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Friday, April 20, 2018

What’s Driving Trade Tensions Between The US and China [feedly]

What's Driving Trade Tensions Between The US and China

There is a lot of concern over the possibility of a trade war between China and the US.  In early April President Trump announced that his administration was considering levying $100 billion of additional tariffs on Chinese exports, after the Chinese government responded to a previously proposed US tariff hike on Chinese goods of $50 billion by announcing its own equivalent tariff hikes on US exports.  And the Chinese government has made clear it will again respond in kind if these new tariffs are actually imposed.

So, what's it all about?

To this point, it is worth emphasizing that no new tariffs have in fact been levied, by either the US or Chinese governments.  The first round of announced US tariffs on Chinese goods are still subject to a public comment period before becoming effective, and the content of the second round has yet to be formally decided upon.  Thus, both countries have time to back away from their threats.

Also significant is the fact that both countries are being careful about the products they are threatening to tax.  For example, the Trump administration has carefully avoided talking about placing tariffs on computers or cell phones, two of the biggest US imports from China.  The US has also refrained from putting tariffs on clothing, shoes, and furniture, also major imports from China.

It is not hard to guess the reason why: these goods are produced as part of multinational corporate controlled production and marketing networks that operate under the direction of leading US corporations like Dell, Apple, and Walmart.  Taxing these goods would threaten corporate profitability. As a former commissioner of the US International Trade Commission pointed out: "It seems that the U.S. trade representative was very much aware of the global value chains in keeping some of these items off the list."

The Chinese government, for its part, as been equally careful. For example, it put smaller plans on its proposed tariff list while exempting the larger planes made by Boeing.

Although the media largely echoes President Trump's claim that his tariff threats directed at China are all about trying to reduce the large US trade deficit with China in order to save high paying manufacturing jobs and revitalize US manufacturing, the president really has a far narrower aim—that is to protect the monopoly position and profits of dominant US corporations.  The short hand phrase for this is the protection of "intellectual property rights." As Trump tweeted in March: "The U.S. is acting swiftly on Intellectual Property theft. We cannot allow this to happen as it has for many years!"

Bloomberg News offers a more detailed explanation of the connection between the tariff threats and the goal of defending corporate intellectual property:

the White House is considering imposing tariffs on a broad range of consumer goods to punish China for its IP [intellectual property] practices. . . . the U.S. alleges . . . that China has been stealing U.S. trade secrets, forcing American companies to hand over proprietary technology as a condition of doing business on the mainland, and providing state support for Chinese firms to acquire critical technology abroad. A consensus is growing that these policies, designed to establish China as a dominant player in key technologies of the future, from semiconductors to electric cars, threaten to erode America's technological edge, both commercial and military.

In other words, US tariff threats are, in reality, a bargaining chip to get the Chinese government to accept stronger protections for the intellectual property rights and technology of leading US firms in industries such as pharmaceuticals, aerospace, telecommunications, and autos.  If Trump succeeds, US multinational corporations will become more profitable.  But there will be little gain for US workers.

The auto industry offers a good case in point.  President Trump has repeatedly said that forcing China to lower its tariffs on imported US cars will help the US auto industry.  As he correctly points out, there is a 2.5 percent tariff on cars shipped from China to the U.S. and a 25 percent tariff on cars shipped from the U.S. to China.  Trump claims that lowering the Chinese tariff would allow US automakers to export more cars to China and boost auto employment in the US.

However, GM, Ford and other automakers have already established joint ventures with Chinese firms and the great majority of the cars they sell in China are made in China.  This allows them to avoid the tariff.  China is GM's biggest market and has been for six years straight.  The company has 10 joint ventures and two wholly owned foreign enterprises as well as more than 58,000 employees in China. It sells approximately 4 million cars a year in China, almost all made in China.

The two largest automobile exporters from the US to China are actually German.  BMW shipped 106,971 vehicles from the U.S. to China in 2017; Mercedes sent 71,198.  Ford was the leading US owned auto exporter and in third place with total yearly exports of 45,145 vehicles.  Fiat Chrysler was fourth with 16,545.

In short, lowering tariffs on auto imports from the US will do little to boost auto production or employment in the US, or even corporate profits.  The leading US automakers have already globalized their production networks.  But, changes to the joint venture law, or a toughening of intellectual property rights in China could mean a substantial boost to US automaker profits.

