What a “Get Tough With China” Stance Would Really Look Like

Before every get-together with China, the US goes through some ritualized complaining (the value of its currency has been the recent big talking point), the Chinese do some sabre rattling of their own, and perilous little of substance happens, except that the Chinese continue to have an economy with a substantial current account surplus, which not only works to the detriment of its major trade partners, but at this scale contributes to financial instability. So in a perverse way, China’s ongoing trade surplus is everyone’s problem.

Martin Wolf of the Financial Times reminds us that this dynamic shows no sign of self-correcting:

…both sides [China and the West0 have made mistakes in managing their economic interaction.

China, for example, allowed an extraordinary surge in exports and the current account surplus to mask the development of an increasingly unbalanced domestic economy. Chinese household consumption collapsed from an already very low share of 46 per cent of gross domestic product in 2000 to a mere 35 per cent in 2008.

These were foolish investments, made as a result of foolish policies. It is absurd for China’s leaders to complain about China’s consequent (and entirely unnecessary) vulnerability to US fiscal and monetary policies.

Meanwhile, the US and a number of other western countries allowed the supply of cheap foreign savings, partly from China, to encourage a huge surge in household debt, private consumption, residential construction and financial sector leverage. While the excess savings of the emerging world were not the principal cause of the financial crisis, they were a contributory factor.

It is key to recognize that Chinese consumption has not risen relative to GDP, which is what needs to happen for the imbalances to moderate. And even though the grumbling between the US and China has focused on the exchange rate, there are other issues in play which get little commentary.

One of the frustrations in talking about China is that it is not well recognized (at least in the MSM) how mercantilist its policies are. Many people in the US have come to accept the idea that China’s cheaper labor costs trump all, hence the US goose is cooked as far as manufacturing is concerned.

The problem is that for most products, that’s urban legend. Direct factory labor is ~10% for a whole raft of goods. For manufacturing moved to China, where the US is a substantial part of the end market, you typically see meaningful offsets to the labor cost savings: increased managerial/coordination costs (particularly if the work is outsourced rather than merely “offshored”), increased shipping costs, increased financing costs (due to longer supply chains). And you also have an increase in risks, which amounts to a hidden cost. Longer lead times makes it harder for the producer to respond to changes in demand and competitor moves. So the cost of being stuck with output that needs to be written down or off will also offset any labor cost savings.

And that’s before you get to strategic risk. Too often, Chinese subcontractors have gotten their know-how from their customers and have gone in direct competition. Even market leaders with world-class technology have lost out. As the New York Times reports:

Nearly all the components that Gamesa assembles into million-dollar turbines here, for example, are made by local suppliers — companies Gamesa trained to meet onerous local content requirements. And these same suppliers undermine Gamesa by selling parts to its Chinese competitors — wind turbine makers that barely existed in 2005, when Gamesa controlled more than a third of the Chinese market.

But in the five years since, the upstarts have grabbed more than 85 percent of the wind turbine market, aided by low-interest loans and cheap land from the government, as well as preferential contracts from the state-owned power companies that are the main buyers of the equipment. Gamesa’s market share now is only 3 percent.

With their government-bestowed blessings, Chinese companies have flourished and now control almost half of the $45 billion global market for wind turbines. The biggest of those players are now taking aim at foreign markets, particularly the United States, where General Electric has long been the leader.

The story of Gamesa in China follows an industrial arc traced in other businesses, like desktop computers and solar panels. Chinese companies acquire the latest Western technology by various means and then take advantage of government policies to become the world’s dominant, low-cost suppliers….

Companies like Gamesa have been so eager to enter the Chinese market that they not only bow to Beijing’s dictates but have declined to complain to their own governments, even when they see China violating international trade agreements.

If the US is to reduce its dependence on debt as a driver of growth, it needs to reduce its trade deficit. That in turns means adopting a savvier stance regarding trade.

Steve Pearlstein in the Washington Post (hat tip reader Michael Q) outlines what a more forceful negotiating posture might look like:

The right response to these challenges would be for the president this week to laud China for the success of its economic policies and announce that the administration will begin forthwith to apply each and every one of them to Chinese exports into the United States. Subsidies and directed credit for local companies, buy-American provisions for government agencies and government contractors, currency manipulation, the rules on “conditional market access” and “indigenous innovation” – surely China could hardly complain if we were to pay them the highest compliment by embracing their economic model.

