Tim Taylor: The US-Chinese Trade War: Why Now? At What Cost? [feedly]

The US-Chinese Trade War: Why Now? At What Cost?

Tim Taylor

http://conversableeconomist.blogspot.com/2019/06/the-us-chinese-trade-war-why-now-at.html

As a person who attempts to avoid rhetorical excess, except in my personal life, I've hesitated to refer to the US-China trade disputes as a "trade war." But it's gone past being a skirmish, a tussle, or a melee. It's gone beyond a battle, too. For those trying to gain an overall perspective, a useful starting point is Trade War: The Clash of Economic Systems Threatening Global Prosperity, a readable e-book of 11 essays plus and introduction, edited by Meredith Crowley (VoxEU.org, CEPR Press, May 2019, available with free registration).

Here, I want to pass along some of the arguments as to why the US-China trade war has erupted, and what the costs are likely to be. For economists looking at trade issues, the Trump presidency is certainly part of what's happening, but it is also operating against a particular economic and institutional backdrop that is worth noticing.  Thus, here are four reasons that have helped lead to teh US-China trade war.

1) The "China shock" of 2001

China entered the World Trade Organization in 2001. As Justin R. Pierce and Peter K. Schott point out in their essay, "The costs of US trade  liberalisation with China have been acute for some workers," the US also adopted "permanent normal trade relations" with China at the tail end of the Clinton administration in October 2000. Before this change, tariffs on imports from China were low, but these low tariffs needed to be explicitly re-approved by the president on an annual basis, and Congress had power to override the president's decision. With these changes, the low tariff rates on imports from China were locked in.

An extraordinary rise in China's exports and trade surplus followed--a rise that was not anticipated by either China (in its official five-year plans) or by the US. Here are a couple of figures based on World Bank data to illustrate. The first one shows that China's exports of goods and services as a share of GDP had been rising in the 1980s and 1990s, but then absolutely took off in the early 2000s, rising from about 20% of China's GDP in 2001 to 34% of China's GDP in 2006. Not coincidentally, China's trade surplus had been about 1.3% of GDP in 2001, but spiked up to 10% of China's GDP by 2006.

As Pierce and Schott emphasize, the China shock hit manufacturing jobs in certain parts of the US specially hard. They write:

The sharp drop in US manufacturing employment after 2000 differs markedly from the more gradual decline in manufacturing employment that occurred during the prior two decades. Indeed, in the 21 years following the peak of US manufacturing employment in 1979 to just before PNTR [permanent normal trade relations], US manufacturing employment fell by 2.3 million (or 12%). In the next four years, from 2000 to 2003, it fell by 2.9 million (or 17%) – a decline that is roughly as large as that experienced in the four years following the onset of the Great Recession.

The figures above also show that the "China shock" dramatically diminished about a decade ago, since the end of the Great Recession. A few years ago, China's exports and trade surplus had already fallen back to where they were around 2001. But the legacy of that shock has lived on in the communities most affected.

2) The Dominance of the US Economy has Declined

The United States, together with the countries of western Europe, have long been at the forefront of the push for reducing global barriers to trade. However, the primary source of economic growth in the world economy in the 21st century, and looking ahead for the next several decades, is happening in the "emerging market" economies. In "Understanding trade wars," Aaditya Mattoo and Robert W. Staiger write that when a single economy dominates the global economy, it can be in the interest of that large single economy to have a rules-based trading system for all countries. But if that large economy loses its dominance, it may prefer to shift to a "power-based" system of negotiating tariffs with specific trading partners. They write:

In 1947, the US was the unquestioned hegemon of the world economy and played a central role in the creation of the GATT (Irwin et al. 2011). Below we describe how it can be in the enlightened self-interest of a sufficiently dominant hegemon to provide support for a rules-based system that limits its ability to exercise power; but as the dominance of the hegemon wanes, this support can erode, precipitating the collapse of the rules-based system until another sufficiently dominant hegemon rises to take its place.

One aspect of this insight is that when China was a much smaller economy, several decades back, it didn't matter all that much to the overall US economy whether China's exports were up or down, or whether some US technology was ending up in the hands of Chinese firms. Having rules to govern the world trading system mattered more. But now that China's economy is close to the that of the United States in size (or larger, depending on which exchange rate is used to do the comparison), the US cares a lot more about these specific issues with China, and the advantages over overall rules matter less.

3) The World Trade Organization Rules Seemed Too Weak 

Part of the reason for tariffs and a trade war is that the dispute resolution procedures in the World Trade Organization seemed so weak. Chad Bown discusses this issue in , "The 2018 trade war and the end of dispute settlement as we knew it": "The idea that WTO dispute settlement was not well-positioned to tackle a suite of Chinese policies whose economic effect was to act against the spirit – if not the legal letter – of WTO rules ..."

For example, the WTO does have rules against countries using clear-cut industrial subsidies to boost their trade surplus. But if a country is providing subsidies through a mixture of cheap credit from state-owned banks and tweaks in its tax code that have the effect of favoring certain industries, it's not clear that the WTO dispute process works well. Luca Rubini digs deeper into the problems of how to measure subsidies and  how to  have rules about them in "The never-ending story: The puzzle of subsidies."

Similarly, the WTO has rule against stealing intellectual property. But if a country has requirements for joint ventures between foreign and domestic firms, and antitrust laws just happen to be enforced more against foreign firms, and the net effect of these changes is a high level of pressure for technology transfer to domestic firms, then it's not clear that an appeal to the WTO will work.

In addition, the US was in the process of arguing that the WTO appeals process was too strong, and that it was handing down unfair decisions against the US. This made it difficult to simultaneously argue that the WTO appeals process should be strengthened to address trade issues with China.

4) The Trump Administration Stops Dancing Around Tariffs, and Starts Dancing With Them

Politicians of both parties have been dancing around with tariffs and protectionism for several decades now. For example, if one goes back to about 2010, or the anti-globalization protests of the late 1990s, or the arguments over NAFTA in the early 1990s, it's easy find politicians of both parties who have been been happy to express very grave reservations about trade, but then would eventually sign on to a compromise and amendment-laden bill reducing barriers to trade.

The Trump administration stopped equivocating about protectionism, and embraced it. President Trump has stated plainly his views that tariffs are good, that trade wars are easy to win, and that if no trade occurs, the US economy wins big. The president's trade advisers have said that countries are unlikely to retaliate against US tariffs, but then have had to support subsidies for industries like agriculture that suffered such retaliation.

