Posts Tagged ‘China’

Taiwan in Trouble

July 30, 2008

I have been fairly well convinced by Robin Hanson and Bryan Caplan that prediction markets are a good way to get informed information about the likelihood that something will happen.  Basically, prediction markets combine the so called miracle of aggregation or “wisdom of crowds” with the idea that the more someone is sure something will happen the more money he will be willing to wager on it.

The converse of trusting prediction markets is that when I disagree with them, I have to justify why I don’t agree, or maybe what I know that other people don’t.  I find this market on the likelihood of a Chinese attack on Taiwan by December 2010 worrying.  It has enough volume (>4000) to be accurate, and is trading at twenty five dollars a share.  This implies that there is a twenty five percent chance that an attack will happen.

This is far higher than I would put the likelihood of a mainland operation.  I would put it down around three or four percent.  In my opinion, the only likely situation in which an attack might happen is that the Chinese economy goes through a steep downturn, the current Communist administration falls, and the military takes over.  Chinese can be very nationalistic, so the military might view an attack on Taiwan as a way to consolidate power.

But in the absence of such a catastrophic turn of events, I can see many reasons why the Communist leadership of China would not want to attack:

-The new Taiwanese president, Ma Yingjiu, favors closer relations with the mainland.  Why attack when the winds of unification are blowing in the right direction anyway.

-An attack on Taiwan would alienate just about every foreign country.  China would face military action from at least the United States, and heavy sanctions from others.

-Any sort of military operation would cause instability within China’s economy.  Foreign exports and imports would certainly be affected in the short run.   Since the Communist party has no electoral mandate, it is in a much weaker position than many assume.

-The long run economic effects would be disastrous for China.  In the medium term exchange with most developed countries would certainly be curtailed.

-Even if the Taiwanese army had no foreign help, it would be a difficult force to defeat with its advanced American firepower.  In the event of an attack, there would be foreign help.  The Chinese can’t count on an easy victory.

My guess is that the disconnect between the market and me is caused by my knowledge of Chinese and recent experience in China.  I think foreign China experts tend to view the Communist party as being stronger than it is, and also reading too much into saber rattling headlines in mainland Chinese newspapers.

Maybe I should short some shares…


Does the Import of Manufactured Goods Destroy US Jobs?

July 1, 2008

One of the implications of being home rather than at school is that at home not everyone has drunk the economics Kool-Aid, so to speak.  I have to grapple with opinions that I never hear around campus.  One frequently raised issue is trade with China, more specifically the effects of importing of manufacturing goods and having a negative balance of trade on manufacturing jobs and the US economy as a whole.  Many people at home think that the negative balance of trade destroys US manufacturing as Americans buy more imported goods.

Russel Roberts, the host of Econtalk, has a great essay responding to this point of view available here.  You will have to check out the original for the excellent charts that back up each of his claims, but his main points are the following:

1. Even though the United States has only run a persistent trade deficit since 1976, the long term increasing job creation trend did not change after 1976.

2. The relative number of manufacturing jobs to other American jobs has declined steadily since World War II, with no trend change in 1976.

3. During the same period, there have been huge productivity gains in American manufacturing.  Roberts shows that even though there are less manufacturing workers today than there were in 1959, there is 4.7 times more domestic manufacturing output today.

Roberts makes a few more points as well.  Read the whole article if you get a chance.

Interpreting Large Numbers — Sichuan Earthquake Edition

May 13, 2008

The New York Times is currently reporting at least 10,000 dead in the Sichuan earthquake yesterday. The Times article on the quake contains 7,500 characters (not counting spaces). Take a look, and imagine each of the letters representing a victim of the earthquake.

I lived in Sichuan for a couple of months years ago. I hope the people I knew then are alright.