To start things off, the administration might announce its intention to block the joint venture Hu intends to announce later this week with General Electric. GE already sells lots of engines to China for all those Boeing and Airbus jets it buys. Now GE is hoping to get the contract to provide avionics to the state-owned Commercial Aircraft Corp. of China, which intends to go into direct competition with Boeing. What better way than by forming a 50-50 joint venture with Aviation Industry Corp. of China, another state-owned firm?

In addition to $200 million, GE will be contributing technology to the partnership that will operate as the avionics brain for Boeing’s new 787 Dreamliner. And going forward, the partners will jointly develop new radars, controls and guidance system at a jointly run research and development laboratory that is already under construction. Call me cynical, but this sure sounds as if one of America’s leading technology companies has decided to sell some of this country’s crown jewels to ensure access to China’s rigged market, potentially jeopardizing the competitive advantage enjoyed by this country’s leading export industry.

This is the nub of the problem. With its state-controlled economy, China can force its companies to act collaboratively to achieve the country’s strategic economic objectives. And that gives it a tremendous advantage in negotiating the terms of trade with a country like ours, where China can strike deals that may provide short-term profits to one company and its shareholders but in the long run undermine the competitiveness of the other country’s economy. What’s good for GE or Honeywell or Rockwell is, in this case, almost certainly not good for America and American workers.

Pearlstein correctly points out that Americans are sqeemish about the idea of industrial policy. But we already have industrial policy of the worst sort, industrial policy by default.

The US and its trade partners have engaged in a 30 year experiment of deregulation, financial liberalization, more open trade, and deep integration of markets. But most other countries had clear objectives: they wanted to protect their labor markets, which usually entailed running a trade surplus (or at least not a deficit). Many of them also had clear industrial policies. By contrast, the US pretended it was adhering to a “free markets” dogma so that whatever resulted from this experiment was virtuous. But in fact, we have had stagnant real worker wages, with a rising standard of living coming from rising household borrowings and to a much lesser degree, falling technology prices. We have also had industrial policy by default. Certain favored groups, such as defense companies, Big Pharma, and the sugar lobby, get special breaks.

I don’t expect to see major changes any time soon, but trying to perpetuate a failing status quo is not a winning strategy.

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  1. PeterJB

    @ Steve Pearlstein ” surely China could hardly complain if we were to pay them the highest compliment by embracing their economic model.”

    The US has already adopted the China economic model when Mr. Benanke started infinite bail-outs, changing accounting rules, tax breaks, free lunches and other such free money Policies. While the transfer onto the public purse all corporate risk, plus regulatory capture including closed eyes to illegal real-estate activities across the board, by US and preferred corporations, SIV’s, Hedge Funds, etc., etc., one must be forgiven that the US is now more fully fascist than the statist emergent China.

    Geithner et al are whining about China because they want China to absorb US losses (as well as the US citizens – nice trick). The Chinese are just not that stupid.

    It was Cheney – from memory, that said ‘to be an enemy of the US was dangerous, but to be a friend of the USA was deadly’. Do you think that China doesn’t know this?

    No China will win this round and the US people will pay the price er, still.

  2. SidFinster

    I in the West would be the straw that causes the citzenry of the United States and EU to pull a Tunesia.

    – Rob future generations so Wall Street can keep paying fat bonuses? A few days of muted outrage, but then Kim Kardashian tweets something asinine and the news cycle moves on.

    – Take away civil liberties? Noone outside the blogosphere cares.

    – Allow mortgage pool operators to foreclose on homes in violation of every rule of procedural and substantive due process, and ignoring the long-settled trusts and property laws of all 50 states to boot? Noone other than a conspiracy theorist has the attention span to follow all that complicated stuff.

    But cut off the party, devalue the currency to make people work hard and save their earnings just to get by (because imported luxuries cost too much to buy and easy credit is not forthcoming) and enshrine this as policy and the masses will go berzerk.

    Not to mention, if the US were ever to actually become a net creditor, or even run smaller current account deficits, at whose expense would that be?