What are the costs of US-China trade war? It's obviously hard to evaluate costs when the trade war is still going on, and perhaps still escalating. Ralph Ossa, in his essay "The Costs of Trade War," writes that a fully escalated trade war will reduce GDP by about 2% in the US, China, and the EU, and by considerably more in many smaller economies (like Mexico, Canada, or Switzerland).

Other essays point out that the longer-term disruptions of production and trade can be quite important. After all, even if the US and China signed an agreement next week or next month that settled all their agreements and reduced tariffs back to 2017 levels, companies around the world will now be put on notice that any global supply chains are at risk. For years or decades into the future, they will be less willing to rely on flows of supplies, products, and innovation across international borders. After building up these global supply chains for decades, disrupting and shutting them down will not be a costless process.  Several of the papers in this issue take on the topic of trade barriers in an era of global value chains, including the papers by Emily J. Blanchard and btYi Huang, Chen Lin, Sibo Liu and Heiwai Tang.

The results of the rise US tariffs have been utterly predictable, like higher prices for consumers for products like steel and washing machines, and relatively few jobs saved at high cost.   The imposition of tariffs has been followed by higher US trade deficits.  But ultimately, a full-fledged trade war is about more than some tariff hikes. At this point, we aren't just arguing over details like whether China's rules for technology transfer are unfair (which they are).

Instead, as a society we are grappling with bigger questions about whether the US would be better off if it created considerably more separation for itself from the rest of the global economy. And we are arguing over whether the world economy and political system is better off when international economic linkages are rising or falling. I don't expect that the Trump administration will learn any lessons here, although the costs of its trade policies to US consumers and firms may at some point force them to back down. However, I'm intrigued to see whether anti-Trump forces will respond to future advocates of tariffs and trade wars in the same way they have responded to Trump--or whether they only oppose tariffs and protectionism if they are initiated by the Trump administration.

_________________
Here's a full Table of Contents for the book:


Introduction
Meredith A. Crowley

Part 1: The origins of the trade conflict

1 The costs of US trade liberalisation with China have been acute for some workers
Justin R. Pierce and Peter K. Schott

2 The 2018 trade war and the end of dispute settlement as we knew it
Chad P. Bown

3 Understanding trade wars
Aaditya Mattoo and Robert W. Staiger

Part 2: The costs of trade wars

4 The costs of a trade war
Ralph Ossa

5 How exporters respond to tariff changes
Doireann Fitzgerald

6 Trade wars in the GVC era
Emily J. Blanchard

7 Supply chain linkages and financial markets: Evaluating the costs of the US-China trade war
Yi Huang, Chen Lin, Sibo Liu and Heiwai Tang

Part 3: The challenges for the world trading system

8 Misdirection and the trade war malediction of 2018: Scaling the US-China bilateral tariff hikes
Simon J. Evenett and Johannes Fritz

9 The never-ending story: The puzzle of subsidies
Luca Rubini

10 The policy uncertainty aftershocks of trade wars and trade tensions
Kyle Handley and Nuno Limao

11 China's rise and the growing doubts over trade multilateralism
Mark Wu  

 -- via my feedly newsfeed

Bloomberg: Full China white paper on trade war

PRC State C9uncil statement

China white paper on trade war, via Bloomberg

On Sunday June 2, China released a government white paper of more than 5,000 words on its trade talks with the U.S. and Vice-Minister of Commerce Wang Shouwen held a press conference to discuss the matter that day. What follows is an English translation of the paper:

China's Position on the China-U.S. Economic and Trade Consultations
(June 2019)
The State Council Information Office of The People's Republic of China
Preface

The China-US commercial relationship serves as both the ballast and the propeller of the overall bilateral relationship. At stake are the fundamental interests of the two peoples, and the prosperity and stability of the world. Since the establishment of diplomatic relations between China and the US, bilateral trade and economic relations have come a long way, with expanding fields of cooperation at higher levels. A mutually beneficial and win win relationship with strong complementarity and interlinked interests has been forged, benefiting not only the two countries but also the entire world.

Given the differences in stage of development and economic system, it is inevitable that the two countries will experience differences and friction in their commercial cooperation. The history of China-US trade and economic relations has seen twists and turns and difficult situations. By adopting a rational and cooperative attitude, the two countries have managed to resolve previous conflicts, bridge differences, and render the bilateral commercial relationship more mature through dialogue and consultation.

Since it took office in 2017, the new US administration has threatened additional tariffs and other measures and provoked frequent economic and trade friction with its major trading partners. In response to the economic and trade friction unilaterally initiated by the US since March 2018, China has had to take forceful measures to defend the interests of the nation and its people. At the same time, committed to resolving disputes through dialogue and consultation, China has engaged in multiple rounds of economic and trade consultations with the US in an effort to stabilize the bilateral commercial relationship. China's position has been consistent and clear – that cooperation serves the interests of the two countries, that conflict can only hurt both, and that cooperation is the only correct choice for both sides. Concerning their differences and frictions on the economic and trade front, China is willing to work together with the US to find solutions, and to reach a mutually beneficial and win-win agreement. However, cooperation has to be based on principles. There are bottom lines in consultations. China will not compromise on major issues of principle. China does not want a trade war, but it is not afraid of one and it will fight one if necessary. China's position on this has never changed.

To provide a comprehensive picture of the China-US economic and trade consultations, and present China's policy position on these consultations, the Chinese government hereby issues this White Paper.

I. Economic and trade friction provoked by the US damages the interests of both countries and of the wider world

Trumpeting "America First", the current US administration has adopted a series of unilateral and protectionist measures, regularly wielded tariffs as a "big stick" and coerced other countries into accepting its demands. The US has initiated frequent investigations under the long unused Sections 201 and 232 against its main trading partners, causing disruption to the global economic and trade landscape. Specifically targeting China, in August 2017 it launched a unilateral investigation under Section 301. Turning a blind eye to China's unremitting efforts and remarkable progress in protecting intellectual property and improving the business environment for foreign investors, the US issued a myriad of slanted and negative observations, and imposed additional tariffs and investment restrictions on China, provoking economic and trade friction between the two countries.

