have fallen from their Covid 2021-2022 peak. I don’t draw any broad conclusions from the recent decline other than consumer handouts have stopped and we can eat out and travel again.
The IRA will also increase imports from China as most materials and key components for EVs and solar (and a good portion of wind) ultimately come from China. This will also be a temporary boost in response to handouts and could obscure broader trends over the next few years. The benefit to China won’t be anywhere as large as the Covid handouts as Biden is mostly concerned about unionized final assembly jobs in the US (shifting labor added value here) rather than creating true industrial fabrication capability here. Mostly we will be assembling stuff we would have bought from China anyway, so any net boost for China comes from directed overconsumption (paying more rich people to buy Chinese batteries in EVs) paying utilities to install more wind and solar, etc, and this boost during the subsidy period will likely steal/front load from consumption that would have occurred after the subsidy period. It may be a little hard to discern what is actually happening.
As far as (per the Economist) China gaming tariff systems, they have been doing this for decades, starting with NAFTA (and expanding into Latam trade agreements) and now using Asian countries to re-export (there is also a legitimate shift by Chinese companies to do some final assembly in other Asian countries - just as S Korea and Japan originally used China).
You note that Chinese auto part exports to Mexico have increased by $2b (a small pct of the growth in Mexico’s part exports to US). Look at other categories. Chinese exports of aluminum to Mexico have increased by 2.5x since 2019 (mostly finished aluminum, plate, strips). Sure it is only a couple billion but China is doing this sector by sector and is very good at exploiting these systems. Mexican auto parts are made with lots of Chinese steel, aluminum, fasteners, wire and intermediate components and assembled with Mexican labor.
The Economist has a valid point. You also have a valid point that tariffs, subsidies, corporate moves to diversify supply chains, etc should also hurt China’s export growth at the margin. The latter drives the former.
Because of the magnitude of artificial stimulus (Covid, IRA) and the re-exporting phenomenon I think it is going to be difficult to see what is actually happening for some time. Looking at countries like Malaysia, Vietnam and Indonesia and comparing their import growth to export growth sheds some light. If supply chains are being moved, export growth (with higher added value) should be much faster than import growth. If they are re-exporting, then growth rates of imports will track each other more closely.
We are developing North American supply chains…remember it took people like former Senator Perdue years to develop supply chains in China for various companies.
Well, this is what they get 50 years later for letting china in. Nixon and his grand idea of normalizing relations. When I first learned this in uni some 35 years ago, at 22 years old I thought it was a crazy idea whose chickens would eventually come home to roost. But its interesting to watch this epic battle, if you may, between the white and the yellow man.
We can't expect political leaders to be oracles, Mr. Bryan. Few diplomats are now calculating policies on the basis of clearly perceived outcomes as of 2073. Not everyone has your prescience. The shift of diplomatic recognition produced a long period of economic benefits: China was brought out of poverty and the material culture of Western and other Asian countries was enormously boosted. Moreover, it is not in any way true that if the long-term consequences of a decision include negative aspects at some point that the alternative approach would have been any better. The US calculation was that opening towards the PRC would prevent a USSR/PRC rapprochement, and it did--if that had occurred after Mao's death the USSR might be with us still.
By the way, Nixon did not normalize relations with China. He merely opened the door at a time when our understanding of PRC events was largely based radio broadcasts monitored in Hong Kong and public PRC periodicals. Carter shifted recognition in late 1978. Also, you may have heard that the US population is now under sixty percent non-Hispanic white--and we have some women too--while it is also true that about forty percent of Asians are not PRC citizens (reports are that there are women among them as well).
I agree that decoupling is happening organically, with companies clearly reading the writing on the wall. All you need to do is provide an unpredictable environment where losses can spring up by way of uncertain regulations, and every CEO worth their salt is going to take a hard look at whether some diversification (or de-risking, such a hot phrase right now) should be in the near future.
