@Juergen and @tbbayly, thanks for doing the live Zoom!
From time to time, Out of Our Minds (@AndrewHenry) should hold live Zoom Q&A/conversations on additional topics.
Can I get an amen?
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I believe that for China the goal is fundamentally different than for a western enterprise that seeks a monopoly. Yes, they have to sustain production at the lower price, but their goal is as much political power as it is economic power, and China is not a free market for land, labor or capital, and so they can make decisions routinely that western developed democracies only make as exceptions to the norm.
Ideally the WTO could facilitate negotiations to resolve disputes, but it appears there are real limits to what they can achieve, for example in protecting intellectual property.
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Amen and amen (2 of them because my post must be at least 10 characters long)
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Here are my thoughts on the situation:
The tariff situation led to a wide discussion of trade and following from there, production of goods and services. In the past ten years there were multiple crisis that highlighted a problem: Most production of goods is happening in China and south east Asia, western countries don’t produce that many goods anymore.
It is a stated goal of the new US government to bring back the production of goods on US soil. But as Jürgen said, this is not easy. Even if this happens it will take many years and it’s not clear if that is possible at all. Why? The answer is of course multifactorial, but one very important factor was touched also in our conversation: wages/labor cost.
In western countries wages are higher than in China and in South East Asia. You simply cannot produce the same thing here because the wages are much higher. This was true until recently and is probably still true. Again there are many reasons for this.
Speaking from a German perspective and as a business owner I know a bit about wages and labor costs. The situation is such that my workers see only 60-70% of the money they nominally get paid on their bank account. The rest goes into:
- income tax which is progressive, 14-42%
- pension insurance (9.3%)
- health insurance fixed at 7.3% plus a “additional fee” around 2-3%
- nursing insurance 1.8-2.4%
- unemployment insurance 1.3%
Numbers 2-5 are all capped but also “matched” by the employer so you need to double those percentages. There are close to no exceptions except at the margins: Low-wage workers can be exempt from a lot of this, but there are very strict rules for this. If you add everything up this is the cost for the employer who needs to cover them via revenue. [Two sidenotes: 1. As a business owner, high-earners, wealthy person, or as a public officer (teachers, police, administraion) you can also make some changes, but you will pay more into tax and less into pension/health (basically exiting the public system and entering private agreements with insurance companies). 2. The pension insurance premiums don’t cover the payouts to pensioners for at least 15 years, maybe even 20 years. So the government made a little change: Just pay the rest from taxes! This is now a substantial part of the German federal budget.]
It has been like this for quite some time. To offset of all this companies, employers and employees have been told that “we just need to innovate more” or “be more productive”, “automate”, “make something that people really want and pay premiums for” etc. You can just never ever compete on price. It did work for some areas like automobiles and industry machinery (side note: especially in automating!).
I want to focus on pension insurance since it is a large part and also leading to my point: I’m quite sure this doesn’t exist in China. Instead as a child you have a high moral obligation to provide for your elderly parents, like buy them a home/appartment, cost of living, nursing. I believe this is a huge deal. Employers don’t have a calculate with the social costs, they are entirely in the private space. Yes, they need to be covered, but it seems it can be done much more efficiently there.
The western/German system is in violation of the 4/5th commandment: Honor your father and mother. We can leave our parents and never care for them since hey, everything is paid by the state! Cost of living, health and nursing: there is in insurance for that. I believe this is our “Korban”: “Insurance will be what I owe you.” You can live your life “autonomously”. But it’s wrong and all indicators show it: Fertility diving, unbearable costs for businesses, insane number of regulations and laws, excessive bureaucracy, high public expenditures quota.
Could it be that China and others do something right that we westerners do wrong? Is this one of the most important root causes for the current situation?
We made the state our god and now see this god crumbling, overloaded. It needs to arbitrate on what’s true and false, good and wrong, just and unjust. We trust it with everything of our lives - everything is insured, our age, health, unemployment - but now it starts to fail.
