Working together through hard times

In light of reporting that the US and China have had talks on fentanyl, I've been thinking about other areas that the US and China can work on. As China works through this economic rough patch, there would be big benefits in working together with global partners. The NYT's calls it a "tactical pause", and I think this is correct. To date, the leadership has not yet had to challenge its modes of operation, and so they have not changed their perspectives or goals.

China seems to be figuring out that it does need partners, after several years that sounded much like a call to enter a war footing. Chris Wray explained last week how China's hackers have been infiltrating US civilian infrastructure at an alarming pace.

Fentanyl is obviously one of the most important issues. It must be noted that China only makes the precursor chemicals, and doesn't export the deadly drug (production is handled inside the Americas). That doesn't make it any less dangerous, but allows us to perhaps avoid ending up in the blame game about drugs.

Now, things have changed a bit, and it is very good news that Janet Yellen may be going to China. China seems a bit more willing to listen, and hopefully will be a little less reactionary.

What would the Chinese want in exchange? I think an agreement on electric vehicles would go a long way to solving China's economic problems, so an agreement on EV standards would be very good.

Solar power generation also would be a good area to work towards an agreement, but on the US side that must include talks on forced labor. China has unwisely implemented an extensive forced labor system in Xinjiang, and it must be made to pay a price for that. The Biden Administration must have a firm line on this issue.

I expect the US side to emphasize the economic damage China is doing to itself by continuing to use forced labor. Cotton, tomatoes, and solar panels are all affected, to some degree.

For each of these industries buyers of the tainted goods will have additional costs for buying due to uncertainty. That in turn makes the price go down, to be competitive. Finally all the cotton grown and harvested with forced labor will be all but useless, piling up somewhere. The competitor who uses forced labor will be able to undercut the competition, but with international sanctions that competitor will also be forced to lower its selling price. The result is a destruction of the other domestic competitors, and deflation.

To counter these sanctions, China wants to implement its 'dual circulation' system, where tainted goods will circulate domestically while other goods will circulate internationally. The problem is that prices cannot be not be the same between the two cycles in order for this system to work, and that won't happen. Cotton especially will be oversupplied domestically due to effective sanctions. Will the forced labor system be able to handle demand and price shifts?

Dual-circulation is not necessarily limited to forced labor goods, it could equally apply to China's domestic aircraft industry, where the product would be distributed domestically and internationally. Still, the concept comes in reaction to sanctions.

The absurd thing is this modern-day gulag is tiny in labor terms, roughly equal to the number of people producing iPhones in China, and nowhere near the size of the construction labor force, a group that is going to need government support very, very soon. China needs to be much more careful in its spending going forward, it just spends way too much on non-productive activities.

This issue is not going to go away, and sooner or later China will realize how much damage it's causing its economy.

The Trump tariffs were never sensible or applied in a careful or selective way, I think we all know that. I was surprised that Biden didn't lift them after taking office, but the combination of his own domestic political cost of doing so and the fact that China had, at that time, been so aggressive created the political calculus.

Still, some of those tariffs are now very negotiable. We should remember that consumers end up paying for these tariffs. Reuters gets the featured spot here because this piece explains one aspect of 'Bubble China', about the delegation to China announced on February 5th 2024:

The delegation, led by Treasury Undersecretary for International Affairs Jay Shambaugh, planned to hold frank conversations on Monday and Tuesday as part of the U.S-China Economic Working Group about Beijing subsidies that the U.S. says encourage overproduction of goods, potentially flooding global markets.

Not just overproduction but overcapacity, all stemming ultimately from the mandate of growth that Beijing still hasn't abandoned. The leadership knows they need quality growth not just growth, but it will be hard to abandon a system that seems to have worked for such a long time.

Janet Yellen has some good ideas on what to do with the tariffs:

The emphasis on China's industrial subsidies comes as the Biden administration is continuing a review of U.S. tariffs imposed on hundreds of billions of dollars worth of Chinese imports by former President Donald Trump. U.S. Treasury Secretary Janet Yellen and other senior administration officials have called for the punitive duties of up to 25% to be shifted to a more strategic focus.

I am confident that appeal to strategy has forced labor directly in its core. It should also have labor rights in focus more generally, because China will only get rich as a nation when it has labor laws that protect common people. The Biden team should definitely talk about how labor law protects workers, which ends up making the domestic economy more stable and richer.

But that is a post for another day.