I thought that the statistic about European car manufacturers was supposed to provide support for the thesis that absent the claimed cosmetic rerouting of supply chains originating in China and ending in the US, the dependence on China is growing significantly in the auto industry generally due to switch to electric power trains, where both US and European manufacturers have less technological advantage (compared to ICE technology).
What? They're supporters of free markets and deregulation, which are hardly communist topics. I'm not a huge fan of theirs, but saying that they're leftist is crazy.
It’s weird for a site called “all sides” to evaluate political leans in a simple one-dimensional scale from left to right. The Economist is definitely strongly on the free market liberal side, which is usually thought of as center right on certain kinds of economic issues and center left on certain kinds of social issues, but doesn’t really fit in a left-right axis.
Jack, I don't see what Noah is reporting about the Economist as indicating any pro-China stance. To say that decoupling is proceeding slowly is not to advocate for it to do so. I also think that "leaning to the left" and being pro-PRC are pretty much decoupled now. China is nominally communist, but name and reality have been divorced for so many decades that I think few on the left think of China in that way; only those on the right who habitually call everything they dislike "communist" tend to make that error.
Agree. I see that in their articles about India. They make things up and then try to find evidence. I am glad the conversation around US is helping to showcase their thinking.
What's wrong with producing what we need right here in the USA? Depending on near slave labor in China is just plain wrong and therefore stupid. You get what you pay for.
The goal is not to quit trading with China, who has been our ally in the past, and with whom we have many reasons to keep as a valuable friend and training partner. We do want to be less dependent on upon China.
Is there any strong evidence for the universality of humanity's ability to make stuff? Personally I find it astounding that we live in a world where two countries, Taiwan and South Korea, with a combined population of roughly 76 million people constituting less than 1% of the global population of over 8 billion, account for around 80-85% of global semiconductor manufacturing by revenue.
My gut feeling is that high tech manufacturing is highly dependent on math ability, which based on international tests like PISA, the countries of East Asia seem to excel at. For instance on the math portion of the 2018 PISA, China topped the charts with a score of 591 while Mexico languished far below OECD average with a score of 409. Personally I'm far less sanguine than Noah that high tech supply chains can exist almost anywhere given enough time.
The simple fact of the matter is that significant disparities in educational attainment exist among different groups. In my opinion it's naive to believe that nations can reach technological convergence unless the underlying skills gaps are closed first.
Noah, if you haven't seen this morning's CSIS discussion of China's downturn - "structural or cyclical" - streamed on youtube, I think you'd find it interesting: https://www.youtube.com/watch?v=aw-KHPZjVok
I can’t believe the Economist would allow such a half-baked and circumstantial article on such an important topic and frame trends in global trade all on Biden’s trade policies! One can be critical of Biden’s lack of a free trade push with allies (TPP + EU, etc) without being naive about China. Decoupling might be less ideally efficient in the short-term, but it will be more secure and eventually supply chains like Vietnam and India will become more efficient as they industrialize further.
Unfortunately, The Economist generally produces lightweight articles full of emotively derived conclusions without a solid foundation. I find it useful as a mirror to what a certain segment of the world population would like to believe and a starting point to dig much deeper into the topics that interest me. Just another data point in a sea of conflicting declarative statements to be considered but not taken as absolute.
Oh, the Economist all too often puts out half-baked articles...... (unfortunately)
I was a paid subscriber to "The Economist" for over 30 years.
I no longer am due to articles like this.
I can. The Economist famously doesn't publish bylines, which allows it to hire (cheap) fresh-out-of-college/uni no-one's to churn out a lot of words for it (And they often do). The Economist perfectly suits someone in HS or college looking to see what topics important people find interesting. But not for any sort of serious fact-based research or insight.
I can believe it. They have long tried to take positions on world topics. but shoddy articles based on speculative research has all but shot their credibility.