Notes:
- Why did I just say “goods” and left out “services”? As Jürgen said, the US has a surplus there. I suspect services scale better than industrial production of goods, especially in the digital space and the internet: They are “virtual” and can be automated more easily.
- I strongly suspect that we need to have multigenerational households (all 3 generations). This saves so much costs, but apparently we are not capable of doing this anymore. My grandmother live in the same household as my parents and my siblings and me.
- The old Kuyper spheres may be right: If the family can’t provide for a need (health, nursing, housing costs), the next sphere to step in is the church and only as a last resort the state/government.
- Yes, markets still believe in the US as the safe haven, but there is a flip side for this: There is just no alternative: Presently neither China nor Europe can act as reserve market or currency.
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What we’re also grappling with is long-term change in the US economy. Yes, manufacturing jobs have declined over time, and those which are still there, tend to be very highly skilled, such as aircraft manufacturing. So, while total manufacturing employment in the US is a reported 15m jobs, inbound tourism … provides something more like 18 million jobs.
I am not quite sure why a job is manufacturing is seen as somehow “better” than a job in another sector, such as working for a state government, which - disclosure - is what I do. Even for China, some of its own manufacturing jobs have migrated to lower-cost economies such as Vietnam.
No, I said the US is spending more than it earns income, which is the same as saying that national savings fall short of national investment, or that there is a trade deficit. More specifically, it is the US government that spends more than its revenues; private sector saving exceeds private sector investment.
“Dumping” refers to a situation where a company sells its product below variable production cost and thus makes a loss. Companies are sometimes accused of doing that in order to gain market share. Such accusations typically come from competitors realizing that the company accused sells at a price where the accusers would make losses. The difficulty with such accusations is that only the company itself knows its true cost structure. Outsiders do not, because they do not know the company’s technology, nor the wages the company pays, nor the prices it pays for its inputs. Thus, any accusation of dumping is based on a lot of guesses and assumptions, which may or may not be true. Obviously, those who complain against dumping assume that they are true, while the accused company will argue that they are not and that it simply has better technology and lower costs that others. There is no
simple way to find out whether or not there is dumping, neither in national nor in international markets. Therefore, the idea that the US could “simply find out” is false.
Dumping is bad, because it risks driving the most efficient producer out of the market, which is undesirable from society’s point of view.
In the context of international trade, US firms can notify the federal government about a suspicion of dumping, and the federal government can then bring a complaint to the WTO. The WTO then sets up a panel of experts with knowledge about the relevant industry which will demand information from the country accused. The panel will then examine the information, compare it with information from other countries and producers, and, importantly, compare the sales price of the accused company in international trade with its domestic sales price. All of this takes some time, during which the US would be allowed to take some counterveiling measures against the accused country, such as compensatory tariffs.
In the end, the panel will come out with a report which it sends to the Dispute Settlement Body, making a judgment of the validity of the accusation and some recommendations how the US and the accused country should settle the case. The DSB then adopts the report and tells the countries what to do. Both can accept that or reject it. In case of rejection, the WTO calls on them to negotiate a solution. If those negotiations do not come to a solution, the WTO authorizes the US to make the retaliatory measures more permanent.
Thus, there is no way in which “the WTO tells us whether China is being unfair.” The point is that there are a lot of unknowns involved. It is the role of the WTO to find out as best as possible, but even that is often pretty uncertain. The real point here is whether countries agree to go through a court-like procedure to investigate a case or they take retaliatory actions unilaterally.
Suppose you buy a complicated item like a medication from a local store and it turns out that the thing doesn’t work as you expected. Do you go and smash the store’s front windows to retaliate? No, if talking to the guys doesn’t help, you go to court, the court will call on some experts to investigate, and ultimately the court will tell you and the store what to do. Why the procedure? Because we think that society will be more peaceful that way. WTO processes are based on the same idea at the international level.
By the way, there is a related issue when it comes to governments subsidizing national producers to make them more competitive internationally. Subsidies can take many different forms, and finding out whether a producer is subsidized is not that simple.
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