Box 1: China's technological innovation is based on self reliance. Accusing China of intellectual property theft and forced technology transfer is utterly unfounded. China is an innovative and diligent nation. It has created a highly sophisticated civilization and contributed significantly to human progress over the course of 5,000 years. Since the founding of the People's Republic in 1949, and in particular since the beginning of reform and opening up in 1978, China's scientific and technological undertakings have passed through a series of phases. They started from a difficult beginning, forged ahead in the course of reform, and have now achieved multiple breakthroughs featuring a variety of innovations. These achievements have won worldwide recognition. Historical records confirm that China's achievements in scientific and technological innovation are not something we stole or forcibly took from others; they were earned through self reliance and hard work. Accusing China of stealing intellectual property to support its own development is an unfounded fabrication. China is fully committed to intellectual property protection. It has established a legal system for the protection of intellectual property that is consistent with prevailing international rules and adapted to China's domestic conditions. China values the leading role of judicial measures in protecting intellectual property, and has achieved impressive result s. The understanding of the importance of intellectual property among the general public and business community in China has increased, the value of royalties paid to foreign rights holders has risen significantly, and the number of intellectual property applications and registrations has surged. The effective impact of China's intellectual property protection has won broad international recognition. Former WIPO Director General Arpad Bogsch spoke highly of China's legal framework for intellectual property protection, noting that China's achievements are "unmatched in the history of intellectual property protection". The US Chamber of Commerce recognized that China is making concrete progress in creating an intellectual property environment appropriate to t he 21st century. 1 In its 2018 China Business Climate Survey Report, the American Chamber of Commerce in China noted that among the main challenges facing its member companies operating in China, concern over intellectual property dropped from 5th place in 2011 to 12th place in 2018. An article in The Diplomat predicted that China will become a leader in global intellectual property. Many of the concerns raised by foreign firms doing business in China have already been addressed through judicial reform and a strengthened enforcement mechanism. Respecting the laws of the market economy, China has been actively improving the policy system for innovation, continuously increasing investment in research and development, accelerating the development of innovators, and strengthening international cooperation on technological innovation in an all round way. In terms of some key innovation indices, China is already among the world's leading players. As China continues to witness a series of major scientific and technological achievements, its industries are gravitating toward the middle and high end, and the country's international influence is markedly increasing. In 2017, total R&D investment in China reached RMB1.76 trillion, ranking second in the world. The number of patent applications reached 1.382 million, ranking No. 1 in the world for the seventh consecutive year. The number of invention patents granted reached 327,000, up by 8.2 percent year on year. China ranks third in the world in terms of valid invention patents held. 2 China has always pursued international technical cooperation with mutual benefit and win win as the basic value orientation. China's economic development has benefited from international technology transfer and dissemination. International h olders of technology have also reaped enormous benefits from this process. China encourages and respects voluntary technical cooperation between Chinese and foreign firms based on market principles. It strongly opposes forced technology transfer and takes resolute action against intellectual property infringement. Accusations against China of forced technology transfer are baseless and untenable.

Turning a blind eye to the nature of the economic structure and the stage of development in China and the US, as well as the reality of the international industrial division of labor, the US insists that China's "unfair" and non reciprocal" trade policies have created a trade deficit in bilateral commercial exchanges that constitutes "being taken advantage of," leading to unilateral imposition of additional tariffs on China. In fact, in today's globalized world, the Chinese and American economies are highly integrated and together constitute an entire industrial chain. The two economies are bound in a union that is mutually beneficial and win win in nature. Equating a trade deficit to being taken advantage of is an error. The restrictive measures the US has imposed on China are not good for China or the US, and still worse for the rest of the world.

Box 2: The Chinese and American economies are interlinked, and bilateral trade and investment are mutually beneficial China China and the US are each other's largest trading partner and important source of investment. In 2018, bilateral trade in goods and services exceeded US$750 billion, and two way direct investment approached US$160 billion. China US commercial cooperation has brought substantial benefits to both countries and both peoples. According to China Customs, the trade in goods between China and the US grew fro m less than US$2.5 billion in 1979 when the two countries forged diplomatic ties to US$633.5 billion in 2018, a 252 fold increase. In 2018, the US was China's largest trading partner and export market, and the sixth largest source of imports. According to the US Department of Commerce, in 2018 China was the largest trading partner of the US, its third largest export market, and its largest source of imports. China is the key export market for US airplanes, soybeans, automobiles, integrated circuits and cotton. During the ten years from 2009 to 2018, China was one of the fastest growing export markets for American goods, with an annual average increase of 6.3 percent and an aggregate growth of 73.2 percent, higher than the average growth of 56.9 percent represented by other regions in the world. 3 Trade in services between China and the US is flourishing and highly complementary. The two countries have conducted extensive, in depth, and mutually beneficial cooperation in tourism, culture, and intellectual property. China is the largest destination for US tourists in the Asia Pacific and the US is the largest overseas destination for Chinese students. According to Chinese figures, two way trade in services rose from US$27.4 billion in 2006, the earliest year with available statistics, to US$125.3 billion in 2018, a 3.6 fold increase. In 2018, China's services trade deficit with the US reached US$48.5 billion. Over the past forty years, two way investment between China and the US has grown from near zero to approximately US$160 billion, and this cooperation has proved fruitful. According to MOFCOM, by the end of 2018 accumulative Chinese business direct investment in the US exceeded US$73.17 billion. The rapid growth of Chinese business investment in the US has contributed to local economic growth, job creation, and tax revenues. According to MOFCOM, the paid in investment by the US in China was US$85.19 billion by the end of 2018. In 2017, the total annual sales revenues of US invested companies in China were US$700 billion, with profits exceeding US$50 billion. Therefore, if trade in goods and services as well as two way investment are taken into account, China US trade and economic relations are mutually beneficial, rather than the US "being taken advantage of."

(I) The tariff measures the US imposed harm others and are of no benefit to itself

The US administration has imposed additional tariffs on Chinese goods exported to the US, impeding two way trade and investment cooperation and undermining market confidence and economic stability in the two countries and globally . The US tariff measures lead to a decrease in the volume of China s export to the US, which fell by 9.7 percent year on year in the first four months of 2019, 2019,4 dropping for five months in a row. In addition, as China has to impose tariffs as a countermeasure to US tariff hikes, US exports to China have dropped for eight months in a row. 5 The uncertainty brought by US China economic and trade friction made companies in both countries more hesitant ab out investing. China's investment in the US continues to fall and the growth rate of US investment in China has also slowed down. According to Chinese statistics, direct investment by Chinese companies in the US was US$5.79 billion in 2018, down by 10 percent year on year. 6 In 2018, paid in US investment in China was US$2.69 billion, 7 up by only 1.5 percent year on year compared with an increase of 11 percent in 2017. With the outlook for China US trade friction unclear , the WTO has lowered its forecast for global trade growth in 2019 from 3.7 percent to 2.6 percent. 8

(II) The trade war has not "made America great again"

The tariff measures have not boosted American economic growth. Instead, they have done serious harm to the US economy.

