Tuesday, July 10, 2007

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Clinton and Obama officially scare the crap out of me

About a month ago I was talking with a big-name economist who was advising a couple of presidential campaigns. I've differed with this person on a few policy issues, but I'd be very comfortable with this person in a position of authority.

I asked him which candidates on the Democratic side would be able to pursue a responsible trade policy, and he replied, without hesitation, "Clinton and Obama."

After reading Eoin Callan's Financial Times story, I'm afraid I can't believe that anymore:

Hillary Clinton and Barack Obama, the frontrunners for the Democratic presidential nomination, have agreed to co-sponsor legislation that would levy punitive duties on Chinese goods to cajole Beijing into revaluing its currency, according to aides....

Brian Pomper, a former Democratic adviser, said China was becoming a proxy for US political anxiety about globalisation and that sponsorship of the bill was the most combative position yet taken towards Beijing by the two candidates.

Sandra Polaski, a trade analyst at the Carnegie Endowment, said US politicians were making China a scapegoat in the face of widespread economic insecurity among voters. “Opinion polls consistently show the American public has a balanced view of China. It is campaigning politicians who are turning the heat on Beijing,” she said.

Brad DeLong makes the point better than I:
Of course, then the candidates will be attacking US consumers (who will pay higher prices for imports), workers in the construction industry, US borrowers (who will then pay higher interest rates to domestic and foreign creditors), and US homeowners (who will see the higher interest rates push down housing prices and reduce their equity). The net short-run effect is surely a minus--it's not as though we desperately need to swap construction jobs for manufacturing jobs right now, and we surely don't need a more-rapid decline in housing prices right now.

In the long run of three to five years, yes: The renminbi needs to become worth a lot more (primarily for China's sake). Pressure on China to adopt better policies is helpful (provided we don't shoot ourselves in the foot). But this strikes me as a classic threat to shoot ourselves in the foot: it is not a good policy move on either Obama's or Rodham Clinton's part.

This prompts Matt Yglesias to ask the following:
Now where I tend to lose the plot is this. If mainstream economists like Brad think it's a bad idea to use threats of tariffs to push China into changing its exchange-rate policies, how come the economics mainstream seems to have so few complaints about the fact that it's completely normal for US trade negotiators to use exactly this sort of leverage to try to get other countries to change the intellectual properties policies or to privatize their water systems or what have you? Why is the threat to shoot ourselves in the foot okay when made on behalf of pharmaceutical companies and movie studios, but not when made on behalf of import-competing manufacturers? Often when I see this argument made, I feel like the point is -- aha! hypocrites! you should support our China bill after all! -- but I really do think Brad's right, this is a bad bill. But by the same token, the people who complain about this sort of thing ought to complain about the other sort of thing as well.
To answer Matt's question to the best of my ability, you have to realize the following:
1) All trade sanctions, when imposed, are welfare-reducing. The hope in deploying them is that they will be sufficiently painful to the targeted country that its government will acquiesce in a prompt manner -- i.e., before they really bite.

2) The kind of sanctions that Matt discusses -- "leverage to try to get other countries to change the intellectual properties policies or to privatize their water systems or what have you" -- have actually worked pretty well. Even better, they've worked at the threat stage, so the costs of sanctions imposition have not been incurred. They've worked remarkably well when the WTO authorizes them, which they do if a dispute resolution panel decides that a country is imposing a protectionist measure. So Clinton and Obama aren't completely crazy to think this tactic could be applied towards China.

3) On the whole, this tactic has worked because the U.S. has a really big market, and the countries we've targeted for sanctions have been much smaler, highly dependent upon the U.S. market, and don't have more than a trillion dollars in U.S. debt lying around.

4) China is a pretty big economy, and they do have that trillion dollars. If the regime is facing any domestic pressure, it's a nationilist impulse to say "f#@k you" to the United States. Furthermore, we're asking them to do something far more significant than enforce intellectual property rights in some sectors. We're asking them to f$%k with what's been their primary engine for growth for the past two years. DeLong is correct that this engine is unsustainable in the long run, but -- and this is the key point -- they're not going to acquiesce to this threat anytime soon. If anything, nationalist sentiment will make it less likely that Beijing would acquiesce after sanctions were imposed than at the present moment.

Clinton and Obama are willing to screw over the American consumer for a self-defeating measure. Both of them should know better.

UPDATE: Dani Rodrik blogs an intriguing proposal on how to remedy China's undervalued currency. That is to say, it would be intriguing if the policy could be executed in a vacuum with zero political externalities. I don't think it can actually be implemented.

ANOTHER UPDATE: Several commentators have suggested that a) Clinton and Obama are merely posturing; and b) Republicans are just as bad.

My response to (a) is that it stops being posturing when you're co-sponsoring legislation that has a decent chance of passing. My response to (b) is a free round of tu quoque for everyone.

posted by Dan on 07.10.07 at 03:06 PM


Dan, I'm not an economist or an international-relations expert. I'm a layman by pretty much any definition. So all these discussions about China kind of go over my head, as they seem to assume some knowledge I don't have.

