China’s Immunity Gap
The Zero-COVID Strategy Leaves the Country Vulnerable to an Omicron Tsunami
In the Atlantic Policy Studies conducted during the past three years by the Council on Foreign Relations four books with a predominantly economic content are being published.[i] The authors and subjects of these books are, in order of publication: John O. Coppock on agriculture; John Pincus on less developed countries; Bela Balassa on trade liberalization among industrial countries; and Richard N. Cooper on international monetary affairs (to be published later this year). From these sources and from others, Harold Van B. Cleveland, in another volume in the series, has drawn conclusions about Atlantic economic relations in his "The Atlantic Idea and Its European Rivals." The purpose of this article is not to review these significant studies but to appraise their conclusions about whether the economic connections and conflicts in the Atlantic are, on balance, moving the nations of the area toward a coherent community in some sense of the word.
A proponent of the Atlantic idea will not find in these books, either in the economic analyses or in their conclusions, much support for his case. Mr. Cleveland's pessimistic conclusions-essentially that Europe and America will go their separate ways except as external threats pull them together- are largely consistent with the findings of the economist-authors of the specialized studies. Both he and Cooper, oddly enough, find conflicts in the one area in which coöperation seems to have been greatest-in international monetary affairs. But proponents of greater Atlantic unity will find much here that adds to the state of their knowledge as well as much to tax their patience, because the books are by and (except Cleveland's) for scholars.
In approaching the question of economic interdependence versus conflict in the Atlantic area, it is essential to recognize a reality the authors underemphasize-that there is an economic counterpart to the protection of the nuclear umbrella enjoyed by the Europeans. The American nuclear umbrella permits European states to follow independent and sometimes irresponsible foreign policies. By assuming the main economic burden of defense as well as the main burden of maintaining monetary stability, the United States also permits the Europeans a greater degree of independence in monetary and fiscal policies than they would have if they were carrying comparable burdens.
This fact has some indirect consequences which the authors usually treat under the heading of conflict. Our enormous government research expenditures on defense activities, it is charged by European critics, give American companies an advantage over their European competitors. Both Cooper and Balassa make the point, somewhat regretfully, that the one-sided research and development relationship can become the basis for another free ride by Europeans; they merely have to license the American development that interests them and welcome American investment, fostered by monetary stability, to get the benefits of advanced technology. Such a state of affairs they see as a basis of conflict. This normal and logical movement of technology across national boundaries is, of course, strenuously criticized and assailed by political leaders in Europe as yet another example of American domination. It may well be that the threat of so-called American domination[ii] will to some extent replace the Soviet threat as a unifying influence in Europe. None of the authors, however, looks deeply enough beneath the surface to find out to what extent this type of economic interdependence is a unifying as well as a dividing force in the Atlantic area.
The research disparity between the United States and Europe and the supposed conflict to which it gives rise illustrate the type of problem that seems baffling to the economist in most of these works. The so-called conflicts often reflect little more than inner contradictions and inadequacies of national states reacting to the perception of their own limitations as they contemplate the sheer size of the omnipresent friendly giant whose influence they cannot either control or live without. The authors of the five books have stressed the politically divisive aspects of these unequal economic relationships between the United States and Europe rather than the economic and technological forces which every day dictate their continued coöperation.[iii] One wonders whether the degree of Atlantic economic community perceived or projected might not take on large proportions if economists were as capable in their judgments and recommendations about political matters as they are in their own professional field. If this comment seems harsh, its validity may become more apparent from an appraisal of the conclusions of each of the volumes under discussion.
Coppock's admirable book, which could more properly be titled "Atlantic Agricultural Disunity," deals with a subject which represents perhaps the classic case of political frustration of economic forces. It needs little review and appraisal within the framework used here, i.e. whether the economic analysis leads to conclusions pointing toward closer economic integration. In agriculture, disunity has a long history. Farm policies conclusively demonstrated by the United States to be unviable are now being duplicated by the European Economic Community, starting with unreasonably high price supports and import controls. Fortunately, we are all rich enough to be able to afford uneconomic farm policies. Moreover, despite unwise policies, the depopulation of agriculture continues in this country and in Western Europe. At some point, the political influence of agriculture becomes largely symbolic and at some later time this fact is discovered by political leaders.
