Thank you for coming and joining us for today's discussion, which I think will be a very interesting one, on subsidies to Chinese industry, why they matter, and what we should do about it. And we're very pleased here in the Freeman Chair today to have two very distinguished scholars looking at this topic you probably have seen. They've just published a book called Subsidies to Chinese Industry, State Capitalism, Business, Strategy, and Trade Policy that looks very, very closely at this issue in several key sectors. Dr. Usha Haley has testified and presented on Chinese subsidies to the U.S. China Economic and Security Review Commission, the U.S. Congress Committee on Ways and Means, the U.S. International Trade Commission, U.S. Department of Commerce, and U.S. Trade Representative. Her research on Chinese subsidies has supported regulation in the U.S. and in the EU. Her 200 publications and presentations include seven books and articles in California Management Review, the Harvard Business Review, and elsewhere. In 2012, she received the Academy of Management's Practice Impact Award for Scholarly Impact, and in 2011, the economist featured her as a thought leader on emerging markets. In 2003, the Literati Club gave her a Lifetime Achievement Award for Contribution to Understanding Business in the Asia Pacific, and she has lived and worked on five continents and is currently Professor of Management and Director of Robin Center for Global Business Strategy at West Virginia University. Dr. George Haley has also testified and presented on Chinese subsidies and business to the U.S. China Economic and Security Review Commission, the U.S. International Trade Commission, the Connecticut Department of Economic and Community Development, and the National Intelligence Council over at the CIA. He has over 125 publications and presentations, including two bestselling books on Asian business, a leading business textbook, and articles in the Harvard Business Review and Industrial Marketing Management. In 2010, AmericanMadeHeroes.com named him a hero advocate for his work with American manufacturers, and Industry Week identified him as a thought leader on manufacturing. In 2009, the American Marketing Association's Marketing News named him a Marketing Academic to Watch based on research, teaching, and impact, and he has lived and worked also on five continents and is currently Professor of Marketing and International Business at the University of New Haven and Director of the Center for International Industry Competitiveness. So without further ado, I'm gonna turn it over to one of the Dr. Haley's who will give a brief presentation and then we'll engage in a Q&A session. Please join me in welcoming Usha Haley. Thank you. Thank you for coming. I'm Usha, and this is George, and today we're going to be talking about subsidies to Chinese industry, why they matter, and what we should do. The research is from our book, Subsidies to Chinese Industry, published by Oxford University Press in April of this year. We think that subsidies to Chinese industry are the game changer of this century and the most under-researched topic that we are confronting. In the last five years or so, we have seen China move from net importer to the largest manufacturer and largest exporter in capital intensive industries in which it enjoyed no comparative advantage just a decade ago. In the last five years or so, we have seen industrialized countries become primarily exporters of scrap and commodities to China and we have watched the effects on business strategy and national competitive advantage. And in this talk today, I'm going to give you a little bit of what we found. Subsidies have not really been explored that thoroughly in economic theories. Economic theories have mostly concentrated on subsidies in industrialized countries not really exploring their effects on emerging markets. And so there's a theoretical gap. Economic theories have mostly portrayed manufacturing subsidies as distorted, redistributing and reallocating resources according to non-market criteria that result in economically inefficient allocations of these resources. When they have looked at certain emerging market industries, they have mostly looked at infant industries and so have not really seen or identified how subsidies could contribute to a country's comparative advantage and not just disadvantage. So for example, when they see China selling subsidized products, economists would say that is hurting China but that it is helping consumers around the world because then they can buy this cheap product. What they don't understand for the most part is that Chinese policy has its historical precedence not in these free market metaphors but in confusion metaphors where individual utility subsumes in harmonious fashion to administrative utility. China's state capitalist regime views subsidies as conceptions of control and what do I mean by that? Important ways in which China's businesses and governments produce meaning and stabilize markets. The flows of subsidies reflect interactions between critical Chinese actors such as the provinces, the center and the municipal governments. And all these subsidies have generally been used to advance the governments and the CPCs, the Communist Party of China's political, social, economic and diplomatic goals and in the pursuit of these goals, the governments willingly pay the cost of economic inefficiency. So I'm gonna begin by talking a little bit about capitalism with Chinese characteristics. Move on to speak about our data and problems. I'll speak about subsidies to seal glass, paper and auto parts, talk a bit about the solar industry and then finally answer some policy questions and actually I'd like to propose a few as well. State capitalism refers to a situation where states place significant and visible roles in markets and there are two dimensions to state capitalism. The extent of the state's ownership of production and the extent of the state's coordination with other enterprises. China uniquely synchronizes party, government, military and economy. The state freely creates and maintains enterprises. It holds a majority of shareholdings. It controls critical personnel and makes decisions about their placement and it supplies capital to state-owned enterprises or SOEs whose managers are ultimately responsible to the state and not to their shareholders. Control of capital is extremely important in the system. But for example, the Chinese central and provincial governments direct all major financial institutions and the state council's vice-premier controls all the major banks. So flows of capital that is who is loaning money to whom is extremely important but very poorly understood. And this is because there are very few industry studies that have existed and because of the complexity and opacity of Chinese borrowing and lending. China, of course, is also not just a homogeneous country. It's a multi-organizational state where there are semi-independent, semi-autonomous organizational sets at both the central, the provincial and the municipal level, all of whom have their own interests, some of which clash. That's what I'm gonna be talking about in just a little bit. Here's a graph of fixed asset investment as a percentage of GDP in China. And it has grown from about 24% of GDP to about 66% of GDP in 2009. Here's another one of the ratio of private to government consumption in China. Private consumption has been rising in China but government consumption has been rising even faster. So the power of the state is expanding. The data do not show a gradualist approach of the state retreating and private enterprise advancing. We did a few studies to look at these flows of capital. These were industry studies. We looked at subsidies to steel, glass, paper, auto parts and solar PV. All of these were capital intensive industries where labor was between two and 7% of total costs. Now I'm not talking about global costs, I'm also talking about costs in China. They were fragmented industries with no economies of scale or scope. That is, the largest, there was a low concentration ratio as economists would say. The largest companies held a small percentage of the market. Just only about 20% or so. Most of the companies were small as I said but they were also geographically dispersed. Every province it seems wanted one of these industries and had them. They had no technological advantage and the prices were still 25% to 30% lower in the US or EU. We looked at subsidies that we could calculate and that we could obtain. And very frankly that is the tip of the iceberg because we couldn't get data for most of the subsidies that we knew existed. Now there are many anecdotal stories about subsidies. We even found data for subsidies that we could not verify from other sources and so we discarded it. Our data are literally as I said the tip of the iceberg. We looked at free or low cost loans, subsidies to energy including electricity, thermal and coking coal and natural gas and subsidies to inputs such as soda, ash, pulp, recycled paper, glass, cold roll steel as well as subsidies to land where land was given for free for example and to technology which is primarily the acquisition of technology or the development of technology. Our data we'd be the first to say has several problems. Among them the institutional limitations of obtaining these kind of data in China. Another was the lack of rigorous surveys. Also the opaque and contradictory accounting data for example so many of these transactions dealt with SOEs and transactions within and between SOEs. So related party transactions that are extremely complex when you're in China and have never been reported. Therefore we use data from governments not just the Chinese government other governments around the world and our data were from around the world from companies, from NGOs, investment houses in industry associations. We cross checked and discarded data so when we could not get data from more than one source we did not use it. Let me talk a little bit about the steel industry. Steel is a pillar industry in China and foreign investment is strictly speaking not allowed. In 2013 China is the largest producer and consumer of steel. It has about 50% of production up from 16% in 1999. In 2005 China went from a net steel importer to a steel exporter. The next year it became the largest steel exporter. In 2007 China became the largest steel producer. Steel making capacity more than doubled from 2005 to 2012 and is continuing to grow. From 2000 to 2006 energy subsidies grew by 1,365% and all we looked at here is energy subsidies for the steel industry. Total energy subsidies from 2000 to mid 2007 were about $27 billion. Remember that China joined the WTO in 2001. So these changes were almost overnight blink of an eye almost. The central government has often called for consolidation of