What is the capital account?

Writing in the Economist, Mark Thoma says something remarkable:

"A COUNTRY that runs a current account deficit is borrowing money from the rest of the world. As with any loan, that money will need to be paid back at some point in the future. The cost of these loans is the interest that must be paid, and any vulnerabilities to speculative attacks that come with them."

We know that a current account deficit means there will be a roughly equal sized capital account surplus. But there is nothing about the capital account that requires the net foreign investment be in bonds!

Foreign direct investment (FDI) is part of the capital account. If companies around the world build more factories in country A than country A companies do around the world, then country A (all else equal) will have a capital account surplus and a current account deficit. Net foreign purchases of equities are also part of the capital account. If more foreigners buy stocks in Country A that citizens of Country A buy in foreign countries, that contributes to Country A's capital account surplus (and current account deficit).

I don't consider net FDI or net foreign purchases of equities loans. Do you?

Suppose Toyota buys a factory from Ford. Does that mean the US is borrowing money from Japan? Suppose Lionel Messi buys shares in IBM. In what sense is that the US borrowing money from Argentina? There is no requirement that the government or domestic individuals buy these items back later. Suppose I buy a factory from Ford. Is the rest of the country borrowing money from me?

Maybe Mark is speaking broadly, metaphorically, and considers profits of foreign owned factories and dividends on foreign owned stocks as "interest on loans"?

Even if this is so, FDI is decidedly NOT "money that will need to be paid back", nor am I aware of any studies showing that FDI inflows (except perhaps by the indirect channel of creating currency appreciation).

In his blog, Mark says he consulted the Krugman & Obstfeld text before writing the Economist post. Does the book make a similar claim?

People, what am I missing here?

They see me rollin'. They hatin'

Despite last minute hysterics from the usual suspects, the first Mexican truck rolled across the border on Friday. Mexico has now cancelled the $2 billion in tariffs they put on American products in retaliation for Obama's 2009 cancellation of an earlier Mexican trucking pilot program.

According to the NAFTA agreement of 1994, Mexican trucks were supposed to have full access to border states by 1995 and access to all of the USA by 2000 (Canadian trucks enjoy this same full access)!

The current "program" for letting Mexican trucks in is so protectionist that only 11 companies are going through the certification process. There are electronic monitors to measure how long the trucks are running. There are drug tests and English tests for the drivers. All things we do not mandate for drivers of American trucks. If it really is a safety issue, then these measures should be applied in a non-discriminatory manner.

The mix of protectionism and racism on display here is unseemly to say the least.

Good Grief: What does Obama have against Lee Myung-bak?

The South Korean president is here to celebrate the US-Korea FTA signing. Here is what our President has planned for him:

"Obama on Friday will then take Lee for a road trip to Detroit, home of the U.S. auto industry."

Let's break this sentence down, Tosh.O style:

1. A "road trip"? Are they DRIVING FROM DC to DETROIT? Who's paying for gas? If they use an electric car, how many days will that take?

2. Where, upon arrival, UAW officials will bury Lee under a parking lot, Jimmy Hoffa style?

3. Maybe President Lee has a thing for vacant lots or $11,000 houses?

4. Umm, Mr. President, I don't think Detroit is actually the Home of the US Auto industry anymore. Are you going to use a time machine and take him to Detroit in 1966?

Plenty of room in the comments for more!

Jobs, Reserves, Exchange Rates, & Trade

There is a big interwebs kerfuffle brewing on manufacturing jobs, currency and financial account manipulation and free trade. Economist's View has a post with links and some analysis that is well worth reading.

Here are some points to consider:

1. The current global trading system is very very far away from free. To criticize any current outcome and blame it on free trade is simply incorrect (If you don't believe me, take a look at "Travels of a T-shirt" or "Misadventures of the Most Favored Nations").

2. The dollar doesn't have to adjust for relative prices to adjust. The relevant relative price is the real exchange rate. US exports can become more competitive with a fixed nominal exchange rate simply by US prices rising more slowly than those of their trading partners. Higher productivity growth in the US would produce this effect.

3. Everybody has a comparative advantage. Statements like "America apparently has little left in the comparative advantage department" are non sequiturs.

4. I do agree that financial account manipulation should be discouraged, but it is way too simplistic to say it's good for China and bad for the US. It's good for US consumers, especially low income consumers and it's bad for Chinese consumers, especially higher income consumers.

