CEI Book Club: Peter Navarro and Greg Autry, Death by China

By Ryan Young. Excerpts:

"Daron Acemoglu and James Robinson argue in Why Nations Fail that countries with extractive rather than inclusive political institutions will find limits to their growth. Extractive institutions are those that enable include expropriation of private industries, high corruption, suppression of political dissent, and arbitrary regulations. Inclusive institutions, by contrast, incentivize political accountability, open democratic elections, judicial integrity, and consistently enforced property and other rights. As impressive as China’s reform program has been to date, its government is still more extractive than inclusive. Its growth is likely unsustainable without continuing political and economic liberalization. If that process were to stop or reverse, the Chinese people will never truly be free or become as rich as the United States, Western Europe, or the nearby Asian Tiger economies.

Navarro and Autry might disagree with Acemoglu and Robinson, though. Acemoglu and Robinson’s argument that China’s economy stands on fragile ground without liberalization doesn’t play into Navarro’s theme of China as the biggest threat to U.S. national security since the Nazis."

"A common theme throughout the book is a decline in American manufacturing. According to the data, U.S. manufacturing is near an all-time high, both in terms of real output and in value added. Increased worker productivity can increase manufacturing output as manufacturing employment is reduced. This is actually good news; the U.S. economy gets spectacular output, plus more time and talent left over for other, additional purposes.

This is why manufacturing’s decline as a percentage of total U.S. GDP is also a good thing. Not only is U.S. manufacturing healthy and growing, but the rest of the economy is growing even faster. It turns out that non-manufacturing jobs are more lucrative on average, so the more of those, the better. Our diversified economy is better able to withstand economic shocks than less diversified countries like China, which not only has much smaller per capita output, but relies on manufacturing for 29 percent of its GDP, compared to less than 12 percent in the U.S. (See data here.)

Death by China also bemoans that current U.S. policy is “allowing a mercantilist and protectionist China to destroy the American manufacturing base and vitiate our economy.” (p. 124) Economists have long pointed out that mercantilism and protectionism are self-harming policies. When China raises trade barriers, it hurts itself. Its export subsidies take money away from Chinese taxpayers and transfer it to much wealthier U.S. consumers, who benefit from artificially low prices. Americans give up less to get more, and have more money left over for other purchases. All this is at Chinese expense.

Chinese currency manipulation has a similar effect. American consumers have to give up less money to get more stuff. This is a good deal for U.S. consumers, but a bad deal for Chinese consumers, who must give up more and get less to the same degree. And this speaks nothing of the opportunity costs and distorted decision making that accompany distorted prices.

Navarro and Autry also worry about America’s trade deficit with China. They argue against an exhaustive literature explaining why trade deficits are worse than useless as a measure of economic health, going all the way back to Adam Smith and David Ricardo. Countries don’t trade with each other, individual people do. Navarro and Autry assume the opposite. Their aggregate thinking is a common analytical mistake. People won’t make deals with other unless both parties expect to be made better off. Add up all these win-win deals, and it turns out that a lot of people are making win-win deals.

Moreover, this would be the case whether the trade deficit is positive or negative, and whether it is small or large. The trade deficit simply does not measure economic well-being. If anything, it inversely correlates with unemployment. When times are good and unemployment is low, the trade deficit tends to be high. It usually shrinks during recessions, when unemployment is high.

Navarro and Autry fall for the zero-sum fallacy, writing that in U.S.-China trade, “one country wins at the expense of the other’s income, jobs, manufacturing base, and prosperity.” (p. 219) Post-Mao China has experienced rapid growth, and currently enjoys per capita income of about $8,827—the highest it’s ever been. This is up from $959 as recently as 2000. In the U.S., per capita income also grew, increasing more than $22,000 over that time. These numbers are from a World Bank dataset measured in constant U.S. dollars, available here. For one country to have more, it is not necessary for another to have less. Economic growth is just that—growth. The pie gets bigger.

Navarro and Autry are convinced that China is responsible for sky-high American unemployment, writing again and again about China’s “weapons of jobs destruction,” and predict massive unemployment. As of this writing, unemployment is 3.8 percent, which is historically quite low. The unemployment rate will go up and down as the economy goes boom and bust, but overall, trade does not affect the number of jobs. It affects the types of jobs.

Trump’s recent steel and aluminum tariffs, which Navarro has publicly defended, will according to a Trade Partnership study save roughly 33,000 jobs in the steel and aluminum industries, and cost about 179,000 jobs in downstream industries—in the short run. In the long run, employment effects are about nil. Many of those steel workers will probably eventually lose their jobs anyway and find different work elsewhere. Displaced workers in downstream industries will find different jobs, too. But artificial restrictions and distorted prices imposed by the tariffs mean that those jobs will likely create less consumer value, on average, than if the government had left well enough alone. And jobs that create less value tend to pay less. China’s unfair trade policies are a direct result of its autocracy. While Navarro and Autry are right that China needs to both open its markets and free its political system, the trade policies they suggest will not solve the problem.