Coppock adduces no inevitable forces moving toward Atlantic unity in agriculture except possibly the need to coöperate on disposal of surpluses, which is inherent in the agricultural policies being pursued on both sides of the Atlantic. He demonstrates that Europe, with a slightly more rational program than is now being pursued, could reduce its labor input in agriculture by one-third in ten years and by one-half in twenty years, while meeting the demand for farm products. Such a massive freeing of manpower would contribute greatly to Europe's economic strength. Despite its price-support program, the United States has already gone a longer distance down the road toward depopulating agriculture. In doing so, it has had to substitute capital for labor. The enormously greater use of capital accompanying the high productivity of American agriculture will undoubtedly be evoked by the E.E.C. countries as a further argument for protection of their farmers. The headlines will continue to chronicle conflict in agricultural policies while European farmers make their contribution to Atlantic coöperation by quietly leaving the land.
Balassa's book on trade policy is enormously useful. Like the others in the series, it brings us up to date on the state of knowledge in the field. But in making this contribution, Balassa deals only peripherally with the Atlantic issues that give the book its excuse for being. He heroically tackles the question of the height of national tariff levels and introduces for the United States and the other leading industrial countries calculations of "effective tariff rates." Effective rates are tariffs in relation to value added by the producer (after adjustment for duties, if any, included in materials used). Effective rates are usually higher than nominal rates for most manufactured goods, as could be expected from the method of calculating them.[iv] For example, as Balassa notes in an appendix, textile fabrics carry a nominal rate in the United States of 24 percent, but an effective rate of 51 percent. More important, this method of calculation demonstrates that for many of the earlier stages of manufacture and processing, the effective protection is greater than on the finished manufacture into which the processed and semi-manufactured materials enter. This is inherent discrimination against developing countries which normally could be expected to enter into the earlier stages of processing, especially of their self-produced raw materials. Balassa makes much of this finding in his recommendations about trade policy toward less developed countries, as Pincus does in his book.
In addition, Balassa attempts to find a quantitative answer to the question, "What difference would it make if tariffs were abolished in the Atlantic area?" Quantitative estimates being possible only on the assumption of unchanged production methods, his calculations were made subject to that limitation. On this basis, he calculates that free trade in the Atlantic area would increase trade by about 2 percent of the combined national products of the EFTA countries, by about 1 percent of that of the United Kingdom and the European Common Market, and by about 0.5 percent of that of the United States. When one considers that rationalization of agricultural policy or a little more education could have comparable effects on the G.N.P. of the United States and probably elsewhere as well, the case for eliminating tariffs as a means of expanding gross national product is somewhat less persuasive than might ordinarily be expected. But, as Balassa points out, the other effects of free trade-increased competition and reductions in cost through economies of scale-would tend to be large. As we shall see, however, these would not be large enough in Balassa's view to overcome political obstacles to the formation of an Atlantic free trade area.
On nontariff barriers to trade, Balassa's treatment is sketchy at best. As tariffs are reduced in successive negotiations, nontariff barriers, which formerly were hidden behind tariff walls, come into view. These tend to be concentrated at specific points on specific commodities and include such government policies as purchasing only from national suppliers or using internal taxes, like those on automobiles, effectively to discriminate against imports. The tax system itself can have an impact on imports and exports. The impact varies according to the weight that is given in the system to direct taxes on the one hand, and on the other, to indirect taxes such as the value-added tax.
On the key policy issue of further trade liberalization in the Atlantic area and the alternatives to a stalemated Kennedy Round, Balassa's conclusion is unequivocal. Even if the Kennedy Round is a failure, it would not be appropriate to move toward the development of an Atlantic free trade area. "Under present conditions, the establishment of an Atlantic free trade area appears neither feasible nor desirable." Balassa gives the following reasons: (1) The major European countries-particularly the E.E.C. nations-are opposed to it because it would interfere with the political and economic integration of Western Europe. (2) It would introduce conditional most-favored-nation treatment and this, he asserts, could better be used against the United States than by it. (3) The EFTA nations have more to gain (in trade) by joining with the E.E.C. than they have to gain by joining an Atlantic free trade area. (4) The attempt to establish an Atlantic free trade area would deepen the division in Europe and the conflict within the Atlantic Alliance. By contrast, the advantages of a unified European economy are great and would make it possible for Europe to become the equal partner which the United States wishes to have.
