An Urban's Rural View
How Do You Solve a Problem Like China?
Donald Trump and Kamala Harris are both promising to preside over a manufacturing renaissance and whoever wins will have the wind at their back.
A lot of new factories are already under construction in the United States thanks in part to subsidies provided by the Chips and Science Act, the Inflation Reduction Act and the Bipartisan Infrastructure Law. With continued focus from Washington, the country could see ground broken on still more new factories.
But don't underestimate the threat China poses to the rejuvenation of American industry. China has a lot of industrial overcapacity and its government is investing in additional overcapacity. That will put pressure on prices of a wide variety of manufactured goods, making it more difficult for new factories outside China to make profits.
China denies it has overcapacity. The Chinese say foreigners who use that word are trying to thwart China's rise by suggesting there should be limits on how much it can produce and export.
But China already dominates world manufacturing. It produces 35% of the world's factory output. That's more than the combined shares of the next nine largest manufacturing countries and nearly six times the 12% share of the No. 2 producer, the U.S.
Economist Richard Baldwin calls China "the world's sole manufacturing superpower." (https://cepr.org/….)
Foreign economists say China's obsession with manufacturing has left its economy dangerously unbalanced, heavily over-reliant on investment at the expense of consumption. They say this underlies the country's slowing growth, rising unemployment and real-estate debt problems. (https://www.dtnpf.com/…)
China's leaders reject that analysis. They're doubling down on investment in manufacturing and planning to export what the domestic market can't absorb. They're pushing to move upstream and trying to dominate the high-tech industries of the future.
"China's excessive investments will not be a small wave, but rather a $450 billion tsunami over the next three years," says Harry Moser, president of the Reshoring Initiative, a non-profit dedicated to bringing manufacturing jobs back to the U.S. (https://digitaledition.assemblymag.com/…)
According to the Wall Street Journal, the Chinese government's support for its manufacturers was in a league of its own even before the recent doubling down. In 2019, China spent 1.7% of its GDP on industrial policy. The U.S. spent 0.4%. (https://www.wsj.com/…)
And China's 1.7% doesn't take into account a variety of indirect subsidies -- cheap loans from state-owned banks, tax breaks of various kinds, cheap steel from state-owned steel companies and cheap energy from state-owned utilities. One estimate cited by the Journal puts China's actual industrial-policy spending close to 5% of national income.
And China's spending isn't just deep, it's broad. "Ninety-nine percent of publicly listed companies report some kind of subsidy," the Journal reports.
The doubling down is as much about power as economics. China wants to become less reliant on other countries. It wants them to be more reliant on China.
Other countries, especially the U.S., don't want to be more reliant on China. They fear further unemployment and deindustrialization, but that's not their only worry. The Russian invasion of Ukraine and Israel's war with Hamas have reminded Washington that a strong industrial base is critical to national defense. COVID taught the U.S. that it's unwise to rely on other countries for critical supplies in a crisis.
Government policymakers in the U.S., Europe and elsewhere are struggling to come up with solutions to this China problem. The last two U.S. administrations have tried tariffs and subsidies to varying degrees and with varying degrees of success.
Trump is promising even higher tariffs and threatening companies like John Deere that are moving manufacturing offshore. Harris says she'll give tax credits to encourage investments in new factories. How serious these efforts would be is unclear.
Anyway, these are tactics. As I've argued previously, what the country needs is a strategy. Let's convene a bipartisan commission of experts to study the problem and recommend a way forward. (https://www.dtnpf.com/…)
Rather than continue with the ready-fire-aim approach both parties have been taking, we need first to agree on answers to some key questions. How much manufacturing does the country need to avoid overreliance on China? How much new manufacturing can be developed without government support? Which industries deserve support? Which are the best of many possible ways to give that support?
Yet another important question for this commission would be whether to work with other countries in reducing reliance on China or to go it alone. I'll discuss that question in my next post.
A foundation has been laid for this commission; both parties agree there's a problem. It's worth trying to see if they can agree on solutions.
The potential dangers of China Shock 2 are serious enough that a united national effort is imperative. Let's give bipartisanship a chance.
Urban Lehner can be reached at urbanize@gmail.com
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