First, the tariff measures have significantly increased production costs for US companies. The Chinese and US manufacturing sectors are highly dependent on each other. Many American manufacturers depend on China's raw materials and intermediary goods. As it is hard for them to find good alternative suppliers in the short term, they will have to bear the costs of the tariff hikes.

Second, the tariff measures lead to domestic price hikes in the US. The import of value for money consumer goods from China is a key factor behind t he long term low inflation in the US. After the additional tariffs were imposed, the final selling price of Chinese products increased, leaving American consumers effectively bearing some tariff costs . According to research by the US National Retail Federation, the 25 percent additional tariffs on furniture alone will cost the US consumer an additional US$4.6 billion per year. 9

Third, the tariff measures have an impact on US economic growth and people s livelihood A joint report by the US Chamber of Commerce and the Rhodium Group in March 2019 showed that, under the impact of China US economic and trade friction, US GDP in 2019 and the next four years could decrease by US$64 91 billion per year, about 0.3 0.5 percent of total US GDP. If the US imposes 25 percent tariffs on all Chinese goods exported to the US, US GDP will decrease by US$1 trillion in the next ten years cumulatively. 10 According to a research report in February 2019 by Trade Partnership, an American think tank, if the US imposes 25 percent additional tariffs on all imported Chinese goods, US GDP will decrease by 1.01 percent, with 2. 16 million job losses and an additional annual burden of US$2,294 on a family of four. 11

Fourth, the tariff measures lead to barriers to US exports to China. The 2019 State Export Report, published by the US China Business Council on May 1, 2019, stated that in the ten years from 2009 to 2018, US exports to China supported over 1.1 million jobs. The Chinese market continues its importance to US economic growth. Forty eight states of the US have increased their goods exports to China during the last decade 44 of them by double digits while in 2018, when economic and trade friction worsened, only 16 states increased their goods exports to China. Thirty four states exported fewer goods to China, with 24 of them seeing a double digit decrease. The Midwestern agricultural states were hit particularly hard. Under tariff measures, exports of American agricultural produce to China decreased by 33.1 percent year on year, including a 50 percent drop in soybeans. US businesses are worried that they might lose the Chinese market, which they have been cultivating for nearly 40 years.

(III) US trade bullying harms the world

Economic globalization is a firmly established trend of the times. Beggar thy neighbor unilateralism and protectionism are unpopular. The trade protectionist measures taken by the US go against the WTO rules, damage the multilateral trading system, seriously disrupt global industrial chains and supply chains, undermine market confidence, and pose a serious challenge to global economic recovery and a major threat to the trend of economic globalization.

First, the US measures are undermining the authority of the multilateral trading system. The US has launched a series of unilateral investigations, including those under Sections 201, 232 and 301, and imposed tariff measures. These are a serious breach of the most fundamental and central WTO rules, including most favored nation treatment and tariff binding. Such unilateralist and protectionist actions have harmed the interests of China and other WTO members. More importantly, they have undermined the authority of the WTO and its dispute settlement system, and exposed the multilateral trading system and international trade order to peril.

Second, the US measures threaten global economic growth. With the shadow of the international financial crisis still lingering over the global economy, the US government has escalated economic and trade friction and hiked additional tariffs, provoking corresponding measures by the countries involved. This disrupts global economic and trade order, dampens world economic recovery, and undermines the development of companies and the well being of people in all countries, plunging the world economy into the "recession trap."

Global Economic Prospects released by the World Bank in January 2019 revised its forecast for global economic growth down further to 2.9 percent, citing continuous trade friction as a major downward risk. 12 The Inter national Monetary Fund also marked down its projection of world economic growth for 2019 to 3.3 percent from the 2018 estimate of 3.6 percent in its World Economic Outlook report published in April 2019, suggesting that economic and trade friction could further depress global economic growth and weaken already anemic investment. 13

Third, the US moves disrupt global industrial and supply chains. China and the US are both key links in global industrial and supply chains. Given the large volume of intermediary goods and components from other countries in Chinese end products exported to the US, US tariff hikes will hurt all the multinationals not least those from the US that work with Chinese companies. The tariff measures artificially drive up the costs of supply chains, and undermine their stability and security. As a result, some businesses are forced to readjust their global supply chains at the expense of optimal resource allocation.

It is foreseeable that the latest US tariff hikes on China, far from resolving issues, will only make things worse for all sides. China stands firm in opposition. Recently, the US administration imposed long arm jurisdiction and sanctions against Huawei and other Chinese companies on the fabricated basis of national security, to which China is also firmly opposed.

II. The US has backtracked on its commitments in the China-US economic and trade consultations

In response to the economic and trade friction started by the US, China has been forced to take countermeasures, as bilateral trade and investment relations took a hit. For the well being of the Chinese and American people and the economic development of the two countries , both sides deemed it necessary to come to the negotiating table to seek a solution through consultation. Since they were launched in February 2018, the economic an d trade consultations have come a long way with the two sides agreeing on most parts of the deal. But the consultations have not been free of setbacks, each of them being the result of a US breach of consensus and commitments, and backtracking.

(I) The first US backtracking

China had advocated resolving economic and trade friction through negotiation and consultation from the start. In early February 2018, the US government expressed the wish that China send a high level delegation to the US to engage in economic and trade consultation. Demonstrating great goodwill and positive efforts, China held several rounds of high level economic and trade consultations with the US, characterized by in depth exchanges of views on trade imbalance among other major issues. The two sides made substantial progress as they reached preliminary consensus on expanding China's imports of agricultural and energy products from the US. However, on March 22, 2018, the US government unveiled the so called report on Section 301 investigation of China, falsely accusing China of "IP theft" and "forced technology and subsequently announced an additional tariff of 25 percent on US$50 billion of Chinese exports to the US.

