China’s Remarkable Recovery From the Great Recession, and Implications For Its Future

Although China was hit hard by the Great Recession, its economy rebounded very quickly. Why?

america-china-commerce-communication-business-concept-1444957-pxhere.com (2) 

The Great Recession was a period marked by a sharp decline in economic activity, beginning in December 2007 and lasting officially until June 2009. It started in the United States when the housing market crashed, but contagion effects spread to the United States’ trading partners, one of the biggest of which was China. China’s economy relies hugely on exporting their goods overseas, and when American households lost about $16 trillion of net worth in the recession, they couldn’t afford to buy as many imported goods from China. Despite China’s permanent level of exports falling by 45%–a staggering amount–its economy rebounded incredibly fast, faring much better than that of any developed country. The crisis even affected countries without close financial links to the United States, such as Russia and South Africa, with these nations also decreasing their demand for Chinese products. Why did China recover so fast, given its export-driven growth model, while the rest of the world didn’t? The answer lies in the response of the Chinese government and a party system with the control necessary to push through stringent domestic policies, even if they caused short-term pain for its already struggling firms.

To start with, China introduced a RMB¥ 4 trillion (equal to $584 billion) stimulus package in 2008, to be put into infrastructure and social welfare programs by 2010. This stimulus was comparable in size to the United States’ own stimulus packages, but it came from an economy about one-third the size at the time, so the effect was more drastic and the initiative much bolder than any other country dared to enact. With its packages, China hoped to spur economic activity and increase its citizens’ total demand for goods and services, or aggregate demand, through the creation of jobs and welfare initiatives. If consumers use the money from these support policies to purchase more goods and services, their spent money circulates and get re-spent on new goods and services, bolstering the economy otherwise weakened from the recession. All of this went superbly for China: “total industrial production in China nearly doubled between 2007 and 2013 despite the crisis and an extremely weak international demand for Chinese goods, whereas the United States has experienced zero growth in industrial production and that in the European Union and Japan has declined by 9.3% and 17.1%, respectively.”

The United States enacted programs with similar goals, so why did China’s work while the United States’ didn’t? The difference was largely influenced by the Chinese government’s control of the economy. China has a market authoritarian system, where the government can keep a much closer handle on any economic activity in their country. In the United States, there is a much less restrictive free market system, and firms are under less pressure to do anything for the good of the country, instead focusing on minimizing profit loss. Once the Great Recession hit, American firms were hesitant to borrow and invest in expanding operations when aggregate demand was still low, and consumers weren’t willing to spend when firms weren’t hiring. In China, this wasn’t the case; they had things like state-owned enterprises (SOEs) run by the government, and the government took rapid steps to help the country even though they incurred debt and loss in the short run.  

China’s state-owned enterprises also acted as a sort of automatic stabilizer for their economy. Automatic stabilizers are policies and programs designed to balance fluctuations in a nation’s economic activity without needing intervention by policymakers. This stands in contrast to the pro-cyclicality of typical, privately-operated firms, which tend to restrict their operations in times of recession. While this minimizes the risks they take during a downturn, it also means firms are less eager to do business, dragging out the length of economic recovery. Normally SOEs are supposed to maximize profit just like privately owned enterprises, but beginning in 2008, they consented to increased production and investment spending, which provided major benefits to the economy and helped the economy start to grow again. Favorably for China, almost 20% of industrial employment following the 2008 crisis came from SOEs; with so many jobs remaining active during and after the recession, their economy was able to recover much more quickly and effectively in a manner not possible in countries without SOEs or similar programs.

While China’s policy actions involving SOEs worked out in the short run, risks posed by its Keynesian approach should be addressed. The timeline for the recovery of demand can vary greatly, so Chinese firms that stepped up production post-recession would be in an even worse position if their increased output went unpurchased. Past efforts by the Chinese government to influence demand have been notoriously unsuccessful, especially thanks to its people’s strong propensity to save. Data also show that from 2008 to 2015, China’s M2 measure of money (total cash and checking deposits plus savings deposits, money market securities, mutual funds, etc) increased by 16 percent annually, but during the same period, China’s economy expanded at a rate less than half that. Domestic inflation, as well as expectations of inflation, has been high since 2008. Taken as a whole, China’s success should be taken with a grain of salt and under different circumstances may have even damaged the economy more.

Beyond these unrealized risks, China also created several other hazards for itself set to materialize in the coming years, including increases in its already dangerous levels pollution and higher inequality among Chinese citizens. It has overproduced steel thanks to government subsidies and tax breaks, drawing the ire of competing steel-producing nations. Its debt has risen to approximately 50% of its GDP in part because of its post-recession policy actions, and it’s uncertain how easily they can repay it. Furthermore, with demand for Chinese exports unlikely to return to pre-recession levels, and because investment already accounts for almost half of its economic activity, China should look to do things like boost household incomes through higher wages and lower social security contributions, put in place fairer resource prices, interest rates, and distribute dividends from state-owned enterprises, or increase spending on pensions and healthcare if it wants to continue its economic growth and achieve its promise for the future.

