Industrial Policy, Unfair Practices & Trade Deficits (Week 4) > 1. Weekly Guide > Introduction Lecture
- Last week was the hardest week of this entire course- looking at the impact of globalization, of the spread of trade, investment, and technology on income inequality, wage and benefit inequality in developing countries.
- Analytically, that’s probably the toughest challenge of the entire course.
Industrial Policy, Unfair Practices & Trade Deficits (Week 4) > 2. Trade Deficit or Surplus > Identifying the Causes of Trade Deficits and Surpluses Lecture
- So let’s move into trade deficits and trade surpluses.
- A trade deficit is when a country imports more than it exports.
- A trade surplus is the reverse, when a country exports more than it imports.
- That’s the definition of a trade surplus or deficit, but what causes a trade surplus or a deficit? I want you to think of three things.
- I think for clarity purpose, think first of all, a country runs a trade deficit when it spends more than it earns.
- A country runs a trade deficit when it buys more than it sells.
- A country runs a trade deficit when it invests more than it saves.
- When a country buys more than it sells, when a country spends more than it earns.
- A country buys more than it sells and finances the balance on credit – foreign credit.
- If one says, as I tell you, all economists will say, the cause of a trade deficit is that a country is investing more than it’s saving, you might have the false impression that what’s going on in the United States is we’re having a vast improvement in infrastructure.
- How can a country cure a trade deficit? There is one way and one way only, and that is to spend less, earn more, or the equivalent.
- What do we mean by a country? By a country, we mean the citizens, the firms, local and state governments, and the federal government.
- So when we say that the country is spending more than it’s earning, we are counting all of these components together and finding that they are not in balance.
- A trade deficit may be a good thing, a beneficial thing if a country is spending more than it is currently earning to build the capacity to service and, ultimately, perhaps, pay off its debts.
Industrial Policy, Unfair Practices & Trade Deficits (Week 4) > 2. Trade Deficit or Surplus > Guest Lecture: Professor Lindsay Oldenski on GDP Equation
- You are going to come in contact with her work later in the course when we look at foreign investment in the United States, including Chinese investment.
- We’re going to be even more interested in her analysis when we look at the phenomenon of outward investment and the whole debate about runaway plants.
- So in this case, we’re talking about the GDP identity, which basically just says that whatever a country spends has to equal what that country earns.
- So when a country produces those goods and services, where do they go? Well, they can be consumed by individual citizens, which happens when you go to the grocery store and buy food, or buy clothing, these types of private purchases.
- When government spends money on public education, textbooks, these sorts of things, that goes under the government’s spending.
- Or they can also be shipped abroad to consumers in other countries through net exports.
- So exports is just the total, or net exports is the total of all exports, things that we produce in the US and ship to other countries, minus the stuff that’s produced abroad that we buy from other countries.
- You just subtract those two things and you’ve got net exports.
- Now in the US for the last several years, net exports have been negative.
- So if net exports are large and negative, which is currently the case in the US, then that means that consumption, government spending, and investment are necessarily going to be higher.
- About $10 of it will be invested in future production, or machinery as capital equipment for future investment.
- In terms of exports, it will be about $15 worth of exports, and about $20 worth of imports.
- The US is buying more things from other countries than the US is selling or shipping abroad to other countries, resulting in a negative net exports.
- So when the US, both private citizens, government, and investment activity are spent domestically, these add up to $105. What this means is that the US is spending more money domestically than they’ve actually produced.
- In that sense, you can think about net exports as something that offset high levels of consumption and investment by consumers, and government, and investment activities.
- So this negative 5, this negative net exports allows the country to consume more than they’ve actually produced by importing.
- Investment, and government spending necessarily must be offset by something.
Industrial Policy, Unfair Practices & Trade Deficits (Week 4) > 2. Trade Deficit or Surplus > Guest Lecture: Professor Lindsay Oldenski on Investment Identity
- So we can take this GDP Identity and, with some simple transformations, turn it into an identity for investment and savings.
- Because what we’re going to focus on now is what this means for total investment.
- So I’m going to leave investment all by itself on one side of the equal sign.
- So now what we’ve got in this equation for investment in terms of these other factors.
- When we’re thinking about investment and savings, a really important concept for savings is the federal budget deficit.
- So we’ve got investment equals GDP minus consumption.
- So now we have an identity in investment and savings.
- So on the left hand side, as before, this is all total private investment in the US. So investment in future production, capital equipment, factories, assembly lines, these sorts of things.
- So when you take your income and look at what’s left after you buy your food, and your clothing, and all of these things, and you pay your taxes to the government, what you’ve got left is income that’s available for saving.