the steel industry because China for the most part is a price taker when it comes to steel rather than a price maker. But here the will of the center is thwarted by the desires of the province. Every single province has a steel industry as you can see the dispersion of the and so there are no economies of scale or scope. Here you look at energy subsidies from 2000 to mid 2007 and there are about 27 billion in total. Just energy subsidies and across all of what we studied coking coal, thermal coal, electricity, natural gas these subsidies increased. Energy subsidies also correlated with steel production in China and steel exports with global exports from China to the rest of the world and of course exports to the United States. What are some of the effects of these subsidies? Massive excess capacity in China with supply exceeding demand on average by 20% every year. More capacity though is added in China every year than the total production capacity of the second largest producer of steel, Japan. From 2000 to 2012 the United States has had a trade deficit with China on every year except one. In 2012 the US trade deficit was 142% greater than in 2000. Despite all the limitations we spoke about Chinese steel still sells for between 20 to 30% less than US or EU steel, setting prices worldwide. And from 2009 the US and EU have filed numerous trade complaints against China. Let me talk about another industry very briefly, the glass industry. China is the largest producer and consumer of glass in the world. It has the largest number of glass enterprises. In since 2003 production has doubled and production capacity has doubled and it has tripled since 2000, okay? We looked at a variety of indicators for subsidies here, not just energy and we found a total of about 30.3 billion from 2004 to 2008. Again as I said, the tip of the iceberg. There is much excess capacity in Chinese glass but more capacity again is added annually. What we saw was that the ratio of subsidies to gross industrial output was rising. That is the percentage of subsidies that could be accounted for was rising. From about 2004 to 2008 it was what we studied and in about 2008 it was about 35% of gross industrial output. I think part of the reason for that is that there's a saturation of capital in the Chinese markets, in Chinese production. So every dollar of subsidies getting a smaller and smaller return. And of course another effect was the trade disparity in glass between the US and China. Although US exports to China in glass have been rising, US imports from China on glass have been rising at a much faster rate, contributing to a growing trade deficit. Now let's look at paper, a really interesting industry. 88% of companies in this industry, in this Chinese industry are small companies by any standard, very small. China has no comparative advantage in the production of paper. It has one of the smallest poor capital forestry in the world. It imports most of its inputs. So for example, 35% of the costs of producing paper in China come from pulp. China imports all its pulp. Labor is only 4% of the costs of manufacturing paper in China or elsewhere. Yet in 2008 China overtook the United States to become the largest paper producer in the world. In 2009 it produced 17% of world paper. We estimate that between 2002 to 2009 there were at least 33 billion in subsidies given to the paper industry. Despite all this excess capacity, about 26% of capacity on average has been added to the Chinese glass industry annually. And again the same story on the trade deficit. Although US exports have been rising, US imports have been rising at a much faster rate and so a huge growing trade deficit. Now let's look at the auto industry briefly. Autos is an interesting industry because I do think the Chinese subsidies have had a beneficial effect here for their industry. Autos is a pillar industry for the center and also for 24 provinces. China as you know is the largest car market in the world but auto parts makes up 70% of the costs of an auto. So they're very important. China is one of the largest auto parts producers in the world and exports to the United States are about a third of its production. Chinese policy is focused on the acquisition and development of new energy and green technologies. Again the industry is highly fragmented with 10,000 registered and at least 15,000 unregistered manufacturers. From 2000 to 2011 we found that about 28 billion subsidies was given with about 11 billion given for restructuring and technology development over the next decade. Here is a graph on the growth of China's auto parts industry. It's grown about 150% since 2003. Interestingly on Chinese exports and imports of auto parts, it is a net importer of auto parts from all the auto manufacturing countries except the United States. The United States is a notable exception and that is because of the way the US companies have structured their supply chain to where they manufacture in China and export back to the United States. And here again is the perennial story of trade disparity between China and the United States with the widening trade imbalance. As I said between 2000 and 2011 we found about 28 billion in subsidies with another 11 billion year marked for technology development over the next decade. What are some of the effects? Well, fixed investment has been rising but output value for Chinese auto parts has been rising even faster. So they've had some benefits here with subsidies. There have been technology transfer issues because of China's indigenous innovation policy which means that if you want to manufacture in China or in some way access their markets you have to transfer your technology. There have been trade issues with the United States including on branding, the WTO and tariffs and new energy vehicles. And there have been provincial disputes with provinces because of this enormous supply of auto parts have created barriers for other provinces to access their market. And these have included local brands and local subsidy regulations to where they discriminate against other provinces. I want to talk very briefly about the solar industry. The solar industry in China has grown 10 fold between 2008 and 2012. The solar industry of course owes its origins to the United States. The United States invented the solar industry and for a long time was the dominant manufacturer in that industry. Today 80% of all solar panels are manufactured in China and prices have fallen 75% between 2008 and 2012. There are major differences in manufacturing style while US private investors have encouraged technology differentiation and concentrated on innovative thin film PV technologies. The Chinese government has emphasized mature technologies of way for silicon technologies in particular which have allowed them to provide to scale up and increase wages and employment and exports. Because of the scale of Chinese manufacturing what the Chinese anoint then becomes the dominant technology. And so this older way for silicon technology now has about 85% of the global market. If you look at it on a level playing field China's cost advantage is less than 4% of that of the US and these cost advantages mean nothing because you also have to factor in the cost of doing business in China. There's a top line and a bottom line cost. But when you start factoring in some of the known subsidies China has an 18 to 20% core cost advantage at least. Let's go a little further. When you start looking at the shipping costs well China actually has a cost disadvantage of at least 5%. So how then could China sell or at 75% below what the other people were selling? Well we started looking at some companies close up and we found that a lot of borrowing was going on. There were a lot of loans in the mix and we looked in 2011 at LDK, Santech, Yingli, Sanpar and the other major Chinese companies. Since we looked at them we now know of course that Santech, Wuxi, Santech has declared bankruptcy and then was bailed out by the province that supported it, Wuxi. LDK China is precarious but all the others are also heavily in debt. What we found out is that without subsidies they would all be bankrupt. The capacity expansion of Chinese and US solar PV companies is also structurally contrasted here. If you see how the US companies have grown and how the Chinese companies have grown as I said there's been a 10 fold expansion in China between 2008 and 2010 alone. And the inevitable supply demand imbalance. When we did the study about a year ago we found a 45% supply demand imbalance and I just rechecked the figures earlier this year and that imbalance has changed. Now the estimated global demand is about 30 gigawatts and the estimated global production, almost all of it from China, is about 60 gigawatts. So the supply demand imbalance is 100%. Despite being the largest producer of solar panels in the world, China is one of the laggards when it comes to installing solar panels. So solar panels, China has less than 1% of the global installations in solar panels. Despite highly publicized projects such as Golden Sun. It is moving in the right direction though but so incrementally, so slowly that these changes don't really matter much in when it comes to proportions. And again, here's the story. US trade with China on solar cells and modules. The increasing trade gap. There are interesting implications not just on trade but also for what kind of technologies will then become the global standard where these technologies will be manufactured and who pays the price where. For example, what we found is that these technologies are mostly developed in the United States. We're then ramped up to scale in Germany and then brought out by China. There are some very interesting policy questions here. The United States of course won this case against the Chinese solar panel manufacturers and how have these duties affected imports, employment or manufacturing in US solar. These same lessons are now being debated and mulled over in the European Union which is also won a case. And what are the lessons for EU solar? What incentivizes Chinese production and exports? What is it that's driving this? And how do US policies affect Chinese provincial production, not just the center? Finally, how can globalized supply chains be addressed? Thank you. Half an hour. Okay, well, a lot to two on there. And we're gonna go ahead and take some questions as is usually our policy here at CSIS. Please identify yourself and wait for the microphone to get to you. The floor's open. Right up front here. Yeah, it's coming. Hi, Paul, I heard of Reuters news agency here in Washington. Familiar with your work, haven't read the book yet. Look forward to doing so. I'm wondering, two questions, you sort of closed with questions. How can we have an opportunity with the strategic and economic dialogue coming up in about a month's time here in Washington