It’s hard to look at all of these explanations without considering Chinese support for Russia which was emphatically renewed yesterday. At this point it’s time to start responding to this as if it’s the worst case scenario.
I honestly think they just have really strong notions about what a 'proper' economy should look like, strong enough to the point where they'll happily stand back and watch GDP growth falter (because of real estate melting down) so long as 'proper' industries (hard manufacturing) are supported and doing well.
Perhaps an influence from their Marxist-Leninist philosophy, where workers produce "real wealth" in the form of physical goods, but real estate trading/speculation is just "bourgeois degeneracy" which needs to be excised or drastically cut down to size.
Building real estate is really lucrative and easy to do if all you care about is GDP growth ("line go up"). Until fairly recently that was the overriding concern of the CCP; that top-line economic growth be as high as possible, all other considerations be damned.
It seems like there was paradigm shift and they're suddenly very interested in how specifically their capitalists make their money. We saw something similar happen to their tech giants (like Jack Ma's Alibaba) where companies once seen as admirable engines of economic growth came under scrutiny and censure.
Given how big China is, I would be amazed if it wasn't a mix of theories. I also think there's an element of mending the roof whilst the sun shines. China has passed its peak worker age and it's got 20 years before it's median age is as old as Japan's without the same GDP. If they want Taiwan and global hegemony, now is the time to pursue it.
Most of those Chinese workers will be from one child families and the lack of state pension will throw the burden back on the younger generations. That includes health care and elder care, which will consume more time and attention.
The CCP are willing to let anyone die, the zero Covid plan didn’t actually stop Covid from killing, and it was enforced in some places by welding shut apartment block doors and trapping the residents inside without food supplies.
I prefer theory 2, but the others all have an element of truth. More generally I feel academic economists have not put forward a solution and it is up to the blogosphere. I would be interested in reading posts about ideas that might work. To me the most effective system would be an update of the bancor proposal of the 1940s, which would prevent any one country from accumulating huge claims on another currency through export surpluses, and encourage each country to run somewhat balanced trade. There are downsides to this model, such as reduced freedom for fast growing countries to run benevolent current account deficits. But it would be better than the current situation, which is unacceptable.
Grasshopper's belly view experience from trying to migrate some of my company's production from a captive FDI manufacturing subsidiary in Guangdong province to a collection of CMs in Malaysia + Vietnam; not sure how much it applies at larger scales.
7) Lack of depth in the manufacturing support supply chain (combination of historical reasons for that, including but far from limited to strategic investment on China's part). Our high volume product is a fairly niche electromechanical device that requires a lot of specialized factory automation tooling and programming etc.
The Malaysian CM and their subcontractors are generally extremely cost competitive on marginal unit cost vs our Chinese supply chain, net of Trump era tariffs as and where applicable (i.e. net transfer cost as delivered at a West Coast port, usually LA / Long Beach).
But if one of the production robots loses it from a hard to diagnose cause, we have to eat both the direct cost and the line down cost of what it takes to fly someone from China to fix the blasted thing.
Relatedly, if we have a weird manufacturing yield problem that requires specialized equipment and skills (electron microscope analysis for example, or really anything that requires chip decapping) again everything has to go to Hong Kong or more often Shenzhen, which costs time, money, and extra transactional losses.
Mind-expanding possibilities. A combination of factors could be in play with a strong influence from Theory 6, based on Xi's focus on security and recent alliance with Mr. Putin.
A question for Noah. You are a professional economist and must be acquainted with the standard view about marching instruments to objectives. If the US or Rurilandia wants to promote manufacturing, the way to do that would be to subsidize manufacturing output which would them be sold either domestically or exported. It would seem strange, would it not to subsidize only output that was going to be sold domestically. And it would be even stranger in this standard view to finance the subsidy with an excise tax on manufactured goods, whihc is the effect of a tariff. If the tariff applies only to imports of one country, that is a third level of oddness.
Yet Noah writes as if tariffs on imported goods from Chana is the obviously correct policy for promoting manufacturing. Does Noah actually disagree with the standard prescription? If so why?
And since manufacturing in general are tradable goods, is it not a mistake from the point of view of promoting manufacturing, to be running large fiscal deficits that, ceteris paribus, mean larger excess of imports over exports?
I'd like to better understand Noah's thinking on this issue.
If this is a question for Noah, why do you refer to Noah in the third person? 😊😊😊
I do not know if tariffs on imported goods from "Chana" is the obviously correct policy from promoting manufacturing. I certainly did not promulgate such a point of view in this post.
AAPL would not go to zero. They would still own the IP and they have little debt. China would not be able to sell the iPhones into WTO countries. AAPL would presumably take a hit in stock price and move to re-establish manufacturing somewhere else.