  3. GSo

    “one of America’s leading technology companies has decided to sell some of this country’s crown jewels”

    This is horrible! Selling something that belongs to someone else, that sounds like theft.

    There is a parallell, when all the brightest crossed the Atlantic from Europe after WWII, giving the US lots of the vital knowledge needed for putting a man on the moon, or a ballistic nuclear missile in the air. At least the US is in a possition to collect some tax revenue from the planned transfer. Sorry, I forgot you have after a strictly democratic process decided not to tax.

    I realy have trouble understanding the logic of both the post and the quotes in it. Was this intended as a call to arms in a trade war?

    “By contrast, the US pretended it was adhering to a “free markets” dogma so that whatever resulted from this experiment was virtuous. But in fact, we have had stagnant real worker wages, with a rising standard of living coming from rising household borrowings and to a much lesser degree, falling technology prices.”

    First, I have problems understanding how you can experiment with pretending to adhere to a dogma. Second, I do not see how the facts mentioned in the second sentence contradict adherence to a “free market” dogma, so why the “but”? There is no divine law securing that those who live by a free market dogma will not experience stagnant wages and loan financed consumption. (I do not believe myself that living by such a dogma gives the best results.)

    The center of gravity is now moving to the East. Learn to live with it for as long as it lasts. It is mainly the result of China and several other countries doing something right, like atracting business and know how from other shores.

    1. Chester Genghis

      No, there is no contradiction in following free market ideology and experiencing stagnant wages, deb-financed consumption, etc. But that’s not the way the ideology is SOLD! Free market ideology says that as jobs disappear, the entrepreneurial (“job-creating”) class will replace them with new, better jobs at higher wages (as long as the entrepreneurial class isn’t burdened by taxes, regulations, “anti-business rhetoric”, etc.).

      And, no, China is not succeeding because they are attracting better talent. They are succeeding because we are handing them technology and markets for that technology through a brain-dead faith in the magic of free markets.

      1. GSo

        Your first point: ok
        Your second point: My word was know how, which they are attracting by paying. The “talent” which came from Europe to the US came partly because the US was paying better for talent than anyone else, and partly because the US could finance the R&D they enjoyed being part of. I do not see any moral difference between paying the talent and paying for the result of talent. And by the way, von Braun had more than talent when he came and so did quite a few of the others.

  4. Hugh

    All of Perlstein’s “right responses” are far too incrementalist. Reforms that offer the currently-dominant group of financial and industrial elites a way back from the precipice via opposition or repeal are not going to go anywhere.

    Think about it: For reforms that would pass through Congress, the business lobby has proven that they can effectively block them. Certain things are possible for the President to do on his own, but even there, they could be reversed by the next administration or by act of Congress. To actually implement some sort of industrial policy and force these bad actors to deal with domestic workers would seem like something of a titanic setback them. Here would be a set of laws they couldn’t simply opt out of by moving their plants to another jurisdiction. There’s no way that most globalized players are going to abide that for very long.

    Instead of trying to break the strongest links in the chain, why are we not trying to attack the global jugular? The durability of the current system clearly resides in this constant recycling of trade surpluses to deficit countries, obviating any need for anyone to consider the true productivity or ultimate sustainability of what they are doing. In a sense, people in the surplus countries have traded industrialization (or, having industrialized, the chance to stay that way) for any hope of ever being fully compensated for their efforts.

    Why not attack that system directly by sabotaging the machinery and shutting down this global conveyor of finance? The next time global finance needs a rescue, let’s make the intellectual capital available to hand it an anvil and not a lifeline. Once confidence in that system is destroyed, it will be very difficult for Rubinesque soothsayers to revive. Our objective should be to undermine the present system with a clear eye to the future in which the current machinations of global finance and corporations are rendered impossible and and in which capital flows do not substitute for avoided bilateral trade.

    The intellectual challenge is to prevent these sort of moves from cratering the national economy. I do emphasize: The national economy. Many foreign countries have built their domestic economies like a house of cards: If industrial demand from the rest of the world is fine, then they’re OK too; If there’s a new round of protectionist measures, then you have a lot of bankrupt industries and angry, unemployed workers. We need to realize that some things that are unsustainable to need to stop, and that countries running raging trade surpluses have locked in economic troubles for some point in the future when – not if – their policies generated a real backlash. Eventually, that time is going to be “Now.” By allowing more time to pass, and the system to become ever more unsustainably distorted, we’ve actually made this process of adjustment more difficult for the surplus countries.