and more broadly the sense that under Xi Jinping, the new leadership, there's more scrutiny of public expenditures, more respect, potentially more scrutiny of SOEs and more potential respect for market principles. Do you see that as a possibility for addressing some of these problems that the US has with China? One, and more broadly, is this, how does this differ from, say, Japan and Korea's approach of also sort of circumventing comparative advantage and building up their economies 20, 30 years ago? Does it differ only in scale or is there a much more heavy-handed state element here? Oh, sorry. Well, you first said, could you deal with this in the strategic and economic dialogue? Probably not because the Chinese have said that they don't subsidize any industries. That is their official position. The second is that they have not released any official subsidies in any of their disclosures since they joined the WTO. They're supposed to have done so every year. They have done so only once since they joined in 2001. And that only to foreign invested enterprises. The United States has approached them to continue to provide to disclosure subsidies and they have not done so. So this is going to be a little difficult. It's like telling the, for example, we have evidence that China is engaging in cyber attacks in the United States and Xi Jinping said, no, they're not. So what do you do in that situation? I think probably at a lower level where you talk about just draw a line, just draw a fine line, the Chinese do respond when, and George may talk a little bit more about this. The Chinese don't depend that much on profits. They look at revenues. Can you talk a little bit about this, George? How do you choose? Okay, when you look at Chinese business and you look at especially the state on enterprises, they are not rewarded. Management is not rewarded for profitability. Management is rewarded for maximizing revenues. Profitability is irrelevant. So that's one key issue that really is very distressing. I think you'll find to America manufacturers. If you don't need to make profits as a manufacturer, then how can they or anyone else compete? The other thing that you might want to also consider is go back 10 years to when President Hu and Premier Wen came in, very much the same was being said about them. And nothing really happened. So I think when you start talking about President Xi and his crew, you need to look at it in a historical perspective which will then create a significant degree of doubt as to whether any change will really take place. And your second question, I'm sorry. One of the differences between the export network? Oh yeah, well, size matters. So, of course. The Chinese economy is the second largest in the world. It matters. There is, I've always said that China is a superpower. Forget talking about when it's going to become one. It is a superpower. It's just a skill. The United States also subsidized in its early days and it also stole technology. But it was a small, minor power. China is not. I think another thing that you might also want to look at and consider is the fact that everyone's talking about how bad conditioned the solar energy industry is in China. The steel industry today is just as badly off. So if you look at these industries, they're all losing money. Silton, up here in the front. Wait, wait for that microphone. Oh, sorry. So what do you think is the ultimate goal? I mean, if in fact these continue to subsidize, to bring all the manufacturing to China. I mean, they basically put the US solar industry out of business by operating and building at a loss on each panel that they build. We know that steel, the same thing at this moment. You put people back to work in the country. You create an overall economic buoyancy through basically spending in China with people working. But what do you think the absolute goal is and when do you think it reverses and prices just go up for everybody? That's very good questions. China is an emerging market. It's a very special emerging market. It's one where emerging markets generally are those where political considerations are far more important than economic ones. So for China, it's not simply making profits worldwide. It's dominating certain industries worldwide. When they went into the auto industry, they said openly in a policy that we need an auto industry. We will dominate that auto industry because every major country has one, every world power has one. It wants to dominate these industries. After that, George is an expert on the Chinese civilization. What do you think they want to do after they dominate? I think they'll raise prices. I can't think of any monopolies that have kept prices low. They will raise prices, but if you go back into Chinese history and the history of the West, you'll find the emperor Tiberius quoted as complaining about Rome's trade deficit with China. And they have long memories, the Chinese do. Bring up that one. And China, whatever it is, it still views itself as the middle kingdom as the center basically of the universe. And they want to return to that status where they are the center at least of this little corner of the universe on the planet earth. They want to be the wealthiest power. They want to be the richest power. They want to be the greatest power. It's not money making for the companies. So for the government, what you need to look at and consider when you talk about the Chinese government, those trade surpluses are being used. They're being used in order to gain influence overseas. If you look at a comparison, for instance, between the amount of loans granted just to Latin America, between the United States and China over the past, I believe it was 10 years, US had loans to Latin America of something over two billion. China had loans to Latin America of something over 30 billion. They're buying their way into a major position with countries around the world. They have identified Africa, for instance, as a region of the world where they want to absolutely dominate the trade Africa has and also the investment into Africa and the manufacturing and production of goods in Africa also. So that's what they're doing with it. They are buying their way into other countries and influencing other countries. An example of what they're doing, if you look at Australia and China, in the, China has been a major purchaser of Australian minerals, iron ore, coal, everything that comes out of the ground. When Australia agreed to allow a small base be put into, I think it was Darwin in Northern Australia, by the US, they immediately started cutting back on their purchases of Australian minerals and they were quite open and honest about telling the Australians they didn't like an American base in Northern Australia and that is why it was being cut back. Now because of the drop in the falling growth in the Chinese economy, they have now indicated they were going to try and implement a policy where they no longer imported coal from especially low quality coal from any place in the world. So it's interesting to see what's going to happen to the Australian economy. It was estimated at one time that $3,000 per capita of income, of per capita income in Australia is due solely to Chinese purchases of Australian minerals and investment in the mining operations in Australia. The first developed economy to have a free trade agreement with China was New Zealand and New Zealand has some very serious problems today. They have a very high currency, they have very high unemployment and they have, if you check out New Zealanders, just common New Zealanders and check their feelings towards China, it is extremely negative towards China today. Just look at the last year, last year China overtook the United States to become the world's largest trading nation. It is the number one trading partner for Brazil. It is the number one trading partner for India. It has overtaken, so you look at the power that China exercises around the world. It is a world power. Matt Goodman in the back. Hi Matt Goodman, is that on? Matt Goodman with CSIS. I just, just a comment on this part of this conversation. I mean, you know, Chris is the one who tells me what the motives of China are in their foreign policy so I don't know anything about that but this pattern of behavior that you've described here as an economist, I describe, it looks to me like a country that's trying to get rich quick so I think that could be the motivation is just to get some economic growth quickly so I'm not quite as convinced by the presentation that this is part of a plot to take over the world or the region but the question I wanted to ask, first I wanted to press you on the Korea-Japan thing just to further answer Paul's question. Did you do any comparative study of countries like Japan which in some of these sectors did provide subsidies to their industries to see not just the impact in terms of China being bigger which I think is the way you answer the question but in terms of what the actual contribution of subsidies to Japan and China's growth and the steel and other sectors was and then I guess sort of a related question finally is did you do any sort of control group study of other sectors of the Chinese economy that have been successful without subsidies to see whether there were other factors that might have contributed? Thanks, and they did, I just want to give a shout out to them for subsidizing, for subsidizing. They actually did subsidize us but they also funded, they funded our research and we told them initially that we would do they funded some of our research, not all of it but some of it and we told them we would do the steel study, this was five years ago and I had, we worked in China, we have researched China, we thought we understood Chinese data, we thought we could give them subsidies in three months, it took us one year to get subsidies, just energy subsidies for the steel industry. This pattern was repeated in every industry that we looked at, okay? So it was very time consuming for us, we got bug-eyed, we got tired, we got old, as these things, we didn't do any comparative studies by itself, this is one of the few longitudinal industry studies of capital flows in China. In that it is unique, perhaps later on I could do something compared to what George could do, but not currently, this took a long time, five years, pretty long time. The second thing you said is China just wants to get rich fast. I don't think that contradicts what we're saying. What it wants to do with its money is something else. If you look at the Genie Index in China as an economist, I mean the disparity between the poorest people in China and the richest people is growing, the only other country with that kind of Genie Index is the United States. So the poor people in China are not really benefiting. I mean there are some who are, but most are not. I wonder, I