- So if the government has more money left over- it brings in more than it spends- then the government can save that.
- So if public savings is negative, it means the government is spending more money that it brings in.
- So in this sense, the US can essentially take on the savings of other countries.
- When people in other countries are saving money, they can use that money to buy bonds.
- In that sense the US is importing foreign savings to use their own consumption.
- So now what this identity says is that all investment must be funded by some sort of savings.
- So it can be funded by private savings, by public savings, or by foreign savings.
- All of these have to add up to the total amount of investment.
- For example, if you have that the value of investment is higher than the value of private savings, which is the case in the US, then that difference has to be made up somewhere.
- So you can do that by having greater public savings.
- Savings needs to come from even another source in order to cover all of the investment that the US is doing in future production.
- So if you’ve got private savings less than investment, and the government is running a budget deficit, then it must be the case that you’re getting foreign savings in the form of imports that are higher than your exports.
- It’s required in order to maintain the high level investment in the US with the simultaneous relatively low private savings and budget deficit that’s going on.
- If your private savings are lower than your level of investment, then that has to be financed through either government savings or through the trade deficit.
- So China is a country that has a very high private savings rate.
- Their savings outweighs their investment.
- So when the US has a trade deficit with China, and imports more goods and services than we export to China, we compensate for that by essentially also importing Chinese private savings through issuing bonds or issuing treasury notes, and borrowing money from the high Chinese savings rate in order to finance higher consumption and investment in the US. But is this a good idea? It sounds like we’re buying Chinese products, so we’re buying products from all over the world.
- So if it really is this “I” here, if it really is going towards productive investments towards building schools, building highways, developing human capital, investing in productive activities that are going to result in higher income in the future, then that’s a positive thing.
- If it’s all coming through this “C,” if it’s all going towards consumption and buying goods for personal use and things that are not leading to future growth and future investment in productivity, then it’s not so much of a good thing.
Industrial Policy, Unfair Practices & Trade Deficits (Week 4) > 3. Industrial Policy > Introduction to Industrial Policies Lecture
- Let’s collect some suggestions about what kinds of industries we would like to see in a highly competitive country like the United States.
- Why don’t we just have the government emphasize new building, new plants, new R&D facilities, in these favored industries? That means have a high-tech industrial policy.
- Then somebody will say, well, what, so you’re going to give up on the auto industry, especially just now that it’s becoming green and fuel efficient? What about steel? I mean, we need steel for military purposes.
- If we’re going to have the government help, that means subsidize, that means give tax breaks, that means provide official support to favored industries.
- That is to say, helping favored industries penalizes other industries.
- Who’s to say that you, I, the students on the Georgetown campus, can pick winners and losers, good industries versus bad industries, better than 10 million stockholders, traders, individuals in private markets? Why should we- smart as we think we are- come up with better solutions than anybody else on who to favor and who to disfavor? Well, we started out positive on industrial policy, and now we’re saying we’re not so certain that it’s going to be effective or better than the private market.
- So you get politicians trying to decide where to locate the successful industries.
- Every senator, and every congressman, is going to think it’s a good idea to locate those industries in his or her backyard.
- What we’re going to find consistently in the United States, in Europe, and in Asia, is everybody will say, well let’s support sunrise industries.
- But what you find in the evidence is just the reverse- that sunset industries in Europe- shipbuilding, old steel facilities, petrochemical complexes that aren’t any more effective- get most of the subsidies.
- Usually it’s the sunset industries that have big unions, have big political sponsors, get most of the subsidies.
Industrial Policy, Unfair Practices & Trade Deficits (Week 4) > 3. Industrial Policy > Industries with Externalities Lecture
- Now a more sophisticated case can be made that there is a role for government intervention when there are externalities in the industry.
- Externalities- what are externalities? Externalities means that the social benefit that comes from the industry is greater than what the private participants- the company and those who use the products- can enjoy.
- It’s hard to identify externalities, and you still have no free lunch.
- That is to say you and I as taxpayers or other sectors still have to come up with money to support industries with externalities.
- Now another approach is to have the government invest in sectors where there is a high likelihood of externalities, for example in pharmaceuticals and health care.
- There is a final example and that is R&D- that’s research and development- tax credits so that the government will give a tax refund for companies that undertake R&D expenditures because the expectation is that there will be externalities, that is to say there will be social benefit from doing more R&D. I’m going to be in favor of that as we come to the conclusion of our course and begin to make policy recommendations.
- One of the exceptions is when there is an industry that has an externality.