Where is a good place to go to get a layman's explanation on what exactly the situation with China is? i.e., what is China doing that we don't like? Why is China doing it? What is it we want them to do, and why? What happens if they don't? etc.

- Alaska Jack

posted by: Alaska Jack on 07.10.07 at 03:06 PM [permalink]

Setting aside some of the other issues for a moment, consider this: The Chinese exchange rate policy makes their goods artificially competitive. The bill proposes to introduce measures to raise the price of Chinese goods through tariffs. It, in other words, propose a remedy to an existing distortion in free trade. What's the big deal? Is anything that increases consumer costs *regardless* of the other effects bad? Are cheap consumer goods the only legitimate economic goal of governmental policy?

posted by: Dan Nexon on 07.10.07 at 03:06 PM [permalink]

Two Comments:

-First to Dan Nexon: The idea that the U.S. balance of payments can be solved through an adjustment of the Renminbi is a bit too simple-minded. I encourage you to read some of Nouriel Roubini/Brad Setser on the topic. Essentially, an adjustment in the currency wont help until we reduce import demand in our country. Adjusting the currency may have the unintended effect of shifting imports to other East Asian countries who have similar pegs. Moreover, until the markets adjust to the change in prices, we will simply be spending more for our imports (known as the "J" curve- I study IR, so if anyone reads this and finds something wrong, please correct it). Lastly, the trade deficit in and of itself may not be a problem if high growth continues. Our country needs to focus on reducing the budget deficit, which no candidate has yet addressed.

-Second, to Mr. Drezner. I understand your fears regarding the democrats trade policy. Support for the CAFTA was abominable, who knows how the S. Korea trade agreement will turn out. Both Obama and Clinton supported the Oman-US FTA. Clinton also supported the Singapore and Chile FTA. So there are some bright moments.

If we look back at this President's rhetoric on free trade at the time of the election in 2000, we find similar pandering to pick up votes. Particularly, the President promised to slap steel tariffs to pick up votes in states like West Virginia, handing him the election and defied WTO law. The President's policy tried to save an ever-failing industry. Like all protectionist measures in the U.S., the tariffs simply postponed necessary adjustments that our manufacturing industries need to make (our Auto industry is a shining example)

Why should we see this as indicative of their views rather than simply political opportunity?

posted by: Dave Quartner on 07.10.07 at 03:06 PM [permalink]

Imposition of any trade sanctions would accelerate the pace of Asian economic integration and will most likely lead to a creation of a bond market to trade excess reserves. The question is - how would this suit American interests?

posted by: Aruna Urs on 07.10.07 at 03:06 PM [permalink]

Do we really believe that Clinton or Obama could (or would) accomplish implementation of such sanctions against China if elected? As the post stated, "Brian Pomper, a former Democratic adviser, said China was becoming a proxy for US political anxiety about globalisation. . ." It is perfectly plausible to assume that it doesn't matter to Clinton or Obama whether such legislation passes of fails. They can say that they sponsored it, and that is what matters most in the campaign. It is hard to imagine that trade sanctions against China in order to revalue the renminbi would be a pillar in the presidency of Obama or Clinton. They are just doing now anything they can to get elected, including capitalizing on "political anxiety about globalization" by using tough talk and creating the perception of tough action.

posted by: Lucas Bittick on 07.10.07 at 03:06 PM [permalink]

Rhetoric spouted to win primary votes is not de facto policy. Respected bases on both sides of the aisle have become so radicalized that it now seems candidates race towards gibberish in wild attempts to garner sympathy from voters. You're seriously suggesting Dan that Clinton and the other guy doing a little China baiting that's obviously designed to secure votes in early primaries scares you more than, oh, let's say Rudy claiming he's uniquely qualified to fight terrorism because he stood on some rubble and talked tough? C'mon.

posted by: Guff Nolan on 07.10.07 at 03:06 PM [permalink]

Dan, you're being naive, or biased. I hope the former. If you seriously think there's any difference among the frontline candidates with regard to China, you need to look more closely. Of course when a country has a massive trade surplus over the US, based in small part on slave labor and in large part on currency manipulation, that country is going to be a fat juicy target no matter what. Sure, we're going to have 18 months of nothing while this crooked disaster of an administration remains in office, more concerned with protecting itself from the law than with protecting the national interest, but do you really think politicians of either party are going to sit back and do nothing now that we're the largest foreign debtor in the world? And by the way, the Republican Party has gone completely nativist to a far greater extent even than the Democrats. At least the Dems just want to send the goods back to where they came from; the Republicans want to send the people back too.