mean if you look at other patterns, of course it really depends on what you're looking at, but I think we can make a case for China wanting to become a world power and dominating some industries. It's also wants to get rich, and some people in particular want to get rich as well. The young lady here, of course. Thank you, my name is Genie, I'm with Baker Hospital. We usually represent former respondents in CVD cases, but here I'm not representing anyone, just my own opinion. And first is a suggestion. I think Qingqing Pipe, who was named as a respondent in the oil country Tobler goods, has set up a plan in Texas. So maybe a few years down the road, you can do a comparative study about how they operate in the U.S. with how they operate in China. And my question is related to your last slide about the policy implication. I remember in 2009, President Obama and President Hu Jintao had a summit about green technology, but nowadays a lot of trade cases against green technology. So I'm wondering what's your recommendation to U.S. policy makers in this ongoing dialogue? Thank you. I have extremely complex questions and I have 30 seconds to answer them, right? Yeah, it was much time as you like. Okay. I don't really, you know, look, this is a very calm, it depends on from issue to issue. Every time we build a smart, smart-of-mouse trap, we have a smart-of-mouse. And then there is also, I tend to get the feeling that there's a lot of greed behind some of these decisions as well, it's not all the Chinese, it's American companies that want to get rich fast and think they can go there and start and manufacture and not give up their technology. So it's, these are, it's a very complex issue. I don't think all of many emerging markets and many markets that we're developing, such as the United States, also steal technology. George has written on this, IP theft is not unique. What is unique here is the scale of this theft, the scale of the changes that is occurring. And the changes that we're talking about in industry have occurred in 10 years without giving any chance for restructuring, without giving any chance for any kind of equilibrium to take place and just skewing all comparative advantage arguments. China does not have a comparative advantage in these industries in which it is dominating. So this is one of the issues that we're looking at. That issue that you brought up, it's very complex. It would depend on the technology, it would depend on the companies involved, it would depend on what kind of firewalls can be put up and how they structure their supply chains. I'm sorry, that's the best. But thank you for your suggestion. Well, Dan Lieberman, I'm a writer. Yeah, when China first started developing in 1979, all the Western economies were fully developed. So they were entering really a tremendous disadvantage. We're trying to compare their development with what they should do today, with what the Western powers are doing, but I wonder if we should compare what the United States and Britain did back in the 1800s. In other words, it's obvious that they had to do something extra to overcome the disadvantages that they were entering. And the second thing is we just keep always criticizing China, but since 1979, they've not only grown, but they've had practically no recessions. It was one minor one in the 1990s. They haven't had the cycles that the Western countries have had and we've had it even before China developed. We had 1980, 1990, 2000. So why are we always criticizing China? It sounds like all we're saying is we don't want you to be successful. We want you to be like us. You answer the one on the cycles. We don't know very much what's happening in China. For example, some of the data that we get, there is excess supply in China, which is not being soft up. We hear about it much later. The data that we get on China are not accurate. They are not timely. Many of the industrial sectors are not transparent. So when we say that China has never been in a recession and everyone is doing fine, we don't really know what we're talking about for the most part. And there is statistically, I mean, statistical information is controlled very tightly. When we were asking for just clarification of some accounting terms, that was against the law. Did you know that? We couldn't get clarification on accounting terms. So this is hardly a place where what you see is what you get. Okay, as to the first part of your question about the development, if you look at China's development policies, starting in 1979 under Deng, they had one set of policies to develop, which was a policy of developing the entire nation. So if you looked at China at that point in time and saw their growth, they were growing throughout China. The Western provinces were growing economically speaking, people were coming to be better off. Then in the 1990s, Chinese development policy changed. They changed from a policy of trying to develop and increase the revenues and income of the country as a whole to a policy of rapid urbanization. And all the growth went to the cities on the coast. If you look at the great majority of provinces in China, since the 1990s, mostly their income has fallen. They have gotten poorer. Now as far as the history goes, if you look at China's development policies, especially the early ones, the early in the 80s, what you see is that those were lifted directly from the US playbook. You're right, we did do very much the same in the United States. The only thing that was different really, there's two major things that were different. In the United States, we didn't have government ownership of companies in the means of production as they do in China. And in the United States, we had the official government policy of technology theft. You go to Alexander Hamilton's first report on manufacturers to Congress and he specifies the success of American government's intellectual property rights in the United States. Now, the Chinese have stolen a lot of technology, but it was never their official policy. They have some of the best laws on the books, by the way. The Chinese do it. The implementation, that's the problem. Another issue with China, and this is one thing where it's a lack of understanding on Westerners part. If I go back, and I think through all the history classes I ever had that brought the Chinese in, it was always represented as a country where every single thing was controlled by the center. And it almost never has been. And you find that the provincial governments have greater power and authority and autonomy of the central government in China than our American states do back in the United States. And so that's one of the things that we have to recognize and understand about how to deal with the Chinese and Chinese policy makers. They have very good intellectual property rights laws, more strict and better than American laws, but implementation is entirely up to the provinces. So enforcement is by the provinces and if they choose to enforce or they don't choose to enforce, that's the central authority has no power to force it. The Chinese have a saying, the hills are high and the emperor is far away. This is a weak center, strong provinces. Diana Negroponte, the Brookings Institution. Dr. George Haley, you have in part answered my question, which is going to be directed at Christopher Johnson. What is the balance on the dynamic between the provinces and the center? As we saw the multiplicity of steel production, glass production in provinces on clearly an uneconomic basis, what's the political dynamic? This is a problem that's been going on primarily since Deng initiated reform in the 1980s. At that time, they had the process of the emergence of the reform policies and then tremendous decentralization within the system, especially after the Tiananmen period as the conservative leadership within Beijing kind of took control of this key bureaucracies, the key planning bureaucracies. So as Deng Xiaoping tried to restart reform, they had to do a lot of decentralization. This has now gone out of control, as George was just saying, and the provinces now have tremendous power to be able to push back on central directives. There have been some indications that Xi Jinping, the new Chinese leader, is attempting to re-centralize control. And you can see this in some of the policies he's been pursuing and in some personnel appointments that appear designed to re-centralize control back at the center. This is a long-standing problem, though, within their system, and it has to do a lot as well with this sort of steady but progressive degeneration of the Leninist system within China in a world that is moving very, very quickly. So it's a perennial problem. The center is always trying to gain greater control. I think the thing that we have to focus on going forward is they claim that they're going to launch a fairly robust reform program this fall at the third plenum. In order to do the kind of reforms that they're talking about, and it touches on a lot of these things we've been talking about today, they're gonna first have to re-centralize control. And whether or not they're able to do that in a collective leadership where these local provinces, especially the local provincial power brokers, look at the case, for example, last year of Boshi Lai, who was basically running an independent barony, it became quite clear, and a lot of the provinces operate that way. So it's a tremendous challenge for the center. We're here. Hi, Charles Scatibi at the Competitive Enterprise Institute. I was going to ask you, I mean, you said it yourself that just how unsustainable this entire system is. I mean, you said that 20% of the steel industry is at overcapacity. If it's so unsustainable, is there a need for the US or Western powers to try to work aggressively to hinder these policies? Because if they say they gain a monopoly over industrial goods, theoretically, that came with lower prices, wouldn't that monopoly just disappear later as soon as they decided to raise those prices? Sir, just a little bit. You're assuming no time lag. These are industries with very high fixed asset investments and there is a development curve for the technology as well. There is always a time lag. Once you lose that industry, it takes time to get back, even with something like rare earths. The second thing is what exactly can we do other than hurt them at their pocket book? That will get their attention. And we have to do something because it's not that they can't do anything, it's just not their priority. I often think it's sort of, I don't know if any of you are old enough to remember the Sorcerer's Apprentice. This was the Sorcerer's Apprentice from Fantasia. This was something that brought about growth. It was an easy fix for unemployment. It's gotten out of control. And it isn't really benefiting the Chinese economy. They've just done an audit of