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National Review
National Review
22 Apr 2023
Andrew Stuttaford

NextImg:Yellen and China — Reality and Illusion

NRPLUS MEMBER ARTICLE A lthough the “rules” that governed the Cold War were never so clearcut as many now imagine, they were a model of clarity compared with how America’s relations with China are currently run. The frank acknowledgment that the U.S. and the USSR were enemies made that contest easier to “manage”— and so, thanks to determination, luck, and the courage of one Soviet lieutenant-colonel, here we still are.

Our relationship with China, by contrast, is an updated version of pre-1914 great power rivalry that has evolved into something that may be more dangerous, not least because our tangled economic relationship makes it hard to say aloud how things really stand. And so it is to Treasury Secretary Yellen’s credit that in a speech at Johns Hopkins School of Advanced International Studies on April 20, she attempted to do just that. Her talk was an interesting mix: combining realism with an attempt to cling to older illusions that went, I suspect, beyond mere politeness.


[I]n recent years, I’ve also seen China’s decision to pivot away from market reforms toward a more state-driven approach that has undercut its neighbors and countries across the world.

Some mean-spirited types might point out that some U.S. allies have viewed the Inflation Reduction Act in precisely the same way, but I won’t do that. Instead, I’ll move onto Yellen’s next sentence.

This has come as China is striking a more confrontational posture toward the United States and our allies and partners not only in the Indo-Pacific but also in Europe and other regions.

Those two sentences describe two sides of the same coin. Despite the governing party’s name, China’s ruling regime has adopted an essentially fascist model economically and politically. It has harnessed capitalism to work for the interests of the state, and those interests have been redefined to include “common prosperity” and an explicitly nationalist agenda. Any resemblance to the “common-good capitalism” being peddled in this country is, of course, an unfortunate coincidence.

The regime may loosen the harness, but it will never remove it. The reappearance of tech mogul Jack Ma is case in point. It represents propaganda, not a sign that China is returning to its earlier more easygoing economic ways. His company, Alibaba, is to be split into six units. They will eventually be spun off into separately listed entities, designed to attract new capital in their own right. In the end, some may be divested by their parent company. Ma’s offense was in becoming too powerful and too opinionated for the Communist Party to accept. The CCP’s actions then devastated Alibaba’s market value. The prospect of dismemberment merely confirms that Alibaba and Ma have been cut down to size.

CNN’s Laura He, writing at the end of March:

In a policy shift, Chinese leader Xi Jinping recently urged the government to support private businesses, while calling on entrepreneurs to play a role in boosting growth and tech innovation, so that China can better counter what he called “containment” and “suppression” from the West led by the United States.

Premier Li Qiang, a trusted ally of Xi who was confirmed as the country’s No 2 official this month, followed up by rolling out a series of measures intended to repair ties between the government and the private sector.

“For a period of time last year, there were some incorrect discussions and comments in the society, which made some private entrepreneurs feel worried,” Premier Li said at his first news conference earlier this month.

Shift? Not so much. Yes, entrepreneurs should feel free to develop their businesses, but a central part of their role is to help China push back against the West. Westerners might want to consider that before investing in China or its companies.

Meanwhile, JP Morgan has been saying that investors are looking to cut risk in China more than any other market. If that’s the case, then they are making a logical choice. Moral and patriotic issues aside, unless investors are confident in their ability both to time the market and understand the internal dynamics of the Beijing regime, they have to hedge their bets in China. There are also encouraging signs of caution on the corporate side too. Although some U.S. consumer goods companies are increasing their activities in China as it reopens after Covid, many businesses appear to be more wary, as they should be.

Yellen described America’s economic approach to China as having three objectives. The first is to:

secure our national security interests and those of our allies and partners, and we will protect human rights . . . And we will not hesitate to defend our vital interests. Even as our targeted actions may have economic impacts, they are motivated solely by our concerns about our security and values. Our goal is not to use these tools to gain competitive economic advantage.

Hopefully that last sentence is, for diplomatic reasons, something that Yellen feels obliged to say but does not mean. Hopefully.

Yellen’s second objective:

[W]e seek a healthy economic relationship with China: one that fosters growth and innovation in both countries. A growing China that plays by international rules is good for the United States and the world. Both countries can benefit from healthy competition in the economic sphere. But healthy economic competition where both sides benefit is only sustainable if that competition is fair. We will continue to partner with our allies to respond to China’s unfair economic practices. And we will continue to make critical investments at home while engaging with the world to advance our vision for an open, fair, and rules-based global economic order.

“Seek” is doing a lot of work here, as is “healthy.” As things currently stand, there is no compelling reason for Americans to want China’s economy to flourish. A richer China is a richer adversary. And there is no reason for Americans to welcome Chinese innovation. As noted above, Xi Jinping’s encouragement of innovation is intended to strengthen China’s effort to combat supposed “containment” and “suppression” by the West.

