US kidnaps daughter of Huawei founder


Ok, I don’t think this is the trade war people signed up for:

Canada has arrested the chief financial officer of China’s Huawei Technologies who is facing extradition to the United States on suspicion she violated U.S. trade sanctions against Iran.

Wanzhou Meng, who is also the deputy chair of Huawei’s board and the daughter of company founder Ren Zhengfei, was arrested in Vancouver at the request of U.S. authorities.

“Wanzhou Meng was arrested in Vancouver on December 1. She is sought for extradition by the United States, and a bail hearing has been set for Friday,” Justice department spokesperson Ian McLeod said in a statement to The Globe and Mail. “As there is a publication ban in effect, we cannot provide any further detail at this time. The ban was sought by Ms. Meng.

A Canadian source with knowledge of the arrest said U.S. law enforcement authorities are alleging that Ms. Meng tried to evade the U.S. trade embargo against Iran but provided no further details.

She is being sought by federal prosecutors based in New York:

Huawei released a statement saying its CFO was arrested while changing planes in Vancouver and is facing charges in “the Eastern District of New York.”

“The company has been provided very little information regarding the charges and is not aware of any wrongdoing by Ms. Meng. The company believes the Canadian and U.S. legal systems will ultimately reach a just conclusion,” the statement said.

How is this even remotely legit? Has Meng even been to the US? I don’t see how the US has jurisdiction here.

We’ll find out more soon, but at first glance this strikes me as extremely dubious, both legally and politically. This is about as dumb as the US trying to arrest Julian Assange, but with far nastier geopolitical implications.

UPDATE: China responds:

Remarks of the Spokesperson of the Chinese Embassy in Canada on the issue of a Chinese citizen arrested by the Canadian side


At the request of the US side, the Canadian side arrested a Chinese citizen not violating any American or Canadian law. The Chinese side firmly opposes and strongly protests over such kind of actions which seriously harmed the human rights of the victim. The Chinese side has lodged stern representations with the US and Canadian side, and urged them to immediately correct the wrongdoing and restore the personal freedom of Ms. Meng Wanzhou. We will closely follow the development of the issue and take all measures to resolutely protect the legitimate rights and interests of Chinese citizens.

UPDATE: Bloomberg has a good rundown of the situation.

Analysts said it’s more likely the case proceeded separately from the trade talks as part of Trump’s efforts to step up prosecutions against Chinese companies that conduct economic espionage and violate sanctions. In October, the U.S. said Belgium extradited a Chinese intelligence official accused of stealing trade secrets from U.S. companies — an unprecedented development.

Either way, China is almost certain to view Meng’s arrest as a major escalation in the trade war that will foment fears of a wider Cold War between the world’s biggest economies. As part of trade talks, Trump has insisted that China stop providing government support to strategic sectors including artificial intelligence and robotics as part of its “Made in China 2025” policy.

This is misguided. Why would China stop providing government support for strategic sectors? Those sectors are key to China’s future competitiveness in manufacturing and technology. In effect, the US is badgering China to radically change its growth plans out of deference to its chief global rival. China will never do that, even if it agrees to do so on paper. The smart play for US would be to drop its free-trade fantasies and pursue its own industrial policy.

Tiankai’s tariff terror

Chinese ambassador Cui Tiankai

Cui Tiankai

The Chinese ambassador to the US offers a stern but misguided warning about the alleged dangers of tariffs:

Speaking to Reuters before heading to join Chinese President Xi Jinping’s delegation at the Group of 20 summit in Buenos Aires, Cui Tiankai said China and the United States had a shared responsibility to cooperate in the interests of the global economy.

Asked whether he thought hardliners in the White House were seeking to separate the closely linked U.S. and Chinese economies, Cui said he did not think it was possible or helpful to do so, adding: “I don’t know if people really realize the possible consequences – the impact, the negative impact – if there is such a decoupling.”

He drew parallels to the tariff wars of the 1930s among industrial countries, which contributed to a collapse of global trade and heightened tensions in the years before World War Two.

“The lessons of history are still there. In the last century, we had two world wars, and in between them, the Great Depression. I don’t think anybody should really try to have a repetition of history. These things should never happen again, so people have to act in a responsible way.”

The problem is that protectionism did not cause the Great Depression. Like the idea that the Great Wall is visible from space (which was told to me by a certified tour guide in Beijing), this is a myth that just won’t die.

