Tariff talking points

Some thoughts from trade expert Alan Tonelson on the impending metals tariffs:

>Many countries have declared their intention to retaliate against the American tariffs with higher barriers to U.S. exports. Curiously, they are overlooking the Chinese government-subsidized overcapacity at the root of the long-time distortions in world steel and aluminum markets.

>Many of these countries want the problem tackled multilaterally. But the World Trade Organization (WTO) has failed to stem this overcapacity (or deal effectively with many other forms of Chinese trade and broader economic predation), and a G20 forum specifically addressing the steel issue has produced nothing since its founding in December, 2016.

>Although major steel-producing powers like the European Union have imposed their own steep tariffs on shipments from China, the global glut has continued. One reason may be that, since the global economic recovery took hold in 2010, according to World Steel Association data. the United States has been the major steel producer that has suffered by far the greatest loss of global production share by volume. (See this post of mine for the 2010 figures and the Steel Association’s latest report for the most recent – January, 2018 – figures.) And as of the most current World Steel Association data (2016), the United States is also the steel producer with the highest steel trade deficit by volume (21.7 million tons).

As a result, charges that American steel tariffs in particular will jeopardize the rules-based global trade system seem to be arguing that this system requires the United States to remain as the world’s dumping ground for government-subsidized steel.

Also don’t miss the follow-up post.

Who’s afraid of a trade war?

Can you be afraid of something that doesn’t exist?

Economist Ian Fletcher writes in the HuffPo:

Trade wars are mythical. They simply do not happen.

If you google “the trade war of,” you won’t find any historical examples. There was no Austro-Korean Trade War of 1638, Panamanian-Brazilian Trade War of 1953 or any others. History is devoid of them.

Please don’t respond with that old canard about the Smoot-Hawley tariff of 1930 starting a trade war and causing the Great Depression. It doesn’t stand up, as actual economic historians from Milton Friedman on the right to Paul Krugman on the left have documented. See here, and here, and here.

The Depression’s cause was monetary. The Fed allowed the money supply to balloon during the late 1920s, piling up in the stock market as a bubble. It then panicked, miscalculated, and let it collapse by a third by 1933, depriving the economy of the liquidity it needed to breathe. A wave of bank failures in 1930 spread the collapse around the country. Trade had nothing to do with it.

As for the charge that Smoot caused the Depression to spread worldwide: it was too small a change to have plausibly so large an effect. For a start, it only applied to about one-third of America’s trade: about 1.3 percent of GDP. Our average tariff on dutiable goods went from 44.6 to 53.2 percent—not a large jump. Tariffs were higher in almost every year from 1821 to 1914. Our tariff went up in 1861, 1864, 1890, and 1922 without producing global depressions, and the recessions of 1873 and 1893 managed to spread worldwide absent tariff increases.

Now, there will be much sound and fury about the decision by the US to slap tariffs on steel and aluminum imports (of 25% and 10%, respectively). China, which accounts for 2% of US steel imports, will mostly shrug:

But most analysts said the move was more of an irritant to China than anything serious at this stage.

A glut of steel from China has fueled global oversupply, but Lu Zhengwei, chief economist at Industrial Bank in Shanghai, said China had already been working to cut overcapacity in its steel industry.

Anti-dumping duties imposed by the Obama administration on China two years ago had also helped cut U.S. imports from China and protect a restructured U.S. steel industry based around mini-mills, experts said. Last year, China’s steel exports fell 30 percent […]

The uproar over trade in nineteenth century commodities is drowning out the far more important issue for the US, which is the destruction of the American edge in advanced manufacturing thanks to trade and technology transfers:

America produced every important invention in the digital age, from integrated circuits to semiconductor lasers, solar cells, flat panel displays, sensors and light-emitting diodes. Except for integrate[d] circuits, Asia now produces virtually all the world’s output of these building-blocks of the electronics industry, and China has a crash program underway to become the world’s major producer of semiconductors.

The steel tariff could be just an opening salvo, as the US prepares to take action on high-tech manufacturing. That’s when the sparks would really fly. On the other hand, there are no clear signs that this will actually happen, so we’ll just have to wait and see.

Amtrak fail

What is going on with this?

The troubling string of Amtrak crashes

An Amtrak train en route to Miami from New York collided with a freight train early Sunday morning in South Carolina, killing two individuals and adding another tragic entry to the list of recent Amtrak derailments and crashes, per the AP.

The list, per the AP: […]

Summary: 12 accidents since 2011 (including last weekend’s), killing 23 and injuring hundreds.

