Category Archives: International

Nicholas R. Lardy – The State Strikes Back: The End of Economic Reform in China?

Nicholas R. Lardy – The State Strikes Back: The End of Economic Reform in China?

Lardy’s “core conclusion is that absent significant further economic reform returning China to a path of allowing market forces to allocate resources, China’s growth is likely to slow, casting a shadow over its future prospects.” In this case, Lardy largely echoes other recent works such as Elizabeth C. Economy’s The Third Revolution: Xi Jinping and the New Chinese State and Ronald Coase and Ning Wang’s How China Became Capitalist.

China has taken a decidedly dirigiste turn under Xi Jinping. If Xi continues down an increasingly statist path, China’s growth will slow. If market reforms continue, China will prosper. Given the outsize amount of power centralized in his person, this choice is up to him more than anyone else. This will remain the case regardless of whether the current U.S.-China trade war ends tomorrow or continues for years. U.S. presidents come and go, but Xi will likely be around for a long time. And if not him, then someone in his inner circle with similar policy views.

Lardy is an excellent economic analyst, parsing through China’s not-entirely-truthful official statistics as well as international data to give as accurate a picture of China’s trajectory as he can, given the sources. One of his major conclusions is that China’s state-run businesses are severely underperforming compared to the country’s private businesses. State-run enterprises consistently make more and larger losses, are more heavily in debt, and the ones that are profitable tend to be less profitable than their private counterparts. They are also concentrated in legacy industries; China’s growth is less in energy and manufacturing and more in services and technology—precisely where China’s private sector is strongest.

This sounds like good news, but the trouble is that under Xi, the poor-performing state-run share of the economy has been growing. Since government tends to make a hash of whatever it does, if Xi keeps this up, China’s growth will slow. This is an avoidable mistake, but it is an open question if Xi will be willing to admit it.

China has several massive white elephant projects that are wasting precious capital, such as its Belt and Road initiative. While this program and others like it scare China hawks in the U.S., they are weakening China. Government infrastructure projects worldwide are late, overpriced, and often of low quality. The Belt and Road initiative is no different, according to available evidence so far. Moreover, the billions of dollars Beijing is putting into it now cannot put into more productive ventures.

Lardy, like everyone else, is unable to guess which path China will take—state-run and poor, or free and prosperous. Unlike many analysts, Lardy is humble enough to admit that he cannot predict the future. He is hoping Xi will eventually decide to turn China’s policy momentum back towards liberalization. The Chinese people share this hope, and China observers of all stripes should hope the same, whether their politics are hawkish or dovish.


New $7.5 Billion Tariffs against European Union

The Trump administration has announced tariffs on $7.5 billion of goods from the European Union. This time, it is being done with the World Trade Organization’s blessing. Here is what is different about these tariffs—and what isn’t.

The EU gives subsidies to airplane manufacturer Airbus, giving it an unfair advantage over U.S.-based Boeing. So the U.S. filed a complaint with the WTO. The decision came down yesterday. As expected, it was in the U.S.’s favor, since corporate subsidies are fundamentally unfair. As part of the ruling, the U.S. is allowed to enact tariffs against up to $7.5 billion of EU goods to counteract the Airbus subsidies without violating WTO rules. This being the Trump administration, the new tariffs were announced within hours of the decision coming down. But just because you can do something doesn’t mean you should.

Aside from the usual economic objections to tariffs, the Trump administration’s strategy won’t work in a repeated-play setting. Because America’s relationship with the EU is longer than a one-time interaction, the new tariffs will soon do more harm than simply make some consumer goods more expensive.

Boeing gets subsidies of its own from the U.S. government, and the EU has its own WTO complaint pending about that. Corporate subsidies being fundamentally unfair, the EU will likely win. It will then likely have the option to put up its own additional tariffs against U.S. goods. If this next round of the repeat-play game plays out as expected, both Airbus and Boeing will continue to receive subsidies, same as before. Moreover, two new tariff increases will harm consumers and businesses on both sides of the Atlantic. At this point, the Trump administration’s latest tariffs will have caused double harm. Again, just because they can enact a new tariff doesn’t mean they should.

As has happened in almost every instance of the trade war so far, Trump’s opponents are using a tit-for-tat strategy. His tariff hikes are not met with the reforms he wants. They are responding in kind with their own tariff hikes. Trump’s tariff hikes reliably cost both Americans and our trading partners double.

