Sunday, 12 December 2004

China's ascendancy

China seems to be all the rage these days. I’ve seen the issue of China’s ascendancy in at least one textbook and one test in recent months. The question is generally asked as a comparative advantage question, such as “If China has an absolute advantage in producing all products (meaning it can produce each of them with fewer inputs per unit of output) against the U.S., will China still choose to trade with us?”. The answer is a modern spin on Ricardo’s “wine and wool” scenario between Britain and Portugal.

I would be interested to hear a contrary answer, provided it doesn’t contain overheated rhetoric about “predation” and so forth.

The answer, of course, is “yes”, China would continue to trade with us because it’s too expensive for them not to. Even if they have an absolute advantage in everything, they will still be internally better at producing some good and there’s an opportunity cost associated with their production choices. So it behooves us to not respond to their ascendancy with quotas or tariffs, but rather to continue trading with them. Monetary theory adds some additional difficulty but the answer should be the same (I would be interested to hear a contrary answer, provided it doesn’t contain overheated rhetoric about “predation” and so forth). Business Week has a good article on the economic history of the U.S. and Europe that provides a present-day lesson:

The close links between the U.S. and Europe fostered growth in both regions then, but how is trade affecting the U.S. today? Just as Europe prospered in the 1800s despite the rise of America, the U.S. is faring relatively well now, in a world where manufacturing jobs are moving in droves to China and white-collar jobs are outsourced to India. GDP per person in the U.S., adjusted for inflation, is up 6% since 2000 despite a recession, the terrorist attacks of September 11, 2001, and a massive trade deficit that is subtracted from GDP.

Surprisingly, real wages are up as well, as inexpensive goods from China hold down inflation and help paychecks go further. According to the latest figures from the Bureau of Labor Statistics, real wages of private-sector workers are up 3.3% since 2000. At the high end, real wages rose 5.1% for managers and 3.1% for professionals despite the recession and pressure from information-technology jobs transferring out of the country. At the less-skilled end, over the past four years there has been a 4.1% real wage increase for clerical and administrative support workers, a 3.2% gain for less-skilled blue-collar workers, and a 6.7% jump for traditionally low-paid health-care workers. These are solid improvements, even compared with the boom years of 1996 to 2000, when private-sector wages showed a 5.4% increase.

As for innovation, the U.S. still has a comparative advantage in key areas such as biotechnology and finance. Biotech, which many believe could fuel the next global boom, is still concentrated in the U.S. And the American financial system, far deeper and more robust than its fragile Chinese counterpart, is much better suited to be the global financial hub.

But as history shows, in periods of political, economic, or military turmoil, the free flow of goods, capital, and ideas can get choked off. And some countries feel the pain more than others. Europe found that out during World War I and the Great Depression. While America was developing mass production and a domestic automobile industry, “Europe was distracted by wars and interwar economic chaos,” writes economist Robert J. Gordon of Northwestern University. The result: The U.S. grew while Europe stagnated. From 1913 to 1950, U.S. GDP per person rose 1.6% per year—as fast as in the previous 100 years—while Europe struggled with a meager 0.8% annual gain.

This evening I had dinner with a buddy and he and I discussed how the U.S. is pretty unique among the nations of the world. For most of them history is a story of war, poverty and short lives. Thomas Sowell put it very well in his Fourth of July column this year:
When you have learned of the bitter oppressions that so many people have suffered under, in despotic countries around the world, have you ever wondered why Americans have been spared?

Have scenes of government-sponsored carnage and lethal mob violence in countries like Rwanda or in the Balkans ever made you wonder why such horrifying scenes are not found on the streets of America?

Nothing is easier than to take for granted what we are used to, and to imagine that it is more or less natural, so that it requires no explanation. Instead, many Americans demand explanations of why things are not even better and express indignation that they are not.

Some people think the issue is whether the glass is half empty or half full. More fundamentally, the question is whether the glass started out empty or started out full.

Those who are constantly looking for the “root causes” of poverty, of crime, and of other national and international problems act as if prosperity and law-abiding behavior were so natural that it is their absence that has to be explained. But a casual glance around the world today, or back through history, would dispel any notion that good things just happen naturally, much less inevitably.

If we have enough sense to listen to our own history, we’ll know that China, assuming they don’t have a banking crisis due to the currency peg, will not grow at our expense, but to our advantage. They’ll produce some things better than us and we’ll benefit from trade with them. Really, given their population, it’s surprising that it’s taken them so long to outgrow us in aggregate—except for the fact that they were economic communists until the 1970s.

There will be challenges due to China’s growth—and those that see economics as an extension of their penises will probably feel threatened by it—and we’ll have to address them through education, job retraining and income assistance. Even so, we’ll end up better off and, assuming they pose no military threat to us, we shouldn’t feel threatened by another country throwing off poverty and developing a middle class.

Via the still-valuable-even-though-the-election’s-over Real Clear Politics.