Also note that while iPhone handsets are manufactured in China, many of the electronic components are manufactured elsewhere. In particular, the cpu is made in Taiwan.
Awesome simple, clear overview of the topic. I find these kinds of articles from you often the most thought provoking and useful as they help me conceptualize.
Thinking about these points I have a few thoughts to add to the mix:
1. I could imagine myself in the Chinese government looking at the same investment charts and saying "That looks about right. China has 4x the population of USA, we should be investing 4x the USA in our industries."
2. I don't see China starting a hot war to take back Taiwan. They would need to start a global war to make it happen. However, they are much more effective in the cultural-influence sphere. I can see them playing a very long game: continue aggressive military posturing, social-influence via media, funding of politicians, hacking, etc... And eventually ending up with a pro-mainland government in Taiwan that openly starts a "unification" process. I could see the mainland government seeing the end-state being something like their relationship with Mongolia.
3. The military build up of China seems more defensive than preparing for a future pre-emptive war. If I was sitting on the China side, I would feel highly insecure with global dynamics. I need to maintain a strong military (hopefully stronger than everyone else's) to ensure that I can intimidate countries in the South China Sea and maintain my presence there. That I can maintain my position for economic partnerships in Africa. And that I am taken seriously on the global sphere. The reality remains that military strength gives leverage in trade negotiations.
4. I agree with some of the other comments as well - I generally see the CCP as scared of the risk of uprising - especially if the domestic economy is weakening. Given the size and scale of the country the government could not stop a general uprising if it were to start. There are a lot of ethnic groups that are not especially pro-CCP and a perceived desire by many of the provinces to be more independent. The controls on speech, the posturing of the CCP being strong and making right choices, etc are all part of this. I would even argue the focus on a strong central military is also at least partially domestically focused.
I don’t know if I agree as I think nationalism is an under appreciated force (in all countries not just China). China’s issues with almost every single neighbor and their Chinese activities in the south China support this.
Again this is not unique to China. In fact What scares me is that they are acting a lot like countries at the moment me of the 19th andbeginning of the 20th century (including Germany, Japan, the US - basically all the countries that had not acquired empires at the beginning of the 19th century).
While I agree that we cannot cede manufacturing dominance to China, the cost of this will be high. China will be further incentivized to create a quasi empire to sell what they make. This increases the potential for war.
That said, I appreciate you argument and concede that predicting Chinese actions with any degree of confidence is incredibly difficult.
Agree on your points regarding nationalism. I think we often forget how important it is in many domestic and international interactions. I actually considered adding a point on nationalism in my comment related to (4) but felt my comment was running long.
The dominate Han ethnic majority in the mainland has its own vein of extreme nationalism meshed with racial tones as any other country. And I think the blogs and commentators get traction due to the economic results that CCP has continued to deliver to the population at large. The risk and fear is that if the economy slows too much and people start feeling not as good as the last generation, unrest could kickoff.
A core theme of the nationalism in China is the view (advocated by the ruling class as well) of China's 5000 years of uninterrupted national growth. Similar to Putin commentary in some respects but China has a more richer cultural record which makes it easier to push this view in some ways. Thus, the "Taiwan is a part of our 5000 old traditional empire." And things like "we are the only society globally with 5000 years of uninterrupted cultural history and identity" are appealing and easy to feed nationalistic tendencies. It's not entirely accurate as the culture has changed over time and there could be counter arguments that Taiwan is the "rightful" ruling body of China. But frankly logic doesn't matter much for nationalism, anywhere.
Because of this nationalism and confidence, I don't think China will compromise on Taiwan or the South China Sea. But I also don't see them fighting a hot war over either. "We can wait." Is the feeling I get.
Interesting points. I think about what might be completely rational for China if they have security concerns. They could want to ensure they can supply and power their economy and military in the event of a great power conflict. In response, the west might rationally seek to secure it's own supplies and capabilities for the same eventuality, and to cut off China's ability to launch and sustain a war of aggression. In this case, China's rational actions and the rational actions of the west would almost certainly conflict.
One need only look at the events that led Japan to attack the US at Pearl Harbor to see how this could lead inexorably to war, despite it not being in either side's interest. And if these are the conditions that actually pertain (and I don't know if they do or don't), I have no idea what either side can do to preserve it's own interests and avoid that likely result. Which bothers me a great deal.
Overall, I suspect that all the theories have a role. However, the article seems to miss the critical question.... is this over production economically viable, and for how long. If China is indeed producing all of these goods "at a profit." This is an indication of real economic strength and the next question is..what is the impact on wages...how long does it remain profitable ? If China is producing these goods "at a loss," it would seem that they are sowing the seeds for their own economic destruction (see Real Estate). Finally, what is the opportunity cost for this singular focus on a small number of industries? Example... what happens when world demand for automobiles collapses (average utilization for a car is under 5%) when automation allows for much greater/more flexible usage. ?