Our New #2 Export: Law Suits

Notice how when there were giant problems in the Gulf of Mexico, our President sent a team of crack ... lawyers? Not engineers, not people who do things, but people who sue people. (...are the luckiest people...in the world!)

Well, our number 1 export today, by FAR, is debt. We make debt in Washington, and we sell it overseas. Surprisingly, we can sell it at a pretty high price*, because American debt is better quality than other sovereign debt, especially those snivelling Europeans. Their debt is low quality, and when you take it out of the box it's all coated with Greece. Yuck.

But it appears that our new second largest exports, if this Congress has its way, will be law suits. Got this note from SL:

Has anybody been paying attention to this delightful little treasure - The Foreign Manufacturers Legal Accountability Act?

It would require foreign manufacturers and producers that import products into the United States to designate a registered agent who is authorized to accept service of process here in the United States. It also imposes new burdens on importers - all importers.

It is being queued up in House Energy and Commerce and, on the Senate side, as part of tax extenders.

Marianne Rowden from AAEI had a good analysis of this bill when she testified on it last week in Energy and Commerce

I wonder if the massive export of lawsuits that this legislation will unleash will ultimately count toward the doubling of exports envisioned under the NEI?

Well, yes, I bet it does. And if you combine our exports of debt and our exports of lawsuits, I surmise that will be ALL of our increased exports. Our entire corps** of government officials at this point is composed of people who have never made anything except good grades in law school.

*Thanks to Angus for the correction. I had said "low price," when I meant low yield, which of course implies a HIGH price from the perspective of the purchaser.
**pronounced "core" not "corpse"

Free Trade: The Great Prosperity Machine

Tom Palmer is not just cute. He's smart. (But he's also cute, I'm just sayin')

Trading Up

Envy, Altruism, and the International Distribution of Trade Protection

Xiaobo Lü, Kenneth Scheve & Matthew Slaughter
NBER Working Paper, January 2010

Abstract: One important puzzle in international political economy is why lower-earning and less-skilled intensive industries tend to receive relatively high levels of trade protection. This pattern of protection holds even in low-income countries in which less-skilled labor is likely to be the relatively abundant factor of production and therefore would be expected in many standard political-economy frameworks to receive relatively low, not high, levels of protection. We propose and model one possible explanation: that individual aversion to inequality — both envy and altruism — lead to systematic differences in support for trade protection across industries, with sectors employing lower-earning workers more intensively being relatively preferred recipients for trade protection. We conduct original survey experiments in China and the United States and provide strong evidence that individual policy opinions about sector-specific trade protection depend on the earnings of workers in the sector. We also present structural estimates of the influence of envy and altruism on sector-specific trade policy preferences. Our estimates indicate that both envy and altruism influence support for trade protection in the United States and that altruism influences policy opinions in China.
----------------------

Estimates of the Trade and Welfare Effects of NAFTA

Lorenzo Caliendo & Fernando Parro
University of Chicago Working Paper, November 2009

Abstract: In this paper we build into a Ricardian model the role of trade in intermediate inputs, sectoral linkages and differing productivity levels across sectors. The model can be used for both ex-ante and ex-post trade policy evaluation. We also propose a new method to estimate sectoral trade elasticities. Estimation requires only trade and tariff data and does not require the assumption of bilaterally symmetric trade costs. With the model and estimates of sectoral trade elasticities for the year 1993, we evaluate the trade effects of the North American Free Trade Agreement (NAFTA). We do so by incorporating into the model the change in tariffs from 1993 to 2005 to calculate the implied changes in exports and imports. We compare these calculated changes to their observed counterparts and find that the model matches the observed outcomes well. We find that as a consequence of the tariff reductions, real wages increased in all NAFTA countries. Mexico had the largest gains, while Canada and the United States gained relatively more from trade liberalization with the rest of the world than from trade liberalization within NAFTA over the sample period.


(Nod to Kevin L)

Now he's the Answer to the wrong question

People, I am OLD. I have followed Allen Iverson's career since he was a high school phenom in Virginia.

He pretty much has no one to blame but himself, but it is really kind of sad to see him end up this way. After being injured at the beginning of the season, he has played 3 games off the bench for the Grizz and seems to be saying "no mas":

Iverson debuted for the Grizzlies on Monday in Sacramento after missing all the preseason and the season’s first three games with a hamstring injury. The Grizzlies lost to the Kings in overtime, and Iverson immediately questioned his limited role after the game. He also criticized his teammates for not noticing he was open on the final possession of regulation.