Many "illustrious" publications seem to start with the conclusion and then wing the "data" to support it. The Economist seems to be joining that category. The premise of the article i.e expecting impact of decoupling to show in data in 3 years (assuming start from Trump tariffs and really accelerating post Covid) is in itself highly unrealistic.
China has built its industrial base over 35-40 years - Schenzhen SEZ started in 1980 and i suppose it would have taken another 4-5 years to gather momentum - replicating even a portion of China's manufacturing base would take atleast a decade because China is today the only country that has an ecosystem at huge scale not just for the final product but all the base materials that go into it, any competitor would only have a part of that chain today. Further one can never discount how businesses might respond if China policy were to veer back to pre Xi days. Nevertheless one can be optimistic that the once bitten businesses and governments would want a plan B in all scenarios and diligent work towards friend shoring should eventually show results thet even The Economist will have to grudgingly acknowledge.
Bloomberg was reporting that Xi and his advisers don’t believe in household stimulus because they think people will get fat and lazy if they have some kind of government safety net. I read this as doubling down on mercantilism. If he wants China to just produce more and more but not consume more, it will create a surplus of goods that will have to be dumped somewhere or be written off.
Good comment ,and it's true.
For at least a decade, policy analysts in and outside of China have agreed that China needs to 're-balance' her economy towards less investment and more consumption. There are three main reasons for this
1) China's exports markets are pretty saturated at this point. Not much more room to grow by exporting more.
2) Foreign demand for Chinese imports are fickle, making Chinese economic activity unnecessarily volatile.
3) Investment is always subject to diminishing returns, and there just aren't enough profitable investment opportunities lying around to meet China's growth goals.
The natural solution to these problems is to put more money in the hands of Chinese consumers, which can, in turn, fuel growth in demand for Chinese production.
Like virtually all other historically Marxist-Leninist parties, the CCP is deeply skeptical that, left to their own devices, consumers will make the "right" decisions when they spend their money. Basically, they will buy whimsical crap and not do enough to support strategically important sectors of the economy.
As you noted, Xi has been critical of the welfare state, which he believes breeds laziness. So it's unlikely that China will just be cutting bigger checks to her citizens directly to achieve the desired re-balancing.
China could instead aim to increase wages for workers. This avoids the laziness breeding problem. China could achieve this with various tools
* raise wages at state-owned enterprises
* introduce laws to empower workers to unionize and collectively bargain for higher wages
* reduce income taxes
* introduce tax credits with a work requirement (a la EITC)
The reason China isn't plowing forward with these is as stated above-- China doesn't trust consumers.
China wants to re-balance to more domestic consumption, but is reluctant to give up party control over how the bulk of money gets spent. It's not going to happen..
Great point.
"People in China can consume more by earning more income in the market through production."
Sure, that is one way. The other way is by increasing the share of production captured by labor. This is what people mean by re-balancing.
No one is claiming that Chinese consumption isn't huge, it's a huge country. The issue is that it is small relative to China's GDP, which makes further GDP growth deeply dependent on investments and exports, which China is finding increasingly difficult to achieve.
If Chinese consumption were higher, that would expand the market for Chinese production and make further economic growth easier to achieve. The issues, as I pointed out in my other comment, are political and ideological.
Well, after 'competing' against the Economist for about 25 years while at Time, it is hardly surprising that it would get a bit slapdash with its research. Once when I complained to a friend who was working at the Economist about a particularly egregious story, she said that their unofficial motto was
Simplify and then exaggerate.
A big part of the story is not manufactured end goods, it is critical raw materials. Looking at source diagrams of rare Earths and other strategic materials is a scary prospect.
The reason we hemorrhaged manufacturing jobs to China in the first place is because we were in an energy and China was willing to poison its citizens with coal and diesel pollution AND displace millions with hydro dams. So it makes sense that China would jump into mining head first and not care about the damage it does to its citizens and land. But just keep in mind once metals and minerals are on North American soil they can be recycled in perpetuity—Google “Redwood Materials”.
