The political economy of pressuring China

I see I was not the only blogger to point out the Paul Krugman = neoconservative argument -- see Ryan Avent's recent posts over at Free Exchange, which also challenge Krugman on the question of whether an appreciating yuan would actually reduce macroeconomic imbalances.  It's safe to say that the neocon meme got Krugman and his supporters a wee bit snippy. 

Krugman has posted a more substantive reply, however, and Avent has responded as well.  They are debating across a number of issues:  1)  whether the Chinese government can truly control China's consumption rate; 2) whether a revaluation would in fact lead to an improvement in U.S. exports/macroeconomic imbalances; and 3)  The best way to get China to alter its status quo policies. 

On the first two questions, I find myself siding with Avent on the first point (it's going to take a looong time for China's consumption rate to increase) and with Krugman on the second point (revaluation would still make a difference).  Scott Summer, Michael Pettis, and Tom Oatley have all also posted thoughtful responses/critiques of Krugman that are worth checking out.  

I want to focus on the third question, however -- what's the best way to pressure China into altering its position?  Krugman's proposal in his op-ed was Nixon redux -- slap on a 25% import surcharge and let slip the dogs of a trade war.  It was the unilateralist (and violation-of-WTO-trade-rules) aspect of Krugman's proposal that sparked the neocon snark on my part.  In my opinion, the U.S. should not act in a unilateral manner on the currency issue when other countries are also seriously put out with China's behavior.  I'm not saying it should be off the table, either -- but it's a policy of last resort rather than first resort.  Coordinated action to isolate China -- through the G-8, G-20, and other international bodies -- seems like the next step, rather than slapping on an import surcharge. 

Krugman elaborates -- a bit -- here: 

Here’s how the initial phases of a confrontation would play out – this is actually Fred Bergsten’s scenario, and I think he’s right. First, the United States declares that China is a currency manipulator, and demands that China stop its massive intervention. If China refuses, the United States imposes a countervailing duty on Chinese exports, say 25 percent. The EU quickly follows suit, arguing that if it doesn’t, China’s surplus will be diverted to Europe. I don’t know what Japan does.

Suppose that China then digs in its heels, and refuses to budge. From the US-EU point of view, that’s OK! The problem is China’s surplus, not the value of the renminbi per se – and countervailing duties will do much of the job of eliminating that surplus, even if China refuses to move the exchange rate.

And precisely because the United States can get what it wants whatever China does, the odds are that China would soon give in.

Look, I know that many economists have a visceral dislike for this kind of confrontational policy. But you have to bear in mind that the really outlandish actor here is China: never before in history has a nation followed this drastic a mercantilist policy. And for those who counsel patience, arguing that China can eventually be brought around: the acute damage from China’s currency policy is happening now, while the world is still in a liquidity trap. Getting China to rethink that policy years from now, when (one can hope) advanced economies have returned to more or less full employment, is worth very little. (emphasis added) 

Look, Krugman is blogging here -- I'm sure that he's thought about the political economy dimension a bit more that a single post suggests.  That said, Krugman is talking exactly like the most neocon of neoconservatives was before Iraq.  He evinces complete disregard for existing multilateral structures, makes casual assumptions about how allies will line up behind the United States and adversaries will simply fold, and underappreciates the policy externalities that would take place if his idea was implemented. 

On the multilateralism point:  as Simon Lester points out, a countervailing duty applied against all of China's imports across the board because of currency manipulation would be a flagrant violation of WTO rules.  So, question to Krugman (and Bergsten):  are you prepared to jettison the WTO to alter China's behavior?  Because that's exactly the policy choice you're setting up in your proposal.

This leads to the next problem -- Krugman/Bergsten's assumptions about how other countries would react.  First of all, I'm not sure at all that China will roll over.  I agree with Krugman that China's compellence power over the United States is limited.  The thing is, America's compellence power over China is also limited. It's the larger economy and the deficit country, so it does have some leverage.  What Krugman is suggesting is a huge demand, however -- one that would have wrenching effects on China's domestic political economy.  Expectations of future conflict between the two countries are quite high, and have escalated in the past two months.  Chinese nationalism is pretty robust at the moment, and nationalists are willing to make economic sacrifices rather than suffer a perceived blow to their country's prestige.  This is not a good recipe for concessions, even if China is hurt more than the United States by a trade war. 

Because that's what would happen -- Beijing would immediately respond with its own retaliatory tariffs on U.S. imports.  They would likely harass U.S. companies with significant amounts of FDI in China.  These moves would hurt China a little, but hurt the United States more.  Like Michael Pettis, I think the chance of a full-blown trade war at this point becomes pretty high. 