Yellen’s third objective:

[To] seek cooperation on the urgent global challenges of our day. Since last year’s meeting between Presidents Biden and Xi, both countries have agreed to enhance communication around the macroeconomy and cooperation on issues like climate and debt distress. But more needs to be done. We call on China to follow through on its promise to work with us on these issues not as a favor to us, but out of our joint duty and obligation to the world. Tackling these issues together will also advance the national interests of both of our countries.

The question of debt distress (in the emerging markets) is for another time, but the notion that there can be genuine cooperation between China and the West over climate policy is delusional. China’s leadership sees climate change as less of a priority than do their counterparts in the West. They do, however, regard Western fear of climate change as both a business and geopolitical opportunity. Not only is the West progressively hobbling its economies in the name of the climate, but it has also allowed China to establish a dominant position in the market for solar panels (and their supply chain), a key energy resource in a decarbonizing West. And the self-harm does not stop there. Something similar may occur with wind turbines, where Chinese manufacturers have yet to replicate an impressive domestic showing, but may now be well positioned to take on the leading Western manufacturers, who have been struggling of late.

And then there are electric vehicles (EVs). For a century, the internal combustion engine has given the West’s automakers an edge, whether technologically or flowing from their long incumbency. But that could be about to change. EVs are well-established in China (accounting for around 20 percent of car sales in the country in 2022), and the country has also gained a dominant position in the EV supply chain. Now, China’s manufacturers may be poised to use these advantages to achieve an international breakthrough. Meanwhile, the U.S. is trying to head off that effort with generous subsidies for production here, an approach not normally associated with success.

Having said that, there may be a decent argument on geopolitical grounds in support of Washington’s effort — which Yellen refers to in her speech — to assist in rebuilding U.S. semiconductor manufacturing capacity. This is an argument — perhaps to Yellen’s surprise — that Adam Smith would probably have backed in principle. As I discussed in a recent Capital Letter, Smith recognized the need to support a “particular sort of industry . . . necessary for the defense of the country.” An awareness of the vulnerability of America’s semiconductor supply chain lies behind the CHIPS Act, which is why that legislation deserves defending despite its appalling flaws.

But no credible justification exists for ploughing billions of taxpayer dollars to develop an EV industry. Doing so is not only inessential — the impact of the switch to EVs on the effects of a changing climate will be minimal at best — but will also benefit Beijing.

Better news comes when Yellen talks of imposing additional controls on the flow of American technology to China:

As in all of our foreign relations, national security is of paramount importance in our relationship with China. For example, we have made clear that safeguarding certain technologies from the PRC’s military and security apparatus is of vital national interest.

We have a broad suite of tools to achieve this aim. When necessary, we will take narrowly targeted actions. The U.S. government’s actions can come in the form of export controls. They can include additions to an entity list that restricts access by those that provide support to the People’s Liberation Army. The Treasury Department has sanctions authorities to address threats related to cybersecurity and China’s military-civil fusion. We also carefully review foreign investments in the United States for national security risks and take necessary actions to address any such risks. And we are considering a program to restrict certain U.S. outbound investments in specific sensitive technologies with significant national security implications.


This, however, is not:

But we do not seek to “decouple” our economy from China’s. A full separation of our economies would be disastrous for both countries. It would be destabilizing for the rest of the world. Rather, we know that the health of the Chinese and U.S. economies is closely linked. A growing China that plays by the rules can be beneficial for the United States. For instance, it can mean rising demand for U.S. products and services and more dynamic U.S. industries.

As Yellen recognizes (how could she not?), the American and Chinese economies are deeply interconnected. In 2022, the U.S. imported Chinese goods worth some $536 billion and exported $154 billion worth of goods. In terms of imports, that number is significantly higher than the figures for Canada, Mexico, or the EU. It is also higher than it was in 2021, despite the deteriorating relations between Beijing and Washington. In 2015, U.S. imports from China were worth $462 billion, and its exports to China were worth $115 billion. The story of Sino-American trade relations has not so far been one of decoupling.

But it should be. Although the economic relationship is too deep to be cut overnight, Yellen and other U.S. officials should be working toward (in Gwyneth Paltrow’s memorable phrase) a “conscious uncoupling” from China. Any such effort will involve identifying key areas in which uncoupling should occur first, a process that should be shaped by recent supply chain disruptions as well as more conventional definitions of strategic goods.

This does not mean that the U.S. should move towards some sort of “autarkic lite” regime. China can, for instance, continue to sell us plastic toys. And not all production of essential products needs to be re-shored. For instance, it could be “friendshored” — an idea that Yellen refers to — although only to countries relatively safe from Chinese disruption. Nor does it mean that U.S. companies in most sectors should be banned from locating production facilities in China. Though shareholders should be aware that every dollar invested in fixed capital in China will be high risk.

