Matt Yglesias

The Trouble With Summits

This week’s column for TAP argues that the precedent of high-profile US-China bilateral “summits” is a bad one:

Chinese President Hu Jintao’s visit to Washington this week is being widely billed in the media as a “summit” with Barack Obama, and that fact may be more important — and more disturbing — than anything that transpires.

It’s great that Hu is visiting, of course. But the precedent that such visits should be big-time summits in the style of U.S.-Soviet meetings in their heyday and that major issues should be primarily addressed in bilateral fora is a bad one. Embracing “the summit” may seem appealing in the short term, but Sino-American bilateralism is a poor strategy for a world in which China will all but inevitably amass an economy larger than the United States’ in the near future. Our long-term interests are much better served by almost any conceivable decision-making process other than so-called G2 summits with China. The short-term frustrations of pursuing a policy of robust multilateralism should not distract attention from the urgent need to do the hard work.

The core issue, to be a bit flip, is that the United States of America has a posse.

Read the whole thing.

Against China Envy

Ryan Avent throws some much-needed cold water on the idea that China’s recent economic growth shows that we ought to be emulating Chinese public policy. There’s a lot to his argument, but I think this sarcastic aside actually captures the key point:

There is certainly a possibility that China has stumbled onto a striking new growth formula, and that Chinese citizens will ultimately grow every bit as wealthy as Americans and then some. That would be something! To move 1.3 billion people from grinding poverty to American income levels would represent a monumental step for human welfare. Who knows; it could happen.

There’s often a tendency to get distracted by rates of change when levels are in many ways more relevant. China is a dynamo and Greece is a basket case, but Greece is much richer than China. Rapid Chinese progress does in part reflects the skill and wisdom of Chinese policymakers. But in large part it merely reflects the madness of a previous generation of Chinese policymakers—the people who left the country at such a low level in 1980 from which it’s so rapidly been growing. If you look at the economic success of Chinese people in Taiwan or Hong Kong or Singapore or diaspora communities around the world, the striking thing about the PRC is how poor it still is.

The United States of America, meanwhile, is one of the richest countries on earth. A poor country can get richer by learning to do things that they already do in other countries. And a small country like Norway can get rich by managing natural resources well. But a large rich country like the United States actually needs to push the frontiers of the possible forward. Google and iPads aside, we haven’t really done that over the past 10 years on the scale necessary to raise American living standards at a reasonable pace. That’s a big problem, but there’s not really any reason to think the Chinese have figured it out.

Renminbi Denominated Hedge Funds

(my photo available under cc license)

Sam Jones reports for the FT:

Pharo Management is becoming the first hedge fund manager to offer shares in its investment vehicles denominated in renminbi.

The move for its flagship fund underscored the extent to which the future of the US dollar and the rising power of the Chinese currency are becoming concerns for the markets’ most sophisticated investors.

To give this an alternative interpretation, rapid economic growth in China is creating the largest pool of suckers the world has ever seen. Real world individuals exhibit bounded rationality, and lots of Chinese people who may have been extremely smart at getting rich in China’s industrial revolution may be quite foolish about their decisionmaking regarding complicated western financial products. American rich people are much better-positioned than Chinese rich people to avoid getting ripped off, and yet a large number of people were taken in by Bernie Madoff’s rather crude fraud. China is a treasure trove of potential marks and Pharo is getting in on the game.

Real vs Nominal Exchange Rates

Something I don’t think I’ve laid out on the blog is the fact that China’s efforts to manipulate nominal exchange rates between the dollar and the RMB have only a limited impact on the real exchange rate, which is instead adjusting via the mechanism of inflation:

Chinese inflation is running consistently higher than American inflation, which is scarcely above 1%. That translates into rapid real appreciation despite the slow movement in the nominal exchange rate. And that should produce a decline in Sino-American imbalances, which seems to be emerging. In December, China’s trade surplus fell sharply from its November level, from $22.9 billion to $13.1 billion.