For its part, the Chinese government is trying to use its large state-owned enterprises, control over finance, investment restrictions on foreign investment, licensing powers, government procurement policies, and trade restrictions to build its own strong companies.  These are reasonable development policies, ones very similar to those used by Japan, South Korea, and Taiwan.  It is short-sided for progressives in the US to criticize the use of such policies.  In fact, we should be advocating the development of similar state capacities in the US in order to rebuild and revitalize the US economy.

That doesn't mean we should uncritically embrace the Chinese position.  The reason is that the Chinese government is using these policies to promote highly exploitative Chinese companies that are themselves increasingly export oriented and globalizing.  In other words, the Chinese state seeks only a rebalancing of power and wealth for the benefit of its own elites, not a progressive restructuring of its own or the global economy.

In sum, these threats and counter-threats over trade have little to do with defending worker interests in the US or in China.  Unfortunately, this fact has been lost in the media frenzy over how to interpret Trump's grandstanding and ever-changing policies.  Moreover, the willingness of progressive analysts to join with the Trump administration in criticizing China for its use of state industrial policies ends up blurring the important distinction between the capacities and the way those capacities are being used.  And that will only make it harder to build the kind of movement we need to reshape the US economy.

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Is the Lewis Model of Economic Development Still Relevant to Developing Countries? [feedly]

Is the Lewis Model of Economic Development Still Relevant to Developing Countries?

ESRC GPID Director and Global Policy's Deputy Executive Editor, Andy Sumner, takes a look at a model of economic development from the 1950s that he argues is highly relevant to developing countries today.

In the mid-1950s, W. Arthur Lewis outlined a model of economic development. At the heart of the model were the dynamics of labour reallocation in a 'dual economy' composed of a traditional or subsistence sector and a modern or industrial or capitalist sector. The Lewis model has since become one of the most influential models in development economics and its creator was awarded the Nobel Prize in appreciation of it.

Lewis argued that the driver of capital accumulation was a sectoral movement of the factor of production abundant in developing countries, labour, from the 'traditional' or 'non-capitalist' sector (of low productivity, low wage, priced to average product not marginal product, and thus with widespread disguised unemployment) to the 'modern' or 'capitalist' sector (of higher productivity and where wages are set by productivity in the 'subsistence sector'). Crucial is the existence of surplus labour in the traditional or non-capitalist sector. Because of this, wages are set just above subsistence across the whole economy, leading to the transfer of labour over time from traditional or non-capitalist to modern or capitalist sectors and the capture of labour productivity gains to capitalists as profits as these are the source of growth via reinvestment. The floor for wages is institutionally set at subsistence. When the surplus labour disappears an integrated labour market and economy emerge and wages will then start to rise.

The Lewis model was intended as a critique of the neoclassical approach in that labour is available to the modern or capitalist sector of an economy not in a perfectly elastic supply but upward sloping rather than flat, and with a distinction between surplus-producing labour and subsistence labour (the latter of which was a negligible source of net profits for reinvestment, which Lewis saw as the driver for growth). Lewis also rejected the assumptions of neoclassical economists of perfect competition, market clearing and full employment and Lewis made the distinction, noted above, between productive labour, which produced a surplus, and unproductive labour, which did not.

Despite its age, the model remains relevant as an 'ideal type' or heuristic device for the study of economic development through which contemporary patterns of structural transformation and their implications for inclusive growth, wages, profits, employment and productivity can be examined.

In the Lewis model the transfer of labour from a low- to a high-productivity sector can change the functional distribution of income in favour of capital owners. IMF research has argued that this is associated with rising income inequality between individuals too. To manage such inequality, Lewis saw a key role for government to intervene via taxes and subsidies amongst many other policies.

Lewis later discussed the relationship between economic development and distribution as one based on within and between sector inequality somewhat resonating with Simon Kuznets analysis of inequality between and within sectors. Lewis though took a different line and argued that the growth of the modern or capitalist sector, or the 'enclave sector' as he called it in that paper, has good and bad impacts on the traditional sector. Notably, the enclave may enrich the traditional sector by buying commodities and services from it; providing employment to those in the traditional sector; sending remittances; selling goods and services cheaper; and by developing infrastructure, public goods and, through an example of new ideas and institutions, the enclave sector can modernize the traditional sector. Whether development leads to widening inequality depends, he argued on whether the enclave is able to respond to the new economic opportunities (e.g. price changes or the demand for labour). In short, inegalitarian development is not the failure of 'trickle down' vertically from rich to poor but the failure to trickle along or spread horizontally the benefits from enclave to traditional sectors.