(II) The second US backtracking

Taking a big picture view of the bilateral relationship, the Chinese government sent a working team again to the US to engage in genuine consultations. On May 19, 2018, China and the US issued a joint statement, agreeing to refrain from fighting a trade war, to continue high level communications, and to actively seek solutions to respective economic and trade concerns. The US publicly announced that it would suspend the plan for additional tariffs on Chinese goods. On May 29, 2018, despite the opposition of its domestic business community and the general public, the US 13 administration tore up the consensus just ten days after the joint statement, gratuitously criticizing China's economic system and trade policy, while announcing the resumption of the tariff program. Starting from early July 2018, in three steps, the US imposed additional tariffs of 25 percent on Chinese exports worth US$50 billion, and additional tariffs of 10 percent on US$200 billion of Chinese exports, which, according to the US, would be raised to 25 percent on January 1, 2019. In addition, the US threatened further tariffs on all remaining Chinese exports, leading to quick escalation of the economic and trade friction between the two countries. In defense of its national dignity and its people's interests, China had to respond in kind and raised tariffs on imports worth US$110 billion from the US.

(III) The third US backtracking

On November 1, 2018, US President Donald Trump had a telephone conversation with Chinese President Xi Jinping and proposed a summit meeting. On December 1 the two presidents had a meeting on the margins of the G20 Summit in Argentina. In accordance with their important consensus on economic and trade issues, the two sides agreed to halt new additional tariffs for 90 days to allow for intensive talks geared toward the full elimination of all additional tariffs. In the ensuing 90 days, the working teams of China and the US held three rounds of high level consultations in Beijing and Washington D.C., reaching preliminary consensus on many matters of principle for the China US economic and trade deal. On February 25, 2019, the US announced the postponement of the additional tariffs scheduled for March 1 on US$200 billion of Chinese exports to the US. From late March to early April, the working teams of the two countries held another three rounds of high level consultations and made substantial progress. Following numerous rounds of consultations, the two countries had agreed on mo st of the issues. Regarding the remaining issues, the Chinese government urged mutual understanding and compromise for solutions to be found.

But the more the US government is offered, the more it wants . Resorting to intimidation and coercion, it persisted with exorbitant demands, maintained the additional tariffs imposed since the friction began, and insisted on including mandatory requirements concerning China's sovereign affairs in the deal, which only served to delay the resolution of remaining differences. On May 6, 2019, the US irresponsibly accused China of backtracking on its position to shift the blame for the inconclusive talks onto China. Despite China's fierce opposition, the US raised the additional tariffs on US$200 billion of Chinese exports t o the US from 10 percent to 25 percent, which represented a serious setback to the economic and trade consultations. On May 13 the US announced that it had launched procedures to slap additional tariffs on remaining Chinese goods, which are worth around US $300 billion. These acts contradicted the agreement reached by the two presidents to ease friction through consultation and the expectations of people around the world casting a shadow over the bilateral economic and trade consultations and world economic growth. In defense of its own interests, China had to take tariff measures in response.

(IV) The US government should bear the sole and entire responsibility for this severe setback to the China US economic and trade consultations

The US government accusation of Chinese backtracking is totally groundless. It is common practice for both sides to make new proposals for adjustments to the text and language in ongoing consultations. In the previous more than ten rounds of negotiations, the US administration kept changing its demands. It is reckless to accuse China of "backtracking" while the talks are still under way. Historical experience has proved that any attempt to force a deal through tactics such as smears, undermining and maximum pressure will only spoil the cooperative relationship. Historic opportunities will be missed.

A civilized country turns to forceful measures only when gentler approaches have failed. After the US issued the new tariff threat, the international community was widely concerned that China might cancel the consultation visit to the US. It kept a close watch on the future direction of the China US trade negotiations. Bearing in mind the broader interests of trade and economic relations between the two countries, China remained cool headed, exercised restraint, and sent a senior delegation to the US, as agreed, for the 11th round of economic and trade consultation from May 9 to 10. In doing so, China demonstrated the greatest sincerity and a strong sense of responsibility for resolving trade disputes through dialogue. In the following candid and constructive discussions, the two sides agreed to manage differences and continue consultations. China expressed strong opposition to the unilateral tariff increase by the US and stated its firm position that it would have to take necessary countermeasures. China emphasized once again that trade deals must be based on equality and mutual benefit . China will never compromise on major principles concerning China's core interests. One prerequisite for a trade deal is that the US should remove all additional tariffs imposed on Chinese exports and China s purchase of US goods should be realistic while ensuring that a proper balance in the text of the agreement is achieved to serve the common interests of both sides.

III. China is committed to credible consultations based on equality and mutual benefit

The Chinese government rejects the idea that threats of a trade war and continuous tariff hikes can ever help resolve trade and economic issues. Guided by a spirit of mutual respect, equality and mutual benefit, the two countries should push forward consultations based on good faith and credibility in a bid to address issues, narrow differences, expand common interests, and jointly safeguard global economic stability and development.

(I) Consultations should be based on mutual respect, equality and mutual benefit

It is only natural for China and the US, the two largest economies and trading nations in the world, to experience some differences over trad e and economic cooperation. What truly matters is how to enhance mutual trust, promote cooperation and manage differences. For the good of the common interests of the two countries and global trade order, and in a strenuous effort to push forward the economic and trade consultations, China remains committed to resolving issues through dialogue and consultation, responding to US concerns with the greatest patience and sincerity, properly handling differences while seeking common ground, and overcoming obstacles to practical solutions. During the consultations, in accordance with the principle of mutual respect, equality and mutual benefit, China's only intention is to reach a mutually acceptable deal.

Mutual respect means that each side should respect the other's social institutions, economic system, development path and rights, core interests, and major concerns. It also means that one side should not cross the other's "red lines". The right to development cannot be sacrificed, still the less can sovereignty be undermined. As regards equality and mutual benefit, we must ensure that the two sides in the consultations operate on an equal footing, that results are mutually beneficial, and that any final agreement is a win win one. Negotiations will get nowhere i f one side tries to coerce the other or if only one party will benefit from the outcomes.

(II) Consultation involves working toward the same goal in good faith

Consultation calls for mutual understanding and genuine effort from both sides. Consultation is a process where the parties concerned seek consensus or make compromise through discussion. Many factors are at play in consultation. It is perfectly normal during consultations for the parties to react differently to various changes at different stages based on their own interests.

The Chinese government believes that economic and trade consultation is an effective way to solve issues. None other than engagement with goodwill and a full understanding of the other's position can contribute to success. Otherwise, it will be hard to reach a sustainable and enforceable deal as the parties will not find the ground for a long term and effective agreement.