It appears that markets are pushing the real exchange rate in the appropriate direction, despite Chinese intervention. That will help bring trade between the countries closer to balance. But it’s up to the governments in China and America to facilitate this process and reduce its cost to citizens by removing structural obstacles to adjustment.

So that’s fine as far as it goes. But it also underscores the case for doing more via nominal exchange rate adjustment. What the PRC government is doing here doesn’t really avoid the problems that would be associated with RMB appreciation and it does create a range of extra problems. The imbalances, as such, will go away over time no matter what happens with exchange rate policy, but this is a needlessly destructive way to make it happen.

What’s The Real Problem With China

David Leonhardt says it’s not the exchange rate of the renminbi:

For the United States, the No. 1 problem with China’s economy is probably intellectual property theft. Technology companies, for example, continue to notice Chinese government agencies downloading software updates for programs they have never bought, at least not legally.

No wonder China has become the world’s second-largest market for computer hardware sales — but is only the eighth-largest for software sales.

Next on the list, say people who work in China or do business there, is the myriad protectionist barriers China has put up. These barriers make this country’s recent efforts at “buy American” protectionism look minor league. In some cases, Beijing has insisted that products sold in China must not only be made there but be conceived and designed there. The policy goes by the name “indigenous innovation.”

This gives me a rare opportunity to disagree with David Leonhardt. The thing that’s so problematic about undervaluation of the RMB is that not only are US import-competing firms disadvantaged by it, but so are the majority of Chinese people. It’s essentially a regressive sales tax levied in China with the revenue going to politically powerful Chinese exporters. But it’s bad for American firms and bad for Chinese prosperity which, in turn, is bad for firms all around the world. The intellectual property situation is, I think, the reverse. US intellectual property owners are politically influential and have imposed an IP regime that is contrary to the interests of most people. China’s IP regime is too lax, but it constitutes a useful tension with a US IP regime that’s too stringent. The cost to a small number of American firms is high, but this is an economically efficient outcome that’s good for the world. When the United States was a fast-growing developing country we had weak intellectual property laws too. That’s just how it goes.

Leonhardt and American firms are on much firmer ground with Chinese protectionist policies. These policies are bad for American businesses and also bad for most Chinese people. Like the undervalued currency, they impoverish the bulk of China’s citizens (and American companies) in order to enrich politically powerful Chinese firms. This is bad for China and bad for America. Like currency undervaluation, it’s something we should robustly fight. The intellectual property stuff, by contrast, most just reflects China refusing to get ripped off.

China As Number One

Back in the requests thread, someone asked for “[m]ore about demography. What are the overall trends? Have Chinese-style anti-natalist policies been vindicated by Chinese growth? Have European pro-natalist policies worked, and at what cost?”

This is an under-contemplated subject in international comparisons. If you want to know about what living standards a country is able to achieve, you want to talk about GDP per capita. That’s output over people. But if you want to know about how mighty a country is on the world stage, you just want to talk about GDP. And if you want to talk about how efficiently a country’s economy is working, you probably want to talk about GDP divided by working age population. Daniel Gros cites GDP/WAP to say that Japan’s economic decline is largely an illusion. But I think this illusion is, in turn, a bit of an illusion. The bottom line about Japan is that if your working age share of the population declines, this drags average living standards down. What we’re seeing in China recently is in part huge efficiency gains, but in part a big increase in the working age share of the population driven in part by anti-natalist policies. Declining birth rates offer a one-time demographic dividend followed by rapid population aging.

As Kevin Drum notes, this means China will run into a serious demographic headwind pretty soon:

By 2030 they’ll have a greater proportion of the elderly than the United States. This is one reason why I’m skeptical of alarmism about China’s imminent takeover of the world. I don’t doubt that China will continue to grow and flex its muscles, but in the long term they have a demographic time bomb to deal with that’s worse than ours, and they’ll have to tackle it as a considerably less wealthy country than us. It doesn’t mean they’re doomed, but it does mean that their path to world domination has a few roadblocks in its way.

