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Tuesday, February 13, 2018

If China Didn’t Exist Economically, We’d Have to Invent It

China is not a "threat" to the American economy. It's essential to it.

Readers who grew up in the 1970s and 80s likely remember a frequent comment from their elders about a failure to finish one’s meal: “There are millions starving in China.” Fast forward to the present and China’s still poor, but it’s exponentially better off than it once was. Thanks to an evolving embrace of economic freedom and free markets, the country once defined by starvation and death is now a crucial part of any discussion about global economic growth. 

Basic logic dictates that China’s rise from misery is a wonderful thing. Human flourishing is on its own beautiful, plus every day that the Chinese get up and go to work is a day that Americans get a raise. With the Chinese eager to consume the world’s plenty, they’re naturally producing feverishly in order to attain that same plenty. Americans gain from Chinese production and similarly benefit from their fascination with all things American. There are countless examples, but at present, there are two times more Starbucks in Shanghai than in all of New York City. 

Is all of the above a good thing? Without a doubt. Only a truly heartless human being would bemoan the growing prosperity of a country that not too long ago was the picture definition of desperation. 

The China “Problem”

Even if his characterization of liberals, populists, and conservatives is true, truth itself is not arrived at with a show of hands.

Yet there are doubters. While it’s hard to imagine he doesn’t at least somewhat cheer China’s emergence from destitution, Bard College professor Walter Russell Mead wrote in a recent op-ed that liberals, populists, and conservatives “increasingly agree” that “America must do substantially more to counter an increasingly authoritarian, mercantilist, and aggressive China.”

If Mead is to be believed, there’s a downside to China’s prosperity. Professors say the darndest things. 

Indeed, it’s seemingly been forgotten by Mead that even if his characterization of liberals, populists, and conservatives is true, truth itself is not arrived at with a show of hands. Serious thinking crucially informed by doubt is the path to knowledge, yet Mead’s op-ed gave the impression of certainty about China not just being a problem, but a problem about which most elite thinkers agree. Mead’s alleged consensus is what should have the scholar doubting his deeply-held beliefs, but that’s not the case.

About the professor’s economic analysis, he regularly references China’s “mercantilism” in the op-ed, but fails to explain what he thinks it is, or what he thinks it means. If it’s China’s decision to peg its currency to the dollar, then it should be said that China’s doing what dozens and dozens of countries similarly (and correctly) do.

China’s not gaining an advantage over the U.S. when it pegs the yuan to the dollar. The sole purpose of work is to exchange the fruits of one’s labor with other producers. Stable currencies relative to one another enable a great deal more exchange, which is once again the reason we work in the first place.

China’s not gaining an advantage over the U.S. when it pegs the yuan to the dollar as much as trade benefits everyone. Implicit in Mead’s odd analysis is that imports are harmful, particularly cheap ones. Somehow it’s bad if Americans get more for their paycheck. Walmart’s valuation would suggest Mead’s thoughts about imports are incorrect.  

But What About Jobs?

Mead then references what populists apparently see as “a threat to American jobs from unfair Chinese competition,” but fails to question that which doesn’t stand up to basic scrutiny. Jobs are a function of investment, and the more productive the worker, the higher the pay.

In that case, the entrance of the Chinese into what is a globalized workforce logically redounds to the American worker in much the same way that the tractor, car, computer, smartphone, and WiFi have redounded to that same American worker: each relentlessly destroyed old forms of work only to make us much more capable of specializing, and by extension, much more efficient.

If Mead thinks Chinese labor is “unfair,” then he must similarly feel that U.S.-created technology is “unfair.”

Without job-destroying technology, we’d still be farming while living in poverty, but thanks to technology we can increasingly spend our days pursuing work that’s commensurate with our skills while exchanging the fruits of our labor for food, clothing, and countless other goods and services.

Mead seems to think the Chinese produce for our endless wants in ways that harm some American workers unfairly but doesn’t explain why he thinks what he thinks. All he writes (without essential critique) is that organized labor interests feel that “Chinese competition undermines American wages and jobs.” Back to reality, low Chinese wages have once again freed Americans from yesterday’s work in much the same way that cars, computers, and WiFi have.

If Mead thinks Chinese labor is “unfair,” then he must similarly feel that U.S.-created technology is “unfair” for its relentless erasing of how we used to earn money. Furthermore, in his evidence-free bash of China, Mead has glossed over the basic truth that U.S. companies like Amazon, Facebook, and Uber have skyrocketed in value while aggressively reducing the cost of shopping, communication, and transportation.