The role of the state is highlighted by Lewis who posited that distribution in the enclave depends on the pattern of growth and a set of factors, many of which are 'susceptible to public control' notably the distribution of property, economic structure (in terms of firm size and the capital intensity of production and dependence on foreign resources) and the speed of growth which has the potential to alter 'the relative quantities of the factors of production, and the derived demands, and therefore the distribution of income'. Further, the traditional sector may see income stagnate because the enclave may be predatory (e.g. driving people off their land); products may compete with traditional trades; the wage rate in the enclave may be too high and raise the price of labour above its marginal productivity; because of geographical polarization (the enclave attracts best brains and capital); because population growth accelerates due to improved public health reducing the death rate; and/or excessive migration from the countryside.

What did Lewis conclude? He concluded that whether the enclave enriches or not the traditional sector 'probably depends most on whether the government coerces or helps the traditional sector, and on the nature of the enclaves' (meaning the modern or capitalist sector).

Of course, Lewis and his model have received a number of historical critiques. Though many of these are about what Lewis has been interpreted to mean rather than precisely what he said. For instance, the erroneous claim that Lewis neglected the existence of an urban informal sector absorbing rural surplus labour or the supposed lack of consideration of an open economy. These are misperceptions of the Lewis model. That said, contemporary development poses a set of new questions such as circular or 'commuter' labour migration between sectors rather than permanent migration and relatedly, the role of non-farm income in rural areas which is often estimated to be a substantial part of rural incomes suggesting again workers are not only active in the 'traditional economy' at one point in time. Further, the role of remittances from urban to rural areas (and international remittances).

More importantly, the transfer or labour can take a variety of forms beyond the one anticipated by Lewis. It is by no means guaranteed that the transfer will be from low to high productivity activities. In fact the opposite seems to be the case in many countries. A transfer from low productivity agriculture to low productivity services has been the experience of many developing countries in some cases and other cases a reversing of the Lewis transition in 'premature deindustrialisation'.

In sum, the basic Lewis model is best viewed as an 'ideal type' or an heuristic device to compare to experience. In reality, there are multiple and likely co-existing and co-evolving modalities of structural transformation. What the Lewis model does provide is what Kirkpatrick and Barrientos, aptly referred to as 'an illuminating framework within which to discuss the reality of the process of development, not taking the homogeneity of its sectors literally, but looking behind this to uncover their internal workings and heterogeneity'. For these reasons and many more the Lewis model of economic development remains relevant to developing countries today for understanding the process of structural transformation or long run economic development.




Andy Sumner is a Reader in International Development in the Department of International Development, King's College London. He is Director of the ESRC Global Poverty & Inequality Dynamics (GPID) Research Network. 

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Thursday, April 19, 2018

Links [feedly] Lots of good ones today from Mark Thoma



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Why Democracy Fails to Reduce Inequality: Blame the Brahmin Left

Piketty causing trouble again...

Why Democracy Fails to Reduce Inequality: Blame the Brahmin Left

A new paper by Thomas Piketty finds that major parties on both sides of the political spectrum have been captured by elites and warns of a future political system that pits "globalists" against "nativists."



Photo by Gage Skidmore [CC BY-SA 2.0], via Wikimedia Commons

Economists and political scientists often point to rising inequality as one of the main drivers of the current wave of populist politics engulfing Europe and the US. Income and wealth inequality have been at the forefront of the political debate across Western democracies for a long time, fueling voter dissatisfaction and leading to the widespread perception that the system is "rigged." And yet Western democracies are no closer to addressing this crisis than they were two years ago, with a recent report by Britain's House of Commons finding that the world's richest one percent is on track to hold as much as two-thirds of global wealth by 2030.


In theory, at least, this kind of growth in inequality is expected to bring about public demand for redistributive policies, such as higher taxes on the rich. So far, though, this has not been the case at all. Instead, we're seeing far-right populist parties gaining momentum at the expense of moderates and center-left parties, spurred by outraged white working- and middle-class voters rebelling against the perceived interests of "globalist" elites.


Why has democracy failed to slow down rising inequality? And why is the current populist wave characterized by so much nativism and xenophobia when—as David McKnight recently noted in The Guardian—a progressive version of populism also exists?


In Project Syndicate and in a recent interview with ProMarket, Harvard economist Dani Rodrik provided one possible explanation: the left, he argued, has been largely complicit in the policies that led to rising inequality—namely globalization and financial deregulation—and has therefore been "missing in action" for the past 20 years.