Very true, but what I think this misses is that China surpassing the United States in aggregate GDP terms is likely to happen much sooner than people realize. The Economist says it’s likely to occur during Jeb Bush’s first term around 2019 or so. You’ll then have a situation in which the mightiest economy on earth is also quite poor (think Mexico) and facing a rapidly darkening future economic outlook. I think it’ll make the 2020s and 2030s a pretty hairy decade in East Asia.

For and Against China Optimism

Martin Wolf thinks the past 20 years worth of convergence between the West and the developing world will continue apace:

Until recently, political, social and policy obstacles were decisive. This has not been true for several decades. Why should these re-emerge? True, many reforms will be required if growth is to proceed, but growth itself is likely to transform societies and politics in needed directions. True, neither China nor India may surpass US output per head: Japan failed to do so. But they are far away today. Why should they be unable to reach, say, half of US productivity? That is Portugal’s level. Can China match Portugal? Surely.

Of course, catastrophes may intervene. But it is striking that even world wars and depressions merely interrupted the rise of earlier industrialisers. If we leave aside nuclear war, nothing seems likely to halt the ascent of the big emerging countries, though it may well be delayed. China and India are big enough to drive growth from their domestic markets if protectionism takes hold. Indeed, they are big enough to drive growth even in other emerging countries as well.

I like this argument for India, which of course is growing a good deal slower than is China, than I do for China. The reason is that the political risks involved in China continue to seem to me to be very severe. If India’s rise is interrupted, it’ll be interrupted. But the Chinese political system is a good deal more brittle. A temporary economic contraction could lead to major political chaos and that could lead to anything. You could imagine China being as rich as Portugal in 20 years, or you could imagine China being in one of its sporadic episodes of central government collapse and civil war.

Subnational Government Debt Loans in China

Sometimes it's a bit hard to say what's happening in China (my photo, available under cc license)

Via Tyler Cowen, an anonymous “senior” Japanese official says:

In reality, China’s residential property bubbles are obvious. But the real danger lies elsewhere. So-called “loan platforms” established by local governments pose a much more serious risk. In the 1990s, China centralized its tax system and rendered local governments dependent on Beijing’s coffers. In order to make up the budget shortfall, local governments established these funding vehicles through which they can obtain commercial loans. In 2008, when Beijing mobilized a massive ¥4 trillion pump priming, it ordered local governments to bear one-third the cost themselves. This triggered a stampede. As of the end of June this year, there are 8,221 platforms and their outstanding loan balance is ¥7.7 trillion, of which 20 percent to 25 percent are deemed “problematic” by the China Banking Regulatory Commission.

Certainly something missed in many admiring columns about the quality of Chinese public infrastructure is the question of how, in detail, is this paid for. The answer seems to be a mix of bad loans and confiscation & resale of confiscated peasant agricultural land. But I’ve seen different takes on who’s ultimately left holding the bag at the end of the day. In principle, it seems to me that there are enough real profits being made in China to allocate losses without materially injuring the interests of most people. Michael Pettis, for example, says that in China “[i]f there is a real transfer of wealth and income from businesses and governments to households, even a rapid slowdown in GDP growth can be accompanied by a very small reduction in household income growth.” My guess, however, is that government officials and well-connected businessmen don’t like this plan!

Country Driving

Everyone’s reading and writing about China these days, and the best book I’ve read on the subject is Peter Hessler’s Country Driving: A Journey Through China from Farm to Factory.