the state finances. If you look at about this last week, shockingly about 36% of the loans are off the book. They don't know where they're coming from. So they don't know how much in debt the states are. The provinces are. There is a real lack of codified knowledge of how the borrowing is working. Sorry. Did you have anything on that torture? I just would want to point out and reemphasize. Once you lose an industry, it's going to take quite a bit before you can actually build up any kind of economies of scale to be able to challenge a dominant industry whether, if it's foreign. And any kind of attempt to bring that industry back within one country or so can bring about just the predatory pricing and predatory strategies to drive that industry back down under the earth and continue to dominate throughout. So if you have sales throughout the world, then you can afford losses in one country or two countries regardless of how large those countries are in order to keep them from bringing their industry back. Hi, David Parker from CSS. I just had a question about the, you talk about such an array of subsidies that are being awarded here. Could you talk a little bit about some of the mechanisms by which they're actually awarded and distributed, how they actually go about doing this at the different levels or in the different industries? Thank you. Easy answer is buy our book. It's there in chapter two. But a more common, it really depends. For example, with loans, they're just given by banks and other instruments. They have specialized instruments. Again, we didn't find everything, just what was reported here and there. With electricity, we were grossly underestimated because we relied on two circulars that were distributed by the provinces. Electricity pricing is very, very complex in China. I hate to keep bringing up the word complex, but that is the truth. So we relied on a couple of things. We also relied on a couple of pronouncements made by the center where they subsidized coal when coal prices went up. And coal was one of the dominant ways of generating electricity in China. For land, we looked at free land that was given. The free land was just discounted. Saplings were given for free. And then for the manufacture of pulp and paper, we looked at price gap, which is the difference between world prices and the Chinese prices as reported by the companies who were buying some of these commodities. So various hodgepodge of methods. But I'd be happy to talk about this. Maybe it's a technical question. Right here in the middle toward the back. My name is Pat Malloy. I'm a trade lawyer, but I was a member of the China Commission for a number of years. And no one is hostile to the Chinese. They had a bad 200 years and they were taken apart by the Western powers and they want to rebuild. I first went to China in 1981. I saw a very poor country. But the problem, as I see it is, they use a term called comprehensive national power, meaning you build your economic technological base and upon that you will grow your military and your political strength. Our problem, the way I look at it and the economist spoke over here, when you look at the formula for GDP growth, net exports, when they're minus, detract from jobs in GDP in your country. And they add when you're running a plus. China's running major pluses and ours are in great debt year after year. And young people wonder why they're living in their parents' basements. Instead of having jobs, this is all part of it. And no one's anti-Chinese to say they have a strategy and we don't have any counter strategy. There's a famous book by Ralph Gomery and Will Baumol called Global Trade and competing national interests which shows that if the other country is moving ahead technologically, they can destroy your industries. And I think that's what's going on. I remember when President Obama used to talk, we were gonna be leaders in green technology. Anybody think that's gonna happen now? No, and so I think that's the context in which what is happening has to be understood. No one's anti-Chinese, but we certainly have to defend our own people and our own economy. And I salute Chris for putting on a great program like this, terrific. China falls at this one, it's going to create a tsunami considering it is the largest trading partner for so many countries. There'll be real problems, so nobody is looking out gunning for China to fall. And that's really not the course. What I am bringing up is an issue and what George and I are bringing up, an issue that we think has been a game changer, an issue that has not been discussed, primarily because academics in the United States look for issues that they have data on and there are no data on this. And it's important to talk about it and to understand that this has been going on because it didn't happen by magic. In the very back there. Thank you, Rick from Fairfax. What do you think about a targeting, manufacturing help here, like a 15% manufacturing tax credit, something like that, which would probably be more apt to get 60 and 218 in the Congress as opposed to what we really need, which is comprehensive tax reform, spending reform, legal system reform, regulatory reform. I think one of the things that you need to look at, and this goes way beyond the scope of the book, but one of the things you need to look at is that we can't even agree on what kind of regulatory reform is required. The idea that all you do is you take away the regulators and everything is going to be hunky dory, that's absolutely wrong. First of all, a lot of the decisions made, especially in the auto industry and some of the other major industries, a lot of the decisions made by the companies run contrary to economic theory. So for instance, if you look at General Motors, where is their most technologically advanced plant? It's in Shanghai. It's where the labor cost is supposed to be low, where by economic theory, you should maximize the use of labor instead of maximizing the use of capital. So the idea that you're going to do well, and I don't know if this is your opinion or not, you're going to do well by just taking the government out of business. It's wrong. You have to bring the government into business and work well with, have a good working relationship between government and business. If you look at the country and the world with the highest trade surplus, and it's not China, it's Germany, and you have a very strong relationship between industry and government and Germany. And so that is the strategy which the United States, if it's going to be able to compete successfully in the future, is going to have to move towards a strong working relationship between government and industry and a strong working relationship between labor and industry. Right now that tends to be falling apart in the US. You have other issues that you're going to have to get into, and this is this idea that government has to be basically chopped up. One of the worst decisions that has been made in the recent economic problems we've had is the number of teachers that have been fired, simply because the government refuses to fund the hiring of teachers and the salaries for teachers. Our kids need to be better educated, not dumbed down. And at least the municipal governments at least around the country have started to recognize this and move very strongly in this direction. There has to be much greater investment in our infrastructure. We've literally got a third world infrastructure today, and it's getting worse. Our bridges are collapsing, our highways are falling apart, our ports are third class. Many companies, rather than the export to the United States through California and West Coast based ports are now exporting to the United States through Mexico and Canada. Vancouver is a much superior port to Los Angeles, why is that? Because we have not invested in infrastructure, we have not invested in labor, we have not invested in training of any kind, really. And the idea that our country exporting to the United States through Mexico, Mexican ports aren't exactly known for their fantastic performance. And yet it's considered superior to export to the United States through Mexico than to send it into Los Angeles. I mean, this is absurd. We are reaching the point of absurdity in this country. Yep, right here. Hi, I'm Matthew Palluga with the Atlantic Council. I'm just gonna switch gears slightly. I just wanna say we have no strong opinions on that. Yeah. I was wondering if any of you three could speak to how China's either central or periphery governments might change their relationship with their major industries given the ensuing EU-US negotiations with the TTIP free trade agreement that this is assuming that it will come together and may produce a productive free market and that's a big if, but how might this sort of rejuvenated relationship across the Atlantic affect Chinese thinking? Thank you. Yes, some crumpled rose leaves that have come up including cybersecurity and surveillance and a whole bunch of other things that I don't really know. I mean, the EU is a much bigger market for China currently than the US is. US demand has been falling and EU demand has been rising for Chinese products across as proportionately. So I'm not exactly sure. I'm not even sure how things are gonna be working on in the EU. As you may know, there are 18 trade cases that are going to be filed against China or have been in the work somewhere in the European Commission. And so there is the European Commission is not a homogeneous entity either. I'd like to take a pass on that. I don't see how I could answer that question correctly. So most of it is hypothetical, but would you like to try? I think there are kind of some serious issues involved. I don't think there's going to be a free trade agreement being generated between the EU, the United States and China. It's going to be difficult enough getting, for instance, there was the initial discussions, opening discussions on a free trade agreement between the United States and the EU. And then Japan said that they would also like to become involved. And all of a sudden we had Congress people complaining about that nefarious power over in Japan. It's, I think right now if we tried to have a free trade agreement that included China, it would really be torn apart in the Congress and it just simply would not get passed any way, shape, or form. I do think there is a chance for at least improved trade relations with the EU and Japan insofar as maybe not a full free trade agreement but at least partial agreements on certain industries. I think there could be a chance in the solar industry, for instance, where we could include China because there are talks about a three way agreement on basically resolving the solar industry issues and problems between the EU, the United States and China. So we might see some limited agreements along that