- What is an externality? James, can I go back to you to discuss that? So an externality occurs when the social value of a good or service exceeds the value that a company can profit from.
- You’re right that in the case of externalities, it might make sense to have some public funding.
- The problem is that externalities are hard to identify and hard to measure, and then you still have the political process of every congressman or every senator wanting a nicotine patch producer in his or her district.
- Perhaps the better recommendation is to take areas where externalities are likely to be present, like in health and medical, and then set up a National Institute of Health, which is what we have in the United States.
- The other alternative is to have an R&D tax credit- research and development tax credit- that any industry can apply for because the likelihood of there being externalities flowing over from R&D- and again, then the industries choose themselves where they think they might be able to get the most externalities.
Industrial Policy, Unfair Practices & Trade Deficits (Week 4) > 3. Industrial Policy > Is Japan a Precedent for China? Lecture
- So let’s use the analysis that we have been undertaking to begin to look at the question of, is China becoming an economic superpower? Now remember, we looked at industrial policy.
- One of the key examples of industrial policy has been Japan.
- If we were sitting here 10 years ago or 15 years ago, we would have begun by saying Japan is a perfect example of super industrial policy.
- We now go back and look at the data, and what we find is that MITI or METI is subject to all of the same criticisms and weaknesses that we found in industrial policy elsewhere.
- So the evidence doesn’t point to this kind of industrial policy as being a recommendation for how China should behave.
- China has become successful in promoting some industries, like high speed rail.
- Chinese authorities are emphasizing automobile production, and they’re using US, European, Japanese, and Korean companies to try and build up the automotive sector.
- So what we have to do is take a closer look at what is going on in China.
- Over the past 15 years, China has become a huge exporter of high-tech, sophisticated products.
- Who is producing those products in China? Primarily, again, US, European, Japanese, Taiwanese, and Korean multinational firms are producing most of the high-tech exports.
Industrial Policy, Unfair Practices & Trade Deficits (Week 4) > 4. Is China Becoming an Economic Superpower? > Guest Lecture: Professor Carl Dahlman on China’s Economic Growth
- We are pleased to have Professor Carl Dahlman here with us today.
- Today, we’re going to draw on his recent expertise with regard to China.
- Before coming to Georgetown, I worked at the World Bank for almost 26 years.
- I’ve written three books on China, again, with a strong focus on the knowledge area of innovation, in particular.
- Carl, what steps is China taking to improve its capabilities in engineering, research, and development? It’s taking a lot of steps.
- Zhou Enlai started talking about four modernizations in China, which were agriculture, industry, national defense, and science and technology.
- Then when Deng Xiaopeng opened up to China in 1978, this was officially made part of their strategy.
- So they’ve been very aware of the importance of science and technology, and they have really put a lot of effort into that.
- It’s extremely impressive because of the depth and breadth of the plan, and it has very ambitious targets.
- That’s the level of the US. So we need to catch up with the frontier country.
- So it’s extremely ambitious and also very, very detailed.
- Carl, how rapidly is China becoming an economic superpower? Ted, it depends on what you mean by a super power.
- If you mean just in terms of the economic size, I would say very rapidly.
- If you take a look at their GDP in 2011, it was 49% the size of the US. But now, two years later, it’s 55% of the US. And calculations that have been made by many people, including the IMF, I think is that within 10 years, it will be as large as the US in terms of GDP. So that’s very impressive, and it’s happening faster than many people thought 10 years ago.
- Now, if you take a look at a superpower in terms of being a major innovative economy, they still have a long way to go.
- Let me refer you back to the numbers I gave you before in the medium and long term plan.
- So if you were to look at really quality patents, that’s where they’re still very far behind.
- As China’s market has gotten very big, more and more producers of the components are locating in China, so they’re beginning to develop very strong backward linkages.
Industrial Policy, Unfair Practices & Trade Deficits (Week 4) > 4. Is China Becoming an Economic Superpower? > Guest Lecture: Professor Carl Dahlman on China’s Challenges
- What are the challenges for China, looking forward? OK. Let me take this in two parts.
- One is narrow, on the science and technology, and then the broader, economic growth and economic superpower.
- To deal with that, they have to improve the incentive regime, and how they reward people for technical publications really based on quality, and also on patenting.
- Now going to the bigger economic picture- before, I told you how fast they’re growing and all the projections of how they’ll continue to grow, how this assumes that the system continues to operate and can maintain growth.
- The basic model in China, the social contract has been people have given up their right to change governments, and the government has promised to deliver in terms of economic growth.
- The problem with that is that it’s easy to say, but very hard to do.