Allow economist Ian Fletcher to explain:

Let’s start by reminding ourselves of a basic fact: the Depression’s cause was monetary. The Federal Reserve had allowed the money supply to balloon excessively during the late 1920s, piling up in the stock market as a bubble. The Fed then panicked, miscalculated, and let the money supply collapse by a third by 1933, depriving the economy of the liquidity it needed to breathe. Trade had nothing to do with it.

The Smoot-Hawley tariff was simply too small a policy change to have so large an effect as triggering a Depression. For a start, it only applied to about one-third of America’s trade: about 1.3 percent of our GDP. One point three percent! America’s average tariff on goods subject to tariff went from 44.6 to 53.2 percent—not a very big jump at all. America’s tariffs were higher in almost every year from 1821 to 1914. Our tariffs went up in 1861, 1864, 1890, and 1922 without producing global depressions, and the great recessions of 1873 and 1893 spread worldwide without needing the help of any tariff increases. […]

World trade did indeed decline, but this was due to the Depression itself, not higher American tariffs. This is no surprise, as declines in the values of the currencies of America’s major trading partners wiped away much of the effect of the tariff anyway.

Fletcher quotes economic historian William Bernstein as follows:

Between 1929 and 1932, real GDP fell 17 percent worldwide, and by 26 percent in the United States, but most economic historians now believe that only a miniscule part of that huge loss of both world GDP and the United States’ GDP can be ascribed to the tariff wars. .. At the time of Smoot-Hawley’s passage, trade volume accounted for only about 9 percent of world economic output. Had all international trade been eliminated, and had no domestic use for the previously exported goods been found, world GDP would have fallen by the same amount — 9 percent. Between 1930 and 1933, worldwide trade volume fell off by one-third to one-half. Depending on how the falloff is measured, this computes to 3 to 5 percent of world GDP, and these losses were partially made up by more expensive domestic goods. Thus, the damage done could not possibly have exceeded 1 or 2 percent of world GDP — nowhere near the 17 percent falloff seen during the Great Depression…

A defense of economic nationalism

Darren Beattie provided (in 2017) a much-needed defense of the ideological foundations of economic nationalism:

It is entirely possible therefore to support tariffs, immigration restrictions, and various other restrictions on the free market in a manner that benefits the American worker and that is also consistent with the highest respect for individual freedom, enterprise, self-reliance, and other virtues of capitalism.

He makes a great point about the Cold War context which spawned free-trade ideology:

The Soviets who posed an existential geopolitical threat to the United States embraced a generally classical Marxist philosophy that was both an economic and a moral doctrine.

Free-trade doctrine provided an ideological foil to an expansionist Marxist regime. From that standpoint, it has served its purpose.

But today’s threats of concentrated power do not seem to conform to the “government dangerous, private sector benign” picture as easily as they may have during the Cold War. This is because 1) the distinction between public and private seems to no longer apply to many of the most powerful sectors of the economy, and 2) new forms of technology have enabled equally dangerous concentrations of power to accrue in the private sector (think of Silicon Valley). So, with the end of the Cold War, we must reevaluate the relationship between economics and liberty.

Furthermore, several structural features in the economy have accelerated since the end of the Cold War that severely threaten the middle class, whose robust health is often considered indispensable to a culture of individual freedom.

It is also indispensable to political stability.

Beattie is right that the public discourse is very superficial on this issue, as I pointed out with reference to trade policy in my post on Ian Fletcher’s book Free Trade Doesn’t Work: What Should Replace It and Why. In fairness, trade policy is boring and makes for poor clickbait. Also, most pundits and politicians have absolutely no clue about economics. Fortunately, this article is free of economic jargon and just addresses the ideological assumptions underpinning most people’s thinking on the trade topic.

A new Manhattan Project

US Army tent fabric

Do you ever get the feeling that the US will sleepwalk into a war with a great-power rival and lose?

The U.S. military has a tent problem.

The only domestic supplier of the specialist polyester fibre used in its tents has gone out of business with potential “significant impact to multiple tent and fabric systems”, according to a multi-agency assessment of weaknesses in the U.S. defence complex.