Will Trump Tariff Solar Panels at the Cost of American Service Jobs?

solar-panels-1794467_1280       

One of President Trump’s main promises on the campaign trail was to crack down on free trade in the name of protecting American businesses, particularly the manufacturing sector. Despite the charged rhetoric during his campaign, President Trump has been a relatively traditional Republican when it comes to trade policy, outside of withdrawing from the Trans-Pacific Partnership (TPP). Last month, however, the Trump administration announced the imposition of new tariffs on imported solar panels and washing machines, a move designed to protect domestic manufacturers against a market flooded with cheap foreign goods, mainly from Asia. The tariffs on solar panels, which start at 30 percent and decline by 5 percent each year until 2021, have particularly profound implications for the expanding market of solar panels and solar energy.

As the cost of producing and installing photovoltaic solar cells has fallen drastically, the market for solar energy has grown rapidly, transforming the idea of widespread adoption of solar energy from an environmentalist’s pipe dream to a practical source of power. According to Bloomberg’s New Energy Finance Team, the price of solar energy has fallen from $350 per megawatt hour in 2009 to about $100 in 2018, with some projections estimating that average solar costs will fall below those of coal in the next decade. The International Energy Agency reported that 2016 saw solar grow faster than any other source of energy, with most of the activity coming from China, whose governmental support has enabled its producers to capture almost half of the entire market.

In many ways, China is on the forefront of the solar energy boom; the country alone added more solar capacity this past year than the total energy capacity of Germany and is responsible for driving much of the innovation that has caused the price of solar energy to fall so drastically. However, Chinese dominance in the solar sector has not been a blessing to American manufacturers struggling to compete with low-cost Chinese panels. Two companies, Suniva and SolarWorld Americas, complained to the White House and the International Trade Commission that they could not compete with the cheap photovoltaic cells imported from China without government intervention to “restore fair competition in the U.S. market.”

The complaints made by Suniva and SolarWorld are not unfounded. Suniva, a Chinese-owned company based in Georgia, filed for Chapter 11 bankruptcy last spring as a direct result of the influx of foreign panels. The International Trade Commission recommended a tariff of 35 percent on imported solar panels, and the Trump administration delivered with last month’s decision. Domestic producers of solar cells, such as Suniva, SolarWorld, First Solar and Tesla, stand to win as they will be able to sell their panels tariff-free and face less competition from their Chinese rivals. The possible benefits that these firms may receive from the tariff were reflected in their stock prices, as both SolarWorld AG’s and First Solar’s stock prices jumped shortly after the decision was made public. There is also no doubt that the creditors of struggling U.S. solar manufacturing firms have a positive view of the tariff, as the value of their investments will appreciate as a result. As far the U.S. solar manufacturing sector is concerned, the tariff does what it is supposed to do.

Proponents of the tariff overlook one crucial fact about the solar industry in America: the vast majority of jobs in the solar industry are not in manufacturing. In 2016, there were about 260,000 people employed in the solar industry (twice that of coal), but only 38,000 of those jobs were in manufacturing (14 percent) and only 2,000 were involved in the direct production of solar cells. Most of the jobs in solar are involved in the development and installation of residential and utility-level solar projects. The Bureau of Labor projects growth of 105 percent in the number of solar installers in the next 10 years, which would make it one of the fastest growing occupations in the country. The tariff will restrict the supply of panels available in the United States and thus raise their prices; in turn, higher panel prices will lead to fewer installations, forcing layoffs. The Solar Energy Industries Association estimates that as many as 23,000 jobs could be lost as a result of the tariff, and Green Tech Media estimates that the tariff could reduce solar installations by as much as 11 percent, setting the United States back in the adoption of clean energy. While some proponents of the tariff may point to the fact that Chinese companies like Jinko Solar have announced plans to build factories in America, the relatively few jobs that these highly automated factories would produce likely wouldn’t make up for the loss of jobs caused by the tariff itself.

Considering the net job loss that will result from this trade decision, it is hard to justify the implementation of the tariff. This decision seems to not result from economic analysis alone, but rather from a desire to maintain congruence between campaign trail rhetoric and public policy. President Trump promised to bring manufacturing jobs back to the United States, and this tariff might do just that – albeit relatively few. The fact that the tariff might slow the adoption of solar energy and bolster other forms of energy may also be a deliberate strategy to play to his base of support. “America First” intentions aside, the tariff’s economic ramifications will harm the livelihoods of many Americans, which should be the preeminent consideration on any policymaker’s mind.     

