Why China Needs To End Its Economic Mercantilism
Recently, the World Bank published revised statistics on PPP (purchasing power parity) -- adjusted GDP--that suggest that the Chinese economy is 40 percent smaller than was previously estimated. After recently returning from two weeks in southern China, I have to say that the new picture of a poorer China did not surprise me. What struck me was not the building boom - which was evident everywhere - but rather the rampant levels of inefficiency and over-manning throughout the economy. Everywhere I looked, what's done in the United States by one or two workers, was done in China by a multitude of workers. Our hotel's front desk was staffed with 7 or 8 clerks, although I never saw more than 2 or 3 guests there. At the pool, 3 workers staffed the cabana, although this being December I only saw one hearty guest braving the unheated pool. At a nearby park 7 government workers were huddled together to weld one chain. At a local deli, 3 people handled paying for the sandwiches. One to put your sandwich in a bag, another to take your money, and a third to put money in the register and hand your change back to the second person. A particular street or "mall" might have 30 to 60 tiny shops all selling roughly the same item (toys, jewelry, electronics, etc). The examples could go on and on. All this is why, despite industrialization, output per Chinese worker is just 14 percent of U.S. levels.
This goes to the heart of the Chinese economic challenge. Instead of embracing growth policies to raise productivity in all the sectors of their economy, China, and indeed many developing nations, has erected neo-mercantilist policies designed to favor a few select export sectors. In The Wealth of Nations Adam Smith said that by favoring domestic goods and exports, "nations have been taught that their interest consisted in beggaring all their neighbors. Each nation has been made to look with an invidious eye upon the prosperity of all the nations with which it trades, and to consider their gain as its own loss."
This sums up China's economic policies. For they use a host of mercantilist actions to gain investments. Intellectual property theft is rampant. One electronics mall I visited in Guangzhou sold Mp3 devices that looked exactly like Apple iPods, and even had the Apple logo on them, but were illegal copies. A record store in a mall sold pirated DVDs and CDs. But China's mercantilism goes beyond IP theft to include tariff and non-tariff barriers to imports, subsidies to promote exports, forced technology transfer, and tax policies, like border-adjustable value-added taxes, that subsidize exports. And of course, their most effective mercantilist tool is to keep their currency, the yuan, significantly undervalued. In this way, exports are cheaper and imports more expensive.
What is especially perverse about this practice is that by running large trade surpluses, China is subsidizing American consumption while limiting their own. Journalist James Fallows notes that it's bizarre for a poor nation to reduce domestic consumption so that they can loan us money so that we can consume more than we produce.
Fallows and most China watchers argue that China is keeping the yuan low and running big trade surpluses in order to "keep Chinese-made products cheap, so Chinese factories will stay busy." But the notion that the only way to have low unemployment is to run ever-growing export surpluses contradicts basic macro-economics, which holds that a change in GDP equals the sum of the changes in consumer spending, government spending, corporate investment and net exports. So if the yuan were to appreciate, China would export less (and import more). But assuming that the government responded with an expansionary fiscal and monetary policy, growth in consumer spending, government spending and corporate investment should offset any loss of jobs from reduced exports.
So if full employment is not their motivation for rampant mercantilism, what is? To understand this, it's worth considering that if China were a firm (which in many ways it is, given the government's excessive involvement in Chinese economic organizations) it would be engaged in what economists call predatory pricing, where it prices below cost to gain market share. Why would a firm do this, since it would mean losing money on each sale? Firms price below cost in order to put one or more competitors out of business, after which they can charge even prices. This is why U.S. anti-trust limits predatory pricing.
China Inc. is engaged in the same practice, although in this case, it hopes to use its mercantilist policies to gain competitive advantage in a host of key industrial sectors, and by doing so, erode the production base of advanced industrial nations. They have done this already in some sectors, such as textiles, but they are now working to move into higher value-added sectors, including semi-conductors and other IT products. The end game for them is world leadership in most advanced industrial sectors.
Beside the simple fact that their rampant mercantilist policies violate the spirit, and often the letter, of international trade rules, there are two problems with this strategy. First, this strategy is not sustainable for the global economy. It was one thing for countries like Taiwan and Singapore, to grow this way, for they were quite small. It's quite another when the largest nation on earth (and many others, like India, Russia and Brazil), see rising trade surpluses as their growth engine.
Second, and more importantly, this strategy is actually not the most effective way to raise Chinese living standards. While mercantilism might lead to some higher paying jobs in a few relatively small export-based industries, they do nothing to raise productivity in the rest of the economy. If China (and other developing nations) want raise their living standards they would be much better off abandoning their mercantilist economic strategies in favor of a growth economics strategy. Growth economics is based on the view that the path to higher incomes is by raising domestic productivity by all firms in all sectors: including in unglamorous sectors like hotels, restaurants, retail distribution, and local government services. To take just one example, the use of information technology in all sectors of the Chinese economy was responsible for 38 percent of the increase in productivity growth over the last decade. Boosting efficiency in the economy, in part by using more IT but also by creating the competitive and market conditions for firms to become more efficient is the royal road to growth.
