Scott Sumner advises the Chinese to call Trump’s bet because:
- China has a big economy.
- American consumers are impatient.
- The Chinese people are more accustomed to hardship than we are.
He may be right. However, it reminds me of something me auld mither once said. She said that the American soldiers fared better than the Brits during World War II because the Brits were more willing to endure great hardships. Americans would endure them—they fought back.
I think the wisdom of the advice depends on the actual state of the Chinese economy—something we have very nearly no way of knowing, the political situation in China—again, something we have very nearly no way of knowing, and the length of time that the stand-off continues.
If the Chinese economy is much more precarious than Dr. Sumner seems to think it is, calling Trump’s bet could be disastrous for them. If the political position of the Chinese leadership is more precarious than Dr. Sumner seems to think its, calling Trump’s bet could be disastrous for them.
If prices rise by just a few cents, the Chinese competitive advantage evaporates. In a trade war time is not on their side. If prices rise just a bit and the trade war goes on for long enough, you’ll see capital investment in the U. S. in manufacturing, particularly “lights out” manufacturing. If that happens China’s advantage goes away permanently.
As a consumer, I was curious what I might be impatient about. He says “consumers showing up at Walmart or Target and finding no Chinese goods—the shelves would be almost empty.”
According to the U.S. government:
“U.S. goods imports from China totaled $462.6 billion in 2016, down 4.3% ($20.6 billion) from 2015, but up 60.8% from 2006. . . . The top import categories (2-digit HS) in 2016 were: electrical machinery ($129 billion), machinery ($97 billion), furniture and bedding ($29 billion), toys and sports equipment ($24 billion) and footwear ($15 billion). . . . U.S. imports of agricultural products from China totaled $4.3 billion in 2016.”
https://ustr.gov/countries-regions/china-mongolia-taiwan/peoples-republic-china
Still not very clear, but when I think of Walmart/Target floor space, I think of clothing (likely from other East Asian countries) and to an increasing extent groceries (likely domestic or from the Americas). These are also items that probably have shorter demand cycles. If China produces novelty electronic items, they probably won’t be missed. If it produces electronic upgrades, like a larger TV, then the TV won’t be upgraded. What is the Chinese good that sparks consumer pushback and how frequently is it purchased?
Of all the metrics employed to measure health, wealth and happiness energy consumption per capita seems to be pretty fundamental.
https://en.wikipedia.org/wiki/List_of_countries_by_energy_consumption_per_capita
It is also the most reliable given the many different measurements that cross correlate. Many of Trump’s actions have focused on energy production – ANWR, off shore production, pipelines, LNG exports, etc. All in all I’d say that his focus on energy is a significant factor in MAGA.
We don’t really know what goes on in China, so I don’t know how they will react. However, in the US I don’t see the electorate as being especially steadfast. Even if tariffs were a good idea, I don’t think we can tolerate them for very long. We won’t endure hardship, we will fight back by electing someone new.
Steve
PD, I think we need to ask which group of people Sumner is thinking of when he refers to American consumers. I suspect it means people in his socio-economic class rather than the workers who have endured decades of frozen wages and rising costs.
I suspect the cultural, political, business and academic élites are considerably more impatient than the lower class Americans who have fought and died patiently in the former groups’ Forever War.
And I suspect it’s the people in Mr. Sumner’s neighborhood who are more impatient than today’s young who patiently labor under more adverse economic conditions than their parents to pay back grotesque student loans that Mr. Sumner and his generation weren’t burdened with.
The obvious answer would be iPhones and iPads. Sort of makes that second-sourcing thing more interesting, doesn’t it?
I don’t see that Apple products command the loyalty they did ten years ago. With the iPhone X they’ve gotten something of a reputation as an overpriced, slightly shoddy producer.
My own belief is that a lot of what is being made in China, i.e. commodity mass-produced components and materials, could easily be made here but would cost a few pennies per unit more. I’ve posted on this subject before. The amount that companies are saving by off-shoring their production to China isn’t enormous. It’s the number of units that are enormous.
Our trade problems are actually more complicated than that. The Japanese are buying a considerable quantity of steel billets and wire rods from China; the South Koreans are buying sheet steel, billets, and wire rods. Those are being reworked into products, e.g. automobiles, that are in turn sold here. If it were my trade war I’d be working on the whole supply chain. We’ve got to get back into it.
It’s not just Apple. China has about 1/2 of the cell phone export market:
http://www.worldstopexports.com/cellphone-exports-by-country/
I think Ben and PD are correct, however. Even with mobile devices, almost everyone can delay an upgrade by a year. My iPhone 6 still works perfectly yet this fall, when the new models come out, it will be three generations behind. And consumers could be insulated from hikes in many cases by mobile carriers looking to keep or poach customers.
I suspect that people will react by being more frugal and delaying big purchases. Housing, transportation, food and insurance (inc. healthcare) still account for the bulk of most people’s budgets. Hit those and there may be a backlash.
It will hit food for certain. Everything that’s artificially colored, flavored, texturized, or vitamin-enriched does it with additives made in China. China has almost the entire market. IMO that’s a significant risk but Americans tend to be blissfully ignorant of it.
I don’t know jack about Sumner, but shake my head.
I find myself squarely with the points Ben has made, and,I think, Dave’s general worldview.
As our resident widget maker/investor, I’m here to tell you that if you just put aside for a brief moment this obsession with mega corporations you will be amazed at how fast smaller businesses fill the voids. (And btw, Apples pockets the Chinese manufacturing advantage. No consumer impact if that changes). Our resident dis-Trump-at-all-costs steve will point out the inevitable dislocations. It’s true, but it’s not decisive in any way shape or form.
China has a big economy.
True – but an extremely unbalanced economy. Read Michael Prettis; China is reliant on exports is a consequence of its chosen development model (aka Japanese). The CCP chose to subsidizing investment and exports; to do that they had to suppress household consumption. As a consequence domestic consumption is far too low to support the economy; also the subsidized industries have become too powerful (sometimes referred as vested interests) so cutting the subsidies to unlock the domestic economy is making little progress.
American consumers are impatient – true; but it also provides incentives. I recall the rare metals export ban – it just spurred a search for alternative suppliers or the complete replacement of rare earths usage altogether. These days the Chinese don’t bother with threatening rare earth supply anymore.
The Chinese are used to greater hardship then Americans – true. But it doesn’t mean the Chinese are willing to eat grass so they keep the right to slave away to save Americans a few $$ on their iPhones.
I realize I’m getting out of my depth here but I believe they selected that strategy because it retained the greatest amount of control within their hands. I think that’s what’s really at stake—control by the CCP.
That’s exactly what I think. It’s been some time since I researched this but although the Chinese value-added on the iPhone may be amazingly small the estimated cost to manufacture them in the States isn’t that much either.
To the best of my ability to determine doing final assembly of the iPhone in China saves Apple just a few percentage points of the total retail price.
No one really knows how much an entirely American-made iPhone would cost. Some of its components are made in China, others in Taiwan, Japan, or South Korea, and some are commodities that no one is really sure where they are made. I’ve seen estimates everywhere from under $100 to over $500.
Maybe lower wages is only one factor for companies doing business in China. They want entry into the potentially huge Chinese market and doing manufacturing there is one price. Sharing technology is another.
They have no qualms about using any leverage at their disposal. But then, they are a command economy and we are a free economy, they are using that to divide us.
I have no problem with across the board tariffs to either leverage the Chinese or simply to raise needed revenue, but selective tariffs will lead to rent seeking in Washington turning what should be a matter of policy into a board game. And the Chinese will game THAT.
We don’t really know the cost differential for manufacturing in China, and we don’t really know how they will respond. Making predictions on that front seem kind of silly. Where it makes sense is to look at the US electorate. Knowing that Trump won by, in essence, about 100,000 votes, what is the chance those people stay true to the cause? Drew has apparently joined the cult so he will support him regardless of results, but what about those people in PA, Wisconsin and Ohio? They supposedly voted for a change and the change they see is stuff costs more and they still don’t have better wages. How long do they go with that? Not long I think.
Steve
For all the mysteries of the Chinese economy and its supposed distortions, the Chinese leadership lifted 700 million people out of subsistence (and often starvation) farming into near middle class, industrial life styles. Meanwhile, our own leadership immiserated our working class and deindustrialized our economy.
The Chinese economy is also very much broader than our own. They make everything from cheap socks to state-of-the art supercomputers plus consumer electronics, oil tankers, satellites, and rockets to put men in low earth orbit. There are whole classes of manufactured goods we no longer make, not just consumer electronics and clothing.
If one is old enough, like me, one remembers when GM made in this country over half of all the automobiles bought in the US each year. Now over half of the autos sold are imports, although some are assembled from imported parts in the US. Even here in rural north-central Ohio, half of all the autos in the Wmart and Kroger lots are imports. I have driven imports for 32 years.