Tents are just one of nearly 300 strategic frailties identified in the country’s military supply chains. (“Assessing and Strengthening the Manufacturing and Defense Supply Chain Resiliency of the United States”, September 2018)

The list ranges from the cold-rolled aluminium used for armour plating through submarine shaft maintenance to the silicon power switches used in missile systems. And that’s just the handful of examples that made it into the declassified section of the report.

“All facets of the manufacturing and defense industrial base are currently under threat, at a time when strategic competitors and revisionist powers appear to be growing in strength and capability,” the report states.

Topping the list of “strategic competitors” is China.

The DoD report (PDF) thunders:

“China’s non-market distortions to the economic playing field must end or the U.S. will risk losing the technology overmatch and industrial capabilities that have enabled and empowered our military dominance.”

True, but why is this up to China? Instead of whining about the unfairness of it all, shouldn’t the US be proactively defending the supply chain for critical technologies? How hard would it be to jump-start (or restart) manufacturing of key technologies in the US? Bring it ALL back under the aegis of a new Manhattan Project for the 21st century. Incidentally, this would also help to reduce the trade deficit and create manufacturing jobs in the US.

The Trump administration has just begun to do this with steel and aluminum imports, invoking national security as a justification for tariffs. Back to Reuters:

Beneath the apparent chaos of U.S. trade policy lies a comprehensive rethink of the country’s industrial-military policy, specifically its raw material supply chains and its manufacturing sector.

Mending fences

The first state visit by a Japanese leader to China in seven years suggest that the two countries, which allegedly have deep-seated mutual animosity, are in the process of strengthening ties:

What Happened: China and Japan signed multiple agreements intended to strengthen bilateral ties during the first day of Japanese Prime Minister Shinzo Abe’s official visit to China, the South China Morning Post reported Oct. 26. Both countries will cooperate on roughly 50 third-country infrastructure projects and agreed to resume currency swaps. Additionally, they will further discuss joint East China Sea energy cooperation and China’s lifting of food import restrictions following the nuclear disaster at Fukushima.

Why It Matters: Both China and Japan are recalibrating their strategies toward each other as they look to hedge against uncertainties as well as increasing trade protectionism from the United States.

This makes sense; as the neoliberal world order falls apart, regional trade blocs will emerge and solidify, and Japan and China, with their proximity and shared Confucian heritage, can be expected to align more closely.

Stratfor argues, however, that any Sino-Japanese rapprochement is complicated by China’s maritime ambitions, which clash with Japan’s interests as an island nation. Japan is also expanding its activities in the South China Sea, recently sending a submarine to conduct drills there for the first time. The duo may need to remain frenemies for a while.

The beatings will continue until morale improves

China port source BBC

From Axios, we learn that the Sino-American trade relationship will remain… strained… for a while:

President Trump has no intention of easing his tariffs on China, according to three sources with knowledge of his private conversations. Instead, these sources say he wants Chinese leaders to feel more pain from his tariffs — which he believes need more time to fully kick in.

What we’re hearing: “He wants them to suffer more” from tariffs on $200 billion of Chinese goods, said a source with direct knowledge of Trump’s thinking, and the president believes the longer his tariffs last, the more leverage he’ll have. […]

Behind the scenes: Trump has privately boasted that his China tariffs have driven down the country’s stock market. Experts say the trade war has hurt market sentiment, but the stock market has never been a reliable barometer of Chinese economic strength.

As 罗臻 points out:

A-shares are not a good measure of Chinese economic sentiment, it’s housing. In order to crack the housing market, however, Trump would need to inflict more pain for longer, to the point where China can’t contain the fallout and home prices start sinking 1 or 2 percent per month.

Trump is pursuing the right strategy for his intentions, even if he isn’t watching the right signals. Or maybe the stock market comments are for public (and China’s) consumption.

The Navarro effect

There’s no such thing as a free lunch — anymore:

President Donald Trump announced that the US would pull out of an obscure 144-year-old postal treaty, in what looks to be his latest direct shot at China.

The Trump administration announced Wednesday that the US would leave the the Universal Postal Union treaty, an agreement from 1874 that helps to standardize postal rules among the international community.

The interesting aspect of the UPU decision is a more recent addition to the agreement. The UPU, which is now under the United Nations’ purview, sets rates that national postal services pay to ship goods internationally. Under a deal reached in 1969, developing countries can ship smaller items at lower rates than developed nations like the US. The provision is designed to help facilitate exports from smaller countries to give a boost to growing economies.