Your mythical "American consumer" may also support this attack on China. Millions of them, including I suspect a disproportionate number of non-ideologically-committed swing voters given where they are, have been forced to take lower paying jobs because of outsourcing, and they're not happy about it. You evidently don't remember the powerful "buy American" movement of the 1980s and early 1990s, or people taking baseball bats to imported cars.

It's all very easy to read from an academic textbook. It has next to no connection with what is actually happening politically on the ground.

posted by: db on 07.10.07 at 03:06 PM [permalink]

I agree with db above - because of cheap foreign labor I now have to work three jobs just to match former income from one, my quality of life is shot all to hell - how many of your academic buddies Dan are working shitty part time jobs in order to pay the bills? It's all very nice to talk theory and I'm not even going to content that the theories are wrong - but the guys in the trenches are the ones getting killed and as Rummy use to like to say about another war - we get a vote. Beware the insurgency of the disenfranchised working stiff.

posted by: working stiff on 07.10.07 at 03:06 PM [permalink]

If the freer traders are not careful Congress will be filled with soul mates of Sherrod Brown or worse.

The workers who are losing their jobs, homes, health insurance, pensions and etc. are not all that impressed with how fast the Chinese economy is growing, nor do cheap prices on cheap merchandise make up the difference.

With Chapter 11 being the newest route to dump unions and offshore jobs, look for the populist revolt to grow.

Even Krugman, the Yoda master of free trade, has figured out that workers are getting screwed.

posted by: save_the_rustbelt on 07.10.07 at 03:06 PM [permalink]

Wow, a lot of these comments got vigorous. I am not sure what Prof. Drezner thinks, but I would imagine that many of the sentiments suggested in these comments he would agree with, regarding the "workers in the trenches" in the global economy.

The warnings of economists regarding protectionism are so powerful because politicians can easily use protectionist rhetoric to pick up votes, rather than making the tough choices necessary for reform. I would remind the commentators that free trade and reform are not mutually exclusive. Health Care and Social Security reform are at the top of the list, in protecting both workers and national business to global competition. Increased investment in education is also necessary.

My hunch is that Prof. Drezner was commenting on one aspect of a very complex issue.

Regarding outsourcing, the majority of jobs lost in the United States is not due to movement overseas, but rather from domestic issues like downsizing.

It is perhaps a little to easy to say that decreased pay is due to Chinese imports as well. That logic, in simple form, say while you may earn less, your prices are reduced as well, leaving you in overall parity

posted by: Dave Quartner on 07.10.07 at 03:06 PM [permalink]

Working Stiff,

Is it possible that you are in some way responsible for what has happened in your career? Or, is it all the fault of "foreginers"? It's just that one seems easier to blame than the other...

posted by: Working Too, but Limber on 07.10.07 at 03:06 PM [permalink]

Working Stiff,

Is it possible that you are in some way responsible for what has happened in your career? Or, is it all the fault of "foreginers"? It's just that one seems easier to blame than the other...

posted by: Working Too, but Limber on 07.10.07 at 03:06 PM [permalink]

Why would it be welfare-reducing to introduce a policy measure - in this case a tariff on Chinese imports - in order to compensate for a pre-existing market imperfection (undervaluation of the renminbi)? It might reduce welfare in the United States, but wouldn't it also cause a theroetically more efficient reallocation of resources in China?

OK, now departing from fantasyland, doesn't the argument presented above by Drezner devolve to: it's sometimes okay to use threats against some countries because those countries are responsible and therefore the threat can be effective, but it's not okay to use them against China because China is irresponsible and the threats don't work?

I do recognize the logic of this, but it also seems to reward good behavior. To use the type of home-family based analogy that I enjoy so much from this blog's creator, it's as if a parent had two children who were misbehaving, but the parent only sanctioned/punished/restrained the one who would moderate his/her behavior and let the one who was determined to misbehave to continue misbehaving. Actually, as a parent I have often been guilty of this because it's convenient, but it's not exactly a morally or theroetically justifiable practice.

posted by: Gene on 07.10.07 at 03:06 PM [permalink]

If such a policy is implemented and China refuses to acquiesce, then the government will be collecting a lot of taxes and not borrowing as much. Imports will be more expensive, as in fact they should be, and we will have increased our savings rate. It is unlikely even interest rates would change. What will China's response be? Import less? Quel difference! Much ado about nothing.

posted by: Lord on 07.10.07 at 03:06 PM [permalink]


OK, now departing from fantasyland, doesn't the argument presented above by Drezner devolve to: it's sometimes okay to use threats against some countries because those countries are responsible and therefore the threat can be effective, but it's not okay to use them against China because China is irresponsible and the threats don't work?

If I understand this post correctly, D. Drezner is saying that threatening smaller countries might be okay and might work sometimes because these countries have no alternative. It´s different with China because China is a large country / economy. Not to mention that China got around a trillion dollars in their foreign reserve. If the USA annoy them, they might retaliate. Is that blackmail?

posted by: Detlef on 07.10.07 at 03:06 PM [permalink]

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