Other statistics in Death by China are misleading. The late Hans Rosling warns about lonely numbers in his book Factfulness, coauthored with Ola Rosling and Anna Rosling Rönnlund:

Never believe that one number on its own can be meaningful. If you are offered one number, always ask for at least one more. Something to compare it with. Be especially careful about big numbers. (p. 130)

Navarro and Autry give just such a lonely number when they argue that, “On [President George W.] Bush’s watch alone, the United States surrendered millions of jobs to China.” (p. 10) Let’s give that large, lonely number some company. In January 2001, when Bush took office, the U.S. labor force was 143.8 million people. When his term expired in January 2009, it was 154.2 million people, despite the economy being in recession. The data are here.

So even if “the United States surrendered millions of jobs to China,” those losses were outweighed by gains elsewhere, most of which have nothing to do with trade policy. Technological change and changing consumer tastes cause more than six times as much job churn as trade, according to a Ball State University study. The size of the labor force is tied more closely to population size than anything else. Today, after nearly another decade of rapid Chinese economic growth, the U.S. labor force stands at 161.5 million people, a net gain of nearly 18 million since Bush took office. Navarro and Autry have misled the reader about the significance of their lonely number.

Navarro and Autry give another lonely number: “a staggering 750,000 Chinese have settled in Africa over the past decade.” (p. 98) Again, they give no other numbers to compare this to. I’ll fill in the gap. In 2011, the year of Death by China’s publication, Africa had a population of just over 1 billion. Adding 750,000 people to that 1 billion is an addition of less than one person in 1,000, or about 0.075 percent.

Put another way, the city where I grew up, Racine, Wisconsin, has a population of about 77,000. The “staggering” migration Navarro and Autry describe is equivalent to about two Chinese families moving into my hometown per year for 10 years. Now that we have compared Navarro and Autry’s lonely number with other relevant numbers, we can better see how meaningful it is as a guide to policy.

On the next page, Navarro and Autry express worry about “Africa, where there are already over a million Chinese farmers. That’s right, over a million Chinese farmers” (italics in original). They don’t say if any, or how many, of those people are double-counted from the 750,000 number on the previous page. And they again decline to give this lonely number some companions.

Navarro and Autry also tell numerous scare stories about consumer products, quoting on p. 44 from a 2007 Chicago Tribune story that “Despite 55 complaints, seven infants left trapped, and three deaths, it took years for the Consumer Product Safety Commission to warn parents about 1 million flawed cribs.” They do not put these scary numbers in context. In 2007, the overall mortality rate for children under 5 in the U.S. was 7.8 per 1,000 per year. That’s a rate of 0.78 percent per year. Three deaths out of a million flawed cribs is 0.0003 percent. This number, which is 3,846 times less than the general child mortality rate, overstates the danger. And the Chicago Tribune story does not specify how many of those million cribs were Chinese-made. Navarro and Autry do not provide a comparison for mortality rates from cribs made in China versus those made in other countries.

America’s child mortality rate is less than half what it was when China began its economic reforms in 1978. Back then in it was 16.3 deaths per 1,000 children under five. By 2015, the number was 6.5 per 1,000. So by that measure, children in the U.S. are more than twice as safe as they were before Chinese products began flooding American store shelves.

Navarro and Autry also point out appalling environmental conditions in China, noting that, “as China has established itself as the world’s manufacturing floor, it has also turned itself into a toxic waste dump and the world’s most polluted country.” Here they have a point, though it might not be valid for much longer. Initial stages of industrialization are indeed very polluting. But when per capita income reaches a level of $4,500 or $5,000 per person, something changes.

At that level of development, families can begin to stop worrying about where their next meal will come from. They can afford sturdier housing, some health care and transportation, and can afford to send their children to schools instead of the farm or the factory. People can afford to care about environmental quality, and do. From that point on, environmental quality tends to improve as a country gets richer.

Economists who graph pollution against per capita income call this U-shaped curve the environmental Kuznets curve. This pattern has held in country after country, and researchers are finding that that it is also holding true in China. One 2016 study in the journal Energy Policy looks at 28 different measures of environmental quality in China and finds that:

[T]he Environmental Kuznets Curve (EKC) hypothesis is well supported for all three major pollutant emissions in China across different models and estimation methods. Our study also confirms positive effects of energy consumption on various pollutant emissions.

This makes sense. According to World Bank data, China reached that $4,500 threshold in 2010, one year before Death by China’s 2011 publication. So as Navarro and Autry were writing their book, China was at the very nadir of the environmental Kuznets curve. By 2017, per capita income in China had reached $8,827 per person, and continues to climb.

The U.S. reached its $4,500 per person environmental Kuznets curve threshold in 1968, just six years after Rachel Carson’s Silent Spring was published, which Navarro and Autry cite. Today, per capita income in the United States exceeds $59,000, and environmental quality has greatly improved. Even since Death by China’s publication, China’s environment has improved enough to show up in the data, though it clearly still has a long way to go. My colleague Iain Murray’s chapter on the Aral Sea in his book The Really Inconvenient Truths gives another example of this process.

Death by China also contains contradictions. I already mentioned how Navarro and Autry apparently believe in some kind of Schrodinger’s China: they belittle Chinese people as backward and poor while also portraying them as an unstoppable high-tech economic juggernaut. Which is it?

Navarro and Autry also write that “one of the advantages that China has over America is its ability to focus on the long term and think in terms of generations rather than individuals.” (p. 162) But they also have “an almost perfect lack of future vision.” (p. 184) Which is it?"