6 seems unlikely (at least for this specific question of why make export goods). If they want to prepare for, they can just do that. Building up the consumer manufacturing is the sort of thing that helps for a war in the long term. If you expect a war soon, just start building war material directly.
Mercantilism (export-oriented economy with some protectionism for domestic industry and high savings) was pretty the model that Japan, Taiwan and S Korea used to develop. China seems to have adopted that successful strategy back in the Jiang days (including the Asian Tigers pattern of copying other products and eventually building high quality versions themselves).
One could argue that Germany and the Asian tigers are still following an export-oriented, high saving/low consumption model (though most have shipped component manufacturing and some final assembly to cheaper locales …..like China). That economic model seems to be hard to shake (though S Korea has worked on some consumption and consumerism and credit cards).
China added quite a bit of domestic infrastructure investment to that mix (as Japan did during its bubble years) but diminishing returns and high credit balances have reduced the importance of investment somewhat. (Also the economy is a lot bigger so the impact of building any one bridge is less). And now they have a big slowdown in residential real estate (which Chinese had viewed as a savings vehicle - a hard asset somewhat insulated from inflation and the currency - until the development companies levered up and stole their deposits).
What does Xi have left when it comes to stimulus? Boosting manufacturing makes sense - in part, Covid did it for him initially as Chinese exports hit record levels in 2021 and 2022 as did container volumes. The difference is that non-Chinese goods producers cut back after Covid but China hasn’t.
The alternative, increasing consumption by developing a domestic service economy, is a lot more difficult to pull off. Small shops and restaurants, sure, but scale will draw the attention of authorities. Can you even develop a service industry without IP protection and rule of law? And where banks pretty much only lend to manufacturers and state-owned industry? Seems like some of the big tech giants in China have encountered some difficulties running their businesses independently.
Also there have been large capital outflows and a sense of worry amongst wealthy Chinese. Changing the economic model to de-emphasize mercantilism might create a panic.
I happen to think China is going to bottom out and do OK over the next couple of years- the Ukraine war will move to a ceasefire and Europe will recover. I am not bullish on a 10 year view due to demographics and a resistance to changing its economic model.
The main difference here is the US is in a LOW savings mode, not least because we tax incomes rather than consumption and have huge fiscal deficits (federal and State and Local taking account of their pension liabilities)
This is where industrial/national security/zero CO2 emissions/supply chain policy intersects with my other bugaboo, raising revenue with more consumption weighted taxes:
1) more progressive "income" taxes with greater deductions/tax credits for saving,
2) VAT for wage taxes to finance SS, Medicare-Medicaid-ACA, unemployment insurance and other transfers like a child tax allowance, and (of course)
3) taxation of net emissions of CO2.
at levels that virtually eliminate the deficit and and eliminate taxation of business income.
If you see CO2 reduction as a top priority and believe it is feasible to move almost all ground transport to EVs on current tech (I do not), then we should import as many cheap Chinese EVs as possible. They’ve also been working on applied chemical research (while we pay people to buy old tech Chinese batteries) and allegedly their new lithium batteries charge much more quickly and with greater range. Climate alarmists need to stop subsidizing buggy whips- union donations are not important if you think we are in existential crisis. Buy the cheapest and best stuff while investing in next gen research. The fate of Taiwan is also irrelevant if we are in existential climate crisis.
Agree the US will have a consumption tax, though like all aging social democracies this will be in combination with income taxes (not replacing them). If it was politically and fiscally feasible to replace income taxes with higher VAT, then one of the dozens of countries with a VAT would already have done it. It is one of those ideas that only seems to work in textbooks. My model is to tax businesses on gross domestic revenues with deductions for domestic salary expense and domestic input costs (no deduction for imported inputs).
The tech companies make high margins and have high US sales but low CGS and game the system by making their IP a foreign input (sending revenues to EU tax havens). Under a GST based system they would have an incentive to earn profits in the US and spend R&D dollars in the US.
Meanwhile, businesses with high labor and domestic input costs (grocery stores) and low margins would see their effective sales tax rate be much lower than 20 percent,
I would likely eliminate the corporate income tax and raise capital gains taxes close to income tax levels and eliminate the step up basis on death for financial assets (exclude personal residence and small businesses/farms where owners and heirs play an active role).
Would also eliminate the tax deduction on gifts of appreciated securities to foundations and endowments and charitable gift funds. Those donations should be treated like a salary earner contributing to a charity’s annual fund. The salary earner has taxes withheld and then gets taxes back on donations. Someone contributing shares (ie selling shares) to a foundation should pay capital gains taxes on those shares (and then be able to get taxes back on the donation, provided it is a foundation or endowment that seeks to deplete principal and investment income down to zero in 20 years via charitable activities).
