How to win the Cold War with China–Dr. Fareed Zakaria


October 15, 2018

How to win the cold war with China–Dr. Fareed Zakaria

https://www.washingtonpost.com

The Trump administration’s most significant and lasting decisions will be about U.S. policy toward China. Far more consequential than even the Supreme Court’s composition or immigration policy is whether the 21st century will be marked by conflict or cooperation between the two most prosperous and powerful countries on the planet. The last time there was such a question — when Britain confronted a rising Germany 150 years ago — it did not work out so well.

Image result for Trump vs China

Since the end of the Cold War, we have lived in an era of almost no genuine great-power competition, which has led to the emergence of a dynamic global economy and a huge expansion of international trade, travel, culture and contact. All this happened under the United States’ uncontested supremacy — military, political, economic and cultural.

That age is over. Twenty-five years ago, China made up less than 2 percent of the global gross domestic product. Today that figure is 15 percent, second only to the United States’ 24 percent. In the next decade or so, the Chinese economy will surpass the size of America’s. Already, nine of the 20 most valuable technology companies in the world are based in China. Beijing has also become far more active on the global stage, ramping up its defense spending, foreign aid and international cultural missions. Its Belt and Road Initiative, infrastructure investment in dozens of countries, will ultimately be at least seven times larger than the Marshall Plan, if not far more, in inflation-adjusted terms.

The Trump administration has many of the right instincts on China. Beijing has taken advantage of free trade and the United States’ desire to integrate China into the global system. The administration is right to push back and try to get a fundamentally different attitude from China on trade. But instincts do not make for a grand strategy.

Were Washington to be more strategic, it would have allied with Europe, Japan and Canada on trade and presented China with a united front, almost guaranteeing that Beijing would have to acquiesce. It would have embraced the Trans-Pacific Partnership as a way to provide Pacific countries an alternative to the Chinese economic system. But in place of a China strategy, we have a series of contradictory initiatives and rhetoric.

President Trump’s Trade Gangster–Peter Navarro

If there is one person in the White House whose ‘to do’ list you want to avoid, it’s Peter Navarro. They call him the ‘most dangerous’ man for the global economic order. He is radical, determined and wields enormous influence on US President Donald Trump– source–https://blogs.economictimes.indiatimes.com/letterfromwashington/peter-navarro-most-dangerous-man-for-the-global-economic-order/

In fact, the administration seems divided on the broader issue of U.S.-China relations. On one side are people such as Treasury Secretary Steven Mnuchin, who want to use tough talk and tariffs to extract a better deal from China, while staying within the basic framework of the international system. Others, such as trade adviser Peter Navarro, would prefer that the United States and China were far less intertwined. This would undoubtedly mean a more mercantilist world economy and a more tense international order. There is a similar split among geo-politicians, with the Pentagon being more hawkish (not least because it ensures huge budgets) and the State Department more conciliatory.

Vice President Pence recently gave a fiery speech that came close to declaring that we are in a new Cold War with China. An outright labeling of China as the enemy would be a seismic shift in U.S. strategy and would certainly trigger a Chinese response. It could lead us to a divided, unstable and less prosperous world. Here’s hoping the Trump administration has thought through the dangers of such a confrontational approach.

Image result for mike pence

History tells us that if China is indeed now the United States’ main rival for superpower status, the best way to handle such a challenge lies less in tariffs and military threats and more in revitalization at home. The United States prevailed over the Soviet Union not because it waged war in Vietnam or funded the contras in Nicaragua, but because it had a fundamentally more vibrant and productive political-economic model. The Soviet threat pushed the United States to build the interstate highway system, put a man on the moon, and lavishly fund science and technology.

The former head of Google China, Kai-Fu Lee, has written an important book arguing that China is likely to win the race for artificial intelligence — the crucial technology of the 21st century. He points out that China’s companies are highly innovative, its government is willing to make big bets for the long term, and its entrepreneurs are driven and determined.

Tariffs and military maneuvers might be fine at a tactical level, but they don’t address the core challenge. The United States desperately needs to rebuild its infrastructure, fix its educational system, spend money on basic scientific research and solve the political dysfunction that has made its model less appealing around the world. If China is a threat, that’s the best response.

America’s Neville Chamberlain


August 5, 2018

America’s Neville Chamberlain

 by

US President Donald Trump’s attempts to flex America’s muscles with the use of tariffs harks back to one of the darkest periods of modern history. During the Great Depression, the governments of Britain and France pursued a similar policy, unwittingly alienating would-be allies and strengthening Nazi Germany.

Image result for America's Neville Chamberlain

 

PRINCETON – When countries get nervous about their security, they often insist that they need to reduce their dependence on foreign products, shorten supply chains, and produce more goods domestically. But does protectionism really improve security? Now that the world is hovering on the brink of a full-scale trade war, we should examine some of the arguments made in favor of protectionism, and then revisit the largest trade war of the twentieth century.

