Post-WTO China

Brad Setser has a very good post on China in WTO – 15 years hence. Some key points from his post are:

Here is a point that I think should get a bit more emphasis. China’s imports of manufactures, net of its imports of imported components, peaked as a share of Chinese GDP in 2003—and have fallen steadily since then. There is no “WTO” effect on China’s imports of manufactures, properly measured (i.e. leaving out imports for re-export). Chinese imports of manufactures for China’s own use are now under 5 percent of China’s GDP—a low number compared to China’s peers. As a result, right now, China supplies roughly three times as many manufactures to the world as it buys for its own use (net of processing imports, manufactured exports around 12.5 percent of China’s GDP; net of processing imports, manufactured imports are around 4.5 percent of China’s GDP, for a manufacturing surplus of around 8 percent of China’s GDP).

He shows here that intervention in foreign exchange markets was almost as high as 15% of GDP.

China was hardly adding to its reserves at all when it joined the WTO. At the time, annual reserve growth, using my best estimates which attempt to count all hidden or shadow intervention, was 2-3 percent of China’s GDP. By 2006 it was ten percent of China’s GDP (counting hidden intervention through the banks); by 2007 it was 15 percent of China’s GDP (counting a new form of hidden intervention through the state banks). Based on the work of Joe Gagnon of Peterson Institute and his co-authors, I think that China’s intervention from 2003 to 2008 added between 3 and 6 percentage points to its current account surplus (I could argue for a higher number, actually—see the footnotes here). The market wasn’t allowed to work for a long time—China’s exchange rate didn’t really start to appreciate in a way that would push firms to reconsider their production structure until late 2007.

Other highlights of his excellent post:

Back in 2000 and 2001, China was expected to do well in the production of apparel and low-end consumer goods. But it was also expected to be a big market for a wide range of sophisticated U.S. and European capital goods. Broadly speaking that hasn’t been the case, setting aircraft aside.

The WTO rules aren’t all that constraining in a country like China—thanks to state control of commanding heights enterprises and banks, and institutions, such as the National Development and Reform Commission (NRDC), that assure party control of major state firms and large investment projects.

The U.S. for example, runs a significant trade deficit in capital goods with China (even after taking out computers). That wasn’t the expectation back in 2001.

The most interesting aspect of the blog post is how the WTO accession for China had some safeguards against dumping – the non-market economy status, the Special Safeguards provision. But, the Bush administration refused to invoke them even in situations there were four of them) where the case was clear cut.Whether the reluctance to invoke the Special Safeguards provision was ideological (non-interference with the so-called market mechanism) or something else, we would not know.

With the benefit of hindsight, I think it was a mistake not to make greater use of the 421 safeguard provision in the years following China’s WTO entry.** There were surges of imports left and right from 2002 to 2007 (and additional surges in imports of machinery in particular from 2010 to 2014). These surges had a material impact on many manufacturing dependent communities, especially in the American Midwest and Southeast (and in some smaller towns on the west coast that were part of the U.S. tech manufacturing sector). The threat of injury should not have been hard to show.

That is important. Who knows? Had they used them, some of the manufacturing communities in the U.S. would not have been badly damaged; Schott and Pierce had documented this very well; the anger over the loss of control over one’s lives would have been contained and, who knows, Donald  Trump might not have gotten elected! Talk of the law of unintended consequences!

He says that “fighting China’s intervention is in some ways fighting the last war.” The correct fight now has to be in these areas:

against the domestic policies that keep China’s savings so high;

against a surge in capital outflows that leads to a yuan depreciation that then becomes entrenched (if China’s currency goes down, I worry it won’t go back up) and

against Chinese import-substituting industrial policies that aim to displace major exports to China.

From a geo-political perspective, I am not sure if the fight has to be ‘against a surge in China capital outflows’. That is at least worth debating. If I were the American President, should I encourage it for it undermines China’s economic stability or should I ‘fight against it’ because it weakens the Chinese currency? Is the exchange rate as important now as it was then?

Overall, a great post by Brad Setser; of a very high quality and rigour that one normally associates with him; good to see him back to active blogging (well, he had resumed blogging in May 2016) after his days in the Obama administration.

Having Brad blog actively is one advantage of the Trump Presidency that not many would complain against!

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