Add to that source diagram a regulatory measure for each region that might be alternative sources and the picture becomes ever scarier.
Chinese exports hit records during 2021 because of unnecessary Covid over-stimulus in combo with lockdowns shifting consumption toward goods rather than services. Of course Chinese exports have fallen from their Covid 2021-2022 peak. I don’t draw any broad conclusions from the recent decline other than consumer handouts have stopped and we can eat out and travel again.
https://tradingeconomics.com/china/exports
The IRA will also increase imports from China as most materials and key components for EVs and solar (and a good portion of wind) ultimately come from China. This will also be a temporary boost in response to handouts and could obscure broader trends over the next few years. The benefit to China won’t be anywhere as large as the Covid handouts as Biden is mostly concerned about unionized final assembly jobs in the US (shifting labor added value here) rather than creating true industrial fabrication capability here. Mostly we will be assembling stuff we would have bought from China anyway, so any net boost for China comes from directed overconsumption (paying more rich people to buy Chinese batteries in EVs) paying utilities to install more wind and solar, etc, and this boost during the subsidy period will likely steal/front load from consumption that would have occurred after the subsidy period. It may be a little hard to discern what is actually happening.
As far as (per the Economist) China gaming tariff systems, they have been doing this for decades, starting with NAFTA (and expanding into Latam trade agreements) and now using Asian countries to re-export (there is also a legitimate shift by Chinese companies to do some final assembly in other Asian countries - just as S Korea and Japan originally used China).
You note that Chinese auto part exports to Mexico have increased by $2b (a small pct of the growth in Mexico’s part exports to US). Look at other categories. Chinese exports of aluminum to Mexico have increased by 2.5x since 2019 (mostly finished aluminum, plate, strips). Sure it is only a couple billion but China is doing this sector by sector and is very good at exploiting these systems. Mexican auto parts are made with lots of Chinese steel, aluminum, fasteners, wire and intermediate components and assembled with Mexican labor.
The Economist has a valid point. You also have a valid point that tariffs, subsidies, corporate moves to diversify supply chains, etc should also hurt China’s export growth at the margin. The latter drives the former.
Because of the magnitude of artificial stimulus (Covid, IRA) and the re-exporting phenomenon I think it is going to be difficult to see what is actually happening for some time. Looking at countries like Malaysia, Vietnam and Indonesia and comparing their import growth to export growth sheds some light. If supply chains are being moved, export growth (with higher added value) should be much faster than import growth. If they are re-exporting, then growth rates of imports will track each other more closely.
We are developing North American supply chains…remember it took people like former Senator Perdue years to develop supply chains in China for various companies.
Well, this is what they get 50 years later for letting china in. Nixon and his grand idea of normalizing relations. When I first learned this in uni some 35 years ago, at 22 years old I thought it was a crazy idea whose chickens would eventually come home to roost. But its interesting to watch this epic battle, if you may, between the white and the yellow man.
We can't expect political leaders to be oracles, Mr. Bryan. Few diplomats are now calculating policies on the basis of clearly perceived outcomes as of 2073. Not everyone has your prescience. The shift of diplomatic recognition produced a long period of economic benefits: China was brought out of poverty and the material culture of Western and other Asian countries was enormously boosted. Moreover, it is not in any way true that if the long-term consequences of a decision include negative aspects at some point that the alternative approach would have been any better. The US calculation was that opening towards the PRC would prevent a USSR/PRC rapprochement, and it did--if that had occurred after Mao's death the USSR might be with us still.
By the way, Nixon did not normalize relations with China. He merely opened the door at a time when our understanding of PRC events was largely based radio broadcasts monitored in Hong Kong and public PRC periodicals. Carter shifted recognition in late 1978. Also, you may have heard that the US population is now under sixty percent non-Hispanic white--and we have some women too--while it is also true that about forty percent of Asians are not PRC citizens (reports are that there are women among them as well).