“I’m not a reserve basketball player,” Iverson said. “I’ve never been a reserve all my life and I’m not going to start looking at myself as a reserve.”

Iverson made similar comments two nights later after the Grizzlies lost to the Golden State Warriors.

and now?

A frustrated Allen Iverson has left the Memphis Grizzlies and is not expected to return anytime soon, if at all, a source close to the situation told Yahoo! Sports on Saturday.

The Grizzlies granted Iverson a leave of absence to allow him to return to his offseason home in Atlanta. The source said Iverson wants to clear his head and is extremely unhappy about the lack of communication with Grizzlies coach Lionel Hollins over his playing time and role with the team. Team sources told Yahoo! Sports that Iverson did not ask the Grizzlies to waive him, but there was no timetable for his return.

Still, Iverson has done nothing to hide his frustration after he returned from a hamstring injury this week and was relegated to coming off the bench. A source with knowledge of Iverson’s thinking said he “probably wasn’t coming back.”

The crazy thing is, he could be a valuable reserve player, getting say 18-22 minutes per game on a contending team with unlimited chucking privileges, but I guess he can't somehow get over the "insult" that would be. 

To me the only thing stranger than Iverson's fierce pride is the fact that the Grizz signed him to begin with.

Defending China

Some random thoughts about the exchange rate hysteria gripping our country's punditry:

How can China's exchange rate peg be "currency manipulation"? Of course literally it is, as is any peg, because you have to undertake policies to keep your currency at the target value. People, this is exactly how the Bretton Woods system worked for the entire Western world and it is how the Gold Standard worked as well.

Is that what we want to mean by "manipulation"?

China is not out there devaluing their currency. They are just pegged to us and we do the devaluing for them (with respect to the rest of the world).

Many US economists are pleased that we have a lower dollar to promote exports. Why is that not OK for China too? Yes I understand that we are a deficit country and China is surplus country, but I would be way more concerned about getting China to open its markets to a much greater extent than I would be about the nominal exchange rate between the US and China.

As alluded to above, the Chinese peg fixes the nominal exchange rate, but the key price for trade is the real exchange rate, which is not under Chinese control. 

I have not seen any analyses of the bilateral RER between China and the US, but I think Chinese inflation is higher than US inflation so that under the recent peg, there have been RER movements actually making the Chinese currency less competitive.

All this fussin' and feudin' isn't good for the international trading system. We slap anti-dumping on Chinese tires, they react against US nylon, other countries take note and get into the act (I think India has like 30 anti-dumping cases against China), and the whole system suffers.

The Chinese peg to the dollar is not cause of all our problems, nor is the floating Yuan the solution to our problems.

Sweet Nothings? Obama Sells Us Out, Again

On sugar corruption, two interesting articles....

article the first


article the second

Some people will actually try to make a "national defense" argument on sugar. GMAFB.

Trade That Americans Want

Wow. This guy is either a crazed, protectionist demagogue,or an idiot.

And I don't think he is an idiot.

SINGAPORE (Reuters) - The United States wants a robust trade policy that is in the interest of its people and the "Buy American" campaign will not violate World Trade Organization commitments, Trade Representative Ron Kirk said on Wednesday.

Kirk was speaking after Asia-Pacific Economic Cooperation (APEC) countries agreed in a two-day trade discussion in Singapore to shun protectionist measures, saying it would be a setback for the global economy.

"We would like a robust trade policy that is one that American people believe operates fairly in their favor as opposed to just the interest of one industry...as well as protecting the rights of workers that helps us to implement the president's number one objective that is to put Americans back to work," he said.

ATSRTWT

This would be a first

President O said last week that he doesn't intend to be real hands on with or micromanage his new public investment vehicles, Chrysler and GM. He also said:

"I'm not an auto engineer, I don't know how to create [an] affordable, well-designed plug-in hybrid. But I know that if the Japanese can design [an] affordable, well-designed hybrid, then doggone it, the American people should be able to do the same. So my job is to ask the auto industry: Why is it you guys can't do this?"

Hmmm, I guess President O is not a business historian either or he would know that one big reason the US headquartered automakers have been "unable" to make world class small cars is that the Federal government has long given them a large subsidy to make big ones!