Yellen claims to believe in the possibility of a “China that plays by [our] rules.” Once again, one can only hope that she was just being polite, because it’s not going to happen. A frank acknowledgement of that by Yellen and other U.S. officials would help us move forward more effectively.

National Review Institute: Discussion on the Economy, Palm Beach, May 4

Raising Interest Rates and Banking Turmoil — What it all Means

The Federal Reserve raised interest rates yet again in the shadow of troubles in the banking industry. This has only led to fears that the move could add to financial turmoil. In order to quell inflation many commentators argue that the Fed did the right thing and would be right to continue to raise interest rates. What does this mean for the economy and the individual? Please join Tomas J. Philipson, Acting Chairman of the Council of Economic Advisers in the Trump administration, and Andrew Stuttaford, National Review Capital Matters editor, for a discussion on these issues and more at the Sailfish Club of Florida on May 4.

The event is complimentary.

More details here.

The Capital Record

We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’s defense of free markets. Financier and NRI trustee David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by the National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.

In the 115th episode, David is joined by our own Ramesh Ponnuru to discuss the realities of free trade — the politics, nuances, nooks, and crannies — what it means for national security, economic growth, and yes, the NBA. It’s a discussion you won’t want to miss.

Capital Writing

As part of a project for Capital Matters, called Capital Writing, Dominic Pino interviews authors of economics books for the National Review Institute’s YouTube channel. This time, Dominic talked to monetary scholar Robert Hetzel about his book, The Federal Reserve: A New History. Below you will find an edited transcript of a few key parts of our conversation as well as the full video of our interview here.

No Free Lunch

Earlier this year, David launched a new six-part digital video series, No Free Lunch, here on National Review Online. In it, we bring the debate over free markets back to “first things” — emphatically arguing that only by beginning our study of economics with the human person can we obtain a properly ordered vision for a market economy . . .

The series began with a discussion with Fr. Robert Sirico of the Acton Institute. Later guests include Larry Kudlow, Dennis Prager, Dr. Hunter Baker, Ryan Anderson, Pastor Doug Wilson and Senator Ted Cruz.

Yes, the six-part series now has seven parts.


The Capital Matters week that was . . .


Benjamin Zycher:

Can it surprise anyone that the multiple Bidenadministration gambits intended to save the planet are proving perverse in every possible dimension? This is the case in particular for the fossil-fuel industry, both in the U.S. and internationally: In a nutshell, the administration seeks a long-term decline in investment and production on deeply dubious “climate” grounds, while at the same time begging foreign producers to increase output so as to moderate politically damaging price increases in the here and now.

Industrial Policy

Ryan Bourne:

Earlier this month, New York Times columnist Ezra Klein criticized “everything-bagel liberalism.” Progressives, he argued, often sabotage their housing, decarbonization, and semiconductor policy aims by piling on regulations, mandates, and requirements designed to achieve other social and economic goals. The result? In using industrial-policy legislation to try to achieve everything they desire, they drive up costs, undermining the main goal of boosting production in those sectors.

Just look at the semiconductor industry’s CHIPS Act funding, which is buckling under progressive wish-list items such as child-care mandates and equity strategies . . .


Dominic Pino:

At first glance, it makes little sense that labor unions would support minimum-wage increases. Union members don’t get paid the minimum wage, and if nonunion workers saw pay increases as a result of a minimum-wage increase, they would have less reason to unionize because the law would have raised their wages already . . .

Dominic Pino:

Though Julie Su is President Biden’s nominee to be secretary of labor, she has been the deputy secretary of labor since July 2021. Because the previous secretary of labor, Marty Walsh, has already left the job to work for the NHL players’ union, Su is currently the acting secretary of labor . . .

Dominic Pino:

Scott Lincicome’s Dispatch newsletter yesterday was all about the labor struggles at West Coast ports. The International Longshore and Warehouse Union’s shenanigans are hardly new . . . 


Joshua Wright:

In February, the Supreme Court heard oral arguments in two cases related to Section 230 of the Communications Decency Act of 1996. These oral arguments occurred in a broader context than the legal issues presented by the two cases. Many have called for legislative modification to (or outright repeal of) Section 230, and there are bipartisan — if incoherent — calls to “do something” about “big tech,” and reform of Section 230 fits the bill.

So, what is Section 230? In a nutshell, it does two things, both of which are extremely important to the functioning of the modern internet . . .

Andrew McCarthy:

When FTX exploded, voracious bureaucrats at the Securities and Exchange Commission and the Commodities Futures Trading Commission were soon exploiting the scandal as a crisis to do what progressives always like to do — subject everything to government regulation.

“Everything” in this context includes cryptocurrencies. The problem, as we observed at the time, is that it is not clear, as a matter of law, whether crypto is a security or a commodity . . .