But the provision also allows Chinese producers to ship items to the US at significantly low rates even compared to some US domestic shipping rates. The Trump administration says many companies even offer free shipping to the US from China because of these lower rates — and as a result, roughly 60% of inbound shipping to the US comes from China.

Trump’s trade adviser Peter Navarro appears to be the instigator of this move.

Trade war drives CPC rifts

Reports are surfacing that the escalating trade conflict with the US is driving a wedge between elements of the Chinese leadership:

BEIJING (Reuters) – A growing trade war with the United States is causing rifts within China’s Communist Party, with some critics saying that an overly nationalistic Chinese stance may have hardened the U.S. position, according to four sources close to the government.

President Xi Jinping still has a firm grip on power, but an unusual surge of criticism about economic policy and how the government has handled the trade war has revealed rare cracks in the ruling Communist Party.

A backlash is being felt at the highest levels of the government, possibly hitting a close aide to Xi, his ideology chief and strategist Wang Huning, according to two sources familiar with discussions in leadership circles.

A prominent and influential academic whose views have found favor in some party quarters has also come under attack for his strident views on Chinese power.

There are hints — which, given the totally opaque nature of elite Chinese politics, we should take with a dollop of salt — that the factional tensions could even be weakening the “core leader’s” grip on power:

China, for all its problems, seems set on an inexorable rise to superpower status to rival the US. On multiple benchmarks – economic, technological, military and diplomatic – Beijing is making rapid advances.

We are a long way, in other words, from peak China. But that begs another question which has been sweeping Beijing over the northern summer – whether we are now witnessing peak Xi Jinping.

In recent weeks, the signs of a nascent pushback against Xi’s absolute power have started to emerge. Some are cryptic, given the nature of Chinese politics, contained in coyly worded postings on social media. Some are the stuff of rumour, or back alley news, as the Chinese call such information, which flourishes in the absence of a free press.

More background on CPC factional disputes.

Daily links: Fentanyl and state failure

China is the main source of the insanely potent synthetic opioid fentanyl in the US, which killed more than 27,000 people in the 12 months through November 2017. “The biggest difficulty China faces in opioid control is that such drugs are in enormous demand in the US,” an official of China’s equivalent of the DEA is quoted as saying. The Opium Wars in reverse?

The trade deficit has sliced $457.2 billion off the US economy’s cumulative inflation-adjusted growth, or 14.33%, from the start of the recovery in mid-2009 through the first quarter of 2018, according to last week’s revised GDP figures. But we are told that trade deficits don’t matter.

Britain is probably not going to run out of food in the event of a “no deal” Brexit. Nevertheless, it’s interesting to note that the British government cannot guarantee food security for its people, and seemingly expects the food industry to take all the responsibility for stockpiling goods. Meanwhile, the food industry has absolutely no plans to do this.

A simulation models the release and spread of a moderately lethal and moderately contagious virus. It kills off 150 million people over the course of 20 months, including 15 to 20 million people in the US.

Over 100,000 Russians marched last month in the city of Yekaterinburg to mark the centennial of the slaughter of the Romanov imperial family by rabid Communists.

Duterte publicly destroys more than A$8 million worth of contraband luxury cars in the Philippines:

Book review: Free Trade Doesn’t Work

In April 2011, years before the problematic aspects of US trade policy had exploded into the national political conversation, I reviewed economist Ian Fletcher’s book laying out a powerful intellectual case against free trade. Given the timeliness of the topic and the very superficial level of most punditry on the trade question, I thought it might be useful to republish my review (slightly edited) below.

Everyone loves free trade. Economists, editorial boards, and politicians join in singing its praises. That free trade benefits all nations is an article of faith for America’s ruling elite. Protectionism is regarded as self-evidently stupid and evil; it is sufficient to call something “protectionist” to discredit it.

The belief in free trade is, in short, a sacred cow. It is unchallengeable in the realm of American politics and punditry because the economic case for it is considered airtight. Facts about industrial decline, job losses, and mounting debt are irrelevant. Common sense is irrelevant. Economic theory tells us that free trade benefits the US overall; therefore, no matter how high the costs of free trade, we can be sure that our economy is somehow reaping benefits that exceed the costs, and that any form of protectionism will necessarily do us more harm than good.