Good faith is the foundation of consultation. The Chinese government has engaged in these consultations wit h the US with the utmost credibility and the greatest sincerity. Attaching great importance to US concerns, China has worked hard to look for effective paths and find ways to address differences. The 11 rounds of high level consultations have made significant progress. The outcomes of the consultations have not only served the interests of China, but also those of the US, as a result of both sides' efforts to pull in the same direction. China has kept its word during the consultations. China has emphasized repeatedly that if a trade agreement is reached, it will honor its commitments sincerely and faithfully

(III) China will not give ground on issues of principle

Every country has its own matters of principle. During consultations, a country's sovereignty and dignity must be respected, and any agreement reached by the two sides must be based on equality and mutual benefit . On major issues of principle, China will not back down. Both China and the US should see and recognize their countries' differences in national development and in stage of development, and respect each other's development path and basic institutions. While no one expects to resolve all issues through one single agreement, it is necessary to ensure that any agreement will satisfy the needs of both sides and achieve a balance.

The recent US move to increase tariffs on Chinese exports does not help to solve bilateral trade issues. China strongly opposes this and has to respond to safeguard its lawful rights and interests. China has been consistent and clear on its position that it hopes to resolve issues through dialogue rather than tariff measures. China will act rationally in the interests of the Chinese people, the American people, and all other peoples around the world. However, China will not bow under pressure and will rise to any challenge coming its way. China is open to negotiation, but will also fight to the end if needed .

(IV) No challenge will hold back China's development

China's development may not be all smooth sailing. Difficulties or even perils are inevitable. Whatever the future might bring, China is confident of meeting challenges head on, turning risks into opportunities, and opening new chapters.

China remains committed to its own cause no matter how the external environment changes. The fundamental solution to economic and trade tensions is to grow stronger through reform and opening up. With the enormous demand from the domestic market, deeper supply side structural reform will comprehensively enhance the competitiveness of Chinese products and companies. We still have sufficient room for fiscal and monetary policy maneuvers. China can maintain sound momentum for sustainable and healthy economic development, and its economic prospects are bright.

China will continue to deepen reform and opening up. China's door will not be closed; it will only open even wider. President Xi Jinping announced in his keynote speech at the opening ceremony of the Second Belt and Road Forum for International Cooperation that China would adopt a number of major reform and opening up measures, strengthen institutional and structural arrangements, and promote opening up at a higher level. Measures to be taken include expanding market access for foreign investment in broader areas, strengthening international cooperation on intellectual property protection, increasing imports of goods and services, implementing more effective international coordination on macro economic policies, and putting more focus on the implementation of opening up policies. A more open China will have more positive interactions with the world, which in turn will advance the development and prosperity of both China and the world.

Conclusion

Cooperation is the only correct choice for China and the US and win-win is the only path to a better future. As to where the China US economic and trade consultations are heading, China is looking forward, not backward. Disputes and conflicts on the trade and economic front, at the end of the day, need to be solved through dialogue and consultation. Striking a mutually beneficial and win win agreement serves the interests of China and the US and meets the expectations of the world. It is hoped that the US can pull in the same direction with China and, in a spirit of mutual respect, equality and mutual benefit, manage economic and trade differences, strengthen trade and economic cooperation, and jointly advance China US relations based on coordination, cooperation and stability for the well being of both nations and the world.

Footnotes:
1 In February 2018, the Global Innovation Policy Center of the US Chamber of Commerce published the International Intellectual Property Index 2018, noting that in 2018, China with a score of 19.08 rose to 25th among the 50 ranked economies, two places up from where it had been in 2017. 
http://www.theglobalipcenter.com/wp-content/uploads/2018/02/GIPC_IP_Index_2018.pdf

--

John Case
Harpers Ferry, WV

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IMF: Chart of the WeekCorruption and Your Money [feedly]

The curse of corruption can kill any campaign, or government. And the best you can do is minimize it. Scarcity and inequalities will infect pay-to-play with blandishments. But how many? Polls say corruption in public is one or two issue for many. IMF has good data on this globally.

Chart of the WeekCorruption and Your Money
https://blogs.imf.org/2019/05/28/corruption-and-your-money/

By IMFBlog

The costs of corruption run deep. Your taxpayer dollars are lost in different ways, siphoned off from schools, roads, and hospitals to line the pockets of people up to no good.

Equally damaging is the way it corrodes the government's ability to help grow the economy in a way that benefits all citizens.

And no country is immune to corruption. Our Chart of the Week from the Fiscal Monitor analyzes more than 180 countries and finds that more corrupt countries collect fewer taxes, as people pay bribes to avoid them, including through tax loopholes designed in exchange for kickbacks. Also, when taxpayers believe their governments are corrupt, they are more likely to evade paying taxes.

The chart shows that overall, the least corrupt governments collect 4 percent of GDP more in tax revenues than countries at the same level of economic development with the highest levels of corruption.

A few countries' reforms generated even higher revenues. Georgia, for example, reduced corruption significantly and tax revenues more than doubled, rising by 13 percentage points of GDP between 2003 and 2008. Rwanda's reforms to fight corruption since the mid-1990s bore fruit, and tax revenues increased by 6 percentage points of GDP.

These are just two examples that demonstrate that political will to build strong and transparent institutions can turn the tide against corruption. The Fiscal Monitorshines a light on fiscal institutions and policies, like tax administration or procurement practices, and show how they can fight corruption.

The costs of corruption run deep.

Where there is political will, there is a way

Fighting corruption requires political will to create strong fiscal institutions that promote integrity and accountability throughout the public sector.

Based on the research, here are some lessons for countries to help them build effective institutions that curb vulnerabilities to corruption:

Invest in high levels of transparency and independent external scrutiny. This allows audit agencies and the public at large to provide effective oversight. For example, Colombia, Costa Rica, and Paraguay are using an online platform that allows citizens to monitor the physical and financial progress of investment projects. Norway has developed a high standard of transparency to manage its natural resources. Our analysis also shows that a free press enhances the benefits of fiscal transparency. In Brazil, the results of audits impacted the reelection prospects of officials suspected of misuse of public money, but the impact was greater in areas with local radio stations.

Reform institutions. The chances for success are greater when countries design reforms to tackle corruption from all angles. For example, reforms to tax administration will have a greater payoff if tax laws are simpler and they reduce officials' scope for discretion. To help countries, the IMF has built comprehensive diagnostics on the quality of fiscal institutions, including public investment management, revenue administration, and fiscal transparency.