It's unlikely that China or other nations will readily abandon mercantilist policies, as they are much easier politically than engaging in the hard struggle of building productivity. They win the favor of powerful constituents (e.g., domestic producers seeking protection from foreign IT competitors; consumers who don't want to pay for software and other digital products; workers seeking policies to protect their jobs from competition). In contrast, supporting policies to boost productivity risks the opposition of powerful interests (of unions and workers who may be displaced; domestic producers who enjoy cozy relationships and low levels of competition; and government bureaucrats whose top-down control is challenged).
As a result, it's time to develop a new global consensus that domestic productivity growth should be the key focus on economic policy in every nation. This means means stronger enforcement by global bodies like the the World Trade Organization and the World Intellectual Property Organization against beggar-thy-neighbor mercantilist strategies. It means that development organizations like the World Bank and the IMF will have not only to stop promoting export-led growth as a key solution to development, they will have to tie their assistance to steps taken by developing nations to move away from such negative-sum mercantilist policies, thereby rewarding countries whose policies are focused on spurring domestic productivity, not on protecting the status quo. Doing this will result in the kind of win-win strategy that we can all support.
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Dear Dr. Atkinson:
People who go to China for a few weeks should not judge China. That super luxurious room you had at the hotel cost you $100. Tell me if it was not a wonderful experience. That's why America continues to deal with China. That rich feeling.
Imagine the farm worker who borrows money to send his child to University and how proud he is when that child gets a job.
The family benefits and the employee benefits.
There is a real sense of pride in this accomplishment. The Chinese people are justifiably proud of the direction their country is taking.
Imagine increasing productivity by 50% by reducing the number of available jobs. There would be a sense of despair that would translate into riots and revolution.
Perhaps this is what you would like to see. Life in China,India,Brazil,Pakistan etc. is a delicate balance of personal improvement and national commitment.
Chinese employees are very hard working and maintain a strict discipline. The lot of the average Chinese has improved considerably in the last thirty years or so.
Some of the comments I see here indicate that there is a plan in China.Good for them. China presents a huge market for goods and services and the next stage would see them aiming at self sufficiency, so the trade imbalance may decrease but domestic consumption will increase.
But hasn't placing "productivity growth" above all been our recipe for labor abuse here -- especially as workers have received no benefit from it?
Not all the blame is on China. You are forgetting the other side of this mercantile coin. Companies like Wal-mart and HP are making billions of dollars from our current trading arrangements with China. Corporate America and their political lap dogs are just as much to blame for this bleeding of the US economy and the middle class.
Many hands make light work, China has many hands...study those pictograms NOW. Cat sandwich? LOL
China is trying to handle the billions moving from rural to urban. That's the whole package. They are in round 2 of industrialization. So productivity is hardly an issue when getting people work with pay is viewed as an economic accomplishment. And by the way, speaking of our debt on the market, might want to look to that issue yourself.
I'm amazed, living in the most productive nation in this world, with all the institutionalized poverty.
The USA is in the peculiar position it found itself before the revolution. The USA is providing raw materials to the Peoples Republic of China and buying back manufactured goods. This is precisely what the British Empire imposed upon its colonies, including the USA and India. Now the USA is beholden to the PRC to the point that many of our medicines are manufactured ONLY in the PRC, with no other supplier.
The PRC is not our friend. The PRC is not their citizens' friend. The PRC is a despotic thugocracy continuing to suppress and oppress the people unfortunate to live within its borders. And the USA is funding this injustice in many ways. The USA owes money to the PRC-as that country buys a lot of the bonds floated, and the USA buys all this stuff made in the PRC. There are two money streams flowing to the PRC. Both should be cut off now. PRC out of USA!!
Hold on a minute Doc. My observation as I traveled through Asia for one month last July was, we have become immune in the U.S. to the pathetic service we receive in most business's. I saw the number of employees used in everything from a 7-11 to the top hospital in Bangkok and what a pleasure it was. The american way of rude service, no service, no thank you, voice activated operator, self check out.......is terrible.
It is time america stopped telling other countries how to operate.
Also when you say:
"This means means stronger enforcement by global bodies like the the World Trade Organization and the World Intellectual Property Organization"
This means even less regard for local laws and no chance that the criminals that have caused untold suffering and death and continue on a global scale will NEVER be held accountable for their pernicious actions.
I applaud the fact that you recognize the failure of the free market but admonish you for your failure to readily make this admission. Yes, by all means, attempt to regulate the "free market" through governing bodies like the WTO. Unfortunately, it's too little too late, as in many instances, the means of production have already been sacrificed. Coupled with China's significant share of US securities, she holds the upper hand.
