China's Industrial Policy--and America's

James Fallows:

China Makes, The World Takes: [D]eals like those struck at the Sheraton Four Points have been mainly good for all parties. Chinese families have new opportunities in life. American customers have wider choices. American investors have better returns. But, of course, there are complications....

In a world of frictionless, completely globalized trade, people on average would all be richer--but every society would include a wider range of class, comfort, and well-being than it now does. Those with the most marketable global talents would be richer, because they could sell to the largest possible market. Everyone else would be poorer, because of competition from a billions-strong labor pool. With no trade barriers, there would be no reason why the average person in, say, Holland would be better off than the average one in India. Each society would contain a cross section of the world’s whole income distribution—yet its people would have to live within the same national borders.

We’re nowhere near that point. But the increasing integration of the American and Chinese economies pushes both countries toward it. This is more or less all good for China, but not all good for America. It means economic benefits mainly for those who have already succeeded, a harder path up for those who are already at a disadvantage, and further strain on the already weakened sense of fellow feeling and shared opportunity that allows a society as diverse and unequal as America’s to cohere.

A further problem is that China’s business and governmental leaders are all too aware of how the smiley curve affects them. Yes, it’s better to have jobs that pay $1,000 a year than none at all. But it would be better still to have jobs that pay many times as much and are at more desirable positions along the curve. If the United States were in China’s position, it would be doing everything possible to bring more high-value work within its borders—and that, of course, is what China is trying to do. Everywhere you turn you see an illustration.

Just a few: In the far north of China, Intel has just agreed to build a major chip-fabrication plant, with high-end engineering and design jobs, not just seats on the assembly line. In Beijing, both Microsoft and Google have opened genuine research centers, not just offices to serve the local market. Down in Shenzhen, Liam Casey’s company is creating industrial-design centers, where products will be conceived, not just snapped together. What was recently a factory zone in Shanghai is being gentrified; local authorities are pushing factories to relocate 10 miles away, so their buildings can be turned into white-collar engineering and design centers.

At the moment, most jobs I’ve seen the young women in the factories perform have not been “taken” from America, because in America these assembly-type tasks would be done by machines. But the Chinese goal is, of course, to build toward something more lucrative.

Many people I have spoken with say that the climb will be slow for Chinese industries....

American complaints about the RMB, about subsidies, and about other Chinese practices have this in common: They assume that the solution to long-term tensions in the trading relationship lies in changes on China’s side. I think that assumption is naive. If the United States is unhappy with the effects of its interaction with China, that’s America’s problem, not China’s. To i magine that the United States can stop China from pursuing its own economic ambitions through nagging, threats, or enticement is to fool ourselves. If a country does not like the terms of its business dealings with the world, it needs to change its own policies, not expect the world to change. China has done just that, to its own benefit—and, up until now, to America’s.

Are we uncomfortable with the America that is being shaped by global economic forces? The inequality? The sense of entitlement for some? Of stifled opportunity for others? The widespread fear that today’s trends—borrowing, consuming, looking inward, using up infrastructure—will make it hard to stay ahead tomorrow, particularly in regard to China? If so, those trends themselves, and the American choices behind them, are what Americans can address. They’re not China’s problem, and they’re not the fault of anyone in Shenzhen.

Comments

[Frank Strain]

Nice piece. Income growth in China can potentially result in increased Chinese imports from the US and Canada and Europe and dramatic mutually beneficial gains. It is hard for an entire country to lose from trade. But trade must be, in the long run, as free from government intervention as possible thus it would be a very good thing (to quote Martha stewart, my favorite economists, if the Chinese government begins to switch from an export growth strategy with its subsidization and exchange rate policies to a domestic consumption growth strategy and if the rest of us would relax, try to distribute gains as fairly as possible, and see the potential positives. A typical economist's win/win potential exists here and every economist should point this out. But it is not the only possible outcome. In the long run a lose/lose outcome is also a scary possibility. Hopefully those in power are not really stupid!! But, alas, I am not hopeful.

[Frank Strain]

Nice piece. Income growth in China can potentially result in increased Chinese imports from the US and Canada and Europe and dramatic mutually beneficial gains. It is hard for an entire country to lose from trade. But trade must be, in the long run, as free from government intervention as possible thus it would be a very good thing (to quote Martha stewart, my favorite economists, if the Chinese government begins to switch from an export growth strategy with its subsidization and exchange rate policies to a domestic consumption growth strategy and if the rest of us would relax, try to distribute gains as fairly as possible, and see the potential positives. A typical economist's win/win potential exists here and every economist should point this out. But it is not the only possible outcome. In the long run a lose/lose outcome is also a scary possibility. Hopefully those in power are not really stupid!! But, alas, I am not hopeful.