Build a professional civil service. Transparent, merit-based hiring and pay reduce the opportunities for corruption. The heads of agencies, ministries, and public enterprises must promote ethical behavior by setting a clear tone at the top.

Keep pace with new challenges as technology and opportunities for wrongdoing evolve. Focus on areas of higher risk—such as procurement, revenue administration, and management of natural resources—as well as effective internal controls. In Chile and Korea, for example, electronic procurement systems have been powerful tools to curtail corruption by promoting transparency and improving competition.

More cooperation to fight corruption. Countries can also join efforts to make it harder for corruption to cross borders. For example, more than 40 countries have already made it a crime for their companies to pay bribes to gain business abroad under the OECD anti-corruption convention. Countries can also aggressively pursue anti–money laundering activities and reduce transnational opportunities to hide corrupt money in opaque financial centers.

Curbing corruption is a challenge that requires persevering on many fronts, but one that pays huge dividends. It starts with political will, continuously strengthening institutions to promote integrity and accountability, and global cooperation.

Related Links: 
Corruption Disruption

 -- via my feedly newsfeed

Mark Thoma: Recent Econ Links (5/28/19), and summaries [feedly]

Links (5/28/19)
https://economistsview.typepad.com/economistsview/2019/05/links-52819.html

• Trump Tantrums the Dems Out of a Trap - Paul Krugman I gotta say, it was very clever of Nancy Pelosi to steal Donald Trump's strawberries, pushing him over the edge into self-evident lunacy. As everyone knows, Trump stormed out of a meeting on infrastructure, apparently out of uncontrollable rage over Pelosi's remarks pointing out that the administration's stonewalling on all fronts, including raw defiance of the law requiring that it provide the president's tax returns, obviously amount to a coverup of something (and maybe multiple things.) And Democrats should be grateful. ...
• Advertising as a major source of human dissatisfaction - VoxEU Although the negative impact of conspicuous consumption has been discussed for more than a century, the link between advertising and individual is not well understood. This column uses longitudinal data for 27 countries in Europe linking change in life satisfaction to variation in advertising spend. The results show a large negative correlation that cannot be attributed to the business cycle or individual characteristics.
• Vietnam Looks To Be Winning Trump's Trade War - Brad Setser Vietnam's exports to the U.S. are growing fast. It also runs an overall current account surplus. If it has resumed purchasing dollars in the foreign exchange market to keep its currency from appreciating, it may soon be a test case for Trump's policy toward countries that intervene to maintain an undervalued currency.
• Robert Heilbroner (1996): The Embarrassment of Economics - Brad DeLong I am approaching an age that can be called venerable, a process over which I have no control but which allows me certain privileges, among them saying outrageous things. This, I must warn you, is an outrageous speech, all the more so because it is delivered in dead earnest, despite a certain flippancy that may intrude from time to time. The subject is the degeneration—I am tempted to say "degeneracy"—of economics, a social discipline I hold, or rather wish I could hold, in the highest regard. Let me describe my own introduction to economics.
• Which Core to Believe? Trimmed Mean Versus Ex-Food-and-Energy Inflation - Dallasfed.org Twice since 2014, core personal consumption expenditures (PCE) inflation—inflation excluding food and energy—decelerated sharply, only to ultimately reverse course. The Dallas Fed's Trimmed Mean PCE inflation rate correctly identified the downward moves as transitory, and looked through them (Chart 1). Chart 1: Sperate Measures Depict Two Very Different Pictures of Inflation Downloadable chart | Chart data Giving more weight to one or the other of these inflation measures would have led to rather different assessments of appropriate policy. Recent data suggest that another divergence is emerging, and the conflicting signals have brought renewed attention to the trimmed mean. We argue here that the trimmed mean, which excludes the most extreme price changes in consumer goods and services each month, provides better real-time signals of the trend in all-items (headline) inflation than does the usual ex-food-and-energy measure. Along the way, we discuss the "why" and "how" of the trimmed mean's construction. In a follow-up piece drawing on some of our recent research, we'll explore another trimmed mean advantage over ex-food-and-energy inflation: its stronger, more stable response to cyclical conditions. ...
• Is the U.S. budget deficit sustainable? - MacroMania The U.S. federal budget deficit for 2018 came in just shy of $800 billion, or about 4% of the gross domestic product (the primary deficit, which excludes the interest expense of the debt, was about 3% of GDP). As the figure above shows, the present level of deficit spending (as a ratio of GDP) is not too far off from where it was in the late 1970s and early 1980s. It's also not too far off from where it was in the early 2000s. Of course, the question people are asking is whether deficits of this magnitude can be sustained into the foreseeable future without economic consequences (like higher inflation). In this post, I suggest that the answer to this question is yes, but just barely. ...
• An old result on automation and wages – Digitopoly The first issue of AER Insights is out and the very first article is one by Francesco Caselli and Alan Manning on "Robot Arithmetic: New Technologies and Wages." Here is the abstract: Existing economic models show how new technology can cause large changes in relative wages and inequality. But there are also claims, based largely on verbal expositions, that new technology can harm workers on average or even all workers. This paper shows—under plausible assumptions—that new technology is unlikely to cause wages for all workers to fall and will cause average wages to rise if the prices of investment goods fall relative to consumer goods (a condition supported by the data). We outline how results may change with different assumptions. The key result is that new technology will not cause wages for all workers to fall and, indeed, should increase average wages if the price of capital falls relative to consumer goods. This is a good, clean theoretical result that is far from appreciated by people who discuss things like automation in the popular press and even by those who study the impact of automation on labour markets. ...
• Why Did the US Labor Share of Income Fall So Quickly? - Tim Taylor The share of US national income going to labor was sagging through the second half of the century, but then plunged starting around 2000. The McKinsey Global Institute takes "A new look at the declining labor share of income in the United States" in a report by James Manyika, Jan Mischke, Jacques Bughin, Jonathan Woetzel, Mekala Krishnan, and Samuel Cudre (May 2019). Here's a figure showing basic background. From 1947-2000, the labor share of income fell from 65.4% to 62.3%. There already seemed to be a pattern of decline in the 1980s and 1990s in particular, which was then reversed for a short time at the tail end of the dot-com boom. But since 2000, the labor share has sunk to 56.7% in 2016. Why did this happen?
• Beyond Unemployment - Michael Spence In modern economies, people may have jobs, but they still harbor major concerns in a wide range of areas, including security, health and work-life balance, income and distribution, training, mobility, and opportunity. By focusing solely on the unemployment rate, policymakers are ignoring the many dimensions of employment that affect welfare.
• Fed Sticking With "Patient" Policy Stance - Tim Duy Bottom Line: Market expectations of a rate cut are well founded. Despite the Fed's resistance, I still think the odds favor a rate cut over a hike. I think the situation is less equally weighted than the Fed believes. This is a fairly challenging time in the cycle. The yield curve suggests that the path of activity will require a rate cut sooner than later, but the yield curve is a long leading indicator. It's typically well ahead of the data. At the current time, the data itself has yet to give the Fed much room to shift to a more dovish stance. For now, the Fed requires greater evidence of slowing activity, particularly in the employment data, to cut rates. Remember, the Fed's typical pattern ahead of a rate cut is to resist, resist, resist, and then move quickly. And note that we don't need to see a recession in the data to justify a rate cut; given the lack of inflation, the Fed only needs to see a substantial risk that growth will fall below estimate of the longer-run sustainable rate.
• Measuring the welfare effects of AI and automation - VoxEU AI promises economic growth as well as creating fear for those whose jobs it may replace. This column takes a wider approach to examining how AI and other technologies will affect citizens' welfare beyond just their income. It argues that the new technologies are intrinsically neither good or bad, it is how they are deployed and how the transition is crafted that conditions the welfare dynamics of societies.
• On the use, or not, of expertise by government - mainly macro In a recent post I ask why we were governed by incompetents, and I related that to ideology, which in recent times means neoliberalism. But I think it is a little more than working in a neoliberal context, because I say that the Labour government often did try and do evidence based policy. Not always. I mentioned Iraq but there are other examples, but in comparison to Conservative governments they did evidence based policy a lot. The difference is while the Conservatives had neoliberal zeal, Labour were prepared to intervene in the market, particularly to help the poor. A good example was the minimum wage, which was set by a specific body who aimed to keep it at a level that did not cause significant employment loss. ...
• The macroeconomic consequences of impaired money markets - VoxEUMoney markets are an important source of short-term funding for banks, which rely heavily on them to cover their liquidity needs. But as this column shows, when money markets do not function smoothly, banks may have to deleverage or increase their holdings of liquid assets, leading to a decline in lending and output. This decline can be mitigated by central banks if they increase the size of their balance sheets.
• Lessons from the Age of Mass Migration - VoxEU Recent waves of immigration in the US and Europe have triggered debate around the economic and political impact. This column uses evidence from migration of Europeans to the US in the first half of the 20th century to show that large cultural differences can incite anti-immigrant sentiment despite their positive economic impact. Therefore, policymakers should give due attention to cultural assimilation and cohesion policies.

