Matt Klein, formerly of this parish, has a must-read column over in Barron's which does nothing less than attempt to redraw the debate over trade with China, by suggesting an alternative strategy to tariffs: target the capital of the country's elite. Go take a look, we'll wait.
His idea is worth considering to for two reasons.
One is it has a chance of resonating with people who think something ought to be done about China. Unlike general handwringing about trade wars as a bad thing of itself, or attempts to explain the wonky mechanics of trade wars, it isn't a defence of the status quo.
Matt says American anger at Chinese policies is justified, but also says tariffs won't work. He offers an alternative based on an analysis many have missed, or failed to articulate, possibly because of a blindspot about a country which claims to be communist:
China’s economic policies are a product of the Communist Party’s intolerance of alternative centers of power. After the pro-democracy movement met its violent end in 1989, Deng Xiaoping’s program of “reform and opening up” was modified so that party elites could capture as much of China’s new wealth for themselves as possible.
The result is that China is now one of the most unequal societies in the world. Between 1980 and 2010, the share of income officially earned by the top 1% of Chinese households rose by about nine percentage points.
So the point to focus on is the exploitation of Chinese workers, large proportions of which are excluded from the social safety net. It has been written many times before that China should re-balance its economy towards consumer spending, and this is even official policy. Frame the impetus as a class conflict the foreign elite has won, however, and suddenly that starts to sound like something a Rust Belt political rally could get behind.
It also has wonky underpinnings. As Michael Pettis has been trying to explain for some time, trade deficits and surpluses are a consequence of capital flows, not the other way around.
So, if the aim is to tackle the deficit, go after the capital removed from the Chinese people and spent on US dollar assets. As Matt writes:
Tariffs will not fix anything as long as China’s elites remain committed to extracting as much as they can from Chinese workers. The better approach would be to hit those elites where it hurts: Western governments should coordinate to ban Chinese investment in their countries, starting with housing.
As we recently wrote, some research by The New York Federal Reserve indicates a tenth of the dollars spent on purchases of US residential real estate were through anonymous shell companies. Throw in foreign money contributing to unaffordable housing, along with the exploitation of Chinese workers to undercut their US counterparts, and there's the beginnings of an alternative policy choice for the trade-angry.
That would also go well beyond investment restrictions as currently proposed, to restrict investments in strategic sectors. Which brings us to point two, it's time to start thinking about the potential and consequence of capital controls.
China already has them in place, after all, even if the elite have removed trillions of dollars to foreign shores. Tat for tit could be framed as sanctions or anti-money laundering. And it might be an area where fractious allies could find common ground - British Columbia has acted to curb foreign property purchases in the Canadian province, for instance.
Such policy could lead to escalation, with implications for multinationals in the country, but also think about the tax havens of the world, places such as the British Virgin Islands that are dead ends for trails of money. A strategic interest in beneficial ownership would be another shift in the system of international finance.
It becomes possible to imagine a question: is the money Chinese? The US would like to know.
Related Links:
High Wages Versus High Savings in a Globalized World - Michael Pettis
Of US-China trade war games - FT Alphaville
China, capital outflow and that over-reporting of imports problem - FT Alphaville
How to think about the Capital of China - George Magnus
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