Also worth noting—Airbus gets about 40 percent of its parts from the U.S. and has a factory in Mobile, Alabama. While all tariffs harm the country that enacts them, this one will cause more direct harm.

For more, see Iain Murray’s and my paper “Traders of the Lost Ark.” My recent paper on the Export-Import Bank, known around Washington as “Boeing’s Bank,” sheds some light on Boeing’s subsidies that may soon lead indirectly to yet more tariffs on U.S. businesses and consumers.

Andrew J. Newman – Safavid Iran: Rebirth of a Persian Empire

Andrew J. Newman – Safavid Iran: Rebirth of a Persian Empire

The Safavid dynasty was one of the most liberal periods in Iranian history. Iran, of course, was not a nation-state in today’s sense of the term until the 20th century. Safavid territory also included Baghdad and ranged up north into Afghanistan, several of the steppe countries and parts of Georgia, including Tiflis (now Tblisi), and ranged east almost as far east as Bukhara. It lasted from about 1510 to 1722, with a few dying embers lasting until 1736, a little bit like post-Louis XVI Bourbons.

For context, the Safavid dynasty ranged roughly from just before Europe’s Reformation and post-Columbian exploration age through the Scientific Revolution and the early Enlightenment. It began roughly a century after Tamerlane conquered most western and northern Asia. China’s Ming dynasty reached its peak and was overthrown during the Safavid era. The most famous Safavid monarch was Abbas I (reigned 1588-1629, roughly contemporaneous with Shakespeare, the second half of Elizabeth I’s reign, and her successor James I). But the generations before and after Abbas I were also comparatively liberal. One of the few opinions Newman ventures is that the Safavids were not a one-hit wonder with Abbas I as the dynasty’s only notable head.

The regime’s official religion was Twelver Shi’ism, which was an important development in Islamic history. But by the standards of their time, the Safavids were highly tolerant of both other kinds of Islam and non-Islamic religions. They compared favorably to both the Europeans of their time and the Iranian government in ours.

Art, architecture, poetry, and literature thrived, both in court and among regular people. Despite ongoing tensions with the Ottomans to the East and limited direct ties to Europe, an openness to trade also made Safavid territories prosperous enough where high art and exotic goods were affordable even to the middle class; even in Europe such things as single-page prints were still mostly the province of the wealthy. At the same time, the Safavid Dynasty was founded on military power, survived by the sword, and ultimately died by it. Its liberalism was in comparative, not economic terms. It is a complex, multifacted period, and was interconnected with what was going on in Europe, Turkey, Russia, India, and China.

Newman’s book is drily written, focusing heavily on kings and battles, and names and dates. If the reader enters with some knowledge of world history from 1500-1700, and a willingness to Google new names, places, and terms, they can tease more insights out of Newman’s narrow and literal focus. His grayscale portrait could have used some color. Unfortunately, English-language histories of the period are hard to come by, so Newman it is. Readers are mostly on their own for discerning the Safavid dynasty’s larger significance and context, and are rarely given interpretations to agree or disagree with. This was still a profitable read, but requires a more active approach on the reader’s part than most books.

Ian Kershaw – The Global Age: Europe 1950-2017 

Ian Kershaw – The Global Age: Europe 1950-2017 

Kershaw is best known as a historian of Nazi Germany, and the author of the definitive two-volume Hitler biography. More recently, he has turned his focus to modern Europe more generally. This book concludes a two-part series. The first, gloomier half is To Hell and Back: Europe 1914-1949; this volume is rather sunnier.

Major themes early in the book include the fall of the Iron Curtain and rapid nuclear armament, along with all the tension and unease those developments caused. I was previously unaware of the scale of post-war migration to escape socialism. East Germany lost about 2 million people to West Germany during the 1950s, with an average of 2,300-2,400 people escaping daily until the Berlin Wall was finished in 1961.

As the book goes on, the reader realizes how deep the scars of 20th century’s first-half tumult run. The very reason for the formation of the European Community and its various iterations on up to the European Union was to prevent another world war. In line with thinkers from Montesquieu in the 18th century on up to Cordell Hull in the 20th, have argued, close trade and economic ties help to maintain peace. Economic integration will make war so costly that no country would dare attempt another round of Napoleonic conquest or, more to the point, a Third Reich.