  5. frances snoot

    “The overall strategy for the reform of China’s foreign exchange management system is to achieve the convertibility of the yuan on the capital account progressively, as this will make trade and investment more convenient and boost the development of the foreign exchange market,” said Yi Gang, head of the State Administration of Foreign Exchanges (SAFE), in a signed article published on SAFE website.

    The remarks by Yi, also deputy governor of the People’s Bank of China (PBOC), China’s central bank, came after the PBOC announced last week that the country’s qualified businesses and banks could now settle their overseas direct investment in yuan.

    Yi also said the SAFE would continue to maintain a strict stance in cracking down on hot money inflows into the country during the next five years.”


  6. frances snoot

    “Reflecting recent tensions with China, the Pope also complained about those countries where, although the right to religious freedom existed, that right was compromised by “philosophical or political systems which call for strict control, if not a monopoly, of the state over society”.




    City of God, global?

  7. ella

    “I don’t expect to see major changes any time soon, but trying to perpetuate a failing status quo is not a winning strategy.” As long as America’s large international Corps gain short term profits and US federal tax benefits from China nothing will change. America’s trade policy has transformed China and in large part has created the Chinese industrial giant we see today. America’s trade policy with other nations as well needs to be revised.

    I have long argued that the only effective trade policy for the US is “Reciprocity”. This is the same argument the Perlstein now makes. It is the only trade policy that is in our national interests and is effective in protecting our economy. Of course we need an effective industrial policy as well. But it appears as though no one in DC is truly concerned with the effect of our trade policy on the nation. They are far more concerned with becoming re-elected.

  8. Jim Haygood

    This is thirty years out of fashion, but don’t forget the ‘human rights’ schtick of a long-gone idealistic United States, briefly mentioned in today’s NYT article about the protocol aspects of tonight’s state dinner:

    “It creates a situation where a Nobel Peace Prize laureate is hosting a banquet for a leader who is imprisoning another Nobel Peace Prize laureate,” said Michael Green, who advised Mr. Bush on Asia issues and helped plan Mr. Hu’s last visit here. “How awkward.”

    How awkward indeed. Instead of squirming as he should, the feckless Barack O’Bomber, Viceroy of Vietghanistan, doubtless will just punt.

  9. tyaresun

    I went to India over Christmas and bout six Madhubani paintings. I got them framed in India at a cost of 2500 rupees, $55. Two of the glasses broke on the trip back. I took them to the local Micheals and the cost of replacing the two glasses was $60 with a 60% off coupon. The sales clerk insisted that the cost was high because he has to charge us for two sheets of glass even though it was obvious that the two frames could be made from one sheet of glass.

    He said that the computer would not let him use one sheet of glass. So much for the technology.

    We also had another painting that we could not get framed in India because of size and they charged me $160 for the most basic frame with a 60% off coupon. It would have cost me $15 at most in India. There is no way in hell these kinds of cost differences can persist forever.

    1. frances snoot


      Vier lege stoelen

      rond een tafel in het gras.

      Wachtend op gasten.

      Four empty chairs

      around a table in the grass.

      Awaiting guests. (Herman Van Rompuy)

  10. Jim the Skeptic

    By the 1970s US corporations wanted to get into the Japanese market. Japan forced them into joint ventures. Eventually they had trained the Japanese to produce their product and they lost market share. Next came the Japanese competition for the corporation’s US market.

    In the 1990s US corporations rushed into Russia hoping to get access to that new consumer market. The result was headlines calling into question the rule of law in Russia.

    Now US corporations have rushed into China hoping to reap huge rewards with access to that potential consumer market. Only a fool would believe that the rule of law in China is going to protect foreigners or their investments. US corporations have been forced into joint ventures and after training their future Chinese competitors, they starting to see the result.

    The wind turbine corporation which saw it’s market share drop from 33% to 3% in 5 years will pay an even bigger price as Chinese companies export their product into the US. This company has shot itself in the foot and after some hobbling around it will die.

    Six months ago the CEO of General Electric said in Rome “I am not sure that in the end they want any of us to win, or any of us to be successful.” I thought that comment might mean that US corporations were coming to their senses. WRONG! Now GE is going into a Chinese joint venture which will result in the loss of at least a part of their aircraft jet engine business.

    The advantage of speech and writing is the ability to learn from others. One is forced to wonder if American management is capable of learning from the mistakes of others. The lessons have been going on for about 40 years and they have earned a grade of “F”. What is causing this stupidity?

    One likely candidate is that Wall Street demands growth even if no opportunity exists, so CEOs take unnecessary risks. The CEOs can’t justify their huge compensation packages by conservatively running a great business, so they roll the dice.

    Another candidate is American managements’ scorn for American workers. They view American workers as overpaid, incompetent, and lazy. (In that order) Once upon a time, US corporations trained employees who had very little formal education, now they complain about employees who have 2 or 3 times the formal education. This is nothing but an excuse.The fact that foreign corporations have come into this country, hired locally, and produce quality products with high productivity never seems to sink into American managements’ collective brains.

    One other candidate is American schools of business which, judging by the result, must be useless. They teach managers to run businesses which these managers know nothing about! At best these overpaid managers are irrelevant.

    By 1985 our economy was the most valuable thing on earth, but it has been steadily damaged since then. Global Free Trade and taxes being shifted from the rich onto others are the agents of our destruction.

    There will not be any tough stance with China.

    1. ex-GE Jim

      Jack Welsh once said that GE was not an American company but a company that did business in America as well as elsewhere. He meant what he said as does his successor and the management of other Transnationals. One wonders why we allow external entities to determine US domestic policies and why we allow these externals unlimited and anonymous access to our political process. One also wonders why US taxpayers accept paying for an Imperial military to secure raw materials and markets and protect trade routes for these external entities.

      One wonders a lot these days,


      1. Externality

        ex-GE Jim said:

        Jack Welsh once said that GE was not an American company but a company that did business in America as well as elsewhere.

        And yet, GE, through its GE Capital unit, received $16B in loans from the Fed during the crash and was able to issue $74B in debt guaranteed by the FDIC. The CEO of GE, Jeffrey Immelt, sat on the board of the NY Fed at the time the loans were approved.


        from Propublica:

        Newly released documents from the Federal Reserve Board show that General Electric Co. was a significant user of one of the Fed’s rescue programs in the fall of 2008, even as the blue-ribbon company enjoyed the highest credit rating available at the time.

        Over several weeks in late 2008, GE borrowed $16 billion by selling commercial paper through the Fed. Companies like GE typically rely on these short-term IOUs to fund daily operations, but as the credit crisis unfolded that fall, private markets were virtually frozen.


        The Fed program was a temporary bridge for GE. As we previously reported [2], by November 2008, the company had been accepted into another rescue program that allowed it to sell paper at lower rates.

        Under that program, run by the Federal Deposit Insurance Corporation, GE sold more than $21 billion in commercial paper in the last weeks of 2008. By early 2009, GE was out of the Fed program but had become the FDIC program’s largest customer.

        Called the Temporary Liquidity Guarantee Program, the FDIC effort offered subsidized guarantees for medium- and short-term debt offerings by banks. This allowed GE to sell its debt at lower interest rates, and by spring of 2009 the company had issued $74 billion in commercial paper and longer-term notes under the FDIC program.

        GE did not initially qualify for the program. But after lobbying by the company and assistance from Hank Paulson, then the secretary of the Treasury, the FDIC changed the eligibility rules and GE was accepted. Soon thereafter, GE stopped selling commercial paper via the Fed’s facility.

        http://www.propublica.org/article/general-electric-tapped-fed-to-borrow-16-billion (emphasis added)

      2. Jim the Skeptic

        Jack Welsh believes he was compensated for outstanding accomplishments. The truth is that he was PRESENT when the company was operating in good times. He and his ilk were and are a part of the problem.

        When GE loses it’s shirt in China it will all be blame on Jeff Immelt, but he was just unlucky to be PRESENT when the company was operating in bad times.