In his 2016 book "Listen, Liberal," social critic Thomas Frank mounted a similar critique: the Democratic Party, which traditionally represented the working and lower middle classes, has gradually abandoned its traditional base and class commitments over the last 40 years, he argued, in favor of a technocratic elite of well-educated and affluent professionals. This entailed a set of policies that served to deepen American inequality, rationalized under the now-fetishized idea of "meritocracy," under which many leading Democrats came to believe that (to quote Larry Summers) if inequality has gone up, it is because "people are being treated closer to the way that they're supposed to be treated." By failing to tackle the growth of inequality, argued Frank, the Democratic Party has ceded its historic role as "party of the people," thus leaving far-right populists to fill the vacuum it left.


In a new paper, French economist Thomas Piketty, who became a worldwide sensation with his seminal 2013 book on inequality "Capital in the Twenty-First Century," attempts to answer both questions: why democracy failed to address the rise of inequality, and why the response so far has been a turn to nativism.


To do so, Piketty tracks electoral trends across three countries—the US, Britain, and France—from 1948 to 2017. Despite their vastly different electoral systems and political histories, he finds, a similar trend can be found in all three countries: left and center-left parties no longer represent the working- and lower-middle-class voters they were traditionally associated with.


Instead, both the left- and right-wing parties have come to represent two distinct elites whose interests diverge from the rest of the electorate: the intellectual elite ("Brahmin Left") and the business elite ("Merchant Right"). Piketty calls this a "multiple-elite party system": the highly educated elite votes one way, and the high-income, high-wealth elite votes another.


With the major parties on both sides of the political spectrum becoming captured by elites, it's no wonder so many voters feel unrepresented. A 2016 poll by the Public Religion Research Institute (PRRI) found that more than six in ten Americans don't feel that their views are being represented by either of the major political parties. A separate poll by Quinnipiac University found that 76 percent of Americans agree with the statement "Public officials don't care much what people like me think." 


In this respect, the rise of anti-establishment populism can be seen not as an anomaly, but as harbinger of what could very well become "the central political cleavage of our time."


The More Educated Voters Are, the More They Vote for the "Left"


In order to track the evolution of party systems and political cleavages, Piketty uses post-election surveys held in each of the three countries. While this approach has many benefits, he notes, it also has some drawbacks, namely a limited sample size and the fact that such surveys were not conducted before the 1940s. The difference in the three countries' electoral systems also present some challenges: in Britain, Piketty examines legislative elections; in the United States he only looks at presidential elections; and in France he examines both presidential and legislative elections. In France, he simplifies the country's multiple-party system into broad "left" and "right" categories, and in Britain he excludes third-party votes and focuses on Labour versus Conservatives.


When examined in these terms, he finds, voters in all three countries have historically been split almost evenly between right and left. 


Despite the immense differences in the three countries' political histories and socioeconomic structures, Piketty finds some striking similarities in the evolution of their party systems. In all three countries, in the 1950s and 1960s, the political system used to be divided along class lines: a vote for left-wing parties in France and Britain, and for the Democratic Party in the United States, was typically associated with low-income, low-education voters. The more educated, wealthier voters tended to vote for the right.


Starting with the 1970s, however, the three countries underwent a similar process of political realignment: the traditionally left parties, which used to be associated with poorer, less educated voters, have gradually become associated with the highly educated "intellectual" elite—as opposed to the high-wealth, high-income elite that still largely votes for the right.


The more educated voters are, he finds, the more they vote for "left" parties: in 2016, for instance, 70 percent of American voters with master's degrees (which account for 11 percent of the electorate) voted for Hillary Clinton, along with 76 percent of voters with PhDs (2 percent of the electorate). Among voters with bachelor's degrees (19 percent of the electorate), 51 percent voted for Clinton. Among those with only a high-school education (which account for 59 percent of voters), however, only 44 percent voted for the Democratic candidate.


Vote for Democratic Party by Education in the US, 1948-2016. Source: Piketty (2018); reproduced with permission. Author's computations using US post-electoral surveys 1948-2016 (ANES) (see). Reading: in 2016, the democratic party candidate (Clinton) obtained 45 percent of the vote among high-school graduates and 75 percent among PhDs. Primary: voters with no high-school degree. Secondary: high-school degree but not bachelor degree. Higher (BA): bachelor degree. Higher (MA): advanced degree (master, law/medical school). Higher (PhD): PhD degree.



Even in Britain, the most "class-based" system of the three, where it was once very rare for educated voters to vote for Labour, the evolution ended up looking very similar: university graduates have massively shifted to Labour over the last few decades, particularly those with advanced degrees.