Great post.
Interestingly, absence of evidence is evidence of absence:
https://www.lesswrong.com/posts/mnS2WYLCGJP2kQkRn/absence-of-evidence-is-evidence-of-absence
Yesn't. In technical Bayesian sence of evidence, yes, but in, say, legal or scientific sense no: https://www.lesswrong.com/s/zpCiuR4T343j9WkcK/p/fhojYBGGiYAFcryHZ
I agree that decoupling is happening organically, with companies clearly reading the writing on the wall. All you need to do is provide an unpredictable environment where losses can spring up by way of uncertain regulations, and every CEO worth their salt is going to take a hard look at whether some diversification (or de-risking, such a hot phrase right now) should be in the near future.
I thought that the statistic about European car manufacturers was supposed to provide support for the thesis that absent the claimed cosmetic rerouting of supply chains originating in China and ending in the US, the dependence on China is growing significantly in the auto industry generally due to switch to electric power trains, where both US and European manufacturers have less technological advantage (compared to ICE technology).
The Economist is a propaganda newspaper that traditionally leans to the left. Therefore it is not surprising they are pro-China.
> traditionally leans to the left
What? They're supporters of free markets and deregulation, which are hardly communist topics. I'm not a huge fan of theirs, but saying that they're leftist is crazy.
I have found AllSides.com to be quite objective in their analysis of media bias:
https://www.allsides.com/news-source/economist
It’s weird for a site called “all sides” to evaluate political leans in a simple one-dimensional scale from left to right. The Economist is definitely strongly on the free market liberal side, which is usually thought of as center right on certain kinds of economic issues and center left on certain kinds of social issues, but doesn’t really fit in a left-right axis.
Jack, I don't see what Noah is reporting about the Economist as indicating any pro-China stance. To say that decoupling is proceeding slowly is not to advocate for it to do so. I also think that "leaning to the left" and being pro-PRC are pretty much decoupled now. China is nominally communist, but name and reality have been divorced for so many decades that I think few on the left think of China in that way; only those on the right who habitually call everything they dislike "communist" tend to make that error.
Agree. I see that in their articles about India. They make things up and then try to find evidence. I am glad the conversation around US is helping to showcase their thinking.
Interesting to hear about India! They clearly have an agenda. I found Bloomberg to also be quite left-leaning, with their new "Equality" section.
What's wrong with producing what we need right here in the USA? Depending on near slave labor in China is just plain wrong and therefore stupid. You get what you pay for.
The goal is not to quit trading with China, who has been our ally in the past, and with whom we have many reasons to keep as a valuable friend and training partner. We do want to be less dependent on upon China.
It is difficult to keep someone as a valuable friend if there are good reasons to distrust.
Is there any strong evidence for the universality of humanity's ability to make stuff? Personally I find it astounding that we live in a world where two countries, Taiwan and South Korea, with a combined population of roughly 76 million people constituting less than 1% of the global population of over 8 billion, account for around 80-85% of global semiconductor manufacturing by revenue.
My gut feeling is that high tech manufacturing is highly dependent on math ability, which based on international tests like PISA, the countries of East Asia seem to excel at. For instance on the math portion of the 2018 PISA, China topped the charts with a score of 591 while Mexico languished far below OECD average with a score of 409. Personally I'm far less sanguine than Noah that high tech supply chains can exist almost anywhere given enough time.
The simple fact of the matter is that significant disparities in educational attainment exist among different groups. In my opinion it's naive to believe that nations can reach technological convergence unless the underlying skills gaps are closed first.
Here here. https://sheilamdean.substack.com/p/the-dying-light-of-surveillance-capital
Noah, if you haven't seen this morning's CSIS discussion of China's downturn - "structural or cyclical" - streamed on youtube, I think you'd find it interesting: https://www.youtube.com/watch?v=aw-KHPZjVok