In the event the Kennedy Round fails, what advice has Balassa to offer the United States? For one thing, wait and see about Europe. For another, turn your attention to what can be done about providing preferential access to the manufactured exports of less developed countries. The first part of that prescription, to this writer, seems politically naïve (as also, I think, his advice that Canada and the United States form a customs union if Britain and EFTA enter into the Common Market). The second part of it has much merit, as Pincus points out, regardless of what happens to the Kennedy Round.
For the United States to give preferential access to the manufactures of less developed countries, according to Pincus, is clearly in our national interest. Moreover, it would call the bluff of the French and Japanese who have given lip service to this idea, believing that the United States would veto it.
In the admirably realistic last chapter of his book, Pincus comes closer to achieving a mature blend of political and economic judgment than is usually found elsewhere in these studies. He argues, I think correctly, that there is no overriding interest, such as security, among the Atlantic countries that dictates a common policy toward the developing countries. Therefore each advanced nation builds its own policy toward developing countries on its own package of interests. To be sure, developing countries on the one hand and O.E.C.D. members on the other have both agreed that 1 percent of gross national product would be about the right amount for foreign aid. But despite such agreement there is no indication that this figure is even being approached. In fact, performance is falling increasingly short of the target. Political agreement does not follow national economic interest in this case, just as in other cases political conflict seems to coexist with economic harmony.
Pincus does suggest, as is so rarely the case in the other studies, alternative policies which would tend to bring the developed countries closer together. For example, if we really want to increase assistance to the less developed countries, consider investment guarantees and trade preferences. In each case, international coöperation is called for. Competition in investment guarantees is likely to lead to some form of coöperation. Trade preferences, if made within the framework of the GATT, must be on a most-favored-nation basis and also require a concert of action by the developed countries.
It is in monetary coöperation that one expects to find the imperatives for Atlantic coöperation. Cleveland's book, finished long before Cooper's, concentrates on conflict in this area, which seems somewhat out of keeping with Cooper's appraisal of more recent developments. Cooper comes very close to opening the gates to some fruitful speculation when he stresses the great changes in the world economy which have occurred in the last two decades: a greater sensitivity of international trade to variations in costs and prices abetted by the reduction in both transportation costs and tariffs; the easier movement of capital under conditions of greater freedom to take advantage of small-yield differentials and of opportunities for international specialization. These developments, he points out, increase the interaction among national economies.
It is exactly these interactions which transmit the findings of science and technology and the know-how of industrial management in realizing economies of scale which together bring to all countries, in the end, the benefits of lower prices, new products and higher living standards. However, he sees in this process an increase in the number of "disturbances" with which national policy-makers must cope. The decision-making domains of business are increasingly outreaching governmental jurisdictions. The impact of national regulatory action or taxation is blunted partly because regulated or taxed businesses may escape from national jurisdictions. "In sum," he concludes, "as national economies become more closely integrated, national freedom to set national economic objectives and to pursue them effectively with national instruments of policy is increasingly circumscribed."
This state of affairs, Cooper says, provides a choice of national policy from three broad alternatives: (1) to accept the loss of national freedom implied and to work out a joint determination of economic objectives and policies; (2) to try to preserve as much national autonomy as possible by obtaining external financial accommodation for the prolonged payments deficits which might result; (3) to reject integration by restricting foreign trade and international capital movements.
In setting up these alternatives, Cooper rightly stresses that national autonomy in the pursuit of national economic objectives requires external finance and, logically, that the extent of external financing available will have a great deal to do with whether members of the Atlantic community are forced into joint determination of economic policies or are free to pursue independent and possibly contradictory policies. To the writer, this is one of the most cogent reasons for restricting the supply of "new" international money, and for making access to it something less than automatic. A larger advanced country should not be free of international restraints on the pursuit of economic or other goals that are in conflict with the goals of the rest of the advanced world, especially if to do so requires the rest of the world to finance its aberration from good behavior. (Smaller advanced countries have no such freedom anyway; Cooper largely ignores them.)
In the absence of adequate external finance, Cooper feels that countries will be pushed toward the third alternative and therefore recommends an orderly and agreed upon use of restrictions on trade and capital movements as well as wider margins of fluctuation for exchange rates to protect national balances of payments. "The third solution, therefore, seems to win by default." It does, indeed, if one must conclude that it is easier for countries to coöperate on programs which will hurt them all in order to distribute the hurt equitably than it is to coöperate on programs which will help all but not necessarily equally. While one may disagree with Cooper's choice among alternatives, as this writer does, he has spelled them out clearly and he has carefully set forth the costs and benefits involved in the choices before us.