[save_the_rustbelt]

"Everyone else would be poorer, because of competition from a billions-strong labor pool."

Welcome to Michigan. And Ohio. And Pennsylvania.

[Bloix]

"Those with the most marketable global talents would be richer, because they could sell to the largest possible market. Everyone else would be poorer, because of competition from a billions-strong labor pool."

Yes, distribution of income just happens as a result of the invisible hand of competition. Liberal democracy, social democratic political parties, free trade unions, legally recognized collective bargaining, wages and hours legislation, social welfare programs like pensions, workers' compensation, universal health care, child care, and free public education, environmental protection, public utilities regulation, zoning laws and building codes, consumer protection laws, tort law, enforcement of contracts, honest and efficient criminal law enforcement, national parks -- none of that stuff has anything to do with the fact that the average Dutchman is "better off" than the average Indian. The state, in Fallow's mind, has just withered away, leaving the free market in its magnificent glory.

Perhaps Mr Fallows might contemplate the century-long struggle that resulted in the eight-hour five-day work week. Perhaps he might try to find out what happens to workers in China who advocate that kind of change.

If you force your working class to compete with workers who live in totalitarian countries that imprison and execute social democrats and labor organizers, then you can force your working class down to the standard of living of workers in totalitarian countries. And you can even pretend that it's the invisible hand at work. You don't need Pinkerton goons in Pittsburgh to break the strikes when you've shipped the steel mills to countries where the army will do it for you.

[dissent]

"Everyone else would be poorer, because of competition from a billions-strong labor pool."

Welcome to Michigan. And Ohio. And Pennsylvania.

Welcome to the white working class, voting for McCain.

A fundamental reason why this country is in decline!

[save_the_rustbelt]

dissent:

Obama should have a huge lead in both Ohio and Michigan.

But a year of bad mouthing the auto industry and sucking up to New Hampshire and Iowa have left Obama with a slim lead.

And other than some R&D money which is directed at all 50 states he really has not offered much, some health care tinkering, a silly tax cut program, etc.

The Democrats should win by a landslide this year. The Democrats seem determined to make it close or lose. What's up with that?

[Charles]

Save The Rustbelt, that's a pretty silly comment.

1. McCain's healthcare proposal would end up with far fewer people with insurance. If you have a pre-existing condition, you're completely screwed. Obama's would end up with more people insured. Just the "pre-existing condition" part is a big deal to most people.
2. McCain promises more wars and no end to the occupation. Obama promises an end to the occupation. As a family with someone deployed in Iraq, this is a major difference.
3. Obama is promising a much saner fiscal policy than John McCain. For anyone who has an auto loan or a mortgage, for anyone with kids who will have to pay off the now-$10T debt, this is a very big deal.

I am far from an Obama fan. But there *is* a difference in this campaign.

[PSP]

Poor Trenton. They don't make much of anything there anymore, and white flight is almost complete. But, the sign on the "Trenton Makes" bridge remains. On the other hand, if you include Princeton in the averages, the residents are clearly better off.

http://www.ronsaari.com/stockImages/lincolnHighway/TrentonMaksTheWorldTakesBridge.php

[Michael]

This Fallows piece reminded me of the following passage from Snow Crash by Neal Stephenson. Pardon the profanity.

"This is America. People do whatever the fuck they feel like doing, you got a problem with that? Because they have a right to. And because they have guns and no one can fucking stop them. As a result, this country has one of the worst economies in the world. When it gets down to it--we're talking trade balances here--once we've brain-drained all our technology into other countries, once things have evened out, they're making cars in Bolivia and microwaves in Tadzhikistan and selling them here--once our edge in natural resources has been made irrelevant by giant Hong Kong ships and dirigibles that can ship North Dakota all the way to New Zealand for a nickel--once the Invisible Hand has taken all those historical inequities and smeared them out into a broad global layer of what a Pakistani bricklayer would consider to be prosperity--y'know what? There's only four things we do better than anyone else:

music
movies
microcode (software)
high-speed pizza delivery"

[nocountry]

The country whose citizensmake a median income of $2000 a year are seeing their incomes grow 15% per year. The people whose citizens make $40000 a year are more or less maintaining their living standards. What's the problem exactly?