- The way the system works is that China has a very high savings rate.
- So they get a tremendous subsidy from this very cheap money.
- On top of that, the state-owned enterprises pay very little dividend.
- The second thing was that the growth was maintained after the big global crisis, 2008, 2009, first, by a big stimulus package that was bigger, in proportional terms to a sizeable economy than the US, and was implemented immediately because they can do that in a centrally planned system.
- The provincial governments have been very active in this.
- A second economic problem is tremendous increase in inequality.
- If you take a look at 1990, in China, it was 0.3- the same as in India.
- The provinces along the coast that have begun the reforms and got a lot of the foreign investment have been growing 15%, even 20% in some cases, whereas the parts of the interior have been growing at 3% or 4%. So you see this very unequal distribution.
- Since television has diffused very massively, people in the poor areas can see how the people in the rich areas live.
- So the government is now under real duress because there’s more public expectations that it has to clean up its act and deliver growth.
- On the environment side, we have big problems of air pollution.
- On top of that, they’re very natural resource poor- except in very low-quality coal which is a problem for the emissions.
- They have to import energy, in particular, very tremendous import dependence.
- On top of that, they have really big problems in terms of water.
- They’re talking about major diversion in the Himalayan glaciers which can be very politically explosive with respect to water for the rest of Asia.
- On top of that, there’s a problem of climate change and global warming because of the emissions.
- China is the biggest emitter- the biggest energy users and the biggest emitter of CO2 in the world.
- Then on the political side, your political and their territorial claims on the South China Sea Islands and East China Sea, they’re fighting all their neighbors who are turning against them and asking the US for protection.
- The US, of course, has been very concerned about the rise of China.
- So the relationships with the US are also becoming very, very tense on the issue of major power shifts and global hegemony.
Industrial Policy, Unfair Practices & Trade Deficits (Week 4) > 4. Is China Becoming an Economic Superpower? > Guest Lecture: Professor Carl Dahlman on China’s Sustainable Investment and R&D Improvements
- Do you think that China’s going to be able to maintain its expenditures in higher education, research and development? They’re going to continue for as long as they’re sustainable, but that’s a real question.
- So these people are highly literate, very well-trained, and they’re unsatisfied.
- So the government is very concerned about how to employ them.
- Now the leadership is very pragmatic and they’re very aware of this.
- The current government that just came in this year is very aware of the need to make reforms, because the stability of the system is at stake.
- Now they’re aware they do need to make these major reforms, and this is going to be announced at their next major congress in October.
- So everybody is waiting to see how significant the reforms are and whether they’re going to be enough to be able to get China to continue to have high enough growth rates to absorb labor and to maintain the social stability.
- So what can China do to improve the quality of the science, the quality of the research, the quality of the patents? It has a lot to do with incentive regimes and how people get rewarded for doing the effort.
- So right away, everybody wants to get promoted, so they massively started to publish all kinds of things which weren’t of quality and to patent things that weren’t of quality.
- They’re also very interested in having big multinational companies do R&D in China, because that way they’ll learn all kinds of management techniques for R&D and quality, and these people may then spin off of on those companies to work for state-owned enterprises, or for government labs, or to teach at universities.
- They’re very aware of the challenges, and they’re trying to deal with it.
Industrial Policy, Unfair Practices & Trade Deficits (Week 4) > 4. Is China Becoming an Economic Superpower? > Guest Lecture: Professor Joanna Lewis on Chinese Green Technology
- We are pleased to have with us Professor Joanna Lewis, who is an author- now a prize-winning author- on green technologies in China- in particular, wind technology in China.
- Tell us a little bit about your background and then how has China become so successful in green technologies? Well, back when I was a student, I became really interested in climate change.
- China, as the largest energy consumer and producer in the world, the largest emitter of greenhouse gases, the decisions that China makes in the coming years to deploy energy technologies has implications, not just for China’s own economy, but for the entire world.
- China’s emergence as a leader in clean energy technology caught many people by surprise.
- Over the past decade, as China’s been building up its energy sector, it’s been deploying many coal-fired power plants.
- It’s done this through a concerted effort to promote both the deployment of these technologies through key policies- many of which were invented in other countries in the world and had proven successful- as well as a focus on becoming a leader in technological innovation in a variety of clean energy technologies.
- So the models that we’ve seen Chinese companies use to really excel in these technologies, these are not models that are unique to China or unique to, for example, the wind power industry.
- Many of the technologies that China now relies on were initially developed in other parts of the world.
- Goldwind is one of China’s leading windpower companies.
- So this is a company that started out licensing technology from foreign companies.
