The saga begins almost exactly a year ago, when the press was filled with stories of Chinese tourists to Japan returning laden down with fancy Japanese toilet seats. For anyone who has ever actually used one of these wonderful Japanese devices, there is no mystery at all why you might want one in your home. But the story apparently struck a nerve, and the local press, loath to pass up a Japan-bashing opportunity, repeatedly chided Chinese for not buying the domestic varieties. Premier Li Keqiang was even asked about the issue in a public forum; his reported comments were pretty balanced, praising the wide variety of choices that Chinese consumers have but also expressing hope that domestic companies could make products just as good. All pretty standard stuff, and it seemed like one of those little media storms that would simply die down on its own.
But no. The Japanese toilet seat meme has only grown stronger and more powerful. The propaganda campaign around Xi Jinping’s latest economic slogan–“supply-side reform”–has embraced the tale of the Japanese toilet seat as one of its main talking points. Since it was officially launched in December, the media blitz on “supply-side reform” has become inescapable. Famous Chinese economists now repeatedly invoke the Japanese toilet seat. Foreign journalists in Beijing are getting a steady stream of briefings from government officials and/or scholars explaining to them why the new mantra of “supply-side reform” is so great. The Japanese toilet seats come up every single time. I can also testify that the Japanese toilet seats have come up in every private conversation I have had about this “supply-side reform” slogan.
The Economist made a valiant recent attempt to explain this new Chinese concept of “supply-side reform,” though the article ends up describing the ideal program of some liberal economists rather than the actual plan adopted by the government (there is so far little indication that it has anything to do with Reagan or Thatcher). Which is understandable since it is hard to see many changes in actual policies that have resulted from the supply-side sloganeering. But taken on its own terms, the rhetoric of “supply-side reform” argues that the current problems of the Chinese economy arise not from a deficiency of demand, but from a failure of companies to adapt to the changing structure of demand. Here is one official explanation (my translation):
In recent years, the fact that Chinese people are traveling abroad to buy toilets, rice cookers and other appliances has become a hot topic, and has even disturbed the Premier. All these changes reflect the new changes in people’s demand for consumer goods: the demands of our people are changing, upgrading, with demand for high-quality consumer goods increasing. The production capacity that has formed over the years is no longer adapted to this changed demand: there is too much ineffective supply and not enough effective supply. For example, on the one hand the price of steel has fallen so that it costs the same as cabbage, while on the other hand we still need to import ballpoint pens.
(There is a variation on the theme that uses ballpoint pens rather than Japanese toilet seats as the example of alleged Chinese inferiority.) There is some surface plausibility to this account–who would deny that China’s state-owned enterprises are not adapting very quickly to changing economic realities? But as the ever-acerbic Yu Yongding pointed out in a recent interview, the concept of a shortage of “effective supply” makes absolutely no sense as a macroeconomic diagnosis of China today. If there is really not enough supply, then China should be experiencing trade deficits and inflation; instead it has a rising trade surplus and almost no inflation. My translation:
The meaning of insufficient effective demand is very clear. What is the meaning of insufficient effective supply? It seems to mean “selling the wrong things”: no one is buying the stuff that is being produced, and the stuff that people are buying has not been produced. …If there is insufficient supply, whether it is “effective” or “ineffective”, prices should rise. However, what we see is 46 consecutive months of negative growth in the PPI, and the GDP deflator going from positive to negative. It is very difficult to explain these phenomena as “insufficient effective supply.” Again, if we look at the most serious case of excess capacity–the steel industry–we see that the prices of steel products have fallen sharply and profits are shrinking. But it is obvious that this is caused by insufficient demand rather than “insufficient effective supply.” If there is insufficient effective supply of a product, then the price of this product should rise. I ask you: what products are these exactly?
So the example of the Japanese toilet seat is indeed very telling, but probably not for the reasons the officials who invoke it seem to think. To look at Chinese people buying this thoroughly Japanese product and see a woeful tale of domestic industrial failure betrays a particular kind of mindset–one that takes autarky as the norm and views trade as a form of weakness. The thinking seems to be that the economy can be rescued by redirecting to domestic companies the money that Chinese consumers spend on their vacations abroad. It’s hard to imagine any of the Western economists who would call themselves supply-siders making such an argument.
The Japanese toilet seat is in fact a perfect example of why you want to have trade in the first place. Japanese people , for their own reasons, have developed this unique tradition of extremely complex and comfortable toilet equipment. Instead of having to replicate the whole variety of cultural and institutional factors that led to Japan’s development of super-luxurious toilets, Chinese consumers who want a more pleasant bathroom experience can just buy one. It’s less about Japanese goods being superior to Chinese goods, and more about Japanese goods being different from Chinese goods.
One of the most interesting things about this whole “supply-side reform” push is how skeptically it has been received. Proponents of the “supply-side” slogan–a term that clearly pays homage to Western free-market ideology–are having to repeatedly fend off charges that they are plotting the return of central planning by another name (see this long piece in the People’s Daily). Perhaps they do not understand that the stories they tell about the Chinese economy are part of the reason those suspicions arise. The obsession with the Japanese toilet seat does not show a sincere desire to rid the economy of regulatory distortions, but rather a distrust of trade and market outcomes and a conviction that the bureaucracy knows better.