Here is Robert Lawrence (via Dani Rodrik, who is on a roll!):

the US protects its domestic market with a twenty-five percent tariff. By contrast, the import tariff on regular automobiles is just 2.5 percent and US duties from tariffs on all imported goods are just one percent of the overall value of merchandise imports. Since many of the inputs used to assemble trucks are not subject to tariffs anywhere near 25 percent -- US tariffs on all goods average only 3.5 percent -- the effective protection and subsidy equivalent of this policy has been huge.

Since when you ask? How about 1962! I have to admit that I didn't know how long this had been in place. I assumed it came about in the 1970s.

PS: for a simple explanation of effective protection, look here.

Garbage 1, Recycling 0

As discussed in my little essay at Lib Fund's "Econlib", problems can arise when one ignores markets and economics in a market economy.....

From the NYT:

The precipitous drop in prices for recyclables makes the stock market’s performance seem almost enviable.

On the West Coast, for example, mixed paper is selling for $20 to $25 a ton, down from $105 in October, according to Official Board Markets, a newsletter that tracks paper prices. And recyclers say tin is worth about $5 a ton, down from $327 earlier this year. There is greater domestic demand for glass, so its price has not fallen as much.

This is a cyclical industry that has seen price swings before. The scrap market in general is closely tied to economic conditions because demand for some recyclables tracks closely with markets for new products. Cardboard, for instance, turns into the boxes that package electronics, rubber goes to shoe soles, and metal is made into auto parts.

One reason prices slid so rapidly this time is that demand from China, the biggest export market for recyclables from the United States, quickly dried up as the global economy slowed. China’s influence is so great that in recent years recyclables have been worth much less in areas of the United States that lack easy access to ports that can ship there.

The downturn offers some insight into the forces behind the recycling boom of recent years. Environmentally conscious consumers have been able to pat themselves on the back and feel good about sorting their recycling and putting it on the curb. But most recycling programs have been driven as much by raw economics as by activism.

Cities and their contractors made recycling easy in part because there was money to be made. Businesses, too — like grocery chains and other retailers — have profited by recycling thousands of tons of materials like cardboard each month.

But the drop in prices has made the profits shrink, or even disappear, undermining one rationale for recycling programs and their costly infrastructure.

(Nod to Mr. Overwater)

This week's sign of the apocalypse

From the AP wire comes the heartwarming holiday story of "Nebraska parents rush to leave kids before law changes":

LINCOLN, Neb. – The mother was running out of more than patience when she abandoned her 18-year-old daughter at a hospital over the weekend under Nebraska's safe-haven law. She was also running out of time: She knew that state lawmakers would soon meet in a special session to amend the ill-fated law so that it would apply to newborns only.

"Where am I going to get help if they change the law?" said the mother...

To the state's surprise and embarrassment, more than half of the 31 children legally abandoned under the safe-haven law since it took effect in mid-July have been teenagers.

But state officials may have inadvertently made things worse with their hesitant response to the problem: The number of drop-offs has almost tripled to about three a week since Gov. Dave Heineman announced on Oct. 29 that lawmakers would rewrite the law.

With legislators set to convene on Friday, weary parents like the Lincoln mother have been racing to drop off their children while they still can.

On Thursday, authorities searched for two teens — a boy and girl, ages 14 and 17 — who fled an Omaha hospital as their mother tried to abandon them. The mother was trying to take them from the car to the emergency room when they took off.

Holy crap!

The best joke I read all weekend

"When people in Dubai are asked to pray for rain, it ends up raining in Iran"--
Nasser Hashempour, vice president of the Iranian Business Council in Dubai.

LOL, eh? It's from a fascinating article in the NYT Sunday Magazine. The article is ostensibly about how the US is co-opting private firms into sanctioning Iran, but, to this ignorant Okie at least, it is most interesting for describing the Iran-Dubai connection.

Some further excerpts:

"Dubai now has as many Iranians as it does its own citizens."

"Since 2003, the number of Iranians in the United Arab Emirates has doubled to more than 450,000, he told me, and the number of Iranian businesses quadrupled to almost 10,000. Most are in Dubai, giving it the world’s second-largest concentration of Iranian expatriates (after California)."

"Iranians now have an estimated $300 billion in assets in tiny Dubai alone."

"Dubai and Iran are now so economically interdependent, local analysts told me, that the city-state has become to Iran something like what Hong Kong is to China."

A swing and a miss?