This argument is deeply felt throughout the continent at a visceral level, something most American observers don’t see. The EU’s agricultural and regulatory policies have few defenders, but then those aren’t the EU’s raison d’etre. Understanding that dynamic is essential to understanding the Brexit debate and other debates about the EU’s future. It does not hinge on a socialism-vs.-markets debate. For most of the debate’s participants, it is instead about nationalism-vs.-cosmopolitanism, or more fundamentally, how best to prevent another World War II.

Even the Cold War was largely an echo of World War II. Most of the continent was overtaken by one of two forms of totalitarianism; communism just happened to be the one that lasted longer. In the post-war Stalin and Khrushchev years, the Soviet bloc was a feared nuclear enemy, requiring NATO and extensive U.S. involvement to keep it at bay.

But as time went on, Brezhnev-era political sclerosis took its toll while the more market-oriented West grew. The Soviet threat became gradually less scary and less stable. By the Gorbachev era, the thinking went from how to deal with nuclear fallout to how to deal with the political and economic fallout from communism’s coming collapse. An American reader might see the Europe-Russia relationship under Yeltsin as a little bit like the dynamic between the Griswold family and Uncle Eddie in the National Lampoon’s Vacation movies.

Kershaw is more of a political historian than a social one, so everyday life for ordinary European people is not the focus here. Music, fashion trends, and art are mostly cordoned off into separate short chapters throughout the book, roughly one per decade. If you want to know what it was like to live there during this period, go elsewhere. But Kershaw is excellent at identifying larger historical themes and seeing how they interact and play out. Kershaw is also a talented prose stylist; this book reads quickly and easily enough for the reader to forgive its 700-page length.

Kershaw also clearly lacks substantive background in economics. He shows this in his frequent use of the term “neo-liberal,” which has no coherent definition. It is nearly always used as a pejorative, though Kershaw’s usage ranges from neutral to mildly negative, further adding to the confusion. In discussing trade issues, Kershaw adheres to the balance of payments fallacy, which would flunk him out of a freshman introductory economics course.

He also does not grasp that John Maynard Keynes and Milton Friedman’s differing monetary policies share a common conception of the quantity theory of money. They part ways on the ought, not so much the is. In addition, Kershaw cites Friedman’s Capitalism and Freedom as Friedman’s statement on monetary theory. That book contains just one chapter out of thirteen on monetary issues. Friedman’s 800-page Monetary History of the United States, coauthored with Anna Schwartz, was his definitive work, the leading cause of his Nobel Prize, and is hardly obscure.

So long as one takes Kershaw’s attempts at economic theory and policy analysis as seriously as they deserve, this is an excellent survey of a neglected area of history that is impacting everything from today’s Brexit debate to trade relations with the United States to how Europe will deal with the rise of China as a major power.

U.S.-China Trade War and the 2020 Election

I just saw this now, but I was quoted in an August 13 U.S. News & World Report article on China tariffs:

“The administration has been saying otherwise, but it is good to see that they do not believe their own words,” Ryan Young, a senior fellow at the libertarian Competitive Enterprise Institute, said in a statement Tuesday. “Several rounds of China tariffs have so far failed to encourage the Chinese government to make needed reforms. Beijing has instead consistently retaliated with its own trade barriers, hurting the U.S. economy as well as its own.”

Read the whole thing here.

Inequality in History

Catherine the Great, Empress of Russia, had a personal allowance of one thirteenth of national income, per p. 292 of Robert K. Massie’s Catherine the Great: Portrait of a Woman.

By way of context, this would be equivalent to about $2.7 trillion per year in the modern United States. This annual income is more than the combined lifetime fortunes of Silicon Valley’s wealthiest entrepreneurs. While that mathematical ratio isn’t particularly interesting, from an ethical standpoint it is crucial that Catherine did not earn this income by creating value for others. She took it away from them in a zero-sum game.

Today’s entrepreneurs gain wealth by creating value for others in exchange–about 50-fold more than their own earnings, by William Nordhaus’ estimate. Rent-seeking remains a significant problem, but fortunately is less severe than in Catherine the Great’s time.

Today’s economy has much room for improvement, but reformers on all sides would benefit from taking stock of how much things have improved over the last few centuries, and why.

From the Archives: Peter Navarro on China Trade

Trump trade advisor Peter Navarro is part of the travel team for upcoming U.S.-China trade negotiations. For an idea of what he will add to the discussion, see his book The Coming China Wars. I have also written about some of his economic ideas in the past: