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The Candidates on Trade:

David Ranson assesses the candidates' trade positions in the WSJ. This is an important issues upon which to judge presidential contenders because, as Ranson notes, "Trade is a good litmus test of statesmanship, since many polls show that voters believe trade with other countries hurts our economy."

During their debates, some of the Republican candidates expressed more ifs, ands or buts about free trade than others. John McCain says: "Free trade should be the continuing principle that guides this nation's economy." Mitt Romney's position is: "I strongly support free trade, but free trade has to be fair in both directions." According to Mike Huckabee: "I believe in free trade, but it has to be fair trade." But elsewhere he has said: "I don't want to see our food come from China, our oil come from Saudi Arabia and our manufacturing come from Europe and Asia."

Hillary Clinton has taken an even stronger stance against free trade, suggesting that the economic theories underpinning it no longer hold. To support that she cited economics Nobel Laureate Paul Samuelson, but he was only making the long-understood but sometimes forgotten point that, even in the long run, free trade does not benefit everyone.

Mrs. Clinton believes in "smart trade." As president she would appoint an official to ensure that "provisions to protect labor and environmental standards" are enforced by international bodies like the WTO and the International Labor Organization. She proposes a "time out" on future trade agreements, and a reconsideration of existing deals -- including Nafta.

Barack Obama is more even-handed: "Global trade is not going away, technology is not going away, the Internet is not going away. And that means enormous opportunities, but [it] also means more dislocations." In a 2005 essay he said: "It's not whether we should protect our workers from competition, but what we can do to fully enable them to compete against workers all over the world."

If Messrs. McCain and Obama see foreign trade as a glass that is half-full, Mrs. Clinton, Mr. Romney and Mr. Huckabee see the glass as half- empty.

Based on Ranson's summary, it seems McCain is the soundest of the lot. Whether he'd be a successful free trade President is another matter, as he would have to contend with a heavily Democratic Senate.

libertarians for obama (www):
I'm not sure why you're discounting Obama's trade policy given the last quoted line of that piece. If anything, given Obama's generally favorable views towards free trade coupled with a same-party Congress, free trade would be more likely to pass under Obama than under McCain, ceteris paribus.
2.6.2008 8:50am
Thorley Winston (mail) (www):

"As some of you probably heard at the debate the other night, Senator Clinton called Nafta a mistake," Mr. Obama said. "I was pleased to hear her say that because, as more than 10,000 jobless Iowans know, that's exactly what Nafta has been."-NY Times Political Blog, 11/18/07


More of that "half-full" optimism?
2.6.2008 9:13am
Mark Buehner (mail):
Apparently the new conventional wisdom is that trade is great as long as it doesnt involve importing food, fuel, or manufactured goods...

Heh.
2.6.2008 9:45am
Clayton E. Cramer (mail) (www):
There is a legitimate question about trade when China manipulates its currency to be artificially cheap. This isn't just bad for the U.S.; it generates considerable upset in Europe as well. If the Chinese public was allowed to have an opinion, they would probably be upset as well, because while they benefit from full employment, it is full employment at an artificially low wage.

Free trade will be fair trade when the Chinese government allows the yuan to float.
2.6.2008 10:20am
PersonFromPorlock:
Oddly enough, Huckabee makes a point others don't: that free trade has strategic as well as economic consequences. I've used the example elsewhere, but when China decides to annex Taiwan and tells us to butt out if we want our retail sector to stay in business, we'll butt out.
2.6.2008 10:23am
Thomas J. Webb (mail) (www):
Here is a perfect example of where politicians must hide their true views with rhetoric. Highly educated people know better than to think that free trade creates a net loss of jobs, but they all must appeal to a public with such simplistic beliefs.

A common utterance on both sides of the political isle is "free trade must be fair trade", which is a fair thing to say, since the benefits could be disproportionately helping certain groups and not others. Of course, calling nafta a mistake or not wanting imports (!) is over-stepping the line, and doubly concerning if those saying these things truly believe their own rhetoric.
2.6.2008 10:27am
Thorley Winston (mail) (www):
Oddly enough, Huckabee makes a point others don't: that free trade has strategic as well as economic consequences. I've used the example elsewhere, but when China decides to annex Taiwan and tells us to butt out if we want our retail sector to stay in business, we'll butt out.


That's a fair point as is pointing out that dependency on foreign oil (read: Venezuela and the Middle East) creates its own vulnerabilities. IMO a distinction needs to be made between "anti-free trade" (note the quotes) rhetoric which is playing on populist protectionist fears about "losing our jobs overseas" and rhetoric which is based in arguments about things like national security.
2.6.2008 10:39am
Thorley Winston (mail) (www):
BTW: here's the full Romney quote from his Address to the Detroit Economic Club:

"And finally, we have to shape America's trade policy to open markets for our goods and level the playing field across the world. For America to remain the world's superpower, we have to remain the world's economic superpower. And that requires us to successfully compete everywhere in the world.

"However, as we pursue new trade agreements, I'm far less interested in just getting an agreement signed than I am in getting an agreement signed that is good for America. I promise you that any nation that unfairly manipulates its currency, steals our patents and designs, dumps unsafe products in our markets, or stifles the American goods in their market place, will face a very aggressive President across the negotiating table.

"Now let me be clear, I strongly support free trade, but free trade has to be fair in both directions. And when the playing field is level, America can compete with any country in the world. And we will win.


I don't see anything unreasonable or protectionist in anything that he actually said, nor does it appear that he sees free trade as a "half-empty" proposition.
2.6.2008 10:43am
frankcross (mail):
I think it is incorrect that currency manipulation of China or anybody else is bad for America. It is a distortion of international trade, and in that respect is bad for everybody, but it is mostly bad for China.

If the yuan is underpriced, it simply means that China is selling us goods for an amount cheaper than they should be. That is pretty much good for America. Do you think you suffer from buying at a lower price?
2.6.2008 11:34am
Joe100:
I think making an opinion about who is "soundest of the lot" based on these small quotes is very unsound.
2.6.2008 11:40am
Don Miller (mail) (www):
I agree with Thorley,

Every thing I see from Romney makes me believe he is a great believer in free trade. His business background would also lend credibility to a believer in the importance of trade.

However, He isn't someone who will be willing to open our doors for a country that won't give our companies a fair shake in exporting to their country.

China is a great example of a country that says all the right words when talking about free trade, but takes actions that indicate that they believe it is only free trade if they are the exporter and we are the importer.
2.6.2008 11:51am
Bruce Hayden (mail) (www):
Oddly enough, Huckabee makes a point others don't: that free trade has strategic as well as economic consequences. I've used the example elsewhere, but when China decides to annex Taiwan and tells us to butt out if we want our retail sector to stay in business, we'll butt out.
On the other hand, the PRC likely has more to lose than we do. A lot of the parts that go into your computers now come from China, but they are in competition with other countries, and the computer companies like it this way, in order to protect against supply interruptions. And, there is a distinct possibility that China would be cut off, at least for awhile, as a supplier by many companies, should they instigate such aggression against Taiwan.

I don't remember all the specifics, but awhile back politicians in India were being pushed towards a major confrontation with Pakistan. But their ardor very quickly cooled when multinationals that were outsourcing in India relayed the message that they would look elsewhere for outsourcing should that happen.

Yes, China is not India, but business is now a major driving force behind policy there, and acts, at least somewhat, as a mitigating factor against nationalistic aggression, esp. against a country that is higher up the supply chain and is an increasingly important trade partner.
2.6.2008 12:17pm
Bruce Hayden (mail) (www):
Mrs. Clinton believes in "smart trade." As president she would appoint an official to ensure that "provisions to protect labor and environmental standards" are enforced by international bodies like the WTO and the International Labor Organization. She proposes a "time out" on future trade agreements, and a reconsideration of existing deals -- including Nafta.
I can see an argument in favor of a timeout. But the rest is pure pandering. Who really cares about labor costs in the third world, except for unionized labor (who are losing jobs to the 3rd world) and yuppies worried about the source of their designer coffee? Of course, these are some of her power bases (thought many of those yuppies seem to be drifting off towards Obama right now). But once in office, or maybe even in the general election, I expect to see her views significantly moderated. After all, look at who she is married to.
2.6.2008 12:23pm
Clayton E. Cramer (mail) (www):

If the yuan is underpriced, it simply means that China is selling us goods for an amount cheaper than they should be. That is pretty much good for America. Do you think you suffer from buying at a lower price?
I don't suffer from buying at a lower price. People that manufacture competing goods suffer if they are put out of business by it.

I am sympathetic to someone whose is being fairly outcompeted in a free market, but sympathy doesn't mean that we have to take extraordinary steps to protect their job. Keeping the yuan artificially cheap is, however, not free market.

Economists have long recognized that predatory pricing can destroy a competitive market. At least when those doing the predatory pricing are other companies, this will either bankrupt the predatory, or as with Standard Oil's attempts to monopolize the market, benefit consumers. But what about when the predator is a government?

There is also the strategic question. Clothing and electronic toys aren't strategic goods. There are other materials that are strategic.

There is also the problem that the more money China gets from the West, the more money that they have for their military expansion. Over the next 5-10 years, our immediate enemy is Islamofascism. Over the next 20-50, it is likely to be China.
2.6.2008 12:23pm
Clayton E. Cramer (mail) (www):
Predatory pricing: an example. The precision machine tools that I use in my manufacturing business are American-made. Partly this was a conscious decision to buy American, and partly it was because the only roughly equivalently priced competition, from China, has a so-so reputation for precision and usability. (The Chinese made metalworking lathes are often described as a parts kit from which one can, with some work, make a precision machine tool.)

I do have a Chinese-made drill press which is pretty darn well made (except for the power switch, which keeps breaking). This is a floor drill press that weighs almost 200 pounds. The materials cost alone (keeping in mind that there's a lot of copper in the electric motor) is a big fraction of the $200 purchase price. There is an enormous amount of machining (not casting or stamping) that goes into making this drill press. I am forced to conclude that either China is heavily subsidizing these exports, or Chinese workers are paying their employers to make these drill presses.

This can't be a long term situation. At some point, China expects to turn this enormous subsidy into a profit--and I rather doubt that it will continue to be a benefit to American and European consumers.
2.6.2008 12:31pm
therut:
"Smart Trade" = newspeak.
2.6.2008 12:34pm
John Thacker (mail):
I'm not sure why you're discounting Obama's trade policy given the last quoted line of that piece. If anything, given Obama's generally favorable views towards free trade coupled with a same-party Congress, free trade would be more likely to pass under Obama than under McCain, ceteris paribus.

I would buy this more if Obama hadn't been slandering NAFTA and calling it a "mistake" first in Iowa, and then in the subsequent debates, such as before SC.

Of course, he could be lying to win the nomination. I hate relying on politicians doing that, even when it is the best strategy.
2.6.2008 12:41pm
frankcross (mail):
That's not how the economy works, Clayton. When you say "China expects to turn this enormous subsidy into a profit" you are suggesting that a communist government will outsmart the market. That ain't going to happen.

And "economists have not long recognized that predatory pricing can destroy a competitive market." Economists are actually quite divided over predatory pricing and they certainly realize that it is effective only in the presence of monopoly power that China is not close to possessing. It's like Ford trying to "predatory price" against GM selling below variable cost -- they'll sell more cars and keep a few more workers employed but the overall effect for Ford will be negative.

A subsidized yuan does have the effect of hurting US manufacturing exports, but the lower price is a benefit. And the lower price may save manufacturing jobs if they are for intermediate goods. The lower price creates jobs because it saves money to be spent on other things. I'm pretty sure America is a net beneficiary, and I've certainly seen no evidence of a net detriment.
2.6.2008 12:43pm
Colin (mail):
If the Chinese public was allowed to have an opinion, they would probably be upset as well, because while they benefit from full employment, it is full employment at an artificially low wage.

The January issue of The Atlantic has an interesting article on the issue of China's choice to fix exchange rates and how that supports its cultural control policies.
2.6.2008 12:49pm
bittern (mail):
Romney quoted as saying:


"Now let me be clear, I strongly support free trade, but free trade has to be fair in both directions. And when the playing field is level, America can compete with any country in the world. And we will win.


TW, what do you figure Romeny means by saying "we will win"? Will the other side will "lose"? If it's all just rhetorical baloney, fine.
2.6.2008 12:57pm
SeaDrive:

I've used the example elsewhere, but when China decides to annex Taiwan and tells us to butt out if we want our retail sector to stay in business, we'll butt out.


Who will be China's trading partner when the dust settles?
2.6.2008 1:09pm
srg:
Clayton E. Cramer, I agree with frankcross. There may be some people put out of business and some jobs lost because of cheap goods from China, but most economists think the offsetting gains are greater - except that they are less visible, so politicians can easily appeal to people to oppose free trade. This is a classic case of the harm being clear, but the benefits, while greater, being so spread through the economy that they are not as easily seen.
2.6.2008 1:13pm
SenatorX (mail):
One of the negatives of having so much imported is the quality of goods. Not just toxic toys and pet food but also parts. For example, Boeing's delay issues with the Dreamliner stem from a new production system where they were going to have parts made all over the world then shipped here for final stage construction. Getting quality parts consistently turned out to be a major problem.

Now I am not saying anything about a neg or pos net benefit. I guess I am just pointing out another issue with the global economy. When your producer is in another land he answers to some different masters and it is much harder to control things like quality.
2.6.2008 1:32pm
jjrrnn (mail):
It bears repeating: Free trade is good even if the other side is manipulating its own trade. There are a few exceptions to this rule, but they are not intuitive and governments cannot be relied upon to understand these odd exceptions reliably.

In every case cited in the comments, the US would do better to remain open EVEN if China deliberately increased protection and further devalued its currency. It would be true even if China allowed NO imports from the US at all.

The benefits to the US of low tariffs always remain (and sometimes, especially) when our partners are far from being free traders.
2.6.2008 2:14pm
Thorley Winston (mail) (www):
It bears repeating: Free trade is good even if the other side is manipulating its own trade. There are a few exceptions to this rule, but they are not intuitive and governments cannot be relied upon to understand these odd exceptions reliably.


Are you saying that's true in the case of national security concerns?
2.6.2008 2:30pm
Randy R. (mail):
China has lifted 300 million people out of poverty and into the middle class in the last ten years, more than any other country in the history of the world. Regardless of your party affiliation, that's a pretty darn good result. In fact, they moved a higher percentage out of poverty than we ever did.

And, as so many conservatives are wont to point out, our economy is strong and produces more wealth than any other country in the world. We continue to have the among the highest standard of living among any country.

Seems to me that whatever we are doing with China is working for both sides.
2.6.2008 2:56pm
William Spieler (mail) (www):
Goods = good

Money = not so good

I didn't wake up from my money bed and brush my teeth with money, pour myself a nice glass of money and sit down for a money breakfast. I didn't drive money to work this morning, I didn't watch the Super Tuesday returns on money last night.
2.6.2008 3:04pm
bittern (mail):
Wm Spieler,
I'd tend to agree with that. More to the point, Americans generally seem to agree with that. China, or the Chinese, apparently do not. So everybody's happy. They make stuff for us, we send them all the money. Is there some problem?

Randy R, are we producing worthwhile stuff, or just "wealth"? And, for how long does that work? Just trying to figure this out.
2.6.2008 3:19pm
jjrrnn (mail):
TW,

I do not include national security concerns. That is completely separate. But then national security issues would still be issues whether the other country is a free trader, a protectionist, a subsidizer, a so-called friend, or an abuser of small animals.

I merely wanted to reiterate the standard economic view. Fair trade is NOT free trade. I have no idea what fair trade really is, but judging by its proponents, I think I am against it.
2.6.2008 3:21pm
Clayton E. Cramer (mail) (www):

And "economists have not long recognized that predatory pricing can destroy a competitive market." Economists are actually quite divided over predatory pricing and they certainly realize that it is effective only in the presence of monopoly power that China is not close to possessing. It's like Ford trying to "predatory price" against GM selling below variable cost -- they'll sell more cars and keep a few more workers employed but the overall effect for Ford will be negative.
The difference (as I pointed out) is that Ford will eventually run out of money to keep up predatory pricing. Compare China's economic resources with that of just any corporation.

And it is precisely because of the dangers of predatory pricing that the Sherman Anti-Trust Act was passed. Now, I understand the argument that it was based on a false premise, because the thinkers of the age didn't recognize the steady deflation that the gold standard was causing. But it should be obvious to all that if company A with a billion dollars in savings wants to destroy upstart company B with $100,000 in savings, this will not be difficult. Ford and GM are pretty evenly matched in economic power. GM and say, Tesla Motors are not.

Now, I will agree with you that in a free market, predatory pricing is just fine. In the short run, consumers benefit from it. In the long run, they may not. There are costs of entry to some markets that are quite substantial--investments of a billion dollars or more. If company A uses predatory pricing to destroy companies B, C, D, E, and F, sequentially, there might be some difficulty in finding investors willing to support company G. This is one mechanism by which a free market monopoly is at least theoretically possible--and without the predatory pricing laws, we might actually get it.
2.6.2008 4:05pm
Clayton E. Cramer (mail) (www):

China has lifted 300 million people out of poverty and into the middle class in the last ten years, more than any other country in the history of the world.
That's why China has been having hundreds of riots a year by angry citizens, I guess--they are resenting being lifted out of poverty.

There's no question that some people are getting rich there, and many more are getting to join the Chinese middle class. But there's a lot of corruption and sleazy maneuvers going on as well with destructive effects on people who don't have political influence--the worst of capitalism and socialism combined into something vaguely fascist.
2.6.2008 4:08pm
Clayton E. Cramer (mail) (www):

I have no idea what fair trade really is, but judging by its proponents, I think I am against it.
Fair trade is one of those nebulous terms--one that I would be reluctant to support. But when the government controls and manipulates exchange rates, that's not a free market, anymore than government subsidies to specially selected businesses are a free market.
2.6.2008 4:10pm
Clayton E. Cramer (mail) (www):

They make stuff for us, we send them all the money. Is there some problem?
Only when we run out of money to send them. Then we'll have a pile of (by then) broken iPods, computers, printers, and they will have titles to our homes. At some point, we do need to make something, not just buy it. I don't support tariff barriers to protect American jobs, but I do think that if China isn't prepared to let free markets operate on exchange rates, there's no obligation to give them most favored nation status, either. I would rather consumers buy stuff from countries that haven't threatened to nuke Los Angeles, but then, I'm rather weird that way.
2.6.2008 4:15pm
Clayton E. Cramer (mail) (www):



I've used the example elsewhere, but when China decides to annex Taiwan and tells us to butt out if we want our retail sector to stay in business, we'll butt out.


Who will be China's trading partner when the dust settles?
A year later, not the U.S. Five years later, when the average voter has forgotten, and Wal-Mart is itching to shave another $.0000001 of every pack of T-shirts, it will the U.S. again.
2.6.2008 4:18pm
spaceman65:
Is it just me, or does hearing the phrase "fair trade" connected to "free trade" open a gaping hole in the concept of truly free trade? I have visions of Romney and Huckabee ranting like my 8-year-old, claiming another country is not being fair, and taking their metaphorical ball. Or am I missing the meaning of the spin?
2.6.2008 4:19pm
spaceman65:
that should be taking their metaphorical ball "and going home"
2.6.2008 4:20pm
Clayton E. Cramer (mail) (www):

A subsidized yuan does have the effect of hurting US manufacturing exports, but the lower price is a benefit. And the lower price may save manufacturing jobs if they are for intermediate goods.
This is a true statement. But for the most part, we aren't buying stuff from China and using them for making stuff. I am doing with that drill press, but I rather suspect that most large scale manufacturing isn't using Chinese tools. Most of what we are buying is stuff that will be at a garage sale in five years (or in a garbage dump)--strictly consumer goods.

On the other hand, an enormous amount of the consumer goods we are buying is paying for purchase and shipment of big machine tools from America to China. We're being hollowed out of much of our manufacturing capacity this way, and it unnerves me.
2.6.2008 4:22pm
Clayton E. Cramer (mail) (www):

Is it just me, or does hearing the phrase "fair trade" connected to "free trade" open a gaping hole in the concept of truly free trade? I have visions of Romney and Huckabee ranting like my 8-year-old, claiming another country is not being fair, and taking their metaphorical ball.
Which truly free trade are we talking about with China? Have you noticed that, except for labor union whining, nearly all the discussion is of China? No one is whining about "unfair trade" with India. Among my recent purchases was an outsized die and die wrench. The die came from Poland; the die wrench from India. They were cheaper than American goods (about 1/3 the price of the equivalent American tools), but they weren't cheap at the Chinese level (which would be about 1/6 the price of the equivalent American tools).

Of course, we're not likely to go to war with Poland or India, either.
2.6.2008 4:26pm
frankcross (mail):
Clayton, I'm amazed at your position on predatory pricing. Good conservative antitrust economists, like Bork, have long ridiculed the prospect. There is a decent neoliberal view that predatory pricing may be a concern under some circumstances. But these obviously aren't the circumstances.

If you think that China is going to destroy every competing source of production, like you suggested, that is just nuts. And, even if they did, new entry is so easy in today's world that the plan still wouldn't work. If China tried to abuse a preeminent world position in textiles, new US textile companies could pop up in no time to destroy that plan. Do you know how the market works?

You want to hate China's government, that's cool. You want to punish it, that's cool. But don't pretend like this is somehow helping the US economy.
2.6.2008 4:26pm
Clayton E. Cramer (mail) (www):

That's not how the economy works, Clayton. When you say "China expects to turn this enormous subsidy into a profit" you are suggesting that a communist government will outsmart the market. That ain't going to happen.
They don't have to outsmart the market. They can do an enormous amount of damage trying to outsmart the market.

Let me give you an analogy: someone running a multilevel marketing Ponzi scheme may think that they are going to get rich. They may honestly not realize that eventually there will be a shortage of fools willing to buy in. But in the meantime, a lot of people will get injured buying into it.
2.6.2008 4:29pm
Clayton E. Cramer (mail) (www):

There is a decent neoliberal view that predatory pricing may be a concern under some circumstances. But these obviously aren't the circumstances.
No, they are circumstances considerably more dangerous than those that liberals worry about. This isn't a big corporation out to get rich, screwing over its smaller competition. This is a national government with a very long-term planning strategy, and resources larger than almost any private corporation.

Worse than being simply greedy, China has a long history (even before Communism) of imperialism. Take a look at historical maps of Chinese expansion.


And, even if they did, new entry is so easy in today's world that the plan still wouldn't work. If China tried to abuse a preeminent world position in textiles, new US textile companies could pop up in no time to destroy that plan. Do you know how the market works?
Textiles have a low barrier to entry. So do toys. Some of the other manufacturing activities (electronics, steel, for example) have rather substantial barriers to entry because of the enormous capital required to get started.
2.6.2008 4:33pm
bittern (mail):
an enormous amount of the consumer goods we are buying is paying for purchase and shipment of big machine tools from America to China. We're being hollowed out of much of our manufacturing capacity this way, and it unnerves me.


Clayton, I'd think the libertarian view would be that being hollowed out reflects the free economic choices of American consumers, and is therefore inherently the right choice. We like to buy cheap stuff; here; take our dollars and machinery. Didn't we start down that road before China had developed the horsepower they've got now?

What is it that America sells that keeps the dollar from cratering?
2.6.2008 5:10pm
James of England:
Bittern: I believe that he means that America will compete with other economies and America will maintain its powerful rate of economic growth. If you and I compete in a race and you win, that doesn't mean that I haven't progressed along the track. He's all about supporting other countries, too, but he wants to maintain America's hegemony as superpower.
2.6.2008 5:16pm
James of England:
Spaceman65: I'm not sure why you're linking Romney in with fair traders. Do you have a particular quote in mind?

In general, Romney is a sound free trader. The stuff about getting other countries to change their behaviour is about promoting free trade, not limiting it. For instance, I believe he does not favour the expanded labour and environmental chapters in FTAs that Obama does.
2.6.2008 5:19pm
James of England:
Ah. Read the quote that you're referring to and, yes, as Thorley says, he's referring to something different to what people generally mean by fair trade. Avoiding expropriation and other harmful actions against property and avoiding trade barriers that foreigners sometimes try to put up.
2.6.2008 5:23pm
Ak Mike (mail):
Clayton, please drop your silly ideas about predatory pricing. There has probably never been a real case of this happening in history.

Just to think about what this entails shows it to be preposterous: China would have to so undersell the entire rest of the world as to destroy all competition - underselling that would in real life bankrupt China, especially if carried out on a wide scale in multiple industries.

Then, when this weakened and barely surviving entity tried to cash in on its years of self-denial and underselling by jacking up prices, a host of competitors would spring up, maybe taking as long as a year or so to create electronics factories, etc. (and that is if the old factories driven out of business could not be pressed back into service). So for that one year China gets to have high prices. That is all the benefit it would get from the "predatory pricing."

Remember, the rest of the world has more capital to work with than China, because through underselling China has been transferring its capital to other countries. So China could not go back for a second round of "predatory pricing," because the result of the first round will be a much poorer China, too poor to keep selling at a loss.

As for your concern that China would buy up the real estate in the US: it's hard to think of anything that would put China under our thumb more than that. Imagine if most if its wealth is tied up here, subject to our laws, our police, our Congress. If they look at us cross-eyed, we'd threaten to expropriate.

If you really think that the Chinese are smart, long-range planners, and imperialist, the last thing they would want to get involved in is destroying their economy through predatory pricing.

Re "hollowing-out" - are you aware of any evidence of declining manufacturing in the U.S.? My understanding is that total outputs of manufactured goods by U.S. firms have been continuing to increase. If someone else is making stuff, it's usually because in the U.S. the capital needed to manufacture that particular kind of stuff would be more productively employed making higher-value stuff. Chinese labor can't make pharmaceuticals, so they have to make band saws instead.
2.6.2008 6:06pm
PersonFromPorlock:
Ak Mike :

Then, when this weakened and barely surviving entity tried to cash in on its years of self-denial and underselling by jacking up prices....

You miss the point. They wouldn't be "jacking up prices," they'd be telling us to accept some politico/military move of theirs or be cut off from essential goods and services. This really isn't about economics, it's about war.
2.6.2008 6:32pm
frankcross (mail):
Clayton, your first answer shows you are not comprehending economics. From an economic perspective, it wouldn't matter whether it was a government or a company. Politically, maybe, but not economically and you seem to want to make an economic argument.

The second answer on barriers to entry also makes little sense. High capital costs? The globe, outside of China, is not short of capital. There would be a little lag time, but not much, studies show new product development happens extremely fast today.
2.6.2008 6:40pm
Clayton E. Cramer (mail) (www):

Clayton, please drop your silly ideas about predatory pricing. There has probably never been a real case of this happening in history.
I used to believe this when I was fresh from reading libertarian theory. But then I met a lawyer who specialized in antitrust--and not even megacorporation antitrust law. There is a lot of it out there, apparently.


Just to think about what this entails shows it to be preposterous: China would have to so undersell the entire rest of the world as to destroy all competition - underselling that would in real life bankrupt China, especially if carried out on a wide scale in multiple industries.

Then, when this weakened and barely surviving entity tried to cash in on its years of self-denial and underselling by jacking up prices, a host of competitors would spring up, maybe taking as long as a year or so to create electronics factories, etc. (and that is if the old factories driven out of business could not be pressed back into service). So for that one year China gets to have high prices. That is all the benefit it would get from the "predatory pricing."
I don't think you have any idea the capital and human resources required for a lot of this stuff to "spring up." Right now, we have a vibrant sector that is capable of manufacturing a variety of electronics. Twenty years without doing any of this would mean that there simply wouldn't be the cadre of skilled engineers and technicians with experience doing it--or at least, not enough to rapidly grow such an industry.

Have you ever watched modern electronics manufacturing? Do you have any idea what is required to do this? "Bed of nails" test sets, for example? Have you ever seen this stuff being done? Have you ever worked with someone involved getting an operation like this going when there is a large, existing structure to do this?

Some years back, to use a low technology example, the attempt to refit the Iowa-class warships ended up calling up large numbers of aged veterans, and asking them to come back, and show a bunch of kids (by comparison) how a lot of this stuff worked.

Libertarian ideology suffers from what all ideologies suffer from: theory taking precedence over experience.
2.6.2008 7:20pm
Clayton E. Cramer (mail) (www):

Clayton, your first answer shows you are not comprehending economics. From an economic perspective, it wouldn't matter whether it was a government or a company. Politically, maybe, but not economically and you seem to want to make an economic argument.
I'm sorry, but your knowledge of how industries develop is clearly inadequate. It takes years to train people in a new technology. You can't overnight create a new manufacturing industry. There are skills that are just too difficult to learn overnight.



The second answer on barriers to entry also makes little sense. High capital costs? The globe, outside of China, is not short of capital. There would be a little lag time, but not much, studies show new product development happens extremely fast today.
Capital is not short, but everytime you drag capital from one field to another, you are shorting the other field. Let's say that China suddenly decided to take advantage of their opportunity. In a period of a few months, businesses have to be created to manufacture those goods--and in some cases, where there are a few thousand skilled workers, we need hundreds of thousands. Where will we find them? What other businesses will be starved of capital to build those factories?

As long as we can be sure that a vendor isn't going to use its power against us, we aren't going to be cut off overnight. But the political aspect of China matters precisely for this reason.

In electronics manufacturing, the phrase "single source" is nasty. If you have a single source for a part, you are at risk that the vendor will go under, get greedy, or suffer a catastrophic failure of manufacturing processes or equipment. So if an engineer specifies a part that has a single source, in most companies, he has to work pretty hard to justify use of that part.

You don't even need to be single sourced for this to be a problem. Think of what happens when 90% of your part supply comes from one vendor? If that vendor for whatever reason stops selling, you are in a serious pickle.
2.6.2008 7:28pm
alias:

Clayton, please drop your silly ideas about predatory pricing. There has probably never been a real case of this happening in history.

I used to believe this when I was fresh from reading libertarian theory. But then I met a lawyer who specialized in antitrust--and not even megacorporation antitrust law. There is a lot of it out there, apparently.


If I understand the argument against predatory pricing (which is made by people like Easterbrook, who understands antitrust better than most), the predatory pricer first has to suffer long enough to drive his competitors out of business, then has to be able to sell goods at a monopoly price for long enough to recoup the initial losses, and hope that no new rivals spring up during that time. The odds are against success, and when predatory pricing fails, consumers benefit and predatory pricers suffer without recouping their losses.

What's the argument in the other direction
2.6.2008 7:53pm
frankcross (mail):
Clayton, you seem to think you are making an economic argument but you aren't. The Bork/Easterbrook analysis is pretty solidly against you as a pure economic matter.

But the main factual problem with your theory is that China does not have and is not near to having a monopoly on the essential goods. So the yuan valuation issue is irrelevant. And you're missing a second, perfectly strong point that China could gain a monopoly without yuan valuation, simply due to competitive advantage.

This is not about "fair trade." You can worry about China but not on these economic grounds. Your argument wanders around from the economic to the political and back. Giving China a monopoly in a key electronics component would be a serious political concern. But that's currently unrelated to factual reality and may well be unrelated to the yuan or fair trade.
2.6.2008 8:26pm
Ak Mike (mail):
Clayton - to pile on a bit more: your response indicates that in order to make its predatory pricing work, China would not only have to undersell the entire world as to electronics so much that it destroys all non-Chinese electronics manufacturing. It would also have to keep selling at a money-losing price for an additional twenty years, so that all the non-Chinese electronics engineers grow old and forget how to build factories, and all the factories crumble.

As far as your anti-trust friends go: lots of claims of predatory pricing are made, and no doubt lots of lawsuits are based on such claims (since you get treble damages). The veracity of such claims has not, I believe, been demonstrated by economists.
2.6.2008 9:00pm
A Guest:
Microsoft Internet Explorer vs. Netscape Navigator / Communicator?

Total price of IE: free (pre-loaded, integrated, set as default)
Total price of Netscape: user needs to download and install, which takes a lot of time and effort for non-techies in 56k dialup world (when 2/3 of people never even changed the home page of their browsers!)

Pretty effective use of predatory pricing to me. Also note multiple other MSFT products.

(Note that I do think that free trade is a good thing, even if the other country is not "fair" -- I'm just trying to provide an example of predatory pricing.
2.6.2008 11:58pm
David M. Nieporent (www):
We're being hollowed out of much of our manufacturing capacity this way, and it unnerves me.
One problem is that this is completely untrue. Our manufacturing output is higher than it has ever been. (And far higher than China's.)
2.7.2008 12:10am
William Spieler (mail) (www):
China is the new Japan

quelle surprise
2.7.2008 12:24am
Randy R. (mail):
Bittern: "Randy R, are we producing worthwhile stuff, or just "wealth"? And, for how long does that work? Just trying to figure this out."

Wealth comes from production. It can also come from transactions, such as what Wall Street does. It can be debated whether that constitutes wealth. However, the US is still foremost in innovation and IT, including biomed and biotech. Nonetheless, there are other regions around the world that are currently more innovative than the US, but China is not one of them.

Today, we mint about 70,000 software engineers, compared to China's 300,000. Whether China will beat us at innovation is an open question, and they sure work hard.

However, all of Clayton's angst is virtually an exact repetition of what people like him said about Japan in the late 80s. Japan was unfairly stealing our steel industry, then our consumer electronics industry, then they were going to buy up all the real estate in the US, and we were going to be a colony of the Japan. The nerve of them! We defeated them in WWII!

Well, it didn't quite work out that way, did it?

Does that mean we shouldn't be concerned about China? of course not. However, we have only ourselves to blame (yes, count me as the blame America first crowd). Bush inherited a surplus, and turned it into the biggest debt ever. Thankfully, the Chinese have been buying our debt, which kept interest rates low and our dollar high. but now they have more control over our economy than if they actually invaded us. Thanks George!

So why invade the US, as Clayton foolishly thinks? He is correct, there are indeed riots throughout China. Their biggest problem is feeding 1.3 billion people. Invading the US? That's pretty far down the list, and it won't solve any of their problems. Their environmental problems are almost intractable -- invading the US isn't going to make their deserts bloom.
2.7.2008 12:29am
David M. Nieporent (www):
Microsoft Internet Explorer vs. Netscape Navigator / Communicator?

Total price of IE: free (pre-loaded, integrated, set as default)
Total price of Netscape: user needs to download and install, which takes a lot of time and effort for non-techies in 56k dialup world (when 2/3 of people never even changed the home page of their browsers!)

Pretty effective use of predatory pricing to me. Also note multiple other MSFT products.
A Guest: the theory of predatory pricing is not merely that one company undercuts another; it's that it does so until the company is out of business and then jacks up prices once it has a monopoly. Microsoft, in fact, never charged for IE.

Also, Netscape's problem was not Microsoft; at one time Netscape was the monopolist, and then it stopped developing the product while IE surpassed it.
2.7.2008 2:13am
PersonFromPorlock:
Randy R.:

Japan was unfairly stealing our steel industry, then our consumer electronics industry, then they were going to buy up all the real estate in the US, and we were going to be a colony of the Japan.

So, where is our consumer electronics industry? It may be in China and not Japan - and may in the future move somewhere else - but the important point is that it's not here.
2.7.2008 7:54am
J. F. Thomas (mail):
Also, Netscape's problem was not Microsoft

I think Netscape would disagree. A much better example is Word and WordPerfect. The way that Microsoft Office became the predominant suite is a picture perfect example of predatory pricing. Microsoft used to bundle Office with new computers for free or practically for free. At the time there was lots of competition in office productivity software (e.g. Lotus, Wordstar, Wordperfect), and most of them were superior to the Microsoft products. Yet by bundling their product with new computers for very low prices, and making it difficult to integrate the competitors' products with Windows, Microsoft was able to make their crappy product the standard.

So let's stop saying that there has never been an actual case of predatory pricing.
2.7.2008 9:19am
Toby:
JF Thomas - were you actually buying computers then? A word processor from WordPerfect used to cost more than the entire Office suite does now.

I was sitting in the row behind the WP guys at the 1993 Win32 "this is the futre of windows" tech conference in Anaheim. They came late, talked amongst themselves, and laughed at the idea that they would ever need to develop like that. When Win95 came out and was a smash hit, WP for Windows was a dog that did not follow UI standards.

Note: Sometimes history is different than the legal breifs...
2.7.2008 4:25pm
c.gray (mail):

Microsoft used to bundle Office with new computers for free or practically for free. At the time there was lots of competition in office productivity software (e.g. Lotus, Wordstar, Wordperfect), and most of them were superior to the Microsoft products.


When it comes to office products, this is flat wrong. I was there and I remember. Office was never bundled on new PCs. You could get a discount on a new PC from some vendors, but it was never exactly cheap.

Wordperfect blew WordStar out of the market in the late 80s. What started WordPerfect's death spiral was the year long delay in producing a stable Windows 3.x-compatible product. This appears to have been a business decision aimed at discouraging WordPerfect customers from putting more money in Microsoft's pocket by adopting Windows. It backfired. For obvious reasons, Microsoft made producing a stable version of Word for Windows a major business priority. By the time WordPerfect's genius executives realised Windows not going away, Word dominated the Windows market for standalone word processing applications. WordPerfect then compounded its woes by failing to produce a 32 bit version in a timely fashion, which started a stampede by its long-term customers to Word.

Lotus ran into the rocks at the same time, for the same reason. Lotus made good use of its brand name to produce its own bundled Office Suite called Lotus SmartSuite. It was highly competitive, in fact more popular than MS Office, until the switchover to 32-bit processors and OS. But then Lotus' 32-bit version arrived to market very, very late.

Microsoft has a well-earned reputation as a sharp competitor in the market place with dodgy compliance with antitrust law. But in the office application market, it benefited from its competitors mistakes than from actually doing anything positive or negative to "win" the market. Lucky for them....Office turned into the main cash cow subsidizing everything else it does.

Unfortunate for the rest of us. Office is annoying lardware. I think M$ uses Office profits primarily to pay a small army of 20-something developers in Redwood to dream up new "features" that nobody wants and many hate, like the animated paperclip and wandering menu bars. Worse, those trying to displace Office often copy its most annoying features.
2.7.2008 4:33pm
NickM (mail) (www):
To me, fair trade means that each party gets what they bargained for. With China, that has a disturbing tendency to not happen (adulterated food, false QC test reports, fake luxury goods, IP theft, etc.). The common ownership (i.e., government) of so many Chinese businesses justifies special trade restrictions as a way of dealing with large-scale fraud.

As for predatory pricing, a government, unlike a private firm, can cut labor costs to the absolute minimum by employing effectively slave labor. It's not predatory pricing in the true economic sense, but it can be used to drive competitors out of business and maintain a monopoly. This makes China a very special case for trade.

Nick
2.8.2008 8:39am