This is really three short books, one about driving the route of the Great Wall, one about life in a rapidly changing small town vaguely in the vicinity of Beijing, and one about a sweatshop boomtown. In an ideal world, there’d be a publication medium for novella-length nonfiction. But the second-best alternative would be for every writer with one great novella-length nonfiction book in him to do what Hessler did and turn out to have three such books, write them all in a row, and slap ‘em together. Hessler’s a New Yorker writer and it shows in the incredibly quality of the prose, the narrative structure, and the storytelling power. This is interesting, readable material. I laughed out loud. I felt suspense. I won’t say I cried, but the term “heartbreaking” comes to mind at several points. Even better, Hessler’s lived in China for a long time and speaks Chinese quite well so he can really operate like a proper reporter and not need to see things through a screen of mistranslation and interpretation.

But best of all from the point of view of this cold-hearted rationalist, is that while this is a book of reportage rather than analysis, there is real anecdotal punch here. I feel like you really do learn something about the small-scale foundations of China’s economic transformation and you get a sense of where the limits might be. Recommended without preconditions, even if you’re not particularly interested in the subject but just looking for a good read.

The Mysteries of the Global Supply Chain

If you look at the back of an iPhone it says “Designed by Apple in California, Assembled in China.” The actual parts out of which it was assembled come from a whole bunch of different countries. Consequently, the actual value is dispersed to a whole bunch of places. But as Jacob Goldstein expalins, under current statistical rules “the entire manufacturing cost of each iPhone — about $179 for each iPhone 3G, as of 2009 — is counted toward China’s export totals” even though the China-located assembly process only accounts for about $6.50 per phone.

As Yuqing Xing and Neel Detert explain (PDF) in “How iPhone Widens the US Trade Deficits with PRC” the result is that what’s really a very successful American export product (the iPhone’s intellectual propert and industrial design characteristics are much more valuable than its manufactured components) ends up counting as a net import.

That’s a little primer in why it’s worth keeping in mind that objects in the balance of trade may not be exactly as they appear. Still fundamentally it strikes me as underscoring the fact that it’s a problem for the world when a major economy doesn’t let its currency float. There are a lot of different ways these trade statistics could be assembled, and a lot of different ways you can interpret them. What’s not open to interpretation is the fact that in an open exchange rate regime, currencies adjust in line with trade flows. When Americans start buying more stuff from Canada, that makes Canadian money more expensive; when Canadians buy more American stuff, the reverse happens. This is all nice and automatic, and doesn’t depend on any particular interpretation of the global supply chain. It’s a good system, and China and the world would benefit from moving in that direction.

China’s Dangerous Lower Middle Class

The other point I wanted to make yesterday was about the political risk to the Chinese regime posed by disappointed college graduates:

While some recent graduates find success, many are worn down by a gauntlet of challenges and disappointments. Living conditions can be Dickensian, and grueling six-day work weeks leave little time for anything else but sleeping, eating and doing the laundry.

But what many new arrivals find more discomfiting are the obstacles that hard work alone cannot overcome. Their undergraduate degrees, many from the growing crop of third-tier provincial schools, earn them little respect in the big city. And as the children of peasants or factory workers, they lack the essential social lubricant known as guanxi, or personal connections, that greases the way for the offspring of China’s nouveau riche and the politically connected.

Back in the 1990s it was often fashionable to argue that increased prosperity would magically transform China into a more liberal political system. Today, that’s clearly not the case. What we’re seeing here, though, is the more likely mechanism for political change—dashed hopes. Peasant farmers often just feel beaten-down and resigned to their fate. But these are the would-be upwardly mobile. People who know perfectly well that better economic opportunities are possible and thus are poised to develop complaints and resentments.

As long as China maintains the world’s fastest-growing economy, it’s hard for me to imagine political dissidence gaining any kind of toehold. But if the PRC leadership can’t continue delivering the goods, these are the kind of people likely to turn into big time troublemakers.