One can only conclude that Cooper prefers national government intervention through mutually acceptable restraints on international interdependence to the integrating forces of markets and voluntary institutional coöperation which have, as his own and other studies demonstrate, resulted in remarkable international economic growth and stability during the past decade. Must the public interest be found only in government policies, and not in the quiet operation of a system of voluntary coöperation?
It is in the failure to explore positively the promising leads scattered through Balassa's book and just referred to in Cooper's that the Atlantic Policy Studies do not fulfill expectations. They bring us up to date-indeed they are indispensable for that purpose. Their view into the future, however, to the extent that it exists, is unimaginative if not grim.
Trade, capital movements and economic development are inseparable parts of a common process. It may be useful to set down some present and emerging relationships which are moving us toward greater unity than some of these books would have us believe. Trade barriers have already been much reduced. Removal of barriers to trade and restoration of convertibility at fixed rates of exchange permit today's large (and tomorrow's larger) corporation to look at a considerable part of the world as a single economy. Economies of scale and rational allocation of resources require that investments be made where they yield the highest returns, that manufacturing be done where it can be done cheapest, that buyers have access to lowest-cost sources of supply. These considerations all transcend national boundaries. In a number of industries they already call for international or multinational corporations for the purpose of doing business and also for free trade in the products involved. But if the dynamic unifying element working here is to be effective, it must be supported by substantial freedom of investment, the antithesis of the control over capital movements preferred by Cooper. In short, capital must be free to flow out and to flow in. Business, under these conditions, is not treated as an instrument of national policy. Nor should it be, if we want unity and efficiency in the world.
The need to permit enterprises, on grounds of economy and efficiency, to operate anywhere suggests a new strategy for tariff negotiations, as Wyndham White has recently suggested. The new strategy in this connection calls for sector free trade-free trade for particular industries, on a worldwide basis. It has occurred on a limited basis in the European Coal and Steel Community and in the Canadian-American automobile agreement. It will probably be an essential element in getting the Latin American Free Trade Area off the ground, and it is a potentially advantageous arrangement in the aluminum, wood-pulp and who knows what other industries. It is an arrangement that cuts across the North-South barrier (e.g. in aluminum); small developing countries can be big in some products. It is an arrangement which is inherently devoted to a widening area of trade freedom, if only because of the degrees of substitution among commodities. It is an arrangement that does not depend on obtaining reciprocity, the bugaboo of past trade negotiations.
Launching sector free trade does not have to depend upon an act of political will, as have past negotiations for trade liberalization, but only upon the private sector's ability to overcome political resistance. If the 80 percent clause in the Trade Expansion Act (designed to permit establishment of free trade in commodities in which the United States and E.E.C. accounted for 80 percent of the production) had been economically rather than politically motivated, some progress might have been made already toward establishing free trade by industrial sectors.
A unifying influence grows out of economies of scale-the necessity to do things on a large scale to get the lowest cost, or indeed even to do the thing at all. Economies of scale have reached the point in some fields where neither the United States nor Western Europe alone is big enough to exploit them. We have seen this already in nuclear weapons development; it is becoming even more obvious in the development of anti-missile defenses; only two presently established economies, the American and the Soviet, can keep up the pace. The same appears to be true of space exploration (and its offshoot, communications satellites); of particle accelerators for advanced nuclear research; and perhaps of the application of data processing to the storage and retrieval of knowledge (libraries), to education and to patent searching and recording.
With an increase in the number of fields in which duplication of technological effort is very expensive or impossible, the choice for smaller nations is reduced to international coöperation or doing without. The strains are already evident in the European states which have yet to make the enormous investments required for accommodating the automobile, and simultaneously are faced with problems of developing supersonic aircraft, nuclear weapons, advanced data processing and space exploration, and meeting the need for investment to increase enormously the proportion of their population educated through the college level. A frightening possibility is that efforts to control the international flow of capital to enhance supposed national interests will worsen this situation. Capital movements provide a mechanism for transferring and sharing knowledge, technology and know-how. Restriction of overseas capital investments which contribute to economic progress will set in train other developments which can already be discerned, such as migration to the United States of scarce foreign scientific and professional personnel who might otherwise be employed in branch plants and laboratories in their home countries. This probably would be followed in Europe by either unwillingness to reduce trade restrictions or a positive demand to increase them, because of the greater competitive power of the colossus of the West.