line but a comprehensive trade agreement of some kind, it'll just be too difficult. Yep, you wanna follow? Yeah, just a follow up and I'm sorry we can pass on this question as well if you'd like. I don't so much mean a trade agreement involving China. I mean the transatlantic trade and investment partnership could be viewed as a threat to China. And so the dialogue is that it's not going to be excluding any third parties. Except this is going to be a sort of a, just it's gonna be between the US and the EU. So will China in any way, or what happens when China gets possibly threatened like this? Or does it view these sort of machinations halfway around the world as really none of its concern? They would be threatened by it and they will lobby. There's a well-established practice of lobbying against US free trade agreements. The Chinese will lobby against this one just as the Brazilians lobbied against the expansion of NAFSA. I would just add though that I think to the core your question, yeah of course it's putting pressure on China and they took note of this when the US side announced it. And I think to some degree their recent indication of greater interest in TPP may reflect some of this as well, they're worried about being locked out if you will of that sort of system. So I think the fundamental answer to your question is yes. They would be worried about it and they're watching it very closely. As George said though, I think they're gonna do everything they can to continue to play off what they know to be differences between the two sides. Over here in the corner. On Kunatham with John Deere. Just curious if any of your work touched upon the strategic emerging industries policy as it were and where that's going and if not any thoughts on how overall subsidies and how they're applied ties in with the SCIs. Being with John Deere, I'd love your thoughts on agricultural equipment but just generally speaking would be interesting too. Well we have general analysis of how it would be affecting them but not as specific as to look at which subsidies are going to be affecting them. The Chinese have their own list, strategically important industries that they're also funding but nothing as tightly as we haven't analyzed it for as long or as in depth as we did these five industries. Have you, would you like to say something about that? Insofar as agricultural equipment, I think what you'd find is that there's a significant difference between the kind of equipment that would be needed in China as compared to what is sold in the United States or even in Europe. Although they'd be closer to the European equipment than to the US type equipment because simply our equipment is much larger. Well ours, Canada, Australia, they're much larger than anything in most other countries at least. Also if you look at the agricultural areas within China, especially in the interior, what you find is that they really could not support a Western style piece of equipment over there. They would need something that's a little bit more rough, a little bit more, less technically advanced so that they could work on the equipment and repair it locally in the same area rather than have to ship it to the East Coast or to the coastal cities for repairs and then shipped back. You also have the issue of the size of the farms, the size of even your collective farms are relatively small by comparison with US corporate farms. So once again the equipment would be different. If they were to affect US equipment makers as far as especially domestic sales of say John Deere equipment, it would be a very precisely targeted export industry that they would be subsidizing and building. Right here in the middle. I'm Charlie McCarron from IHS. You said one of your main concerns is the development of monopolistic pricing power in China as they build out industry, they develop capacity, they force out international competition but at the same time doesn't the fragmentation regionally speaking and also within industry prevent such consolidation and pricing power. So you look at for instance recently over the last 18 months China has been experiencing quite severe deflationary pressure of all things. So I'm trying to reconcile these two thesis that you've presented. I think that's an excellent question. I think that is what the center would like. They would like a consolidation of these industries and so move China from being a price taker to a price maker. But the provinces have their own interests. So it's generally moving in that direction. What happens when say for example, the solar industry, if the solar industry, let me just say if the solar industry around the world is destroyed and all panel manufacturing occurs in China, I can assure you prices will go up. But will that happen right away overnight? Will everybody fall in line? I think you can expect that they want to make more money. Somebody there said the Chinese just want to get rich. Yeah, they want to get rich. They don't want to be dependent on subsidies. So yes, the prices will go up. This is just an unnaturally low price. Yeah, over here. Hi, I'm Julian Chinese Embassy. I'd like to speak for myself. I have several different views from the professor. The first one is I think every enterprises, no matter state owned enterprises or private, big or small, that's still profit oriented. Only profit orientation can provide sustainability for the competitiveness of various sides of enterprises. Second, I think you emphasize a lot on the scope and even maybe the scale, the scale of Chinese industries, enterprises and even Chinese markets. Personally, I think competitiveness comes more from quality instead of quantity. You just, I think China also emphasized a lot on the quality, maybe scale, just a part of the story. My last point is that in a globalized supply chain, in China still at low end of global supply chain, I think no country can dominate the global supply chain. Thank you. Any response? Give a more diplomatic response. It's not, if you go back to, I believe it was Zhu Rongji where he said, grab hold the large and let the small go free. Well, that's what China is trying to do. They're not going to dominate the entire supply chain, but they will want to grab hold of the large, the important, most profitable, most technologically beneficial to China, elements of that supply chain. And so that's what they're trying to do. Insofar as quality goes, we would tend to agree with you, quality is an extremely important aspect of gaining dominance in an industry. And one of our, look at one of our slides on the auto parts industry. What you saw is that the investment was going up, but the actual dollar value of goods being produced was going up even faster. And that's an indication that the Chinese investment is trying to focus on higher value added elements of the supply channel, higher value added elements of the industry. So in that respect, we would tend to agree with you, quality is important. The Chinese government recognizes it, and it's trying to move upstream and into higher quality elements. So in that respect, we have no real disagreement. The other element that you look at going into the solar industry, for instance, China isn't trying to dominate the entire solar industry. It's just trying to dominate that element of the solar energy industry, which has the greatest return on investment, which takes the greatest degree of technological skill and knowledge, and has the greatest job multiplier of any element of the solar energy industry. I just wanna say here that we think the Chinese are behaving extremely rationally and strategically. We think the rest of the world is not. So the Chinese have been behaving very rationally. Over for short-term rationality. Short-term rationality, yeah. Okay, I think we've got time for one more, right here. I think it's a similar theme, Paul Robinson also, IHS, by the way. I think it's a similar theme to some of the previous questions, but you mentioned wanting to gain advantages in all these higher-value-added industries. I just don't see how it's possible to gain an advantage in a high-value-added industry by producing at a loss. Doesn't high-value-added imply profit? I mean, I guess, like I see your point in terms of moving into higher levels of technology, but you can't ever get there at a loss because you've gotten there at a loss. But the value of output, which is... The value added would be profit. No, not profit. No, not profit. It does not include profit. I would also wanna point out one thing. They're not viewing this as producing at a loss forever. Just until they get the dominant position, then they will start reaping in what their profits would be. You're looking at profits in the short term. The Chinese are looking at profits in the long term, although we do think the rationality right now is a bit too short-term. If they have all of this excess capacity and there is some degree of agreement between the Western countries, and they start effectively limiting exports of goods from China, there will be a crash in China which will definitely bring down that government. This excess capacity that's being built up, for example, in the steel industry, where more excess capacity is added every year and the total production of number two producers in Japan just makes no sense. Steel prices keeps spinning downward. There is so much excess capacity clogging up the supply chains in China. You can walk through and see that. It doesn't make sense. So it's very, very short-term rationality and the problem here is that all of these different provinces have their own rationalities who sometimes don't agree with each other or with the centers. So it's a short-term rationality with a long-term goal. That's where you would want to look at it. Very unsuccessful or very bad strategy because they've already reached 50% level and they're losing money. It's a high-risk strategy is what it is. They are betting their government on being able to tow a very fine line and have very fine controls over what happens. Okay, well, I think with that, we're approaching time. Let me just say a few words in closing. I think that today's discussion has demonstrated exactly what I hoped it would. This is why we have the reality check series here at CSIS is to try to tackle some of these controversial issues. And I really want to thank the audience for being very engaged in pushing the speakers. I think that's great. That's exactly what we want to have here at CSIS is a robust debate. And I hope you'll also join me in thanking the Haley's for their presentation today.