The Economy

Dominic Pino:

Does the U.S. economy have problems? Absolutely. It always has, and it always will. There’s always room for improvement, and policy-makers have plenty of work to do.

It still remains true that despite those problems, the U.S. economy significantly outperforms its peers. That’s the subject of the Economist’most recent cover story. The British paper doesn’t have a dog in the U.S. domestic partisan fight, and it steps back to admire what the U.S. economy has done . . .

Douglas Carr:

Staggering under the weight of bloated government spending and deficits, the U.S. economy has steadily weakened during the Biden administration . . .

Dominic Pino:

Desmond’s argument, that the last 50 years have seen no progress in America against poverty, is based on the official government measure of poverty. It is true that the official poverty rate has fluctuated between 10 and 15 percent for the past 50 years.

But there’s a problem with that interpretation of the data. “It’s for a very simple reason that serious researchers have known for a very long time: The official poverty measure does not include much of the government assistance,” Corinth said. “If you were to include all the benefits we provide, you get a much different picture of poverty.”


Dominic Pino:

Brian Albrecht recently wrote a piece for Capital Matters about a report he co-authored that looks at the doomsday predictions regarding major corporate mergers of the recent past. “We find that most of the doomsday scenarios that critics predicted never materialized,” he wrote.

I also wrote a post on that report, which looked at Amazon’s purchase of Whole Foods, the consolidation in the beer industry, Bayer’s purchase of Monsanto, Google’s purchase of Fitbit, Facebook’s purchase of Instagram and WhatsApp, and Ticketmaster’s merger with Live Nation. All of those failed to deliver the catastrophes predicted by those who opposed the mergers, and, in many cases, things improved substantially instead.

A more recent supposed doomsday merger is that between Canadian Pacific and Kansas City Southern, two of the seven Class I freight railroads in the U.S.


Andrew Stuttaford:

Climate policy-makers’ war against cars is, of course, part of a wider war against mobility. Naturally, that includes the effort to curb flying, where, not for the only time, snobbery and climate fundamentalism intersect. It just doesn’t do to let all those dreadful people fly. . ..

I’ve written about this before, here and here, but, as is evident by now, issues such as these don’t go away. The green ratchet doesn’t stop turning . . .

The Pandemic

Joel Zinberg & Casey Mulligan:

Many politicians, public-health figures, and media pundits continue to insist that the Covid lockdowns were a success and represent a blueprint for future pandemic responses. Illinois governor J. B. Pritzker recently claimed that “thousands and thousands of more people would have died in Illinois if we had followed the lead of a state like Florida.” Pritzker was echoing California governor Gavin Newsom’s assertion that an 56,000 additional Californians would have died had he followed Florida’s Covid policies. Newsom even claimed that “‘lockdown’ states like California did better economically than ‘looser’ states like Florida.”

The data tell a different story . . .

Joel Zinberg:

Seven months ago, President Biden told a 60 Minutes interviewer that “the pandemic is over.” That didn’t stop his administration from repeatedly extending emergency declarations and measures and from seeking hundreds of billions of dollars more to combat Covid-19.

Congress has apparently had enough. A bipartisan group of legislators recently passed a resolution sponsored by Republican Representative Paul Gosar of Arizona to terminate the Covid-19 national-emergency declaration originally proclaimed in March 2020 . . .


Dominic Pino:

India currently has the fifth-largest economy in the world, with a GDP of over $3 trillion. China’s is nearly $18 trillion. So, India won’t be surpassing China economically anytime soon — but could it ever? 

The Debt Ceiling

Andrew Stuttaford:

The prospect of a fight over the debt ceiling is not something to look forward to. However, up to now, there have (mainly) been two working assumptions providing a degree of comfort to the markets. The first has been that “something” would be worked out before disaster struck. The second has been that the crunch could be put off (probably) until August.

That timetable was by no means certain, but there are increasing worries that the reckoning may be in June.


Andrew Stuttaford:

It should be stressed that Thatcher was operating in the world of practical politics; she was, to use a nonsense term, no “free-market fundamentalist.” For her, Hayek was a guide to the direction of travel, the road away from serfdom, so to speak . . . 

Fiscal Policy

Jack Salmon:

With the debt-ceiling deadline fast approaching, and policy-makers on both sides of the political aisle refusing to acknowledge the largest drivers of our ballooning federal deficits, the recent release of the Social Security trustees’ report throws another wrench into the works . . .

Electric Vehicles

Oliver McPherson-Smith:

The central planners in the Biden administration aren’t satisfied with the current rate at which consumers are buying electric vehicles (EVs), so the EPA just published a proposed rule that will require auto manufacturers to reduce their production of gas-powered cars if they don’t sell enough EVs . . .

To sign up for The Capital Letter, please follow this link.

Please note that, owing to travel plans, there will be no Capital Letter next week.