Donors could also buy a building for a university or hospital (which would be more like an annual fund donation as the donationis immediately expensed rather than designed to sit in an account forever).
Our income tax system will be more like Europe’s- rates aren’t too much higher than ours but very few deductions and with high marginal (40 percent) kicking in at middle class incomes, resulting in high average tax rates (which are much less distorting than high marginal tax rates).
I advocate replacing wage taxes with the VAT; one mildly regressive tax with another more efficient mildly regressive tax. I want to "replace" the personal income tax with a personal consumption tax (by making saving deductible/tax creditable)
Strong agreement with moving to more of a consumption based tax scheme. Unlikely to happen without a great deal of logrolling- see: diffuse benefits, concentrated costs.
Also strong agreement with moving away from wage taxes in all possible respects, although we also have to be careful to not re-jigger the wage versus not officially wage (gig economy, etc.) balance as a cost of labor.
I *think* I'd like to see some weak consumption taxes on the business side as well; incentivize broadly for higher value added.
And I suspect we need to add a bit more transaction costs on highly liquid capital markets (to the degree that we tax consumption rather than income, with fewer preferences for capital gains, maybe the capital markets will stabilize all by themselves); goal being to weakly incentivize longer term capital holding versus very high turnover.
Theory 6 apparently, with all due respect. Nothing takes a country to war faster than a population restless for a unified purpose. The bonus? Some of that population self eliminates in battle very effectively - and in the modern era - while consuming the products of an overdrive in manufacturing which in turn keeps any able bodied persons working.
Simplistic I know. You are far more learned. Just was thinking of the empire of Japan pre-ww2 and their surplus of young men. Must keep the kids busy, yes?
I don't think imperial Japan is a valid analogy since they had a homogenous population highly loyal to the regime - whereas China is an unpopular oligarchy whose only objective is to stay in power; also it has unstable regions with separatist minorities.
I don't see any way that PRC waging aggressive war would not be massively harmful to them. Given how dependent they are on resources it would be pretty easy to strangle them economically.
I think the USSR is an interesting counter example - they produced a bunch of tanks, planes, and munitions that mostly got stockpiled and not used. So you can do military production as economic stimulus for quite a while without actually starting a world war.
Sounds to me like we need a Containment 2.0, with an eye towards Chinese population pyramids. If we can hold off invasion plans through continual fortification of Taiwan and allow their population to age into military/gerontocratic impotence we can secure Taiwan's safety without a shot fired
Even if China isn't preparing for war, I don't think it is a massive stretch to look at the history of sanctions in places like Iran (we don't like you having nukes), South Africa (we don't like your racism), Cuba (we need to win votes in Miami), Venezuela (you didn't hold elections the way we like), Nicaragua (we don't like how you're repressing people), and so on and go, gee even without a war a lot of that applies to us so who knows when the hammer will come down?
I think this analysis is missing the currency angle: China obviously depresses it's currency to make it's exports more competitive on the global market, probably unfairly so. It's fundamentally an export driven economy, and relies on being able to sell it's goods overseas to drive domestic growth (see also: Japan and the post-plaza Accords lost decades). Which is a great thing for international consumers but obviously bad for businesses.
The US can never replicate this model because USD is the global reserve currency. And I think the original architects of this model understood this (looking at you, Regan, Thatcher) when they offshored all western manufacturing to Asia, but they underestimated the time it would take for china to catch up on high tech manufacturing and push out competition everywhere.
Rather than comparing the US to China (whose rise was inevitable), maybe we should be asking why we blew or opportunity to keep pace with Germany and Japan. After years of labor battles, we started producing crap like the Chevy Citation and the Ford Fiesta. We couldn't compete on either quality of efficiency with our WWII foes who had to rebuild their manufacturing bases. Rather than denying our inadequacy, we relied on patriotism and government funding to keep American manufacturing afloat. That funding would have been better spent on reengineering, but the labor mess took all of management's attention. Also, we probably should have listened to Ross Perot in 1992 rather than go full-throttle into the globalization dream. Maybe with a program of tariffs and better management, we could have kept American plants for heavy things like air conditioners and appliances here in the USA. Letting all of that work go to Mexico was bad governing then, and bad politics now. We really screwed the pooch in those two periods where you see us diverge from Germany and Mexico, regardless of the rise of China.
It’s hard to look at all of these explanations without considering Chinese support for Russia which was emphatically renewed yesterday. At this point it’s time to start responding to this as if it’s the worst case scenario.