- China would like to become, not just a country that relies on technologies that were invented elsewhere, but an innovator in its own right.
- We’ve see many examples of Chinese companies becoming leaders both in the deployment of technologies, in the manufacturing of clean energy technologies, but more recently, actually conducting innovation in many state-of-the-art clean energy technologies.
- Looking beyond China, can you make some comparisons? I know you’ve also dealt with green technologies in India.
- I mean, I think China and India are two countries that we often speak in the same breath.
- They have the technical capacity in a variety of clean energy technology sectors.
- I think the key difference that has allowed China to really pull ahead of India, pull ahead of every other country in the world at this point in terms of deploying windpower technology is that they put in place this stable policy framework which has supported the industry.
- China has implemented several policies that provide regulatory certainty.
- Of course, wind, solar, all of the clean energy technologies we might look at need to compete with the other sources of technologies out there.
Industrial Policy, Unfair Practices & Trade Deficits (Week 4) > 4. Is China Becoming an Economic Superpower? > Guest Lecture: Professor Joanna Lewis on Technology Transfer & Intellectual Property
- Well, so what are lessons for other developing countries that want to create and sustain green technologies, and where does the technology come? What are the mechanisms of tech transfer? I think this is an extremely important question.
- Technology transfer is something that many countries look to try to understand how they can acquire access to technologies that may have been invented elsewhere.
- A lot of discussion about technology transfer is how you can best transfer technology from one country to another, but it’s not just about transferring the hardware.
- I think one of the most important things for developing countries and other emerging economies to consider as they are looking at their own technology transfer strategies in this sector is that just acquiring a technology- we call it the hardware, the actual solar panel, the actual wind turbines themselves- and bringing them into your national context aren’t necessarily going to enable this to be a stable industry going forward.
- A lot of thought has to go into what is the strategy for localizing, for example, the manufacturing of this technology.
- How can you build up the additional capacity that you would need to allow a new technology industry to thrive in an environment where it may not have existed before? One of the things that I think China has done very well is that, in addition to having several companies that- as I mentioned initially- went out to work with foreign companies to learn about these different technologies, in many ways to set up joint ventures, to license technology, what really ends up building capacity on the ground is experience, building up engineering capacity, building up expertise in this field.
- A lot of this has to do with a lack of experience and how to cite the technology, how to operate and maintain the technology.
- These are the so-called soft skills that go into the transfer technology that are extremely important.
- Technology transfer is a much bigger issue.
- People frequently say, well, the problem with China is actually they pirate the technology or they steal the technology or they violate intellectual property rights.
- It sounds like you’re talking about a more above-board, legitimate acquisition of technology on the part of Goldwind or other Chinese companies.
- They want to be involved in the evolution of this sector, both in manufacturing and innovating in next-generation technologies as well as using this as a laboratory to deploy many new clean energy technologies which we’re going to need- carbon capture and sequestration technology, for example.
- There’s a whole variety of technologies which China is now deploying which I think will have important lessons for other countries as we learn what kind of role these technologies can play in the transition to a low-carbon economy.
- In order to understand the actual technology transfer models that are being employed in China, for example in the wind power sector, looking at just one company like Goldwind can actually show you the range of models that are being utilized.
- When Goldwind was just starting out, they licensed their technology from several small German companies.
- So Goldwind is really a pioneer in permanent magnet direct drive wind turbine technology.
Industrial Policy, Unfair Practices & Trade Deficits (Week 4) > 4. Is China Becoming an Economic Superpower? > Guest Lecture: Professor Joanna Lewis on the Coal Industry in China
- We really can’t forget that even with China’s success in clean energy, coal is still king in China.
- I think given the current air pollution situation in China, there are a lot of positive steps towards really thinking about how to decrease the role that coal plays in China’s energy sector.
- While coal is still dominant in China’s energy sector, I think all of the signs that we’re seeing of the transition to clean energy are very important.
- Because coal is really at the root of all China’s environmental challenges from the local to the global, transitioning away from coal is going to be the core challenge of the leadership going forward.
Industrial Policy, Unfair Practices & Trade Deficits (Week 4) > 6. Conclusion & Looking Ahead > Conclusion: Summary
- This week has been the second-hardest week of the entire course.
- Then we moved into industrial policy, even sophisticated industrial policy, and the role in helping a country become more competitive.
- This led us naturally into the beginning of our investigations of China and whether or not China is becoming an economic superpower.
- We’re going to continue to pursue issues of high relevance, high importance but probably less analytic complexity.
Section 4: Industrial Policy, Unfair Practices & Trade Deficits