A World Without a China

Americans have some odd ideas about the strength of the Chinese economy:

In the poll, only one in five Americans said that the U.S. economy is the world’s strongest — nearly half picked China instead. Looking forward, Americans are somewhat more optimistic about regaining primacy, but still only about one in three expect the U.S. economy to be the world’s strongest in 20 years. Nearly three-fifths of those surveyed said that increasing competition from lower-paid workers around the world will keep living standards for average Americans from growing as fast as they did in the past. Ruben Owen, a retired Boeing engineer in Seattle who responded to the survey, spoke for many when he said, “We’re still in a reasonably good place … but it’s going to get harder because other places are growing stronger.”

Note that China is not only poorer than the USA, it’s poorer than Ecuador. It’s about half as rich as Uruguay or Belarus. Trinidad has about triple the per capita GDP of China. I think it’s probably true that average living standards in America are no longer the highest in the world, but we’re being beat by the likes of Norway, Switzerland, and the Netherlands not by China. But who knows? Maybe “stronger” just means “growing really fast” in which case China is, in fact, growing really fast.

The larger point is that, as Jamelle Bouie observes, “the world isn’t zero-sum, at least when it comes to the global economy.”

Just think about the impact on the United States if, for no clear reason, everyone in China died tonight. Would that decline in low-wage competition boost American living standards? It’s difficult to see how. Lots of stuff Americans buy is made by Chinese people. If the Chinese people die, we won’t have that stuff. Maybe Americans could make it instead. But then whoever’s making that stuff would need to stop producing whatever it is they’re producing now and start making made-in-China stuff. Either way, it adds up to less stuff being produced. Less stuff = lower, not higher, living standards.

But aha! you say. Currently we have about 9.8 percent of the population unemployed. They’re not producing anything. Absent China, maybe those people would be mobilized and we’d equalize the quantity of production. And there’s something to that. It does seem to be a shame that 9.8 percent of the people in America who want a job producing something are currently producing nothing. And, indeed, it is a shame. But it’s not the existence of China that’s got them in their current state of non-production. It’s poor macroeconomic policy in the United States. We have the ability right now to mobilize many unemployed people and have them do something. We just need to spend money to pay them to do something. Doesn’t “the money have to come from somewhere?” Not really. Money is just made up by the government. If we need more money, the government can create more money. What “has to come from somewhere” is actual productive capacity. But the existence of China doesn’t reduce our capacity to produce. On the contrary, it increases the world’s productive capacity. But America’s political leadership has failed to fully mobilize our productive capacity, leaving more and more people adrift and fantasizing about the notion that somehow doing away with “competition” from foreign producers is the best way to reduce idleness.

The voters are confused about this, but the political leaders are the ones who fundamentally deserve the blame for the sorry current state of affairs.

Inflation in China

Unlike the United States, China is not burdened by massive excess capacity and idling of usable resources. Also unlike the United States, China has a very real inflation issue to deal with:

Government ministries are pitching in. The banking regulator is trying to boost loans to agricultural projects. Representatives of the State Council, China’s cabinet, are traversing the nation on a food-price inspection tour, and the agriculture ministry is issuing optimistic updates on the planting of winter wheat.

“What the government has been trying to do so far is . . . control inflationary expectations through propaganda,” says Arthur Kroeber, managing director of Dragonomics, a Beijing research firm. China’s civil affairs ministry has ordered local governments to step up welfare payments to ensure the poor can afford food.

Beijing is handing out one-time subsidies of Rmb100 ($15) to more than 220,000 low-income workers. In Shaanxi province, the government has set aside Rmb60m to help university dining halls cover costs.

What’s both maddening and frustrating about this is that the simplest measure to curb China’s inflation is also the measure the US wants to see to help our shortfall in aggregate demand—let the currency float. A more valuable Chinese currency would increase real wages (and thus the affordability of basic commodities like food) without locking in inflationary expectations of nominal wage hikes. Meanwhile, it would assist in global rebalancing, boost demand for American-made products, and generally be in the interests of most Chinese people and most non-Chinese people. But China’s export lobby seems to have an iron grip on the government and the PRC is determined to try every possible anti-inflation measure except the best one available.

