Thread by @Brad_Setser

So, I understand the criticism @niubi is making here --

But I actually think this is a hard not an easy issue. China is a managed economy, and it isn't going to stop managing its economy overnight, even if it makes moves toward becoming a more market oriented economy.

1/x

https://twitter.com/niubi/status/1097934863334813703

Take the issue I know best -- currency.

China manages its currency, and it isn't realistically going to stop managing its currency -- nor would it be in the United States narrow interest for China to open its financial account and let its currency float down right now.

2/x

Discussing how China manages its currency strikes me as reasonable. The U.S. doesn't currently really want China to float right now, so why pretend?

(of course the US also shouldn't name China for manipulating when China is helping the US by resisting depreciation)

(3/x)

And more broadly, b/c China isn't a (full) market economy, partial market opening reforms have a history of delivering less than promised, as it turns out there are a lot more barriers that it initially seemed

(4/x)

China's WTO commitment to get rid of tech transfer requirements is perhaps the best example. I don't think even the Chinese take their claims that de facto tech transfer requirements (as opposed to de jure ones) disappeared with WTO entry seriously ...

(5/x)

There are a number of other examples -- cases where one barrier is taken down but another springs up, mitigating the practical impact. And it is hard to believe that Xi can credibly commit to change China's basic system now

(6/x)

Take another example -- purchase commitments for soy and grains. Sounds sort of anti market. But, well, COFCO historically has been a big part of the market, and guess what is is "one of the largest SOEs of those under the direct supervision of China's State Council"

(7/x)

COFCO historically was "the sole agricultural products importer and exporter operating under direct control of the central government"

China might agree to privatize it, but I am not holding my breath

en.wikipedia.org/wiki/COFCO_Gro…

(8/x)

So the US is left with a choice -- recognize the reality of state control of some prices (the exchange rate) and some sectors, and try to mitigate the impact of that control, or seek fundamental reform that isn't likely to happen.

(9/x)

Now my caveats --

any credible package needs a mix of Chinese commitments to change how the state behaves/ makes its behavior more amenable to the US (and others) and more fundamental reforms.

(10/x)

And U.S. allies have legitimate concerns that Trump is basically interested in shifting China's state purchases toward the U.S. and away from them in order to address his obsession with the bilateral deficit -- as opposed to say raising total Chinese imports

(11/x)

but my not PC in economic circles (too dirigiste ... ) view is that it wouldn't necessarily be a bad idea for the US to say ask for China's imports of manufactures to start growing at a faster rate than China's GDP. Would help direct policy in a useful direction -

(12/12)

p.s. the FT's Tom Mitchell touches on similar issues from a somewhat different point of view in his new column. "In industry after industry, foreign companies have been allowed in only after local champions have secured unassailable positions"

ft.com/content/a3117e…