    

Filling the breach: Exploring China’s role in post-TPP Asia

caseyphoto

This month, U.S. Secretary of State Rex Tillerson met with top Chinese officials to pave the way for talks between the two countries’ leaders. Chinese economic policies in the Pacific will surely be discussed, especially as China exploits the demise of the Trans-Pacific Partnership (TPP) to assert itself as a powerful influence on trade policy in Asia. As the talks near, China’s new trade agreements with other Asian countries will offer valuable insight into how China has sought to expand its economic influence and upset Asia’s political landscape in the process. Amid rising tensions in Asia, the leaders of the United States and China must both recognize the futility of their attempts to use trade agreements as tools to dominate political developments in the Pacific region. Furthermore, while these two superpowers compete unsuccessfully for regional power, it will be the economic prosperity of other Pacific nations that suffers.

Discussions of Asia without the TPP may come as a surprise to some, especially considering the Obama administration’s strong support for the agreement. However, carried into office by the surging tide of populism, President Donald Trump has quickly acted to reverse any pro-globalization policies promoted by the previous administration. Without ratification from the United States, the TPP cannot go into effect, removing any possibility of the trade deal further integrating the economies of Asia and the United States. When President Trump put an end to the agreement, critics speculated that in response to U.S. actions, China would step in as the new economic leader in the Pacific region through trade deals excluding the United States. At the time of Trump’s withdrawal from the TPP, China had not yet enacted any such agreements, leaving its future role in the region unclear.

However, it did not take long for China to adjust to the United States’ withdrawal from the TPP and champion new international trade policy in the Pacific. After the TPP’s demise, many countries in Asia turned to the Regional Comprehensive Economic Partnership (RCEP) as the primary trade agreement, intended to promote freer trade between the many Pacific nations involved. Glaring differences between the RCEP and the TPP include the RCEP’s inclusion of China, as well as the absence of the United States despite its position as a major trading partner with many of the nations involved in the RCEP. Although negotiations among the 16 participating countries are ongoing, the RCEP agreement primarily focuses on lower tariffs, without any rules on environmental and labor protections. The trade deal will further integrate the economies of the participating countries, allowing for supply chains unhindered by expensive tariffs.

Cast in the role of outside observer to the RCEP because of its own political motivations, the United States loses out on a powerful tool for exerting its economic power to influence political and social issues in Asia. Under President Obama, the United States offered the economic benefits of lower tariffs to encourage developing nations in Asia to adopt stronger environmental and labor standards. Under the RCEP, it is unlikely that such protections would be enacted on the scale that the TPP proposed. After all, for many manufacturing-based economies in Asia, the lack of these safeguards allows their firms to produce at lower prices than many competitors can. Through the RCEP, China seeks to provide the Pacific region with the benefits of lower tariffs, without taking away the low-cost manufacturing advantage of these nations. In doing so, it hopes to assert itself as a powerful influence in the region and improve ties with other Asian countries, even as it pursues aggressive, expansionist policies in the South China Sea.

If China wishes to continue as the dominant economic force in Asia, however, it must also accept the detrimental economic effects of its politically motivated exclusion of the United States from the RCEP. Exports to the United States make up 18 percent of China’s total exports. As such, China would gain a great deal from free trade with the United States, though China would have to weigh this against regional influence lost to the United States. Furthermore, if China continues to exclude the United States from its trade agreements in the Pacific, increased tensions between the two countries could drive Trump to pursue protectionist policies. This would prove highly detrimental to the Chinese economy, threatening its ability to sell products abroad at lower prices than U.S. competitors can.

Most significantly, though, the politicized absence of the United States from Pacific trade agreements endangers the economic well-being of other Asian countries. Manufacturing-dependent economies like Malaysia and Vietnam looked to the TPP to provide access to U.S. markets like textiles, where these countries could sell their products at low prices. However, Chinese markets already have access to cheap manufactured goods produced domestically. Thus, trade deals with China would be unlikely to benefit other Asian economies to the degree that free access to U.S. markets would. Because of this, China would be less able to exert its economic leverage in pursuit of political influence in Asia, and developing economies in the region would suffer.

As talks between the leaders of the United States and China draw near, both countries must recognize the unintended consequences of trade policy as a tool for political influence. The allure of unfettered access to American markets will continue to divide the loyalties of Asian nations, even as China entices them with promises of freer trade within the region. As issues with the TPP and RCEP demonstrate, neither nation will secure uncontested political influence in the Pacific region through heavily politicized trade agreements. Instead, both the United States and China should focus on creating trade agreements to optimize economic growth in the numerous developing nations of the Pacific region through freer trade. If the United States and China cooperate on trade policy to achieve this goal, both they and many others in the Pacific region will benefit. Neither country should allow political machinations to stand in the way of economic progress.