I think we are now on the way to go up. So today we're going to learn the basic skills of how to solve bivariate distribution, where we have X and Y variable. And I call this session 6.1 because it's just an extension of the session we did on Saturday. So some of the things we did on Saturday, we're going to also use them today, but not everything because not all of it, but yeah, most of the concepts we used, we're still going to apply them today. I'm not going to ask you about question and answer. By the end of this session for now, you should be able to know how to calculate the expected value of an X and Y bivariate variable, or be able to calculate the variants, the covariance and how to describe the bivariate distribution. So when we work with bivariate distribution, there are other things that when you're working with univariate, you don't have to worry about. For example, like you need to know about the expected value, the law of expected value, because when you work with one univariate problem, it's easy to calculate the expected value and it's easy to also interpret that. The minute you have a bivariate variable and they ask you to calculate the expected value of X and Y, where they say you need to calculate the expected value of X plus Y, then you need to know how to solve that as well. So if A is a constant number, not a variable, the variable is like your X, Y and Z are your placeholders. So if A is any number, which will be a constant number, let's say a number like two, three, four, five, 20, 100,000, those are constant numbers. And X and Y are any random variables that we can assign. If we need to find the expected value of a constant, it will be the value of a constant. So the expected value of E of two. So if I need to find the expected value of two, it will still remain as two. If I need to find the expected value of two times X, then I must take out the constant and find the expected value of the variable. So that will be two times the expected value of X and you know how to find the expected value of a random variable, right? We know that the expected value of a random variable, we can write it as the sum of your X, your outcome times its corresponding probability. And you can apply that formula and answer the questions. If I have the expected value of a constant plus a variable, the answer will be, we need to split it into two. So this is the same as finding the expected value of a constant plus the expected value of a variable, which we know that the expected value of a constant is C. Therefore it will remain C and the expected value of a variable, you can find that. So it's the same as finding the expected value of three plus X. And that will be the same as three plus the expected value of X. Finding the expected value of a variable X plus variable Y, it will be the same as expected value of variable X plus the expected value of variable Y. I don't even have to explain further. The other rule or law that you also need to know is always remember when you calculate the variance, especially when you get the bivariance as well, the bivariant random variables. So in terms of the variance as well, if, sorry about that, if C is still our constant, so to calculate the variance of a constant, it will be equals to zero because there won't be any variance on that. So that variance will be equals to zero. So the same as if I need to find the variance of 100, it will be zero. If I need to find the variance of two, it will be zero. Finding the variance of a constant plus a variable will be the same as finding the variance of a variable. So if I have the variance of two plus X, and that will be the same as the variance of two plus the variance of X, which is the same as we know that two is a constant, it will be zero, which will just be the same as the variance of X. I need the variance of a constant times a variable. Now this one is little different to the expected value. So we need to take out the constant but square the answer. So for example, if I need to find the variance of three X, therefore is the same as three to the power of two times the variance of X, which will be three to the power of two is nine, variance of X. And that's how you will find the variance. And if you're going to find the variance of a bivariate variable and where we have X plus Y, the variance of X plus Y will be creating the variance of individual variable and adding them together. So the variance of X plus the variance of Y, and this is only applicable if and only if X and Y are independent. If they are not independent, therefore the variance of X plus Y will be the same as the variance of X plus the variance of Y plus two times the covariance of X and Y. So you need to make sure that X and Y are independent in order to use that formula. The variance of X plus the variance of Y plus two times the covariance of X and Y. And we're going to look at how do we calculate the covariance and real estate now. So this comes from one of your study guide. Let's see if we can apply the same knowledge that we just learned now. If X is any random variable, some of the following, some of the following identities are not true. So let's go with number eight. Without looking at the answers, because we need to determine whether the answer is true or false. So what is the expected value of the expected value of E times X plus two? We know from the previous section, the expected value of X plus two, two is a constant. I'm just gonna do one and then you guys do the rest. That will be the expected value of X plus the expected value of two, which is the same as the expected value of X plus two. Right? Remember the expected value of A constant is that constant. Do the variance plus two. What is the variance X plus two? How do you find that? If you want, I can go back one step, I can do this and I must just remove the animation. Just give me a second, go back. So remember, the variance of a constant plus an X is the same as the variance of X. And remember also, let's come back here. The variance of a constant, the expected value of a constant plus X is the same as the constant plus the expected value of a variance of the variable X. Okay, so number B, are you done? Number B is correct. Number B will be correct because yeah, we find in the variance of X plus the variance of a constant and we know that the variance of a constant is zero. So that will be zero variance of X and that is the true one. And the expected value of four X minus six, do you still remember? If it's the expected value of a constant multiplying the variance, the variable and what will be minus the expected value of a constant? I think it's correct. It is correct because when we find the expected value of a constant multiplying by the variance, we multiply with the constant and find the expected value of a variable minus the expected value of a constant and we know that the expected value of a constant is the same as the constant. So that is also correct. Number D, is that correct? And find the variance of four X minus six. Remember with the variance, you will have to multiply with the square of the constant and finding there the variance of a constant. It's equals to zero. The first part is right. I'm not sure about the plus 36. The plus 36 is the incorrect part because you will find the variance will be four square variance of X minus the variance of six and we know that the variance of zero is zero. So that will be 16 variance of X. So this one is incorrect. It's not true. And let's move on to the number E. Find the variance of minus four X plus six. Yes, that's correct. That's correct. Find the variance. That is not correct as well because this is minus four X squared. So we're going to square minus four squared. It's 16. Variance of X. Plus the variance of six which then it will be 16 variance of X and that is zero. So pay attention to that if you want. So D and E are the incorrect ones. Okay. Miss, also Elizabeth, why is E incorrect? Because the variance of a constant becomes a zero. Yeah. The minus. Minus 16. You need to square minus four. Oh, you square it. Oh, yes. Oh, yes. Okay. Yes, I see that. Minus four times minus four is six. It won't be a negative. Okay. You also need to know how to calculate the covariance which is the strength or the measure of strength of the relationship between the two variables, your X and Y, and you can use this formula to calculate. I'm not going to do an example or anything. When we do the example from the marginal probabilities and the joint probabilities, I'm going to show you how to use this formulas. So you will need to use the formula to calculate the strength of the relationship by using this formula as your covariance. So they mean one and the same thing. So this is the covariance. Covariance, you can write it in that manner. The first one is the longest method which says the sum of your observation minus the mean of that observation. So the mean of X, because you will create marginal probabilities and multiply it with Y. The outcome of Y minus its corresponding expected value times the corresponding probability of X and Y. And we're going to look at how do we get the probability how do we get the probability of X and Y which is your joint probabilities as well. And the second one is the more simplified formula which gives you the expected covariance by finding the sum of the sum of your X times Y times the probability of X and Y which is the probability of the joint minus the mean of X times the mean of Y. You can use either one of them. They will still give you the same answer. And this is how you will find the sample covariance which you don't have to worry too much about that formula as well. In terms of the covariance, so because it tells you about the strength of a relationship, if your covariance value is greater than zero, then it means it's got a positive relationship or it's positively correlated. If it's less than zero, which is in the negative, then it is negatively correlated or it has a negative relationship. And if it's equals to zero, therefore there is no relationship. And you can also use the strength in terms of whether is it a weak one or a strong one or a moderate one. But you don't have to worry too much about the rest. Okay, so now let's go into the joint probabilities. In the previous session that you attended, we were working with only one variable, the univariate, which is the X. Now we have X and Y. So in order for us to find the expected value, the joint marginal probabilities, the variance or calculate the probability of X plus Y or the expected value of X plus Y, we need to do certain things. The other thing you need to know and remember that the probabilities are lie between zero and one and the sum of all probabilities should always be equals to one. That is what you have learned from the last time. Let's look at this example. Sharon and Julius are sales reps at Cari dealership. Let's X denote the number of cars Sharon will sell in a month and let Y denote the number of cars Julius will sell in a month. An analysis of their past monthly performance has the following joint probabilities. And this is the joint probabilities that they gave us which is your contingency