Krugman's assumption that Europe would automatically follow suit without prior consultation seems awfully casual.  As the New York Times reported today, there are a lot of European companies that are not thrilled with volatility in the value of the euro -- and what Krugman is proposing is guaranteed to increase volatility.  European authorities might  prioritize bolstering the EU's reputation as an actor that doesn't violate multilateral norms over the economic issues at stake (and if you think that materialist explanations always trump arguments about political prestige, well, then, the euro should never have been created in the first place).  I'm not sure how keen the Europeans will be about the unilateral move Krugman is suggesting.  It's far from guaranteed that the EU would even be able to speak with a single voice on the issue. 

Krugman's ignorance about how Japan would react (to be fair, Japan is not the easiest read right now), and his omission to mention how the rest of the G-20 or ASEAN would respond, suggests that he really hasn't thought this all the way through.  I'd like to see some contingency planning in case the rest of the world doesn't line up the way he thinks. 

Finally, there's no discussion -- none -- about what the political and economic effects would be during the period of uncertainty and/or  if China decided they weren't going to acquiesce.  Let's keep this within the economic realm and consider the following question:  what's the effect of political uncertainty on investment behavior?  Consumption levels?  I would posit that it would increase risk-averse behavior -- particularly if this kind of trade war roiled financial markets.  Wouldn't this simply exacerbate the liquidity trap concerns that Krugman has been fretting about? 

Note that much of the last paragraph was framed in the form of questions.  I'm not sure my answers are correct -- but I'm really not sure that Krugman's assertions/assumptions are correct. 

Daniel W. Drezner

Dawn of the Theories of International Politics and Zombies

Longtime readers might recall this August post about how international relations theory would cope with a zombie attack, which in turn prompted further blog inquiries from other disciplines. 

The trigger for that post was a mathematical simulation by Carelton University researchers that came to a bummer of a conclusion: 

An outbreak of zombies infecting humans is likely to be disastrous, unless extremely aggressive tactics are employed against the undead.... A zombie outbreak is likely to lead to the collapse of civilization, unless it is dealt with quickly.

Well, hold everything!  Richard Nielson at the Social Science Statistics Blog alerts us to new research on the matter from Blake Messer: 

The latter problem may be less intuitive so I'll explain my reasoning: Humans who survive the initial outbreak survive for a reason. Disproportionately, they were faster, smarter, and stronger to begin with than their fallen peers. Even if they weren't, they were luckier and have probably been able to, at least, find a more defensible location than where they started at round zero of the outbreak, increasing their chances of survival simply by virtue of having survived the early rounds of the outbreak.

So, I constructed a computational agent-based zombie outbreak model to test how my assumptions might alter the solution.

His result seems pretty encouraging:

[T]he [Carelton University] team's model leaves something more profound out the equation: human capacity for ex-post organization and response. When accounting for these things, I can find scenarios of large initial zombie outbreaks that, when followed by quick adoption of strong anti-zombie defense policies may help pockets, or even large fractions of civilization to ward off the impending doom of mass zombie infection! How exciting!

Phew!!  Sounds like an uprising of the undead won't be as calamitous as we originally thought. 

Except that then we get to Gabriel Rossman's sociological take

[If] the Romero movies have taught us anything, it’s that the defensive resources are only effective if they aren’t sabotaged by the internal squabbles of humans. (If you’re not familiar with Romero’s movies, think of what Newman from Seinfeld did in “Jurassic Park”). Thus you’d have to add another parameter, which is the probability in any given period that some jackass sabotages the defensive perimeter, steals the battle bus, etc. If such sabotage eliminates or even appreciably reduces the “safe area” efficacy then human survival in the “safe areas” is contingent on the act of sabotage not occurring....

So a more elaborated model would not only have to add in parameters for spatial heterogeneity, but also human sabotage.

The man has a point.  Indeed, other zombie enthusiasts have made related points: 

[T]he prospect of a zombie apocalypse actually represents a chance to throw off the constrictive fetters of society, shoot your neighbours in the face, steal some guns and a car, and drive off into the sunrise, taking along only those friends and family you trust and care about the most. As such, it represents a simplifying of life.

However, part of what needs to be figured out is whether there is any organizational cohesion in the wake of a zombie attack.  As the Carnegie school of political organizations would suggest, organizations exist in part to compensate for the stupidity bounded rationality of individuals.   Perhaps hierarchy and standard operating procedures in the wake of zombie attacks would help prevent the kind of sabotage discussed by Rossman. 

And yet.  If bureaucratic conflicts and organizational pathologies hamper effective counter-terrorism policies, imagine the effect they would have on anti-zombie policies.  The bureaucratic turf wars would be significant.  Quelling the rise of the undead would require significant interagency coordination.  In the United States, one could easily envisage major roles for the Departments of State, Defense, Justice, Homeland Security, Transportation, and Health and Human Services.  This does not include autonomous or semi-autonomous agencies like the Federal Emergency Management Agency, Environmental Protection Agency, Food and Drug Administration, Center for Disease Control, and the myriad intelligence agencies.

So the ability of organizations to adapt to an army of the undead is an open question.  Clearly, further research in this area is desperately needed.