        The only question left about GE in China is whether they will shoot off a toe and shoot off an entire leg! :^)

  11. Debit

    Of course, Chinese mercantilism has turned out to be a major headache for all of its trade partners. However, on the flip side of the coin, the US has been lacking concrete industrial policies for quite a while outside key privileged sectors as mentioned in this article. Meanwhile, China has never been short of concrete industrial policies since the 1990s, something the US should learn from. In short, merely complaining about the Chinese Yuan and lax intellectual property rights will lead to nowhere.

    Free-trade and deregulatory economic ideologies do not constitute as concrete industrial policies.

    1. decora

      Yeah their ‘industrial policy’ involves massive slave labor camps, political prisoners doing labor, and mass-poisoning the population.

      Let’s take the baby milk scandal. Melamine went into the milk, but it also went into the cows. Why? Because commodity prices went down.

      Then, the Chinese government tried to cover it up. Now, they are putting people who are victims of the scandal into prison for “talking to the media in public”.

      Wow, what an ‘industrial policy’. Wonderful.

      1. Debit

        Lax labor laws and environmental regulations have been also the case with today’s wealthy countries when they were industrializing. The British went through ‘Dark Satanic Mills’ in the 19th century, for example. This is hardly unique to China. The Chinese are pretty much going through what Britain and the US have went through over a century ago, but in a more massive scale.

        My point is that the Chinese leadership has a concrete goal: To industrialize and move up in the value chain. Indeed, a lot of things going on in China has been ugly and even brutal, but what else can you expect from a country that has been in economic limbo until the death of Mao?

  12. Jason

    You’ve missed some very significant events here.
    All these events – It’s about oil
    We’re not running out, but demand is going up rapidly and we can’t increase the supply fast enough. It’s like 5 people fighting over 3 cookies, then 2 people join the fray.
    The scientists don’t know how to drill deepwater oil properly – which is why we had the Gulf spill wasting half the well, and they don’t know how to make tar sand economical
    Korea was a proxy warning from China. The US had no choice but to militarise after the midterms – and the world realised the US wasn’t going to reduce oil consumption. France-UK signed a joint nuclear testing facility, and India is building a nuclear arms triad. China is the biggest alternative energy investor, accelerating energy independence. But China also has huge nuclear capability – it’s impossible to stop (over 1000 missiles) even with a missile defense shield. Even if you could, over 200 nuclear bombs going off is enough to mess up the world by dispersing radioactive particles around the world (cancer/deaths/etc).
    The good news is, after Korea, both China and US realised they couldn’t risk nuclear war. So for the first time after 16 years of failed climate talks, China backflipped, changed its hardline approach, agreed to all the US’s demands, which allowed both to sign the Cancun Agreements (their first ever climate commitment).
    After Cancun, China signed a FTA letting the US sell high-tech renewable products to China. China also promised to spend $1.5 trillion on foreign (i.e. US) made renewable products, increasing jobs for families, pay off debt and restore American power. China recently killed its own auto industry by banning its citizens from buying cars. Nuclear war benefits no one, so out of self interest, China is helping the US, even though it’ll slow Chinese economic growth.
    US needs a carbon price to create jobs and pay off foreign debt.
    But voters realise it means higher prices, and are blocking it, without realising they’re provoking a nuclear war. People don’t transition out of goodwill, you need to raise prices. Recently, China opened its banks to the US. China also just signed with an American solar company First Solar Inc, to build its Inner Mongolian solar plant (the world’s largest) – it was a taster of China’s promise to spend $1.5 trillion on US renewable products.
    But why Carbon taxes/trading? consumer based free market mechanism (i.e. prices). It’s either asking oil-intensive consumers to pay $100, or every consumer to pay $1. It needs to be done, but which is easier?
    The political situation is just that, too political, it needs to change fast and get practical so that these carbon taxes can be passed to accelerate the renewable industry, create jobs, help families, and pay off debt.
    China even agreed to remove its own wind subsidies (with lots of compliants within China) straight after the Obama administration complained it was stopping US investment in renewables, and it’ll be interesting what the visit by Hu Jintao produces on these issues (the Hu visit might be the most important since Deng Xiaopeng in 1979, when the PRC abandoned Mao’s Communism for good old American style capitalism).
    The Cancun Agreement was not binding – this sucker needs to be legalised at the next climate summit.
    I’m no Democrat, leftist or rightist, but this ain’t about Democrats or Republicans, this is about getting what needs to be done, done – practicality and ensuring prosperity, as well as avoiding this Cold War your touting – all this political talk about defense and building up missile defense shields is worthless, because it doesn’t stop a nuclear winter or nuclear fallout, besides, no nation is stupid enough to let their second strike capabilities falter, something will crack, economically or proxy-like if and as tensions continue. A true patriot would let off the political baggage and do what’s right for the country.
    There’s a reason why Obama will be bringing up renewable energy subsidies and trade with Hu Jintao. It’s also interesting that during Gate’s visit, Gen. Liang, in rebuffing nuclear talks, instead referred to the strategic economic dialogue. An indication the PRC leadership may see restoring trade imbalances and energy cooperation as the only solution to nuclear tensions. Which brings me to another point of the CCP’s active efforts to allow the Yuan to appreciate. If you look over the past month, you’ll find things like China allowing JP Morgan to invest in the Chinese banking sector (after six year ban), China taking an interest in US train lines, as well as China demonstrating it’s willingness to give money to nations in renewable energy contracts (i.e. UK, Scotland, etc). China is also preparing for the worst, that the US doesn’t take steps to reduce oil consumption (i.e. modernising its second strike nuclear capabilities, Russian-Chinese pipeline, geopolitical agreements, securing Shell oil contracts, etc). The key to avoiding Cold War II is clearly energy cooperation between the US and China.
    Might be interesting to follow how the Obama administration is securing US energy security by trying to catch up with China and India on high tech industries. Recently, 800 American solar energy jobs got shipped off to China, with CEOs citing a better energy policy in China – so whilst they get into manufacturing new industries, America is being left behind because of poor Energy policies stifling American competitiveness against China. Of course, we can gamble on another oil spill and waste the last half of the Gulf oil well whilst India spends $630 million in deals with Germany/Japan to fund solar projects and secure energy security in India, and China restructures its electricity grids to support alternative energy and electric cars as well as a budget to spend $1.5 trillion on buying foreign high tech alternative energy goods. America is paling in comparison because of divisive politics. The pure politicising of these issues, and the lack of US moderates who can unite both sides of the political divide on Energy policy looks bleaker each day as the House Reps start gearing up on domestic issues.
    Obviously the US needs to drill the oil in the Gulf and other deepwater sites, but only when they can do so without such a high risk of spills and waste. In the meanwhile, an Energy Bill or policy guarantee is long overdue in the US.
    Sorry if it’s all over the place. But all the events and implications are there. Google it if you like :) Thank you
    Essentially the choices are a Nuclear arms race or Renewable energy race