I honestly think they just have really strong notions about what a 'proper' economy should look like, strong enough to the point where they'll happily stand back and watch GDP growth falter (because of real estate melting down) so long as 'proper' industries (hard manufacturing) are supported and doing well.
Perhaps an influence from their Marxist-Leninist philosophy, where workers produce "real wealth" in the form of physical goods, but real estate trading/speculation is just "bourgeois degeneracy" which needs to be excised or drastically cut down to size.
Yeah, and we may do well to learn from them. Those who can pick and learn from those they disagree with have an edge.
Begs the question why they propped it up for so long though.
Building real estate is really lucrative and easy to do if all you care about is GDP growth ("line go up"). Until fairly recently that was the overriding concern of the CCP; that top-line economic growth be as high as possible, all other considerations be damned.
It seems like there was paradigm shift and they're suddenly very interested in how specifically their capitalists make their money. We saw something similar happen to their tech giants (like Jack Ma's Alibaba) where companies once seen as admirable engines of economic growth came under scrutiny and censure.
Given how big China is, I would be amazed if it wasn't a mix of theories. I also think there's an element of mending the roof whilst the sun shines. China has passed its peak worker age and it's got 20 years before it's median age is as old as Japan's without the same GDP. If they want Taiwan and global hegemony, now is the time to pursue it.
Most of those Chinese workers will be from one child families and the lack of state pension will throw the burden back on the younger generations. That includes health care and elder care, which will consume more time and attention.
If China was willing to just let old people die, then what was the whole Zero Covid thing about?
The CCP are willing to let anyone die, the zero Covid plan didn’t actually stop Covid from killing, and it was enforced in some places by welding shut apartment block doors and trapping the residents inside without food supplies.
I prefer theory 2, but the others all have an element of truth. More generally I feel academic economists have not put forward a solution and it is up to the blogosphere. I would be interested in reading posts about ideas that might work. To me the most effective system would be an update of the bancor proposal of the 1940s, which would prevent any one country from accumulating huge claims on another currency through export surpluses, and encourage each country to run somewhat balanced trade. There are downsides to this model, such as reduced freedom for fast growing countries to run benevolent current account deficits. But it would be better than the current situation, which is unacceptable.
Grasshopper's belly view experience from trying to migrate some of my company's production from a captive FDI manufacturing subsidiary in Guangdong province to a collection of CMs in Malaysia + Vietnam; not sure how much it applies at larger scales.
7) Lack of depth in the manufacturing support supply chain (combination of historical reasons for that, including but far from limited to strategic investment on China's part). Our high volume product is a fairly niche electromechanical device that requires a lot of specialized factory automation tooling and programming etc.
The Malaysian CM and their subcontractors are generally extremely cost competitive on marginal unit cost vs our Chinese supply chain, net of Trump era tariffs as and where applicable (i.e. net transfer cost as delivered at a West Coast port, usually LA / Long Beach).
But if one of the production robots loses it from a hard to diagnose cause, we have to eat both the direct cost and the line down cost of what it takes to fly someone from China to fix the blasted thing.
Relatedly, if we have a weird manufacturing yield problem that requires specialized equipment and skills (electron microscope analysis for example, or really anything that requires chip decapping) again everything has to go to Hong Kong or more often Shenzhen, which costs time, money, and extra transactional losses.
Mind-expanding possibilities. A combination of factors could be in play with a strong influence from Theory 6, based on Xi's focus on security and recent alliance with Mr. Putin.
A question for Noah. You are a professional economist and must be acquainted with the standard view about marching instruments to objectives. If the US or Rurilandia wants to promote manufacturing, the way to do that would be to subsidize manufacturing output which would them be sold either domestically or exported. It would seem strange, would it not to subsidize only output that was going to be sold domestically. And it would be even stranger in this standard view to finance the subsidy with an excise tax on manufactured goods, whihc is the effect of a tariff. If the tariff applies only to imports of one country, that is a third level of oddness.
Yet Noah writes as if tariffs on imported goods from Chana is the obviously correct policy for promoting manufacturing. Does Noah actually disagree with the standard prescription? If so why?
And since manufacturing in general are tradable goods, is it not a mistake from the point of view of promoting manufacturing, to be running large fiscal deficits that, ceteris paribus, mean larger excess of imports over exports?
I'd like to better understand Noah's thinking on this issue.
If this is a question for Noah, why do you refer to Noah in the third person? 😊😊😊
I do not know if tariffs on imported goods from "Chana" is the obviously correct policy from promoting manufacturing. I certainly did not promulgate such a point of view in this post.
AAPL would not go to zero. They would still own the IP and they have little debt. China would not be able to sell the iPhones into WTO countries. AAPL would presumably take a hit in stock price and move to re-establish manufacturing somewhere else.