[Dilbert]

What's the problem exactly? -nocountry

Well you could start with healthcare for one. Approximately 1.2 million Americans go bankrupt yearly because of medical costs. If a single Canadian, Brit, Frenchman, Swiss, Spaniard, German, Korean, Japanese, Taiwanese (the list goes on) suffered bankruptcy it would be a national disgrace. Over here, the invisible hand of the market place is how we handle health care. Nobody warned us this Darwinian invisible hand kills the weak and the sick. Ever wonder why the life expectancy of Americans is way down the list of civilized countries, two years behind Canada and three behind Japan?

[andthenyoufall]

I think it's interesting that Brad didn't title this and the post below "the labor theory of value shambles, zombie-like, from its grave."

[save_the_rustbelt]

Charles:

I do not remember praising McCain, I won't vote for him, never would.

But Obama is not exactly setting the world on fire. That is what puzzles me. Why so timid and bland?

[Denis Drew]

To me -- as far as factory (blue collar) work is concerned -- outsourcing is just the equivalent of automation. The whole upshot of all the so-called disasters (globalization, immigration) for working Americans can be no more than the shift in overall income share of 12.5% that has taken place since 1973 (with admittedly terrible impoverishment for bottom 50 percentile incomes) -- and that may as easily blamed on the vacuum of bargaining power on the labor side of the labor market as anything else; the same income shift did not occur in Europe which faces the same "disasters."

Here's my cabdriver, three-step program for RENORMALIZING income distribution between the oceans and south of the Canadian border -- by a common sense re-writing of our labor law:
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First, double the minimum wage over three years -- with inflation adjustment guarantees for incomes under $100,000 (at a cost of 3% direct inflation and maybe 3% more -- guessing -- with other wages pushed up). RETURN "NORMALCY" TO THE MINIMUM WAGE.

Doubling the minimum should chain-shift a goodly part of that 12.5% lost income share the bottom 50 percentile.

Second, establish French-Canadian style sector-wide (lite) labor agreements here (airline and super market employees would kill for sector-wide -- just mention it out loud and it would be a killer issue for the Dems -- and Canadian labor market structure should be easy to copy here) AND institute automatic union certification and de-certification elections periodically (every four years?) at every work place (no reason to fight for economic elections any more than for political elections -- also, would clean up the worst complaint against unions: entrenched and complacent or even corrupt leadership). RETURN "NORMALCY" TO THE AMERICAN LABOR MARKET.

Is there enough income in the top 10 percentile for modern (sector-wide) unionization to be able to chain-shift sufficient income share to the next-below (roughly) 50-90 percentile to finish bringing bottom 90 percentile incomes back into line with 1973's fairer shares? Most of the way seems possible: the top 10 percentile currently enjoying 40% of overall income share -- enough for the rest of us to eat into deeply with higher labor prices.

The fed would have to be brought on board to the idea of shifting income through inflation until (1973 level) normalization of income share is reached -- perhaps at that point inducing a recession to kill off inflationary expectations (small price to pay to end 35 year wage depression).

Third, (at least temporary) severely higher marginal tax rates (75% over $500,000?) might be needed to kill off too long overgrown compensation expectations on the part of ball players, news anchors and CEOs. This last is a cabdriver invention; the foregoing are boilerplate anywhere else in the world or earlier times right here.
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The big question for me: Will Obama to be like JFK in 1960 who stated he wasn’t worried about whether the minimum wage was $1.00/hr or $1.25/hr? Will Obama care whether the minimum wage is $10.00/hr or $12.50/hr -- or on its way to $15.00/hr?

I know for sure that LBJ would be pushing for $15.00/hr -- at least.

[Charles]

Save The Rustbelt says, "But Obama is not exactly setting the world on fire. That is what puzzles me. Why so timid and bland?"

I can only speculate, STR. But, first, I have to say that expectations are out of whack. Does anyone remember the statesmanship of Bill Clinton in 1992? Or the thrilling, drum major Carter campaign of 1976?

Of course not. Both men started off as small-state governors and grew greatly in their years as president.

And, I have to say, Obama's policy positions are clearly spelled out. They may or may not be policies that compromise too much, but there's no question what they are and that the math adds up.

Back to your question. I speculate that Obama has taken deliberately understated positions for two principal reasons. First, there's no money, so it's better not to make promises that can't be fulfilled. Second, the more aggressive and definite the position, the easier it is to attack. "As you treat the least of these have you also treated me" is widely approved; actually doing something concrete to help the poor, not so much.

A third possible reason is that he's trying for an unusual demographic. The states they believe are in play include Virginia, Nevada, and Colorado. Those states have different issues than traditional swing states.