Ian Fletcher, Senior Economist of the Coalition for a Prosperous America, explains why this isn’t so. His book Free Trade Doesn’t Work: What Should Replace It and Why is a methodical dismantling of the assumptions, arguments, and popular beliefs that undergird free trade. In lucid prose that even an economic ignoramus (like me) can understand, Fletcher lays out the arguments against free trade and in favor of a flat tariff.

Dissecting Ricardo

The intellectual core of the case for free trade is, of course, David Ricardo’s 200-year-old theory of comparative advantage, which holds that (in Fletcher’s words): “If we could produce something more valuable with the resources we currently use to produce some product, then we should import that product, free up those resources, and produce that more valuable thing instead.” All well and good — but the theory depends on a host of dubious assumptions which simply do not hold true in the real world. Those assumptions are that:

  1. Trade is sustainable
  2. There are no externalities
  3. Factors of production move easily between industries
  4. Trade does not raise income inequality
  5. Capital is not internationally mobile
  6. Short-term efficiency causes long-term growth
  7. Trade does not induce adverse productivity growth abroad
  8. There are no scale economies

All of these assumptions are false at least some of the time. Assumption (2), for example, ignores both the negative externality of environmental damage and the positive externality of technological spillover (i.e. free trade wipes out industries that could have spawned new technologies and new industries). Assumption (5) is necessary for free trade to be a guaranteed win-win, rather than a potentially win-lose, proposition; the theory of comparative advantage says that market forces drive all factors of production to their best uses in the economy, but assumes that these factors cannot be driven right out of the economy to other countries. Of course, they can be. Capital is highly internationally mobile, and while this benefits the world economy as a whole, it certainly can hurt individual countries.

Assumption (1) falls apart when a “decadent” nation, which prefers short-term consumption, trades freely with a “miser” nation, which prefers long-term consumption. The decadent nation buys all the imports it can get, paying for them with a combination of exports, debt, and the sale of assets. The decadent nation is happy because it gets to consume more right now; the miser nation is happy because it gets to invest more and accumulate wealth. In the short run, both nations are “better off”; in economic terms, they have “maximized their utility.” Eventually, however, the decadent nation will exhaust its ability to assume debt and sell assets, leaving it poorer than it would have been without free trade. Trade restraints for this nation would be like restrictions on an heir’s squandering his inheritance.

And so on. Comparative advantage is, in short, a deeply flawed and inadequate picture of reality. Insofar as its assumptions hold true, it’s useful. “Fairly open trade, most of the time, is a good thing,” Fletcher concludes. But what about when it’s not?

Are tariffs the answer?

Neither the Ricardian view that free trade is always good, nor the pessimistic view that international trade is a zero-sum game, war by other means, is correct. The truth lies in some synthesis of these two extremes. The work of economists Ralph Gomory and William Baumol, set forth in their 2000 book Global Trade and Conflicting National Interests, tries to provide that synthesis. Gomory and Baumol observe that, contrary to Ricardo’s model, countries that get a head start in certain industries can lock other, potentially more-efficient, countries out of those industries due to the effects of economies of scale. Therefore, competition is imperfect and free trade outcomes are not always optimal.

Gomory and Baumol’s analysis suggests that international trade is sometimes win-win, and sometimes win-lose. Fletcher explains the policy implications of their work thusly: “Basically…a wise nation will willingly let other nations have their share of the world’s industrial base, but will try to grab the best industries for itself. Then it will sit back (here’s where laissez faire plays its legitimate role) and let the rest of the world compete…to produce for it the things it doesn’t want to produce at home.”

Fletcher’s preferred policy is the Natural Strategic Tariff — a flat tariff of around 30% on all US imports. It is “strategic” because, due to the different sensitives and responses of industries to import competition, it tends to cause the relocation of “good” industries like high-tech manufacturing to the US, but not “bad” industries like textiles. It works — for the US, not for other countries — because it interacts with the existing competitive strengths of the US economy. It is relatively politics-proof because it does not single out any industries for protection. It is, overall, an elegant and pragmatic response to the problem of America’s free-trade-induced industrial decline.