As you know, I love an internet beatdown as much or more than the next guy. However, Rodrik's attempt to put the Turkish hammer on Tyler Cowen's NYT piece is kind of a semi-whiff. Here's Dani:

The "free trade reduces prices" fallacy, yet again. This time the culprit is Tyler Cowen. In his column for the New York Times today, Cowen argues that freer trade in food commodities such as rice would boost global supplies and help reduce prices. He is probably right about the first, but not about the second. The effect of freer trade on domestic food prices depends on whether a country is a food importer or exporter. Freer trade would reduce prices of food (relative to other prices) only in countries that are food importers. Food exporters would experience a rise in the relative price of food, and there is simply no way of escaping that reality.

The economics of what Rodrik is saying are indisputable: if we go from no trade to free trade, the exported good's relative price will rise in the exporting country and fall in the importing country.

However, it's not at all clear to me that Tyler ever says free trade lowers prices for everyone. The closest he comes is in the first paragraph:

Rising food prices mean hunger for millions and also political unrest, as has already been seen in Haiti, Egypt and Ivory Coast. Yes, more expensive energy and bad weather are partly at fault, but the real question is why adjustment hasn’t been easier. A big problem is that the world doesn’t have enough trade in foodstuffs.

So, maybe you could interpret that as being wrong. However, it surely does not say "trade lowers the price of the traded good for everyone", which is the error Rodrik claims he is making.

For me, it's too vague to make any claim about what economic theory or fallacy is underlying the paragraph. As it is the opening of an op ed, I suspect its main intent is to get our attention.

The article is actually about how the lack of free markets, market friendly government policies, and supporting infrastructure in a lot of developing countries can be extremely counterproductive in an ever more interconnected world, using rice as an example.

An increasing percentage of the world’s production, including that for agriculture, comes from poor countries. Over all, that’s good for rich countries, which can focus on creating other goods and services, and for the poor countries, which are producing more wealth. But it can slow the speed of adjustment to changing global conditions.

For example, if demand for rice rises, Vietnamese farmers — who remain shackled by many longstanding regulations of communism — aren’t always able to respond quickly. They don’t even have complete freedom to ship and trade rice within their own country.

Poorer countries also tend to be the most protectionist. To make matters worse, about half of the global rice trade is run by politicized state trading boards.

The reality is that many of today’s commodity shortages, including that for oil, occur because ever more production and trade take place in relatively inefficient and inflexible countries. We’re accustomed to the response times of Silicon Valley, but when it comes to commodities production, many of the relevant institutions abroad have only one foot in the modern age. In other words, the world’s commodities table is very far from flat.

Many poor countries, including some in Africa, could be growing much more rice than they do now. The major culprits include corruption in the rice supply chain, poorly conceived irrigation systems, terrible or even nonexistent roads, insecure property rights, ill-considered land reforms, and price controls on rice.

The ability of a country to grow rice depends not just on its weather, but also on its institutions. Burma, now Myanmar, was once the world’s leading rice exporter, but it is now an economic basket case and many of its people go hungry.

My own criticism of Tyler's piece would rely less on Heckscher-Ohlin and more on Pritchett: In terms of helping the world's poor, freer trade is a drop in the bucket compared to allowing increased labor mobility.

If you live in a country with "corruption, non-existent roads, insecure property rights and price controls" free trade is not going to help you. Leaving will help you. The best thing the rich countries could do for a Haitian or Egyptian would be to let them come and work in the rich world.

Good Stuff

1. Hey Brazil! Wanna be our personal gas station? Brazil's discoveries of what may be two of the world's three biggest oil finds in the past 30 years could help end the Western Hemisphere's reliance on Middle East crude.


2. Our trade pact with Colombia, Nic Kristof gets it! Some Democrats point out that Colombia’s government has been tied to paramilitary units that kill union members. It was important for Democrats to raise these concerns — forcing the Colombian government to crack down on paramilitaries and prosecute those who murder unionists. But Colombia’s progress has been immense. Assassinations of union members, while still a problem, have fallen 80 percent since 2002. Last year, the murder rate for union members was 4 per 100,000, reaching levels far below the homicide rate for the general public. As she clips flowers in a vast greenhouse, Ms. Reynosa knows that her future depends on access to the American market. She agrees that Colombia has human-rights problems, but she argues passionately that the free-trade agreement is the way to register continued improvements. More trade will mean more jobs and more security and human rights, she argues.