    1. Externality

      Without getting into the merits of this, I doubt that threats of nuclear war with China will convince the American people to do much of anything. For over a decade, the elites in DC have created phony threats of WMDs to justify wars, violations of international law, and the deaths of hundreds of thousands of people.

      In 1998, the Clinton Administration destroyed one of Sudan’s pharmaceutical plants, falsely alleging that its owner had links to Al-Qaeda and was producing a chemical that was a precursor to, among other things, VX nerve agent. It was quickly established that were no AQ links, no solid evidence that the precursor was present or being manufactured, and that the precursor was not, in any case, banned. “Several tens of thousands” of Sudanese died from preventable or treatable diseases such as malaria after their main source of affordable drugs was destroyed. Conducted without approval from Congress or the UN, the attack violated international law.


      The Bush Administration’s 2003 invasion of Iraq was based on false claims that Saddam was about to build a nuclear bomb and could, inside of 20 minutes, immerse most of the Middle East in poison gas clouds. Saddam had no operational nuclear program, and his “chemical weapons” consisted of approximately 200 scattered, highly degraded munitions left over from the Iran-Iraq war 20 years earlier. Over 4,000 Americans and between 100,000 and 1,000,000 Iraqis died based on tissue of neo-con lies.

      The ongoing economic and cyberwarfare against Iran stems Israeli and Zionist hysteria regarding Iran’s purported nuclear weapons program. For the past 35 years, Americans have been told that Iran is about to get nuclear weapons, to the detriment of all. Despite the constant calls for war by US and Israeli elites, neither the Shah nor the current government has, during all this time, built a nuclear weapon.




