Hi folks, welcome to another issue of my weekly review, where I personally review events of the past week (or weeks) that I believe will have a lasting impact beyond news cycles. In some weeks, instead of a review of events, I may go for a long-form essay
Human progress by definition is 'oversupply'. Wealth and abundance is by definition having too much of something. Americans will easily recognise this through daily life the size of their food servings and cars, and more generally consumption as a percentage of GDP.
We started off 100,000 years ago in an environment where safety was undersupplied. Specifically, we solved for safety with technology - agriculture, weapons and productive tools. As a result, humanity prospered and we reached undersupplly of resources between us and we achieved partial solutions through negotiation - military or otherwise. As we progress through each level, the ways we reconfigure ourselves and the world changes.
We are now at a stage where humanity should work together and cooperate to manage undersupply at a planetary level - things like clean air, renewable energy, sustainable food and so forth.
The oversupply of the renewable industry is a huge positive for humanity. The US and other developing nations can leverage the huge manufacturing capacity of China to move towards net-zero at a much lower social cost.
On overcapacity in China: It is real, it exists, pick any principal industrial commodity and I will show you the over-capacity in China. Nylon, fertiliser, vitamin c, steel, aluminium, petrochemicals, refined copper, whatever.
One must understand, that China's objective is to feed its downstream industry with the world's lowest priced domestic-produced commodities, in order to gain economic advantage on producing and exporting value-added products. But how would you achieve that? After all, commodity prices equalise globally through trade, right?
China encourages domestic production in order to replace relevant imports. I have seen that happening over and over and over again for a variety of commodities during the past 30 years. I can see a repetitive, undeniable pattern.
In order to prevent domestic and international prices from equalising and to put domestic raw materials into a pressure cooker, China uses fiscal means.
Enter the value-added tax (VAT), implemented in China in the first half of the 1990s. VAT should be a cost-neutral in- and out tax, like it is in most countries that tax added value. Not so in China. In China VAT is versatile tool for manipulating the economy.
The unsuspecting, superficial observer may argue that China's domestic and international raw materials are somewhat similarly priced. However, by China's tax law, VAT is included in all prices in China and it must not be shown separately. China's raw material prices include 13% VAT, which is not refunded upon export, so exporting them becomes only feasible if the domestic-foreign prices gap exceeds 13%. That is the pressure cooker.
Value-added export products produced from the pressure-cooked commodities, however, get the full VAT refunded upon export, like normal WTO members do.
All tricks in the book were used to encourage the build-up of the world's largest and most modern production sites for industrial raw materials and to make sure that they produce more than the domestic market can absorb (there can be no over-production without overcapacity), in order to keep domestic commodity prices low. This space does not suffice to describe how this works in detail.
Initially, when this system was devised in the 1990s, China played no big role in commodities. The concept looked harmless and irrelevant, because China was a small player. Today China dominates basically every commodity in the book, domination defined as >15% world market share - whether as a buyer, as a seller or both.
This fiscal system is at the root the hollowing-out of western economies. If you tackle it, all related problems will vanish. U.S. politicians have no concept of VAT, at best they view it as a subsidy, and EU officials are horrified at the scale of potential market convulsion an abolition of this predatory system could cause, while some Chinese trade officials confided to me they are horrified about the size of the monster they created.
I like how Yellen and co don't like to give a concrete definition of overcapacity. Your over capacity maybe my spare capacity, emergency capacity, or even market building capacity.
Human progress by definition is 'oversupply'. Wealth and abundance is by definition having too much of something. Americans will easily recognise this through daily life the size of their food servings and cars, and more generally consumption as a percentage of GDP.
We started off 100,000 years ago in an environment where safety was undersupplied. Specifically, we solved for safety with technology - agriculture, weapons and productive tools. As a result, humanity prospered and we reached undersupplly of resources between us and we achieved partial solutions through negotiation - military or otherwise. As we progress through each level, the ways we reconfigure ourselves and the world changes.
We are now at a stage where humanity should work together and cooperate to manage undersupply at a planetary level - things like clean air, renewable energy, sustainable food and so forth.
The oversupply of the renewable industry is a huge positive for humanity. The US and other developing nations can leverage the huge manufacturing capacity of China to move towards net-zero at a much lower social cost.
It is something to be celebrated.
On overcapacity in China: It is real, it exists, pick any principal industrial commodity and I will show you the over-capacity in China. Nylon, fertiliser, vitamin c, steel, aluminium, petrochemicals, refined copper, whatever.
One must understand, that China's objective is to feed its downstream industry with the world's lowest priced domestic-produced commodities, in order to gain economic advantage on producing and exporting value-added products. But how would you achieve that? After all, commodity prices equalise globally through trade, right?
China encourages domestic production in order to replace relevant imports. I have seen that happening over and over and over again for a variety of commodities during the past 30 years. I can see a repetitive, undeniable pattern.
In order to prevent domestic and international prices from equalising and to put domestic raw materials into a pressure cooker, China uses fiscal means.
Enter the value-added tax (VAT), implemented in China in the first half of the 1990s. VAT should be a cost-neutral in- and out tax, like it is in most countries that tax added value. Not so in China. In China VAT is versatile tool for manipulating the economy.
The unsuspecting, superficial observer may argue that China's domestic and international raw materials are somewhat similarly priced. However, by China's tax law, VAT is included in all prices in China and it must not be shown separately. China's raw material prices include 13% VAT, which is not refunded upon export, so exporting them becomes only feasible if the domestic-foreign prices gap exceeds 13%. That is the pressure cooker.
Value-added export products produced from the pressure-cooked commodities, however, get the full VAT refunded upon export, like normal WTO members do.
All tricks in the book were used to encourage the build-up of the world's largest and most modern production sites for industrial raw materials and to make sure that they produce more than the domestic market can absorb (there can be no over-production without overcapacity), in order to keep domestic commodity prices low. This space does not suffice to describe how this works in detail.
Initially, when this system was devised in the 1990s, China played no big role in commodities. The concept looked harmless and irrelevant, because China was a small player. Today China dominates basically every commodity in the book, domination defined as >15% world market share - whether as a buyer, as a seller or both.
This fiscal system is at the root the hollowing-out of western economies. If you tackle it, all related problems will vanish. U.S. politicians have no concept of VAT, at best they view it as a subsidy, and EU officials are horrified at the scale of potential market convulsion an abolition of this predatory system could cause, while some Chinese trade officials confided to me they are horrified about the size of the monster they created.
I like how Yellen and co don't like to give a concrete definition of overcapacity. Your over capacity maybe my spare capacity, emergency capacity, or even market building capacity.