There was much criticism of China’s lax safety standards and official opacity after a high-speed train collision in the city of Wenzhou killed 40 people in 2011. The fact that the US has suffered more than half that number of casualties in low-speed train accidents since 2011 should occasion a certain amount of concern.

A rearguard action

John Robb offers a proposal for an imploding United States to postpone China’s rise to absolute global dominance by throwing a wrench in China’s $8 trillion “One Belt, One Road” infrastructure project:

One solution is to mount a rearguard action — a method of delaying an advancing enemy when your forces are in retreat. An action that buys time for the US to regroup and regain cohesion. The US faced a similar situation re; the Soviet Union in ’79 after the invasion of Afghanistan. In that case, support for Afghan insurgents kept the Soviets occupied while the US recovered (Carter, inflation, Iran, etc.). In this case, the rearguard action would be the disruption of China’s plans for one belt one road. This could be done inexpensively and with very little manpower or visibility. How?

  • Create groups that operate like global guerrillas. Small groups that operate independently w/o oversight. More letters of marque than special operations.
  • In the short term, disrupt the Chinese construction effort. Double and treble construction costs by delaying timeliness and forcing increased security efforts. Drive up the costs of financing. Drive away subcontractors.
  • Next, force the Chinese to physically and logically protect the entire system, from roads to ports to trains, from disruption. As my analysis of Lawrence of Arabia shows, it’s more damaging to partially disrupt a system than to completely break it. Keep up the pressure — with the ability of systems disruption to generate a million to one return on investment, this is sustainable.

As Robb points out elsewhere: “Transportation (ports, roads, trains, etc.) is a natural monopoly. Nobody has tried to build one on a global scale until Xi.”

China's One Belt One Road

The US may conclude that it has no choice but to play the spoiler to China’s grand, shining vision of a sprawling infrastructure network linking 60 countries together under the benevolent aegis of the CPC. To get an idea of how this might work, consider that insurgent groups were able to successfully bleed the US of >$200,000,000,000 in failed efforts to reconstruct Iraq.

As for “the ability of systems disruption to generate a million to one return on investment,” consider a classic example from Robb: A small insurgent attack on an oil pipeline in southeast Iraq, which cost roughly $2,000 to execute, inflicted $500 million of damage on the Iraqi government in lost oil exports (an ROI of 25 million percent).

Doesn’t the US risk more from disruption than China? No. The US doesn’t have a choice. If it doesn’t act while this system is being built (when it is the most vulnerable to disruption), the US will cede global dominance to China forever. China is creating the equivalent of “Standard Oil stranglehold” on the global economy and once established it will likely become too big/too entrenched to roll back through global guerrillas.

A military in rapid decline

The US military is tried and found wanting by the Heritage Foundation:

Since the inaugural 2015 “Index of U.S. Military Strength,” subsequent editions have described an unsettling trend, and the 2018 “Index” leaves no room for interpretation—America’s military has undoubtedly grown weaker. A quick look at some of the findings of the 2018 “Index” readily demonstrate this fact:

  • The U.S. Air Force is currently short nearly 1,000 fighter pilots, and of the service’s 32 combat-coded fighter squadrons, only four are actually ready for combat.
  • Of the U.S. Army’s 31 Brigade Combat Teams (BCTs), the building blocks of American ground combat power, only three are considered ready to “fight tonight.”
  • In 2017, the Marine Corps’ overall strength rating was downgraded to “Weak,” given declining capacity and readiness issues. This downgrade means half of the service branches (Army and Marines) are both rated “weak.”

From the full executive summary of the study:

Overall, the 2018 Index concludes that the current U.S. military force is likely capable of meeting the demands of a single major regional conflict while also attending to various presence and engagement activities but that it would be very hard-pressed to do more and certainly would be ill-equipped to handle two nearly simultaneous major regional contingencies. The limits imposed on defense spending and the programmatic volatility created by continuing resolutions, passed in lieu of formal budgets approved on schedule, have kept the military services small, aging, and under significant pressure. Essential maintenance continues to be deferred; the availability of fewer units for operational deployments increases the frequency and length of deployments; and old equipment continues to be extended while programmed replacements are either delayed or beset by developmental difficulties. […]

As currently postured, the U.S. military is only marginally able to meet the demands of defending America’s vital national interests.

That’s not very reassuring.

What did they talk about?

Would’ve been interesting to be a fly on the wall of Zhongnanhai during this particular meeting:

Steve Bannon flew to Beijing last week for a secret meeting with the second most powerful Chinese Communist party official, less than a month after the former chief White House strategist declared that America was at “economic war with China”.