So which country’s economy is at risk in a trade war?
One more point, for all the difficulties the Chinese Ruling Class has, all its purported alienation from the Chinese people, China has the clear advantage that its Ruling Class is patriotic and nationalistic, and our Ruling Class consists almost entirely, both Democrats and Republicans, of treasonous globo-homos.
Bob, you seem to be saying that a centralized, command economy is preferable to free market. Do you mean that? I ask because the Chinese do believe that, and we are at war, economic war, a long war as the Chinese see it. And I don’t mean which system is morally right or wrong. I mean which system is functionally more correct, and will prosper?
Steve, we voted for change, we almost always do. Remember “Hope and Change?”. We got “cash for clunkers”. We vote for change and we’ll do it again because we never learn.
The leaders we need run fast and far from public life because they don’t need the aggravation it brings. So we get egotistical self- aggrandizers who love the attention,{don’t tell me Obama doesn’t fit that mold), instead of level headed, long term planners with a grasp of history and geopolitics. We get the leaders we deserve.
Democracy itself is to blame, one person, legal or not, literate or not, one vote. The electoral college was meant to be the check on runaway Democracy, but has withered away, leaving us alone with our demagogues and impulsive electorate.
Globo-homos? That is a new one. Anyway, Gray, if you are right, then the voters don’t tolerate tariffs for very long.
Steve
They supposedly voted for a change and the change they see is stuff costs more and they still don’t have better wages. How long do they go with that? Not long I think.
If he is seen as battling the Masters, the neoliberal forces assaulting the country for the last forty years, people will sacrifice in support. If he is seen as battling the professional class, they will sacrifice in support. It doesn’t matter whether it’s true; no narrative is more powerful in the human mind than, “nefarious forces are attempting to destroy our country, but we, the heroes can defeat them and restore peace and justice.”
This is a matter of perception and so far Democrats are losing it.
I haven’t written about this for a while but here’s how I see the power structures in the Democratic Party. They’re divided between the technocrats, people like Robert Rubin, and machine politicians, people like Mike Madigan. Somewhere in between are the machine politicians who would like you to think they are technocrats—people like Rahm Emanuel.
People like Bernie Sanders don’t have the chops to be technocrats or the guile to be machine politicians. They make good front men but they’ll never have any power. What will happen if a bunch of social democrats are elected is that they’ll be stuck in no-influence positions in minor subcommittees and ignored because doing anything else would reduce the power of the groups that actually control the party.
That is the nature of life. We must make decisions based on imperfect information. If it is silly, the entire practice of medicine is silly.
Make that health care economics and I will agree. My point was that we had a dichotomy, and we know a lot more about the US than we do China so that is where we should focus.
“people will sacrifice in support”
Guess we will see. This is probably true of his base. No matter what he does they will support him, but that last 5% of the vote that determines who gets elected? The voters who are pretty much not that interested and make last minute decisions? I don’t think they are going to be looking deeply at along term struggle to change the country. They will just look at whether or not things are better.
Steve
So, you think that physicians make decisions only on the basis of complete information and certainty? Or do they make a best guess based on the information at hand?
Not only that but influencing our own behavior is easier than influencing the behavior of the Chinese. That’s how I think we should look at tariffs and trade. How do tariffs affect our behavior?
I’M for tariffs as a source of revenue, I don’t think Trump sees them as anything more than a tactic, a bargaining chip, a twist of the Chinese arm.
If I’m right, by Nov. 4, 2020, there will be no more talk of tariffs.
I have a bad habit. And I apologize to people who sling their arrows at me after I have slung mine, but I get bored easily and move on, leaving threads in the trash can.
But I was directed back by Dave’s link from a later post.
Listen to Ben, people. It’s a deal. It’s a negotiation. Trump knows where he wants to go. He understands people. He knows hE has absolutely no chance of getting there. He just wants to move the ball. All the outrage and general crapola commentary is kindergarten shit. He’s running circles around the Dem leadership, OTBs, CNN and MSNBCs of the world who don’t even know the rules of the game. It’s absolutely fascinating.
Trump is at core a well intentioned man. But he is very flawed. A cad, not an intellectual (is that bad?) a master of hyperbole, greedy, insecure etc etc. But he is Peter Druckers effective executive. Things happen, and everyone around is pissed off. In my experience as a serial business owner, Bravo. In contrast, Obama was as empty a suit as you will find. All smooth, no real accomplishment. The classic corporate climber.
As for Dave’s assessment of the political parties……fast forward.