China not playing by the rules?

In a front page headline today, the New York Times comes to the rescue of Gamesa, a Spanish company producing wind turbines in the nefarious Middle Kingdom:

Gamesa has learned the hard way, as other foreign manufacturers have, that competing for China’s lucrative business means playing by strict house rules that are often stacked in Beijing’ favor.

…The story of Gamesa in China follows an industrial arc traced in other businesses, like desktop computers and solar panels. Chinese companies acquire the latest Western technology by various means and then take advantage of government policies to become the world’s dominant, low-cost suppliers.

State subsidies and policies to foster infant industries at the expense of foreign competitors. This sounds almost like the dark and nefarious practices followed by… Spain.

Personally I see nothing dark or nefarious here. This is good old fashioned industrial policy at work. How else do we expect poorer countries to converge to riches? Innovate on the frontier? I am an amateur economic historian at best, but here’s my opinion: almost never been done.

China’s story today sounds a lot like continental Europe in the early 19th century, Japan after the Meiji Restoration, and the Asian Tigers in the 20th. Go back two hundred years and you can find the British press enraged with the same complaints as they lose their textile industry to that backwards backwater, France.

Technology is the fundamental driver of growth. And poorer countries don’t get rich by innovating on the frontier, they get rich through the diffusion and adaptation of technique and knowledge. Once rich, the innovation begins.

Now, it’s quite possible that China is violating trade agreements and treaties left and right. The meddlesome fact not highlighted by the Times: competing in international trade means playing by strict house rules that are often stacked in the US and Europe’s favor.

The global system of rules that protect free trade and intellectual property do a great many wonderful things, and I don’t advocate elimination of either, but nor should we forget that these rules are written, stacked and now enforced by rich countries who developed through the same process they are trying to contain.

Are they even protecting their interests? A quote, from the same article, that did not make the lede:

Although [Gamesa’s] market share in China has atrophied, the country’s wind turbine market has grown so big, so fast that Gamesa now sells more than twice as many turbines in China as it did when it was the market leader five years ago.

Good grief. This is not a zero sum game, folks.

I welcome words from people who (unlike me) have actual expertise in trade, industrial policy, and history.

5 thoughts on “China not playing by the rules?

  1. This is, essentially, the argument made by Ha-Joon Chang in ‘Kicking away the ladder’ (http://www.amazon.com/Kicking-Away-Ladder-Development-Perspective/dp/1843310279). A short version of the central argument can be found here: http://www.paecon.net/PAEtexts/Chang1.htm

    Condensed in one sentence the storyline is: Western economies got rich using the very strategies they are now trying to deny others. Trade protection is foremost on Chang’s mind, but there’s some interesting stuff on patent law too: “Many countries allowed patenting of foreign invention until the late 19th century. As I mentioned above, Switzerland and the Netherlands refused to introduce a patent law despite international pressure until 1907 and 1912 respectively, thus freely “stole” technologies from abroad. The examples can go on”. If I remember correctly, German industrialist were also free to ‘steal’ foreign technologies at least up to the late 19th century, which is interesting as the country first needed to catch up before it could itself take a leading role in technological advancement.

  2. China is different because China is so big. When they pursue these policies, our people suffer, because the effect is so large. You are not dealing with reality here. I strongly suggest you read the links below and think through the implications. You are speaking from a position of economic privilege which undercuts your ability to see the situation as a whole.

    Look, this is not an issue because China is doing well. This is an issue because the manufacturing and middle class in this country has been hammered. (The willingness of American economists to throw American workers under the bus is disgraceful).

    Corporations have gotten exactly the globalization they wanted, and as a result, Americans hate free trade. This had been a systematic abandonment of a country and a workforce. Capital has been withdrawn and is idle or deployed in Asia – for export to our unemployed. Good luck with that.

    After China joined the WTO, American manufacturing employment sank like a stone – 40% of manufacturing employment in the last 9 years. This is not simply the continuation of a preexisting trend. Scroll down to the second chart (of US Manufacturing Employment) to see us drop off a cliff after this sea change.
    http://www.huffingtonpost.com/dave-johnson/china-springs-the-trap_j_681855.html

    It gets worse. Companies are still shoving R&D and capacity overseas as fast as they can.

    “New reports show that during the recession American companies ramped up investment overseas for plants and new hires, as well as research and development – even as they cut back domestically.

    Foreign subsidiaries of U.S. corporations increased their spending on research and development by more than 7% in 2008 from the previous year, pushing the total to nearly $37 billion. But these same multinational companies sliced R&D expenditures in the U.S. that year 2.2% to $199 billion, Commerce Department data showed.

    A similar but less dramatic difference was evident in hiring: Employment at these overseas units rose 1% in 2008 – and a stunning 15% in China – but was down 2% for the U.S. elements of the 2,200 multinational firms the Commerce Department studied.

    Some of these jobs were lost to automation, but Obama and many independent economists said a big factor was the sharply different policy approaches of U.S. and foreign governments.

    For decades, Washington has taken a largely hands-off, or laissez faire, approach, sometimes even adopting tax and other policies that critics said actively encourage the movement of manufacturing and other business activity overseas.

    By contrast, export giants such as Germany, Japan and South Korea have embraced government policies – and even pressure tactics – that push businesses to maintain operations at home.”

    link
    http://www.latimes.com/business/la-fi-economy-rd-20100913,0,3957503,full.story

    Globalization has been reversed before – I hope it is again. It deserves to be throttled. If corporate predators live by shareholder value, may they perish from the wrath of the vengeful citizen of the nation state.

  3. That for some reason made me want to cheer.

    I think an important thing to remember is that America still subsidizes certain sectors through military contracting. America also rather disgustingly subsidizes industries that should be transferred to poor countries (agriculture) or should be used less in general (oil).

    It’s also far from clear whether China has a competitive advantage in any areas where it wouldn’t already have a competitive advantage.

  4. It’s not that these policies don’t have meaningful effects on the US — of course they do. It’s just that they are so obviously and manifestly in China’s interests that it’s absurd to be even remotely upset that China is following them.

    The NYT transitioned during the Clinton years into a front for the monied interests looting our economy. Remember, this is an institution which has called for improperly classified information at Wikileaks to be suppressed.