If there are such strong forces in being and in the offing, then policy prescriptions about international money should be different from those suggested by Cooper and Cleveland. First, restrictions on the investment of long-term capital would be, in the longer run, contrary to the interests of the United States and of Europe alike. Second, provision of a new source of international liquidity could have an adverse as well as a positive impact on unity.
The shortage of liquidity in particular cases-Italy in 1964-65 and Britain in 1964-66-calls forth an outpouring of international monetary coöperation that is almost unbelievable. Central bankers and finance ministers usually know the rudiments of their business. Any structure based on confidence will collapse if those supported by it do not stick together. Because the world's supply of liquidity-for ultimate settlement of balances among nations-can be provided only by shuffling around claims on each other, central bankers and finance ministers must respect each other's claims. Of course, the achievement of greater financial independence through a large increase in the supply of reserves would destroy this built-in imperative to unity. As this is written, concord in monetary policy seems to have reached the point of international agreement to reduce interest rates, a forerunner of other coördinated domestic monetary policies.
Monetary coöperation in one form or another is the major imperative for viability among the advanced nations. There is not enough gold in hand or in prospect to supply the world's liquidity needs. Elimination of gold from the world's present monetary system would be a start toward a better one. Someone-and we do not find him among these authors-should boldly suggest that international coöperation will be furthered more by economizing on reserves than by the creation of enough new supplies of liquidity to let countries loosen their ties to the world economy. And someone should also stress that coöperation from all the major industrial nations-including the French-is not a necessary prerequisite to increasing the supply of internationally acceptable money.
The Atlantic Policy Studies are significant and important on the economic side, but they do not cut through the political veil to the underlying technological and economic realities which stand in conflict with most of the outmoded political considerations which are trotted out these days as national objectives. Because Atlantic, as usually defined, is itself a somewhat outmoded geographical and political concept, there is little wonder that studies largely confined to the area should be unable to identify and appraise the non-political, non-national forces which are working against political constraints on economic integration, and which in time will probably overcome them.
[i] "Atlantic Agricultural Unity: Is It Possible?" by John O. Coppock, 1966. "Trade, Aid and Development: The Rich and Poor Nations," by John A. Pincus, 1966. "Trade Liberalization Among Industrial Countries: Objectives and Alternatives," by Bela Balassa, 1967. "Atlantic Monetary Arrangements," by Richard N. Cooper (not yet in print). All published for the Council by McGraw-Hill, New York.
[ii] Every reader of these books should consider carefully the implications of the following comparison of gross national products of the United States and the European O.E.C.D. countries:
1965 G.N.P. AS A PERCENT OF TOTAL O.E.C.D. G.N.P.(a)
Including U. S. Excluding U. S.
United Kingdom 8.39 percent 20.75 percent France 7.55 18.67 Germany 9.40 23.24 Italy 4.10 10.15 United States 59.56 .... Other European O.E.C.D. Countries 11.00 27.19 Total 100.00 percent 100.00 percent
a Excluding Japan and Canada. Source: Agency for International Development.
[iii] Cf. A dispatch in The New York Times of January 16, 1967, stating: "The French Government opened the door last year to let United States armed forces out and to let United States investment capital in. The turn to military isolationism captured the headlines, but the turn to economic liberalism was a more complete and unexpected reversal of policy." The reasons for this reversal of investment policy are fairly clear: (1) U.S. companies had access to France through her Common Market partners; France got the goods but not the employment and taxes. (2) France's balance-of- payments position has been weakening. (3) U.S. companies bring in technological advances and an aggressive and modern competitive spirit.
[iv] For example, suppose that the world price of a certain type of leather is $100 and the cost of the hides to make the leather is $70. Then the "value-added" by the foreign producer is #30. Now assume that imports of hides are duty-free, but that imports of leather are subject to a 10 percent tariff. The tanner is, therefore, in a position to charge $110 for the leather. But the $10 duty protects not the cost of producing hides, which can be imported free of duty, but only the "value-added" in tanning the hides, which amounts to $30. Thus, a nominal tariff of 10 percent on leather gives effective protection to the tanning industry equivalent to 33 1/3 percent by permitting the domestic producer to incur higher costs to that extent on his processing operation. (The foregoing is derived from a forthcoming C.E.D. policy statement.)