3. Roger Simon lays out Hillary's path to the nomination. A random excerpt: And then, of course, bribe the superdelegates.

Roddick to France: "Forget" about it!

Or in pictures, too much of this:

created this:

Story here. Next up for the US team is Spain in the semi finals.

Have you heard about the new Argentine diet plan?

Recently elected Argentine President Christina Fernandez is facing the first big crisis of her administration over the government's inceased tax rates on some agricultural export crops, chiefly soybeans. Argentina has been growing rapidly since 2003 though with higher and higher inflation, now estimated to be between 20 and 30 percent, and higher and higher government spending. The government raised export tariff rates on March 11 and farmers went "on strike" with roadblocks, protests, and a cessation of delivering agricultural products either for export or for domestic consumption. Farmers vow to continue striking indefinitely and Fernandez vows not to give in to extortion.

From the FT story:

Agriculture is the backbone of the Argentine economy and high international prices for commodities, especially soya, have translated into booming exports.

The government’s new tariff regime replaces a 35 per cent levy on soya sales, with charges of up to 95 per cent if prices rise to $600 (€380, £300) a tonne.

Other crops are similarly affected, but soya is Argentina’s agricultural star commodity. Cattle farmers and other producers have been switching to the grain en masse, attracted by high profitability.

Under the new tariff scheme, farmers pay 44 per cent on exports at prices of about $465 a tonne. Added to income tax and provincial levies, this results in a total tax burden on farmers of 73 per cent, according to the Argentine Agrarian Federation, one of the four main producers’ associations.

The government argues that higher tariffs are needed to share out more fairly the windfall from exceptional commodities prices, and that the sliding scale benefits farmers more than a straight increase.

But the agriculture sector feels it is being squeezed to provide funds for a spendthrift government to fuel what critics say are unsustainable subsidies. Farmers say that the new tariff regime, coming just four months after the last increase in export tariffs on grains and cereals, was the last straw.

The government could close down meat exports in an effort to stave off shortages. It has requisitioned cattle owned by the armed forces for slaughter. But farmers say that is a drop in the ocean. Meanwhile, no trucks have entered the port of Rosario, Argentina’s grains export centre, for four days; eight ships have been diverted for lack of cargoes in Argentina and 15 are stuck in Rosario awaiting loading, according to the Agrarian Federation.

While I get a kick out of seeing farmers taxed instead of subsidized, them are some pretty steep tariffs. Note that when prices go up, tariff revenues rise with a constant tariff rate; what is going on here is that the tariff rate is also rising. I'm guessing the Argentine farm lobby screwed up and didn't put enough pesos into the Kircher-Fernandez political organization.

Is Brad DeLong right about China?

In one of the most curious defenses of free trade ever, DeLong argues that we should continue to trade freely with and embrace China so that their children will think fondly of us when they are our new overlords. Really! I am not making this up.

Some quotes:

if possible, the current superpower should embrace its possible successor. It should bind it as closely as possible with ties of blood, commerce, and culture--so that should the emerging superpower come to its full strength, it will to as great an extent possible share the world view of and regard itself as part of the same civilization as its predecessor: Romans to their Greeks.

There is a good chance that China is now on the same path to world preeminence that America walked 130 years ago. Come 2047 and again in 2071 and in the years after 2075, America is going to need China. There is nothing more dangerous for America's future national security, nothing more destructive to America's future prosperity, than for Chinese schoolchildren to be taught in 2047 and 2071 and in the years after 2075 that America tried to keep the Chinese as poor as possible for as long as possible.

I am just not so sure about this. First China is still a very poor country, and we recently found out it's even poorer than we thought. Second, though still very poor, China already has a very very serious pollution problem. Third, none of the east Asian miracle countries have caught up to the US (nor does it look like they will). Singapore and Hong Kong are indeed quite rich but they are cities, not countries. In per capita terms, Japan, South Korea, Taiwan, Thailand all grew rapidly relative to the US for a while but plateaued well short of US income levels. Fourth, China has serious governance problems. I do not foresee a totalitarian government reaching US-EU levels of wealth, and I do not foresee a change of government in China that would be anything close to smooth.

So, free trade with China? Sure, I'm for free trade with everybody. Trying to please our new overlords in advance? If they turn out to be so, I don't think what we do now will matter much, but I also wouldn't hold my breath waiting for the takeover.