There tends to be a great deal of duplicity in debates about trade. Import tariffs and other similar measures are often presented as convenient foreign-policy tools for serving the general good. But if one looks past the rhetoric, it is obvious that such measures really just reward particular constituents, and amount to an unfair form of taxation.

US President Donald Trump would argue that a trade war is a means to an end. To his mind, tariffs are a reasonable response to unfair currency practices and national-security threats. But, of course, there is also a domestic political calculus: namely, tariffs will help specific producers and constituents by making their competitors’ goods more expensive. The problem is that tariffs inevitably force domestic consumers to foot the bill for that subsidy, by paying higher prices.

Image result for America's Neville Chamberlain

There is nothing new in Trump’s assertion that, “Trade wars are good, and easy to win.” And that means we can test his claim against the historical record. When Neville Chamberlain was serving as Britain’s Chancellor of the Exchequer in 1932, he reversed his country’s century-old position as a champion of free trade. Worried about Britain’s longstanding trade deficit, he announced a new “system of Protection,” which he hoped to use “for negotiations with foreign countries which have not hitherto paid very much attention to our suggestions.”

Chamberlain concluded that it was only “prudent to arm ourselves with an instrument which shall at least be as effective as those which may be used to discriminate against us in foreign markets.” In the event, he was paving the road to World War II. His trade policy weakened Britain and strengthened Germany. And in a mere six years, his appeasement policy toward the Nazi Germany regime would reach its pinnacle with the 1938 Munich Agreement, which Hitler discarded six months later by destroying the rump Czechoslovakia and bringing it under the control of the Third Reich.

The interwar years were dominated by the fear of a German nationalist resurgence. For Western powers, containing Germany would require either an alliance system or a more ambitious collective-security pact. France preferred the former option, and advocated an arrangement in which its alliance with Poland, plus the “Little Entente” of Czechoslovakia, Romania, and Yugoslavia, would contain both Hungarian and German expansionism. Great Britain favored the second option, and saw the League of Nations as the most effective instrument for defending territorial integrity.

The lesson of the Great Depression is clear: trade wars intended to strengthen national security actually undermine it. This is especially true in the case of defensive alliances, because trade barriers force allies to forge closer ties with the very revisionist power that was supposed to be contained.–Harold James

Both approaches crashed in the Great Depression, owing primarily to France and Britain’s own protectionist policies. Both countries shifted abruptly to a policy of high tariffs and import quotas that gave preference to products from their overseas empires. The result was that Czechoslovakia’s industrial producers and Romanian and Yugoslav agricultural exporters could no longer sell to Western Europe. Instead, they became increasingly dependent – economically as well as politically – on Nazi Germany. Likewise, Poland, after fighting a customs war with Germany in the 1920s and early 1930s, entered into a non-aggression pact with the Nazi regime in 1934.

Through all of this, the League of Nations and other multilateral bodies tried to organize conferences and summits to halt the slide toward protectionism. But those talking shops all failed.

During the Great Depression, accusations of currency manipulation formed the primary impetus for protectionist measures. One hears the same sort of rhetoric today from Trump, both when he criticizes the US Federal Reserve for tightening monetary policy and when he claims – falsely – that China is artificially depreciating the renminbi.

The lesson of the Great Depression is clear: trade wars intended to strengthen national security actually undermine it. This is especially true in the case of defensive alliances, because trade barriers force allies to forge closer ties with the very revisionist power that was supposed to be contained.

Precisely this scenario is playing out today. Trump’s protectionist rhetoric is a response to the dramatic rise of China. But by launching a tariff war that also affects the European Union and Canada, Trump is making China look like a more attractive partner than the US. To be sure, Trump and European Commission President Jean-Claude Juncker have now reached a preliminary agreement to de-escalate the US-EU tariff fight. But Trump has already roiled the transatlantic alliance. Like Germany’s neighbors in the 1930s, Europe and Canada may feel as though they have no other choice than to seek out a more open – or at least more stable – partner.

Trump’s trip to Europe last month went a long way toward destroying the alliances that have maintained global stability since the end of WWII. And his self-abasing press conference with Russian President Vladimir Putin had more than a whiff of Chamberlain-style appeasement. If Trump actually wanted to make China more attractive to the world, then he could do no worse than to continue his war on free trade and the multilateral institutions that arose from the ruins of 1945.

Image result for Princeton's Dr Harold James

Harold James is Professor of History and International Affairs at Princeton University and a senior fellow at the Center for International Governance Innovation. A specialist on German economic history and on globalization, he is a co-author of the new book The Euro and The Battle of Ideas, and the author of The Creation and Destruction of Value: The Globalization Cycle, Krupp: A History of the Legendary German Firm, and Making the European Monetary Union.

 

Should Economists Make Moral Judgments?


May 26, 2018

Should Economists Make Moral Judgments?