Kim Jong-Il is a Good Drinker

The biggest scandal yet revealed by WikiLeaks comes from the summary of a conversation between Deputy Secretary of State James Steinberg and PRC State Councilor Dai Bingguo:

Regarding his recent visit to Pyongyang, Dai briefly recounted his two-hour meeting with DPRK leader Kim Jong-il. Dai said he was on relatively familiar terms with Kim, because he had met with Kim on several occasions in his previous role as Director of the Chinese Communist Party (CCP) Central Committee International Liaison Department (CCID). Dai admitted that in contrast with his discussion with Vice FM Kang (see below) his conversation with Kim was
not as direct and candid and joked that he “did not dare” to be that candid with the DPRK leader. Dai noted that Kim had lost weight when compared to when he last saw him three years
earlier, but that Kim appeared to be in reasonably good health and still had a “sharp mind.” Kim told Dai that he had hoped to invite the Chinese official to share some liquor and wine, but that because of scheduling problems, he would have to defer the offer to Dai’s next visit to North Korea. Kim Jong-il had a reputation among the Chinese for being “quite a good drinker,” and, Dai said, he had asked Kim if he still drank alcohol. Kim said yes. Dai said he also met briefly with Kim Yong-nam, President of the Supreme People’s Assembly, who invited him to attend the performance of a famous Chinese opera, “The Dream of the Red Chamber.”

For the third time in a row, a WikiLeaks document dump has conclusively demonstrated that an awful lot of US government confidentiality is basically about nothing. There’s no scandal here and there’s no legitimate state secret. It’s just routine for the work done by public servants and public expense in the name of the public to be kept semi-hidden from the public for decades.

Regarding the specific revelation here one can only regret that the author of the memo, US Ambassador to China Jon Huntsman, is a Mormon and thus perhaps unfamiliar with the nuances of drinking-related terminology. Is the idea here that Kim is a huge drunk, or that Kim has an unusual capacity for holding his liquor? And is that by western standards or merely by the standards of east Asia’s more modest alcohol consumption? The public has a right to know!

Leonhardt on China

This David Leonhardt piece on efforts to build a consumer culture in China is just fantastic. There so much right here in these two grafs:

What’s striking about Wuqi is just how serious its officials are about making this transition happen — and yet how difficult it nonetheless will be. The Wuqi International Hotel was as comfortable as most Marriotts or Hiltons in the United States, but the surrounding streets had the dusty feel of a backwater. The hardware, liquor and food stores down the block were each the size of a storage closet and about as well lighted. In the evenings, when Wuqi residents gathered in a public square to talk or perform exercises together, many of the stores were closed. The parents I met were thrilled that high school was free but were still saving an enormous portion of their modest incomes to pay for college or a new home. Those savings create a self-reinforcing cycle, in which stores don’t flourish because people don’t shop much and people don’t shop much partly because there aren’t many good stores. As Feng Zhendong, Wuqi’s reform-minded Communist Party secretary, says, “There’s only so much to spend on.”

Then there was the hotel itself. During my first night there, I don’t think I saw a single other guest — in the lobby, the restaurant, the elevator or on the 19th floor. After I used the hotel gym, the front desk called to ask if I would be using it the next morning as well. In that case, someone would make sure it was unlocked.

There’s so much right in here. One thing is that not only is consumption a low share of Chinese GDP, the productivity of the retail sector is lousy. Of course parts of China have fancy international chain stores, but the more “authentic” streets I saw not only had these tiny stores but on average they had zero customers at any given time. Then you have in the empty hotels the problems of an economy that’s still heavily planned. Over-investment in certain kinds of prestige projects? Or maybe it’s over-investment in things that don’t compete with incumbent firms. Wuqi doesn’t have a pre-existing Western-style business hotel that’s averse to seeing a new one open up. The whole thing is moving at an unprecedented speed, and I don’t think anyone really understands how to keep it going.