According to one person in China familiar with the situation, Mr Bannon travelled to Beijing to meet Wang Qishan, the head of the Chinese Communist party’s anti-corruption campaign.

The meeting occurred at Zhongnanhai, the Chinese leadership compound, after Mr Bannon had visited Hong Kong to give a closed-door speech at a big investor conference hosted by CLSA, a Chinese state-owned brokerage and investment group.

“The Chinese reached out to Bannon before his Hong Kong speech because they wanted to ask him about economic nationalism and populist movements which was the subject of his speech,” said a second person familiar with the situation.

Mr Wang, who is seen as the second most powerful person in China after President Xi Jinping, arranged through an intermediary for a 90-minute meeting after learning that Mr Bannon was speaking on the topic, according to the second person, who stressed there was no connection to President Donald Trump’s upcoming visit to China.

He knows what’s up

Is the US losing the tech race?

There is a lot of unfounded hype about the Chinese tech industry, as I talked about here.

But none of that matters. Consumer gizmos don’t matter. Mobile apps don’t matter. What matters is this:

For the first time, China has demonstrated that it is far ahead of the United States in a critical new technology, namely quantum communications. A Chinese satellite succeeded in transmitting so-called entangled photons to earth stations. That’s the high-tech equivalent of sending a message in undeveloped photographic film: If you try to read it, the light will destroy it. The Chinese breakthrough has huge implications for cryptography, and for a host of other applications. […]

China has the world’s fast supercomputers built entirely out of Chinese components. It has the world’s largest radio telescope. It has thousands of surface-to-ship missiles that can hail down on American aircraft carriers from the stratosphere, and it has ultra-quiet diesel electric submarines that can lurk on battery power for weeks. It has satellite killer missiles. China might spend barely over $1,000 to equip foot soldiers, about 1/100th of what America spends, but it has invested massively in high-tech defense.

Between 1999 and 2013, China’s share of world high-tech exports rose from 3% to 26%, while America’s fell from 18% to only 8%.

A couple of years ago I sat across from the founder of a high-tech start-up in Shenzhen. He showed me an app on his phone with a map of the South China Sea and thousands of dots. “Each one of these is a ship. We know its location, course, speed and the condition of its motor.” How? The data is obtained by sensors mounted on cheap high-altitude balloons attached to the ground by fiber-optic cable. China can field thousands of such balloons, on the coast and on ships. If all the satellites in the sky were knocked out in a war, the U.S. would be blind–but China would still have complete coverage of its own territory and coast.

We need a Kennedy-style Moonshot or a Reagan-style Strategic Defensive Initiative to revive our high-tech industries. We don’t have high-tech companies anymore: We have a set of monopolies like Microsoft and Google that collect rents, and trade with the volatility of a Procter and Gamble. All the technologies that gave us the present economy depended on fundamental breakthroughs in physics. We no longer aim for breakthroughs. We write apps for ever-more-sophisticated toys.

Goldman is absolutely correct. The obsession with social media, the “sharing economy” and similar nonsense misses the point that the US is rapidly losing its edge in advanced technology and R&D.

If this trend is not reversed soon, it’s obvious that the US is completely finished.

Copying? Yeah, about that…

It’s a two-way street, according to a prominent Silicon Valley VC firm:

Chinese technology companies have long had a reputation of being copycats of Western peers, but U.S. companies have recently begun to return the favor, said a partner at prominent venture-capital firm Andreessen Horowitz. China’s internet titans such as Tencent Holdings Ltd. are influencing U.S. startups and majors alike, and many Chinese models are being replicated in the U.S., said Connie Chan, a partner at the Silicon Valley venture firm whose investments include Airbnb Inc. and Facebook Inc. LimeBike, a San Mateo, Calif., upstart backed by Andreessen Horowitz, adapted China’s dockless bike-sharing model for U.S. consumers, Ms. Chan said at The Wall Street Journal’s D. Live Asia conference Friday. The company’s smartphone-activated bicycles, which use designated public spaces for parking instead of docking stations, were first rolled out by Beijing-based Ofo Inc. and Beijing Mobike Technology Co. Also, Apple Inc. recently added payment services to its iMessage chat service, taking a page from Tencent’s playbook, Ms. Chan said.