If there’s low-cost competition that’s replacing certain American companies and jobs, and that’s competing for the dollars of American consumers, much of it comes from the United States. The latter helps explain why the ten most valuable companies in the world are all American. Many of those ten are in Silicon Valley, where a “cheap revolution” that rewards the American worker happily continues. 

What About Intellectual Property?

Interesting here is that in attempting to construct what he deems consensus, Mead actually tries to rope in those low-cost leaders in Silicon Valley into his China-bashing clique. He contends that “left-leaning tech lords of Silicon Valley” have “watched their intellectual property get stolen” by, you guessed it, China. Stolen IP is a favored canard of protectionists who want to cleanse what is inexcusable.

The idea that the Chinese “steal” IP is an empty one. The problem is that the argument is a weak one. Not only are Apple and Microsoft two of the biggest IP thieves (from Xerox) in commercial history (by their own admission), the fact that each company could thrive with ideas that Xerox plainly couldn’t develop is a reminder that, assuming Chinese spies are actually stealing ideas, odds are strong they don’t know what to do with them.

As is, most Silicon Valley experiments fail in the first place. After that, Valley-based movie studio head Ed Catmull (Pixar) notes in his brilliant book, Creativity, Inc., that “all of our movies suck at first.” Catmull’s point is that lesser lights will invariably wreck even the best ideas that are only great insofar as they’re matched with talent. 

The idea that the Chinese “steal” IP is an empty one; one defied by simple logic along with the market valuations placed on the Valley’s public and private companies. If Mead’s thesis were true, the valuations would be plunging. 

Mercantilism Here and There

Mead oddly writes that top government officials in China “have cemented political authority over Chinese businesses,” and that the latter “gives Beijing powerful tools to integrate economic mercantilism with geopolitical revisionism.” Implicit in that is the Soviet Union failed not because of communism, but because it lacked the talented central planners that China presently has.

Assuming Mead’s definition of mercantilism is correct, it should be said that he’s arguably pointing the finger at the wrong country. Yet China’s economic resurgence is an effect of its people and businesses shedding endless government control from the Commanding Heights, not enlisting more of it. To the extent that Chinese bureaucrats do exert commercial influence, that merely speaks to repression of what would be much greater prosperity if China’s government were less interventionist.  

As for the “mercantilism” that Mead can’t quite define, it seems he’s yet again glossed over the mercantilist qualities of America’s very own political classes. Can he have forgotten CNOOC’s thwarted attempt to acquire Unocal, the bank and carmaker bailouts of 2008, Congress’s unwillingness to shut down the Ex-Im Bank, the scrapping by President Trump of the Trans-Pacific Partnership and NAFTA, along with Treasury’s devaluation of the dollar under every 21st-century American president? Assuming Mead’s definition of mercantilism is correct, it should be said that he’s arguably pointing the finger at the wrong country. 

We Need China

If China didn’t exist, we’d have to invent it. 

Mead concludes that China is a particular “threat” since its economy “is roughly 10 times the size of Russia’s,” but that just speaks to how essential China is to rapidly-rising American prosperity. Per Adam Smith, wealth grows the more that work is divided up among increasingly specialized individuals. Given China’s massive population, the ongoing entrance of the country’s people into the workforce ensures greater and greater specialization stateside, and with that, much greater wealth. If China didn’t exist, we’d have to invent it. 

It should ultimately be said that in vainly bashing China, Mead resorted to tactics learned on the playground. While kids pursue faux victory against others by yelling that “everyone” agrees with them about something, Mead excuses his desire for more protectionism and militarism as a function of everyone who matters in his world apparently agreeing that we need both. 

Back once again to reality, we work in order to get and the Chinese endlessly produce so that we can get. We want work that increasingly matches our skills, and the entrance of the Chinese into the workforce makes stateside specialization much more likely.

As for China’s supposed military threat, it says here that a $4 trillion federal government is a much bigger menace to the American worker than are once-poor people working diligently to enter the middle class. While a show of hands doesn’t prove anything, it’s a safe wager that Americans fear the policy ideas of well-meaning academics quite a bit more than they do Chinese people working to better themselves. 

Reprinted from RealClearMarkets.

  • John Tamny is Director of the Center for Economic Freedom at FreedomWorks, a senior economic adviser to Toreador Research & Trading, and editor of RealClearMarkets.