Also note that while iPhone handsets are manufactured in China, many of the electronic components are manufactured elsewhere. In particular, the cpu is made in Taiwan.
Awesome simple, clear overview of the topic. I find these kinds of articles from you often the most thought provoking and useful as they help me conceptualize.
Thinking about these points I have a few thoughts to add to the mix:
1. I could imagine myself in the Chinese government looking at the same investment charts and saying "That looks about right. China has 4x the population of USA, we should be investing 4x the USA in our industries."
2. I don't see China starting a hot war to take back Taiwan. They would need to start a global war to make it happen. However, they are much more effective in the cultural-influence sphere. I can see them playing a very long game: continue aggressive military posturing, social-influence via media, funding of politicians, hacking, etc... And eventually ending up with a pro-mainland government in Taiwan that openly starts a "unification" process. I could see the mainland government seeing the end-state being something like their relationship with Mongolia.
3. The military build up of China seems more defensive than preparing for a future pre-emptive war. If I was sitting on the China side, I would feel highly insecure with global dynamics. I need to maintain a strong military (hopefully stronger than everyone else's) to ensure that I can intimidate countries in the South China Sea and maintain my presence there. That I can maintain my position for economic partnerships in Africa. And that I am taken seriously on the global sphere. The reality remains that military strength gives leverage in trade negotiations.
4. I agree with some of the other comments as well - I generally see the CCP as scared of the risk of uprising - especially if the domestic economy is weakening. Given the size and scale of the country the government could not stop a general uprising if it were to start. There are a lot of ethnic groups that are not especially pro-CCP and a perceived desire by many of the provinces to be more independent. The controls on speech, the posturing of the CCP being strong and making right choices, etc are all part of this. I would even argue the focus on a strong central military is also at least partially domestically focused.
I don’t know if I agree as I think nationalism is an under appreciated force (in all countries not just China). China’s issues with almost every single neighbor and their Chinese activities in the south China support this.
Again this is not unique to China. In fact What scares me is that they are acting a lot like countries at the moment me of the 19th andbeginning of the 20th century (including Germany, Japan, the US - basically all the countries that had not acquired empires at the beginning of the 19th century).
While I agree that we cannot cede manufacturing dominance to China, the cost of this will be high. China will be further incentivized to create a quasi empire to sell what they make. This increases the potential for war.
That said, I appreciate you argument and concede that predicting Chinese actions with any degree of confidence is incredibly difficult.
Agree on your points regarding nationalism. I think we often forget how important it is in many domestic and international interactions. I actually considered adding a point on nationalism in my comment related to (4) but felt my comment was running long.
The dominate Han ethnic majority in the mainland has its own vein of extreme nationalism meshed with racial tones as any other country. And I think the blogs and commentators get traction due to the economic results that CCP has continued to deliver to the population at large. The risk and fear is that if the economy slows too much and people start feeling not as good as the last generation, unrest could kickoff.
A core theme of the nationalism in China is the view (advocated by the ruling class as well) of China's 5000 years of uninterrupted national growth. Similar to Putin commentary in some respects but China has a more richer cultural record which makes it easier to push this view in some ways. Thus, the "Taiwan is a part of our 5000 old traditional empire." And things like "we are the only society globally with 5000 years of uninterrupted cultural history and identity" are appealing and easy to feed nationalistic tendencies. It's not entirely accurate as the culture has changed over time and there could be counter arguments that Taiwan is the "rightful" ruling body of China. But frankly logic doesn't matter much for nationalism, anywhere.
Because of this nationalism and confidence, I don't think China will compromise on Taiwan or the South China Sea. But I also don't see them fighting a hot war over either. "We can wait." Is the feeling I get.
Interesting points. I think about what might be completely rational for China if they have security concerns. They could want to ensure they can supply and power their economy and military in the event of a great power conflict. In response, the west might rationally seek to secure it's own supplies and capabilities for the same eventuality, and to cut off China's ability to launch and sustain a war of aggression. In this case, China's rational actions and the rational actions of the west would almost certainly conflict.
One need only look at the events that led Japan to attack the US at Pearl Harbor to see how this could lead inexorably to war, despite it not being in either side's interest. And if these are the conditions that actually pertain (and I don't know if they do or don't), I have no idea what either side can do to preserve it's own interests and avoid that likely result. Which bothers me a great deal.
Overall, I suspect that all the theories have a role. However, the article seems to miss the critical question.... is this over production economically viable, and for how long. If China is indeed producing all of these goods "at a profit." This is an indication of real economic strength and the next question is..what is the impact on wages...how long does it remain profitable ? If China is producing these goods "at a loss," it would seem that they are sowing the seeds for their own economic destruction (see Real Estate). Finally, what is the opportunity cost for this singular focus on a small number of industries? Example... what happens when world demand for automobiles collapses (average utilization for a car is under 5%) when automation allows for much greater/more flexible usage. ?