Countries Don’t Compete

There are some worthy points in today’s Thomas Friedman column, but his concept of international economic competition is dead wrong. He thinks this is a partial explanation for high US unemployment:

Global competition is stiffer. Just think about two of our most elite colleges. When Harvard and Yale were all male, applicants had to compete only against a pool of white males to get in. But when Harvard and Yale admitted women and more minorities, white males had to step up their game. But when the cold war ended, globalization took hold. As Harvard and Yale started to admit more Chinese, Indians, Singaporeans, Poles and Vietnamese, both American men and women had to step up their games to get in. And as the education systems of China, India, Singapore, Poland and Vietnam continue to improve, and more of their cream rises to the top and more of their young people apply to Ivy League schools, it is only going to get more competitive for American men and women at every school.

To stand up for the old New England WASP establishment for a moment, let’s note that Harvard’s first African-American student graduated in 1870 and Yale’s graduated in 1874. But it’s of course true that if the quantity of people in the world capable of getting high SAT scores goes up faster than the number of spaces at Harvard and Yale then it will get harder to get into Harvard and Yale. This is a problem that’s historically been solved by founding Stanford, but if the rich people of the world collective refuse to launch new institutions of higher education then there’s going to be a problem here.

But this has nothing to do with unemployment in the United States. If you look at countries that are doing well economically right now—Germany, Australia, Norway—what you’ll see is that these places haven’t “out-competed” China, they sell stuff that China imports. Specifically Chinese growth is increasing global demand for natural resources and for Germany’s heavy industrial equipment. The competition paradigm implies that if China were struck tomorrow by a horrifying disease that led to its rapid economic collapse, that we’d somehow benefit. In fact, there’d be a global economic disaster.

It would of course be better for America to have a healthier, better-educated population and better infrastructure. But this is true no matter what happens in China or any other country.

Germany and China

David Shorr writes from Seoul, South Korea that we should pay more attention to Germany’s trade surplus:

Germany is one of those countries that sells stuff rather than buying. Here’s the point about Chancellor Merkel’s statements: she talks a lot about Germany’s exports as a a success of their competitiveness and not very much about needing Germans to buy more. As with China, Germany is quite happy to chug along with export-led growth, thankyouverymuch. This begs the question — if Americans become less profligate (and households have already shown they can reduce consumer debt — then who will pick up consumer demand where we left off?

I think it’s wrong to put China and Germany in the same box here. The reason is that if you look at the Eurozone as a whole (or the EU-27 as a whole, or various other broader metrics) the overall surplus is pretty small as a share of GDP. Germany is (along with Sweden and the Netherlands) the export-oriented part of Europe sort of like how the Seattle or New York City areas of the United States are the export-oriented parts of our country.

That’s not to say the relationship between Germany, the Eurozone, and the world is unproblematic. On the contrary, it’s a total disaster. The Irish situation is a mess, and the Eurozone-wide growth rate is abysmal which means there’ll be more trouble ahead for Greece, Portugal, Spain, and Italy soon too. When the Euro was proposed, skeptics posited that the labor market wasn’t nearly integrated enough to make it work, but most European leaders forged ahead anyway. The result is an urgent problem, but it’s a very different one from the China situation.

Currency Battle Rap

Funny:

I will say, though, that looking at any trade-related issues as a question of “China” versus “America” is always misleading. Industry employes just 27 percent of China’s workforce. Almost 40 percent of Chinese workers are laboring in agriculture, together producing only 10 percent of China’s GDP and thus being quite poor. These people do not benefit from an undervalued RMB. On the contrary, the low price of the RMB further depresses the value of their already meager earnings. The main beneficiares of the cheap yuan are the owners of China’s exporting enterprises, and the people who work at our supply those enterprises. This, however, isn’t “China” it’s a particular set of politically influential Chinee people who have a dominant voice in China’s economic policy.

