=economics =china
The consensus of American and
European economists used to be that Chinese economic growth was just
catch-up growth, and Chinese industrial policy was actually
counterproductive. Now that Chinese per-capita GDP has blown past Brazil's
and is still growing faster than India's, this consensus has shifted, and
more people are starting to ask if maybe industrial policy is actually
effective sometimes.
So, what has China been doing right?
scale
In a Ricardian model, a country should always focus on whatever it has a comparative advantage in. The model that works is to focus on what you could have a comparative advantage in and to do whatever it takes to get that advantage.
- Lessons From the East Asian Economic Miracle
Lots of things are better at a
big scale.
Gas turbines are better at bigger scales, up to at least
100 MW. Seals around the edges are better for big blades, and the gas is
compressed so the inner blades of even big turbines are fairly small, and
those inner blades have little cooling holes in them.
When you build
chemical plants, it's better to do a lot of things in the same location to
reduce transportation costs and use waste heat. The optimal scale for chemical plants is large
enough that even big ones in America are often too small, because the
companies can't afford to make a bigger complex.
The ultimate example
of minimum scale these days is making a new city, and China has been doing a
lot of that. Americans mocked Chinese "ghost cities" for years, and now I'm
embarrassed to remember going along with that assessment. China built a
bunch of empty buildings and had workers in malls with now customers, but
now the apartments are (partly) occupied and the malls are busy.
Even
better than just building a new city is creating a new city specialized in
an expanding industry with benefits to large scale. I'm talking, of course,
about Shenzhen, the
global capital of electronics.
Automotive manufacturing is another
industry that benefits from scale, and the Chinese government has tried hard
to develop it. They put large tariffs on imported cars, and forced foreign
carmakers operating in China to share knowledge with Chinese partners. Now,
it makes the most automobiles by far, more than America and Japan combined.
surplus
In 2021, lumber prices briefly
tripled, due to a shortage of lumber mills. From the perspective of the
economy of a whole, this is a failure of the lumber milling industry, but it
profited greatly from this failing.
Companies put much effort into
trying to shift profits from other parts of the supply chain to themselves.
The Chinese government has a different view.
To the Chinese
government, zero-sum transfers within China don't matter. If they subsidize
batteries heavily and those batteries get used in China, then that's fine;
the only question is how much production is desired, and the Chinese
government will just give
directives about production volumes directly.
Because of this, the Chinese government is less concerned about
oversupply than private corporations, especially oversupply of raw
materials. If there's too much steel, then let prices drop, and if that
means steelmakers lose money, then just give them government money and tax
some things steel is used in.
Big chemical plants are big, which
leads to a small number of big chemical companies. Some chemical plants are
bigger than the
optimal bet size for even big chemical companies. So, they want a
partnership with banks or something, but they don't want to make a big plant
producing something they already make if they don't have full ownership,
because they're not getting all the profits but they're reducing their
profits from existing plants because of the increased supply lowering
prices. The chemical industry leads to natural oligopolies but because the
products are very commoditized the result is underinvestment.
On the
other hand, state-run companies in China and the middle east have just made
giant methanol plants and it worked out economically.
market prices
How much does an MRI cost? Sorry,
that's a
trick question.
Which insurance plan is the best one for you?
Companies seem to
deliberately make it difficult for you to know.
How much does
1000 tons of glycerol or hexanediol cost? Sorry, that's another trick question: there is
no consistent market price for many chemicals, even fairly common ones.
Chemical companies do private contracts at different prices, and often have
different prices for "internal customers" and external ones. Publishing
those prices is only disadvantageous to them.
When selling a
commodity product without benefits to more scale, there's no incentive to
get an extra customer, so it's better for companies to drive away ten
customers to overcharge one.
Publishing price data reduces
transaction costs, so it's normal for small transactions, but in many cases
that benefit is negligible, in which case you can consider publishing price
data and transactions publicly to be a positive externality. When you look
at things this way, it makes sense to subsidize it, and that's what the
Chinese government seems to do: to get subsidies, you need to report your
prices and transactions, and this makes the market more efficient.
Imagine if American hospitals had to publicly publish their fees through a
standardized system whenever they do something in order to get subsidies.
That would be a very different situation, wouldn't it?
national security
The government of China has been
trying to reduce the impact a blockade of China would have. So, China has
been, for example,
hoarding chips, which has been the main cause of a global shortage.
China also wants to be able to make all the chemicals it needs using
domestic raw materials, which basically means coal. So, it's interested in
massive coal-to-methanol production, and is working on turning that methanol
into aromatics and potentially gasoline. Yes, China only has enough coal for
a few decades, but they're not concerned about long-term sustainability -
they're concerned about war. (My source for this is reading lots of
scientific papers from China about industrial chemistry, looking at what
chemical plants they're building, and knowing basic chemistry.)