6 seems unlikely (at least for this specific question of why make export goods). If they want to prepare for, they can just do that. Building up the consumer manufacturing is the sort of thing that helps for a war in the long term. If you expect a war soon, just start building war material directly.
Mercantilism (export-oriented economy with some protectionism for domestic industry and high savings) was pretty the model that Japan, Taiwan and S Korea used to develop. China seems to have adopted that successful strategy back in the Jiang days (including the Asian Tigers pattern of copying other products and eventually building high quality versions themselves).
One could argue that Germany and the Asian tigers are still following an export-oriented, high saving/low consumption model (though most have shipped component manufacturing and some final assembly to cheaper locales …..like China). That economic model seems to be hard to shake (though S Korea has worked on some consumption and consumerism and credit cards).
China added quite a bit of domestic infrastructure investment to that mix (as Japan did during its bubble years) but diminishing returns and high credit balances have reduced the importance of investment somewhat. (Also the economy is a lot bigger so the impact of building any one bridge is less). And now they have a big slowdown in residential real estate (which Chinese had viewed as a savings vehicle - a hard asset somewhat insulated from inflation and the currency - until the development companies levered up and stole their deposits).
What does Xi have left when it comes to stimulus? Boosting manufacturing makes sense - in part, Covid did it for him initially as Chinese exports hit record levels in 2021 and 2022 as did container volumes. The difference is that non-Chinese goods producers cut back after Covid but China hasn’t.
The alternative, increasing consumption by developing a domestic service economy, is a lot more difficult to pull off. Small shops and restaurants, sure, but scale will draw the attention of authorities. Can you even develop a service industry without IP protection and rule of law? And where banks pretty much only lend to manufacturers and state-owned industry? Seems like some of the big tech giants in China have encountered some difficulties running their businesses independently.
Also there have been large capital outflows and a sense of worry amongst wealthy Chinese. Changing the economic model to de-emphasize mercantilism might create a panic.
I happen to think China is going to bottom out and do OK over the next couple of years- the Ukraine war will move to a ceasefire and Europe will recover. I am not bullish on a 10 year view due to demographics and a resistance to changing its economic model.
The main difference here is the US is in a LOW savings mode, not least because we tax incomes rather than consumption and have huge fiscal deficits (federal and State and Local taking account of their pension liabilities)
Yes - we are addicted to debt and focus on consumption
This is where industrial/national security/zero CO2 emissions/supply chain policy intersects with my other bugaboo, raising revenue with more consumption weighted taxes:
1) more progressive "income" taxes with greater deductions/tax credits for saving,
2) VAT for wage taxes to finance SS, Medicare-Medicaid-ACA, unemployment insurance and other transfers like a child tax allowance, and (of course)
3) taxation of net emissions of CO2.
at levels that virtually eliminate the deficit and and eliminate taxation of business income.
If you see CO2 reduction as a top priority and believe it is feasible to move almost all ground transport to EVs on current tech (I do not), then we should import as many cheap Chinese EVs as possible. They’ve also been working on applied chemical research (while we pay people to buy old tech Chinese batteries) and allegedly their new lithium batteries charge much more quickly and with greater range. Climate alarmists need to stop subsidizing buggy whips- union donations are not important if you think we are in existential crisis. Buy the cheapest and best stuff while investing in next gen research. The fate of Taiwan is also irrelevant if we are in existential climate crisis.
Agree the US will have a consumption tax, though like all aging social democracies this will be in combination with income taxes (not replacing them). If it was politically and fiscally feasible to replace income taxes with higher VAT, then one of the dozens of countries with a VAT would already have done it. It is one of those ideas that only seems to work in textbooks. My model is to tax businesses on gross domestic revenues with deductions for domestic salary expense and domestic input costs (no deduction for imported inputs).
The tech companies make high margins and have high US sales but low CGS and game the system by making their IP a foreign input (sending revenues to EU tax havens). Under a GST based system they would have an incentive to earn profits in the US and spend R&D dollars in the US.
Meanwhile, businesses with high labor and domestic input costs (grocery stores) and low margins would see their effective sales tax rate be much lower than 20 percent,
I would likely eliminate the corporate income tax and raise capital gains taxes close to income tax levels and eliminate the step up basis on death for financial assets (exclude personal residence and small businesses/farms where owners and heirs play an active role).