America has a bizarre cotton policy. But that’s not because “America” has decided that this policy is good for “America,” it’s because cotton-growers control the relevant levers of power.

The Not-So-Great Game

In case you think it’s only the American right-wing whose foreign policy thinking is dominated by paranoid fantasies, Robert Farley offers this account of Russian thinking about Chinese plans to conquer Central Asia:

This brings [Aleksandr] Khramchikhin back to China. He has previously written some fairly alarmist pieces about the potential Chinese threat to Russia, so this time he focuses on the possibility that China would attack Kazakhstan. This seems to be a sufficiently fantastic scenario that it could be dismissed out of hand, but instead he argues that China would easily win such a conflict while absorbing Kyrgyzstan and Tajikistan with minimal effort. This means that Russia would have to come to Kazakhstan’s assistance or face the prospect of a 12,000km border with China stretching from Astrakhan to Vladivostok. (I’m not sure what happens to Mongolia in this scenario, but I assume it’s nothing good.) And at this point, Khramchikhin argues that Russia might as well capitulate on the spot.

I suppose this is like how if Communists take over South Vietnam next thing you know they’ll be running Malaysia, Indonesia, the Philippines and probably Australia and Japan to boot.

I would say that one of the major lessons of the past fifty years has to be that it’s extremely difficult to coercively dominate foreign populations who have nationalist objections to your rule. It’s not impossible, but it’s damn hard and the government of China would need to be pretty crazy to want to try to govern Kazakhstan. Crazy things do happen—look at Iraq—so I don’t think it’s totally safe to assume that the Chinese won’t ever do anything crazy. But part of the craziness of any course of action along these lines is that Russia would have any number of low-cost ways to make things difficult for China by sending supplies and weapons across the very long and hard to police Kazakh-Russian border.

Much like with the idea that the Taliban somehow poses a threat to Russia, there just seem to be a group of people in the Russian security establishment who really want to be involved in the former Soviet Republics. This desire is leading them to hallucinate a whole host of possible threats.

I really enjoyed Peter Hopkirk’s book, The Great Game, about Anglo-Russian imperial conflict in 19th Century Central Asia. But the bottom line is that this is a part of the world that contains very little of value. The ultimate fates of the British and Romanoff Empires were ultimately determined by factors that had nothing to do with Central Asia, and the bad habit a whole series of great powers fall into in this region is simply wasting resources.

The View From China

Via James Fallows, a slice of Chinese media perspective on the midterms:

Global Times/Huanqiu Shibao (Daily, circ. 1.5 mil) [ 环球时报 - "Global Times," an influential but fairly raw-meat nationalist paper]

The U.S. looks for a scapegoat for its decline (pg1)

Quote: The world media believes that Americans did not take into serious consideration the current administration’s policy adjustments but abruptly hoped their leader would instantly bring them back to the golden time after Cold War, which is impossible. Obama has been completely denied. It is believed to be a “thought riot” in the U.S…. Yu Wanli at Peking University’s Center for International Strategic Research said that Americans will become more impatient than usual due to the elections. What Obama has encountered right now is because he has become the scapegoat for U.S. decline.

To state the obvious, the United States and China are very different societies. But one point we have in common, that separates us from our European partners, is that both are very large societies whose scale has allowed us to preserve a remarkable amount of solipsism even in the face of rapidly falling costs of transportation and communication. So in the United States you had a rash of really thoughtless China-bashing midterm ads, and in China you have this slightly odd conceit that Americans are primarily driven by China-related anxieties rather than primarily being totally indifferent to the world beyond our borders.

Managing this relationship is going to be one of the most important tasks of not only the current president, but all national political leaders for the next generation or two. I wonder if this kind of gigantism-induced mental isolationism will make the landscape easier or harder to navigate. The good news, after all, is that it is a real common point of reference.