  13. decora

    “The problem is that for most products, that’s urban legend. Direct factory labor is ~10% for a whole raft of goods. For manufacturing moved to China, where the US is a substantial part of the end market, you typically see meaningful offsets to the labor cost savings”

    then why does something that would take at least 100 man hours of labor go on sale at home depot for $49.95? Does china have magic robots operating injection molding machines?

    You have also completely ignored environmental costs, which are really health care costs and/or people dying of cancer. Do a google image search for ‘China pollution’.

    Of course, like Zhao Lianhai, China will take any health/environmental activists and put them in prison, then pour out numbers about how ‘health care costs have gone down’ because they just let people die. or if enough Goldman people get into the People’s Hall, maybe China will just by Mortality Swaps against it’s own people.

    We just saw the Rare Earth Metals issue, and what happened? A US Plant opened that had been closed because of environmental regulations…. complying with them would have cost too much…

    Does China have magic mining companies that don’t hurt the environment? No, they just throw environmental activists into labor camps and put anyone who tweets about them in prison.

    Its labor arbitrage, its human rights arbitrage, its environmental arbitrage. Those dumb kids at the WTO protests in 1999 were right, and everyone else was wrong.

    1. Yves Smith Post author

      It’s called a loss leader. Chinese companies are known for selling below cost, for at least an initial period, either electively (to gain market share) or via various government subsidies.

      And on top of that, Home Depot may also be treating certain items from China as loss leaders to get people into the store.

      And how certain are you of that 100 hours of labor claim? May be hype to disguise government subsidies.

      1. Debit

        This apparent Chinese ‘loss leader’ tactic is actually straightforward. Their overall objective is to acquire technology and they are willing to undercut cost which suits most foreign companies as a price (although there is a caveat: foreign companies in China must follow tight capital control set by Beijing).

        Both Japan and South Korea have tried this tactic in the past during their respective developmental periods, although in smaller scale than today’s China.

        Whether it be China, Japan, or South Korea, the underlying theme has been to establish world-class industries and all of them have shown that they are willing to bite the bullet to achieve their objectives.

  14. Greg

    The key to Chinese policy is not the exchange rate, it is the hoarding of foreign exchange, especially US dollars.
    Dollars earned by Chinese companies by their sales in the US
    are traded for yuan with the government. (This is a major cause of inflation in China.) The Chinese government then ‘invests’ these dollars overseas in financial instruments, effectively taking them out of circulation. They can be borrowed, but we see the results, and limits, of that.

    The $500 Billion per year hoarded by China is money taken directly out of the US economy, driving down prices and causing, in itself, 5 million unemployed in the US, and driving many US manufacturers to and over the brink.

    See: http://anamecon.blogspot.com/2010/04/effects-of-unbalanced-trade.html

    If the Chinese spent the money on US production, there would be no problem, but the CHINESE ARE AT WAR WITH THE US.
    Their talk and bluster are just moves on the battlefield. Unfortunately, WE are governed by idiots, guided by the myopic. They do not see 5 million unemployed as casualties of war. They do not see idled and closed factories, an eroding tax base, and a decaying infrastructure, as damage inflicted by the enemy.

    Until they acknowledge that they’ve been stupid, they cannot get smart. Assuming they are merely stupid, and not treasonous.

    Chinese mercantilist policies are responsible for a great deal of our grief. Until we acknowledge that the destruction of our domestic production capabilities is a problem, nothing will happen.

  15. Tiger W.

    Your points about additional/hidden costs of sourcing from China are valid. However having done such China-sourcing projects, i can also say that even taken them into account it’s still (well, used to a couple years ago at least, not sure about the whole china inflation thing today) massively cheaper to source from there, which is why US companies have done it. It’s not just labour, also mgmt, rent are cheaper, and more importantly because so much of the world manufacturing is done in china and you have really cheap suppliers as well, actually even your raw materials can be much cheaper…

  16. MaxV

    China is not the only one that has local content laws in the wind industry. In fact, every country in the World has local content rules for wind towers.
    However, if the Chinese economic model is really based on “acquiring” foreign technology and replicating it at lower prices, why is not the American government pushing for changes in IP legislation and enforcement in China? Wouldn’t that be a major issue?

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