Would also eliminate the tax deduction on gifts of appreciated securities to foundations and endowments and charitable gift funds. Those donations should be treated like a salary earner contributing to a charity’s annual fund. The salary earner has taxes withheld and then gets taxes back on donations. Someone contributing shares (ie selling shares) to a foundation should pay capital gains taxes on those shares (and then be able to get taxes back on the donation, provided it is a foundation or endowment that seeks to deplete principal and investment income down to zero in 20 years via charitable activities).
Donors could also buy a building for a university or hospital (which would be more like an annual fund donation as the donationis immediately expensed rather than designed to sit in an account forever).
Our income tax system will be more like Europe’s- rates aren’t too much higher than ours but very few deductions and with high marginal (40 percent) kicking in at middle class incomes, resulting in high average tax rates (which are much less distorting than high marginal tax rates).
I advocate replacing wage taxes with the VAT; one mildly regressive tax with another more efficient mildly regressive tax. I want to "replace" the personal income tax with a personal consumption tax (by making saving deductible/tax creditable)
Strong agreement with moving to more of a consumption based tax scheme. Unlikely to happen without a great deal of logrolling- see: diffuse benefits, concentrated costs.
Also strong agreement with moving away from wage taxes in all possible respects, although we also have to be careful to not re-jigger the wage versus not officially wage (gig economy, etc.) balance as a cost of labor.
I *think* I'd like to see some weak consumption taxes on the business side as well; incentivize broadly for higher value added.
And I suspect we need to add a bit more transaction costs on highly liquid capital markets (to the degree that we tax consumption rather than income, with fewer preferences for capital gains, maybe the capital markets will stabilize all by themselves); goal being to weakly incentivize longer term capital holding versus very high turnover.
Theory 6 apparently, with all due respect. Nothing takes a country to war faster than a population restless for a unified purpose. The bonus? Some of that population self eliminates in battle very effectively - and in the modern era - while consuming the products of an overdrive in manufacturing which in turn keeps any able bodied persons working.
Simplistic I know. You are far more learned. Just was thinking of the empire of Japan pre-ww2 and their surplus of young men. Must keep the kids busy, yes?
I don't think imperial Japan is a valid analogy since they had a homogenous population highly loyal to the regime - whereas China is an unpopular oligarchy whose only objective is to stay in power; also it has unstable regions with separatist minorities.
I don't see any way that PRC waging aggressive war would not be massively harmful to them. Given how dependent they are on resources it would be pretty easy to strangle them economically.
I think the USSR is an interesting counter example - they produced a bunch of tanks, planes, and munitions that mostly got stockpiled and not used. So you can do military production as economic stimulus for quite a while without actually starting a world war.
USSR-era materiel got used and squandered in Ukraine.
Only because the leadership got spanked to hell in Afghanistan.
Sounds to me like we need a Containment 2.0, with an eye towards Chinese population pyramids. If we can hold off invasion plans through continual fortification of Taiwan and allow their population to age into military/gerontocratic impotence we can secure Taiwan's safety without a shot fired
Even if China isn't preparing for war, I don't think it is a massive stretch to look at the history of sanctions in places like Iran (we don't like you having nukes), South Africa (we don't like your racism), Cuba (we need to win votes in Miami), Venezuela (you didn't hold elections the way we like), Nicaragua (we don't like how you're repressing people), and so on and go, gee even without a war a lot of that applies to us so who knows when the hammer will come down?
I think this analysis is missing the currency angle: China obviously depresses it's currency to make it's exports more competitive on the global market, probably unfairly so. It's fundamentally an export driven economy, and relies on being able to sell it's goods overseas to drive domestic growth (see also: Japan and the post-plaza Accords lost decades). Which is a great thing for international consumers but obviously bad for businesses.
The US can never replicate this model because USD is the global reserve currency. And I think the original architects of this model understood this (looking at you, Regan, Thatcher) when they offshored all western manufacturing to Asia, but they underestimated the time it would take for china to catch up on high tech manufacturing and push out competition everywhere.
Now the chickens have come home to roost.
Rather than comparing the US to China (whose rise was inevitable), maybe we should be asking why we blew or opportunity to keep pace with Germany and Japan. After years of labor battles, we started producing crap like the Chevy Citation and the Ford Fiesta. We couldn't compete on either quality of efficiency with our WWII foes who had to rebuild their manufacturing bases. Rather than denying our inadequacy, we relied on patriotism and government funding to keep American manufacturing afloat. That funding would have been better spent on reengineering, but the labor mess took all of management's attention. Also, we probably should have listened to Ross Perot in 1992 rather than go full-throttle into the globalization dream. Maybe with a program of tariffs and better management, we could have kept American plants for heavy things like air conditioners and appliances here in the USA. Letting all of that work go to Mexico was bad governing then, and bad politics now. We really screwed the pooch in those two periods where you see us diverge from Germany and Mexico, regardless of the rise of China.