The article does not provide more specifics on how “China’s internet titans such as Tencent Holdings Ltd. are influencing U.S. startups and majors alike, and many Chinese models are being replicated in the U.S.,” but Chan might have been talking about things like this:

Snapchat and Kik, the messaging services, use bar codes that look like drunken checkerboards to connect people and share information with a snap of their smartphone cameras. Facebook is working on adding the ability to hail rides and make payments within its Messenger app. Facebook and Twitter have begun live-streaming video. All of these developments have something in common: The technology was first popularized in China.

Ok, not really.

  • QR codes (barcodes you scan with your phone) were invented in Japan and first popularized there in the early 2000s, way before China.
  • Taxi-hailing apps have been around in the US and Europe since at least 2009. Didi Dache (the leading Chinese equivalent) was founded in 2012. Were there others in China before that? In any case, Uber was established enough in the US to start its international expansion in 2011, before Didi Dache even existed.
  • Compare:
    1. “Indeed, in Japan and in Finland people already buy goods via their phones.” –PCWorld, Sept. 2005
    2. “With e-payments still in the early stages of development in China…” –KPMG, Sept. 2007
  • Live-streaming as a concept has been around in the US and China for a long time. But according to Connie Chan in Sept. 2016: “…the livestreaming explosion in China really only started a year ago. When Chinese entrepreneurs saw Meerkat’s [a Silicon Valley app] explosive growth in March 2015, they sought to create livestreaming apps of their own; since then, over 150 live streaming apps have been launched in China.”

More from the NYTimes:

WeChat and Alipay, two Chinese apps, have long used the bar-codelike symbols — called QR codes — to let people pay for purchases and transfer money. Both let users hail a taxi or order a pizza without switching to another app. The video-streaming service YY.com has for years made online stars of young Chinese people posing, chatting and singing in front of video cameras at home.

Let’s face it, most of this just boils down to Chinese companies making clever improvements to imported technologies, resulting in apps that are insanely popular in the Chinese market. In some cases, notably WeChat, the Chinese “versions” are manifestly better and more functional than their foreign counterparts, so Silicon Valley is now trying to copy them.

I’m not exactly speechless with awe. To be sure, WeChat is a great app, to the point that Facebook seems to be blatantly ripping off some of its features. WeChat’s achievement, however, is to take a large number of amazing functions and integrate them into one easy-to-use, well-designed platform. It’s not like Tencent invented those functions (be they “chatbots” or mobile payments or whatever).

The term micro-innovation is probably the best description of what Chinese firms like Tencent are doing. The innovation is mainly happening on the level of product design, customer experience and business models, not technology per se. It’s noteworthy, but I’m not sure it merits the kind of breathless coverage it sometimes gets in the media.

OMG you can do it all in one app! You DON’T EVEN HAVE TO SWITCH APPS!!!

On the other hand, and this is just a hypothesis, I would guess that the most impressive mobile tech innovations in China are mostly not reported on in the West because they are too specific to the needs of Chinese users (in terms of language etc.) for the average foreigner to understand why they’re a big deal.

Going back to the top-quoted article, the people at Andreessen Horowitz make much of dockless bike-sharing. This has apparently has taken China by storm since I left, but it’s questionable whether it will catch on in the US given its various problems. We’ll see.

Thought policing by remote control

Interesting discussion on whether free speech on American campuses can withstand Chinese nationalism:

Earlier this week, Kunming native Yang Shuping, a student at the University of Maryland, gave a commencement speech extolling the “fresh air” and “free speech” she experienced while studying in the United States. Video of her speech spread on the Internet, and Yang and her family found themselves under attack by fellow Chinese students in the U.S. and a chorus of critics on Chinese social media, who argued—at times viciously—that she had betrayed her country. Yang then apologized for the speech and asked for “forgiveness from the public.” Why was she attacked? What do her speech and the reaction it engendered reveal (or obscure) about the experiences of Chinese students on American campuses, and what do they portend for the future of academic freedom in the U.S.? To what extent is Chinese nationalism reshaping university life in America?

The answer would appear to be no.


But the environmental NGOs don’t usually hesitate to confront governments. For example, Greenpeace activists scaled an oil rig in 2012 to protest Russian drilling in the Arctic Ocean. The WWF and Greenpeace even spoke out against Chinese-government subsidies that have resulted in destructive overfishing, especially off the coast of West Africa.

So why didn’t they utter a peep about China’s degradation of the South China Sea?

Knowing when to keep their mouths shut seems to be the price these organizations must pay to enjoy the good will of Beijing. It’s one thing to offer respectful criticism over Chinese fishing subsidies within the bounds that the Communist Party tolerates as a social safety valve. But it’s another matter entirely to condemn the crimes that China is committing in the South China Sea, a position that would infuriate the Politburo.