At least since the days of John Maynard Keynes, professional economists have not had to worry too much about the moral implications of their technical work. But that is quickly changing with the global march of illiberalism, and economists now must ask themselves hard ethical questions before dispensing policy advice.

Image result for John Maynard Keynes

 

BUDAPEST – I recently attended a PhD seminar in labor economics at the Central European University in Budapest. In it, we considered whether the Hungarian government’s scheme to focus on long-term unemployment is working efficiently, and we raised a host of technical problems for the doctoral candidate to address.

But I came away disturbed by the experience, wondering whether professional economists (particularly in the West) need to reassess the moral and political context in which they conduct their work. Shouldn’t economists ask themselves whether it is morally justifiable to provide even strictly technical advice to self-dealing, corrupt, or undemocratic governments?

To be sure, reducing long-term unemployment would alleviate a social evil, and possibly ensure a more efficient use of public resources. Yet improved economic performance can shore up a bad government. This is precisely the dilemma confronting economists across a range of countries, from China, Russia, and Turkey to Hungary and Poland. And there is no reason to think that economists in the “democratic heartland” of Western Europe and North America won’t face a similar dilemma in the future.

 

Over time, economists have offered three different moral or political justifications for their technical work. The first, and simplest, justification simply assumes that the “powers that be” (the ultimate recipients of their work) are “benevolent despots” in the mold that John Maynard Keynes described (though Keynes did not consider the British bureaucrats of his time to be despots).

Image result for milton friedman

In the 1970s, this defense was challenged by economists at the other end of the Western political spectrum, who pointed out that bureaucrats were a supplier lobby like any other. As such, they will always have an interest in expanding their own individual and collective importance, regardless of whether it maximizes social benefits. This assumption led economists to become “intervention skeptics” who preferred market-based solutions for any problem where the need for regulation was not obvious.

Between these two positions, most economists have been content to ply their trade on the assumption that, however self-interested bureaucrats might be, they are subject to oversight from democratic politicians whose own self-interest is to get re-elected by keeping voters satisfied. So long as the economist’s technical solutions to policy problems are offered to officials with democratic legitimacy, according to this view, there is no cause for political or moral concern.

In fact, even economists in communist dictatorships could proffer their best technical advice with a comparatively clean conscience, because they were convinced that introducing more market-mediated outcomes would inject efficiency into planned economies and increase the sphere of individual freedom. This was true even in the Soviet Union, at least after Nikita Khrushchev’s accession to power in the 1950s.

But now, for the first time in many decades, economists must consider the moral implications of giving good advice to bad people. They are no longer exempt from the moral quandaries that many other professionals must face – a classic example being the engineers who design missiles or other weapons systems.

Image result for The IMF Building in Washington DC

 

The new moral dilemma facing economists is perhaps most stark within international financial institutions (IFIs) such as the International Monetary Fund, the World Bank, and the World Trade Organization, where economic mandarins with significant influence over public policy earn their living.

After the fall of Soviet-style communism, the IFIs admitted Russia and the other former Soviet republics (as well as China) on the assumption that they were each on a path to embracing democracy and a rules-based market economy. But now that democratic backsliding is widespread, economists need to ask if what is good for authoritarian states is also good for humanity. This question is particularly pertinent with respect to China and Russia, each of which is large enough to help shift the balance of world power against democracy.

That being the case, it stands to reason that democratic countries should try to limit the influence of authoritarian regimes within the IFIs – if not exclude them altogether in extreme cases. But it is worth distinguishing between two kinds of international institution in this context: rule-setting bodies that make it easier for countries with hostile ideological or national interests to co-exist; and organizations that create a strong community of interest, meaning that economic and political benefits for some members “spill over” and are felt more widely.

Image result for the world trade organization

Among the IFIs, the WTO is an example of the first type, as is the United Nations among international political institutions. The European Union, on the other hand, is the preeminent example of a true community of interests. And the IMF, the World Bank, and many UN agencies lie somewhere in between.

From this categorization, we can derive guidelines for economists to follow when advising authoritarian regimes. Advice or scholarship that allows authoritarian governments to avoid conflict with other countries would be morally acceptable in most cases. After all, as Winston Churchill famously observed, “jaw-jaw” is better than “war-war”. A good example would be research into how best to share scarce freshwater among Middle Eastern countries.

On the other hand, economists need to take great care when providing advice or conducting research with clear policy implications for authoritarian governments. Economists should not be in the business of helping authoritarian regimes advance nefarious ends on the back of stronger economic growth or resources saved. That probably means not giving advice to Hungarian Prime Minister Viktor Orbán on how to reduce long-term unemployment.

Needless to say, every case will be unique, and economists will have to decide for themselves. As in the past, some may even embrace authoritarianism. But for the profession as a whole, the moral consequences of translating economic analysis into practice can no longer be ignored.