An avoidable disaster

If you have any doubts as to the existence of the problem, consider:

  • US imports are 17% of GDP while the entire US manufacturing sector is only 11.5% — meaning the US could export its entire manufacturing sector and still not balance its trade.
  • The US has run a deficit in high technology since 2002.
  • Every few years there emerges an entire new industry which has no strong American players (e.g. hybrid cars).
  • The US invented photovoltaic cells, but is now fifth behind Japan, China, Germany, and Taiwan in their production.
  • In 2007, the US was a net importer of spacecraft.
  • American companies had 90% of the world market in semiconductors in 1980, but have less than 10% today.
  • The printed circuit board industry is on its last legs in the US. (From Manufacturing and Technology News: “There isn’t one single vertically-integrated North American shop that could independently supply a circuit board.”)

Says Fletcher: “Losing positions in key technologies means that whatever brilliant innovations Americans may dream up in small start-up companies in future, large-scale commercialization of those innovations will increasingly take place abroad.”

The more one looks at the actual history of trade, the more unnecessary and avoidable this outcome seems. Contrary to popular belief, American policy was basically protectionist from Independence until after World War II. All four presidents on Mount Rushmore were protectionists, as Fletcher points out. So was Alexander Hamilton, who worried that Britain’s lead in manufacturing would remain entrenched, relegating America to banana republic status, and proposed tariffs, import and export bans, and subsidies for exports and key innovations. From 1812 until 1846, America had high tariffs (up to 40%). A brief episode of free trade from 1846 to 1861 was followed by more tariffs. From 1865 to 1932 — when America’s economic performance surpassed the rest of the world by the greatest margin — tariffs remained high. The overwhelming consensus in favor of protectionism did not end until free trader Woodrow Wilson reduced tariffs in 1913. Then Congress pushed them back up, making the Roaring Twenties a tariff era. Under FDR in 1930s, tariffs came down again — and stayed down. JFK’s Trade Expansion Act of 1962 marked America’s decisive turn against protectionism; America has not run a trade surplus since 1975.

Tariffs, then, apparently worked for most of America’s history. But didn’t the Smoot-Hawley tariff of 1930 cause the Great Depression (and even World War II)? Nonsense, according to Fletcher. Smoot-Hawley applied to about one-third of America’s trade — a mere 1.3% of GDP. It increased duties, on average, from 44.6% to 53.2%. (“Tariffs as a percentage of imports were higher in almost every year from 1821 to 1914.”) And as for the myth of a death spiral of retaliation by foreign nations, the State Department reported in 1931 that “With the exception of discriminations in France, the extent of discrimination against American commerce is very slight.” Says Fletcher: “Smoot was a moderate and routine adjustment to America’s trade regime, not a major shock to the world trading system.”

Free trade doesn’t exist

So much for America. Is free trade good, at least, for the rest of the world? Not really, argues Fletcher. Opulent Japan and South Korea are highly protectionist. If industrial policy and neo-mercantilism are somehow crippling them, it’s hard to imagine what these countries would look like with free trade (the Jetsons, perhaps?). The developing world is not well-served by free trade either. Rapidly-growing China, whose government owns 30% of the country’s industry and systematically manipulates foreign trade to increase economic growth, arguably would not be better off embracing laissez-faire. Trade liberalization has either hurt or not helped most other developing nations.

Free trade tends to mean that the industrial sectors of developing nations either “make it to the big time” and become globally competitive, or else get killed off entirely by imports, leaving nothing but agriculture and raw materials extraction, dead-end sectors which tend not to grow very fast. Free trade eliminates the protected middle ground for economies, like Mongolia or Peru, which don’t have globally competitive industrial sectors but were still better off having such sectors, albeit inefficient ones, than not having them at all.

For all the scorn we heap upon it, protectionism works, a fact grasped by our more clear-sighted trading partners. That is why embracing free trade is not even an option for America. International trade is a rigged game, and if America refuses to protect its economic interests, US trade policy will simply be dictated by the governments of Beijing, Tokyo, Brussels, and so forth. Fortunately, the American public is starting to wake up to this reality and vote accordingly, and Fletcher predicts that the free trade consensus will fall apart over the next few years.

I’ve barely scratched the surface of Ian Fletcher’s important and hugely informative book. Anyone interested in trade policy, even (or especially) supporters of free trade, should check it out. Since I do not wish to be an example of the saying that a little knowledge is a dangerous thing, I welcome correction on any of the points made above.