Voting for Left-Wing & Democratic Parties in France, Britain, US 1948-2017: From the Worker Party to the High-Education Party. Source: Piketty (2018); reproduced with permission. Author's computations using French, US and British post-electoral surveys 1948-2017 (see). Reading: in 1956, left-wing parties (SFIO-PS, PC, Rad., green, extr.-left) obtain a score that is 17 points lower among university graduates than among non-university graduates in France; in 2012, their score is 9 points higher among university graduates. The evolution is similar for the democratic vote in the US and the labour vote in Britain.


While globalization and immigration have played a big role in the creation of this "multiple-elite" party system, notes Piketty, the process that led to its creation began before these issues became so politically charged, and possibly would have taken place without them. The crucial factor was the growing number of voters with higher education levels, which, he writes, "creates new forms of inequality cleavages and political conflict that did not exist at the time of primary and secondary education."


Some have criticized Piketty's study for not giving enough weight to immigration and racism, particularly when it comes to the realignment of Democrats and Republicans in the United States around racial issues. Piketty does acknowledge that the strong support of Muslims in France for left-wing parties and of African-Americans and Latinos for Democrats in the United States cannot be explained solely by variables such as income, education, and wealth, but has to take into account the substantial hostility minorities encounter from the right side of the political spectrum. He also acknowledges that racial sentiments did play a part in driving certain white low-income, low-education voters away from Democratic Party. Nevertheless, he argues, the trend holds: America has become a multiple-elite party system, even when entirely excluding the Southern states.


Overall, the polarized debate over immigration has a curious effect on multiple-elite party systems: it ruptures them even more. In France, Piketty finds, the share of voters that oppose immigration has actually declined, from 70 to 75 percent in the 1980s to about 50 percent today. The intensity of the right/left cleavage, however, has increased as the issue became much more divisive over time.


While evenly split on immigration, French voters are also roughly evenly split on economics, with 52 percent of French voters supporting redistributive measures to reduce inequality. However, these halves are almost entirely uncorrelated, resulting in a "two-dimensional, four-quarter political cleavage" between four groups: the "internationalists egalitarians" (which Piketty describes as "pro-immigrants, pro-poor"), the "internationalists inegalitarians" (pro-immigrants, pro-rich), the "nativists-egalitarians" (anti-immigrants, pro-poor), and the "nativists-inegalitarians" (anti-immigrants, pro-rich).


Globalists vs. Nativists


The 2016 US presidential election, notes Piketty, represented yet another potential political realignment: for the first time, the top 10 percent of voters (based on income) voted Democrat. A similar phenomenon was seen in France's 2017 presidential elections (Emmanuel Macron's voters were "highly affluent," Piketty notes), suggesting that high-income, high-wealth voters were also moving in the direction of the "left."


High-Income Vote in the US, 1948-2017: Before and After Controls. Source: Piketty (2018); reproduced with permission. Author's computations using US post-electoral surveys 1948-2016 (ANES) (see). Reading: in 1948, the democratic candidate obtained a score that was 22 points lower among top 10 percent income voters than among bottom 90 percent income voters; in 2016, the score of the democratic candidate is 10 points higher among top 10 percent income voters.


This, writes Piketty, could be an anomaly, owing to the unusual nature of the 2016/17 election cycles in France and the United States. But they could also herald something much more significant: a complete realignment of the party system, which would move further away from traditional notions of "left" and "right," instead pitting "globalists" (high-income, high-education) against "nativists" (low-income, low-education).


Yet this transformation is far from certain. The "multiple-elite" structure could also stabilize—the 2017 British election, notes Piketty, points in that direction. While in France and America there are signs that high-income voters are shifting to the "left," in Britain there is no sign of this happening anytime soon. In fact, he writes, the last two British elections (in 2015 and 2017) have "reinforced" the multiple-elite nature of the British party system: high-education voters have increased their support for Labour, while high-income voters increased their support for Conservatives.


None of the above two options seems likely to lead to a reduction in inequality, renew voters' trust that democracy can address their problems, or overcome nativist sentiments. However, Piketty proposes a third possible trajectory, one in which left-wing parties (or nativist parties, though this is less than likely) return to their long-abandoned class-based politics and adopt a powerful progressive agenda focused on reducing inequality through redistribution. Without such an agenda, he argues, politicians would find it difficult to unite low-income, low-education voters and build a wide enough coalition able to counter inequality.


But first, left parties would necessarily have to put an end to Brahminism and convince voters they represent more than the sum of their elite.



For further discussion about Piketty, listen to Kate Waldock and Luigi Zingales discuss "Capitalism in the 21st Century" in an episode of the Capitalisn't podcast:

John Case
Harpers Ferry, WV

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