Unemployment rate is hardly the primary motivation of the Politburo. At published rates of nearly 10% and university studies indicating actual rates 2x the government data, lowering unemployment is not the goal. It is far longer term with much greater significance: emphasize policies that maximize growth and market dominance. Of course this creates inflationary demand pressures that must be balanced, especially in the energy and raw materials sector.
But as long as China is in the driver's seat and winning, why alter course, especially if it risks revolt or worse, upsetting their nouveau riche? Certainly, China does not wish to "bite the hand that feeds her", so minor concessions can be expected, like floating the Yuan/RMB a few percentage points and further purchases of US securities. But ultimately, it appears that the goal of China is not too dissimilar from our own: enrichment of the elite.
'China Inc.' is not interested solely in profit for the sake of profit. While we here in the US meander about in search of the latest method of making $$, China, by virtue of the involvement of its government, is following an overall China-First philosophy. And, whether we like it or not, whether we call it 'communism' or not, it makes sense.
Dr, what are you on about honestly?The USA, proundly capitalist as it is, still has stark mercantalist tendencies, most the form you listed above, tariff and non-tariff barriers, subsidies, anti-dumping laws, political and security excuses and many others.Most western countries have these and they won't cease ground unless it's beneficial to them.
I detest what China does, mostly on ethical grounds, but we can't assume the moral high ground for we are just as guilty as them when it comes to mercantilism.ATleast there is no hypocracy about them, after all they have been an open economy for only a generation.
The western world on the other hand pays lip-service to free-trade, open markets and globalisation, but only really give way in areas that they will win.Look at farm subsidies.
"So if full employment is not their motivation for rampant mercantilism, what is?"
Not only will predatory pricing drive the competition out of business and allow China to raise prices to captive markets, it will cripple our manufacturing capabilities for militarily strategic goods. It is about time that U.S. businessmen, happily taking the wage differential with China to the bank, began to consider the consequences of a world hostage economically and militarily to the Chinese.
Something like 80% of China's exports are re-importation by American business concerns. And through this, American business is killing their own markets by denying the wage base the benefits of the productivity the author hails. But more, they are killing strategic military ability to defend their own interests here or abroad.
It is time to consider the strategic impact of the flight of American jobs offshore, and to label it for what it is, treason.
Raising Chinese living standards would mean paying the workers more for their work. This would mean that China - a prime place for outsourcing - would be a bit less prime. What's left? Where else can US companies go for ridiculously cheap labour? The only place on the planet that I can think of is "deepest, darkest" Africa - and if the local warlords weren't wanting to take such a big cut of the profits, US companies would already be there.
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I think I understand your point (maybe not, I'm not educated in economics), but is the answer to global economic growth to keep shifting the cheapest labour sites around from one country to the next? Also, this is simplistic, but isn't China, with that huge trade surplus, having money go into their country - while our trade deficit makes money go out of our country? Why in heaven's name would they want to stop that?
Why China Needs To End Its Economic Mercantilism
"Beside the simple fact that their rampant mercantilist policies violate the spirit, and often the letter, of international trade rules, there are two problems with this strategy. First, this strategy is not sustainable for the global economy. It was one thing for countries like Taiwan and Singapore, to grow this way, for they were quite small. It's quite another when the largest nation on earth (and many others, like India, Russia and Brazil), see rising trade surpluses as their growth engine."
Do you really think the Chinese government gives a damn? Do you think they're ever going to actually cooperate in a global economy?
China will quite likely be the nation that tips the world over into catastrophic global warming, because they are putting so much coal smoke into the atmosphere. And it that were not enough, many economists predict that the "rise of a Chinese middle class" will make automobile ownership rise in China, with the subsequent effects on the environment and the world price of crude. Their expected increase in the manufacture of plastic products will also exacerbate the problem of the world price of crude.
And when the real tipping point comes with the price of crude, it wouldn't surprise me in the least if all those extra people you see performing jobs that could be performed by much fewer people- all those extra people will be marching en masse (in waves, that is) directly toward the oil fields in Iran.
You seem to be suggesting that we rearrange the deck chairs on the Titanic. And so far your piece has only one response, from someone who truly has absolutely nothing better to do. I have a serious case of unemployment and insomnia, and you have at least helped with the insomnia.
If a company produces X widgets with 100 people and, through productivity gains, is able to produce X widgets with 50 people (thus laying off half its work force) ... what is the advantage?
From a corporate viewpoint, it is obvious: Reduced cost, greater profit. But from a Societal or even national view? If the result is that those people will be un- or under-employed, I suggest it is actually preferrable to be LESS productive.
Only when those affected can find acceptable alternatives does Productivity become a desirable thing.
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