 -- via my feedly newsfeed

EPI: ‘Schools are no longer just institutions of learning—we are the primary hub of care outside the family’ [feedly]

The family-like dimensions of much public (and service) work contributes an important source of relationship, and thus power, not present in earlier manufacturing and mining modes of labor. Few observe the labor embedded in the hammer they buy. But how can one ignore that of the nurse?

'Schools are no longer just institutions of learning—we are the primary hub of care outside the family'
https://www.epi.org/blog/schools-are-no-longer-just-institutions-of-learning-we-are-the-primary-hub-of-care-outside-the-family/

My colleague Elaine Weiss launched her new book Broader, Bolder, Better on the challenges facing teachers around the country at an EPI event this week by emphasizing the need for policymakers and researchers to listen to educators themselves rather than imposing their biases on the pros.

Truly moving remarks from guest of honor Joy Kirk, a middle-school teacher from Fredrick County, Va., made quite clear why that's a sound strategy.

Kirk described the transition she has witnessed in the role of teachers and schools as anchors in the community over her 24 years of teaching, which began in urban Philadelphia before she moved to a more rural setting.

"Schools are no longer just institutions of learning. We are the primary hub of care outside the family," she said, a stark reality considering the deeply under-resourced state of so many of the country's schools.

"And for some of our students, we are their only safe place, because if you're suffering violence at home, if you're suffering upheaval, if your parents are constantly moving because they can't hold a steady job—for whatever that reason is—your one safe place is your teacher's classroom," she said.

Weiss's book is the culmination of years of research into how schools can proactively help to counter some of the social strains in various communities, by promoting innovative and targeted approaches to solve every day problems.

"Our book is grounded in community voice and celebrates teacher activism," Weiss explains in a blog post. "It calls out the consequences of structural racism and urges community leaders to translate their daily witnessing of the impacts of poverty into partnerships with the schools that are on the front lines of combating it. It thanks the local and community leaders who are already walking this walk and asks all of us to find ways to further support them."

Kirk's description of her work and situations she and other teachers encounter reinforce other research from EPI showing a growing shortage of teachers created in part by declining interest in the profession among young graduates—in part because of a massive pay gap compared to other professions requiring similar levels of education.

"There are stories we hear from them that make us know that, you know what, that state test that I have to give—I don't care, I just don't care," she said.

"I care more about who you are going to be when you grow up from the other lessons you learn from me as a teacher than how you do on a state test. I care about the content of your character than a single test score. Because there's no place for me to say, as a teacher, Donnie didn't get an hour of sleep last night, Suzy didn't have a hot meal for the past three days, Donnie's grandma just passed away from cancer—those are the struggles they deal with every day."

Kirk continued, speaking to a gripped audience:

"And so the shift has become recognizing more of those needs. At first it was the teachers alone, as individuals we're scrambling—okay, we know so and so doesn't have water, how can we get them into school early and maybe get them down to the gym? As teachers, you're making these little baskets and you're letting this kid come to class 20 minutes late and the other kids are wondering but it's because as teachers you know they don't have water right now and you've got to do something—but you don't want them to stand out.

"But as the problem began to grow, especially through the recession, we began to recognize this was more than just a few teachers on a team, or a few teachers in a school. It's a community issue and we need to step up.

"We need the mental health workers, we need the school psychologists. We have some of our schools now that now offer laundry service and the kids can bring in clothes to do their laundry, so they're not 'that' kid."

The whole event is worth watching if you couldn't attend, and it's available here on EPI's YouTube page. And of course, buy the book!

 -- via my feedly newsfeed