table which has your X values of Sharon at the top and on the left the Y values of Julius on the left-hand side. And they have zero, one, two cars and the probabilities that correspond to their joint probabilities as well. So in order to answer question relating to bivariate, you need to know one. The step one is to unpack the table and calculate the marginal probabilities. Marginal probabilities are like your totals. Yeah, totals. We call them marginal probabilities. In basic probability, we call them simple probabilities. They are one and the same thing. And to get them, you just add the rows. If it's for the columns, you just add the columns and create the totals. Those are your marginal probabilities. Okay, so we're going to do that. That's step number one and step number two. Then once we have the marginal probabilities, then we can calculate the expected value of X, the expected value of Y and we can also calculate the standard deviation of X and standard deviation of Y. And we can also calculate the covariance of X and Y because we cannot separate them. The covariance of X and Y and we need to find also, we can also move forward and calculate and find the probability distribution of X plus Y, which means recreate the table as an X plus Y table. So let's see how do we do that. So the first thing that we can do on this is to calculate the marginal probabilities. Like I said, marginal probabilities. So this side, we will do the probability of X. On this side, because X is at the top on the rows, we will add all of them and on this side, we're going to calculate the marginal probabilities of Y because we're going to add the rows. So let's add the columns first. 0.12 plus 0.21 plus 0.01 is 0.40, right? 2 plus 4 plus 4 is 10. K1 is 5. That is 0.50, 10, 0.10. And you can do the same with the Y column or Y row. Are we done? Yes. Okay, what is the, for zero? 0.60. 0.60. And for one? 0.30. 0.30. And the last one? 0.10. 0.10. So now we have the marginal probabilities and we can go and create the same discrete table, this discrete variable table that we learned on Saturday. So we can create the X and its corresponding probability on this side. So this is to answer number one, can do this, 0, 1, 2. So this is to answer number one. And we have 0.40, 0.50 and 0.10. And we can answer number two as well because number two says we need to find the marginal probability. So we do the same, 0, 1, 2. And this is our Y and this is the probability of Y. And we found that it's 0.60, 0.30 and 0.10. Can you see how easy it is? Now we do have the marginal probabilities, we can calculate number three says calculate the mean and the standard deviation. I'm gonna go and do one, you can do the Y on your own. So let's do the X. So I'll do X. So number three, right? We need to find the expected value which is the sum of your X times your probability X times the probability of X. Now we do have that which is zero times 0.4 plus one times 0.5 plus two times 0.1 0.1, which is 0 plus 0 plus 0.5 plus 0.20, which then is equals to 0.25. So I do have my expected range. So you can go, that would be your homework, you can do it outside of this. You can go and calculate your expected value. Oh, you can do it now, but we're gonna run out of time.  I'm gonna give you time to do that. It's fine, we'll end at six. The expected value of Y, you just need to do the sum of Y times the probability of Y. So you just use this table here. I'm gonna give you some time to do that What's the answer? Okay, do you have the answer? I'll just write. So it is, it is zero comma, zero times, zero times zero comma six zero plus one times zero comma three zero plus two times zero point one zero. Okay, and that is zero plus zero point three zero plus zero comma two zero. Which is equals to? Zero comma five zero. Zero comma five five zero. So we have our expected value. We need to calculate the standard deviation. We know that there's standard deviation. Before we do the standard deviation for the mean of X, the answer there is the zero point five plus zero point two would that be zero point seven zero? Yes, I calculated it, drug this. Thanks. It's zero point seven zero. Yes, you're right. Sorry about that. Yes, fixed it. Okay, so now let's do the standard deviation. So we know that the standard deviation for X will be given by the square root of the sum of your X observation minus the expected X squared times the corresponding probability of X. Therefore, that will be the square root of our, it will be zero minus zero point seven squared times zero minus zero point seven squared. Zero point four plus minus zero point seven squared times zero point five plus two minus zero point seven squared times zero point one. And you can see the entire, I'm not gonna do one by one by one by one. I'll use the case here. Are you winning? I am doing everything, including the square root. And let me know what answer do you get. Okay, I've got my answer. And what is your answer? It's point two one four. Oh, but I didn't see the square root. Yeah, take the square root because I don't have enough space to use up all the things. So the square root would be point four six, two six, zero one three four. No, I'm sure you calculated the variance. Doing everything and taking the square root, the answer you should get should be zero comma six four if I run it to two decimal. Double check your numbers. Can we do them again? Did you do them one by one? And you must make sure that if you're using your calculator and you're doing all of them at the same time, make sure that you include the brackets as well or use the multiplication because the answer of everything that is underneath the bracket, underneath the square root should be something like zero point four one. And you should take the square root of that answer. It should give you zero comma six four zero three, one, two, four, two, three, yes. Okay, so we can also do the same with the Y. So we need to find the standard deviation of Y which then it is the square root of the sum of your Y value minus the expected mean of Y squared times it's cross bounding probability which is the square root of zero minus zero point five squared times zero point six. Plus minus zero point five squared times zero point three. Plus two minus zero point five squared zero point one. And we can go and find the value underneath the square root. And you should get zero point four five, zero point four five. And if you take the square root of zero point four five. Zero comma six seven. Zero comma six seven. So you still remember all these values since I ran out of space here and it's going to the next one. Remember that we just covered number one, number two, number three. We need to do number four, which is the covariance. Now with the covariance, I need enough space. So the formula for the covariance, the covariance of X and Y. I'm gonna use the easy one that I can still remember is the sum of your X minus the expected times Y minus the expected times its cross bonding probability of X and Y. Let's see if I'm writing it right. I am writing it right. Okay, what it means, it says, we're going to say, for example, if we take, we start with the X on the side. So it will say zero minus, you still remember what our expected value for X is and our expected value for Y. Do we remember those? It's zero point six, zero point seven and zero point five. Zero point seven and zero point five because we need that one. So we say zero minus X. Minus zero point seven will start first with the X one and then go to the Y, which is zero as well. Minus zero point five. It will be a long calculation. Multiply by its joint probability, which is zero comma one two. Multiply by zero comma one two. Plus, we go to number one. One says, do we do this one now? So we started with this. Now we come here. So this on here, it will have two values. So it's zero and one, right? So that will be one minus zero comma seven times zero minus zero comma five times the corresponding probability, which is zero comma four two.  We come to two, two with this corresponding probability corresponds to Y of zero and two X of two. So it will be two minus zero point seven times zero minus zero point five times the corresponding probability of zero comma zero six. Plus, then we come to the second row, which corresponds to zero and one. So that will be zero minus zero comma seven times one minus zero comma five times the corresponding probability, am I on the right track? No, I'm on the wrong one. It should be with zero one. Sorry, it's zero and one. Yeah, I'm on the right track, which is zero comma two one, zero comma two one. Plus, now we go to this one, which X is one minus zero comma seven and our Y is one minus zero comma five times the corresponding probability, which is zero comma zero six. Plus, we come this one, two minus zero comma seven times one minus zero comma five times the corresponding probability, which is zero comma three. Plus, it's a long calculation. And we can say on this one, it's zero minus zero comma seven and two minus zero comma five, corresponding probability, zero comma zero seven. Plus, one minus zero comma five, minus zero comma seven times two minus zero comma five and the corresponding will be zero comma zero two. And then the last one. That is two minus zero comma seven and also two minus zero comma five times zero comma zero one. Yes, and then you can just calculate all of them. I'm gonna save you a whole lot of time to tell you what that is. And there is no shortcut to this. No, there's no shortcut. The answer you will get will be minus minus zero comma one five. Or here is the other easy one that you can use. Remember, let's go find that the easy formula. The sum sum of X and Y and the corresponding probability minus mean of X, mean of Y. Okay, this one, it's, it looks easy but it's also a little bit of complexity to it. X and Y, you say is the sum sum of all the X values and all the Y values of X and Y times the joint probability of X and Y minus the expected of X times the expected of Y. So this one, you need to first solve this part first because the summation does not include those two. Expected value of X times the expected value of Y you can just take those two because this is the same as zero comma seven times zero comma five. So that one you can calculate. The only part that is complex is on this side. So now on that side, what you need to do because it says it is X times Y so it means we need to multiply X and Y and its corresponding probability. So we're going to say zero times zero multiplied by the corresponding probability plus zero times one and its corresponding probability plus like that. So let's do it here. Do I wanna write it on here? Let's write it on here. We'll come back to this later on. We'll come back to this patch. So we'll come back to the formula later on. So we know that eventually we need to calculate the covariance of X and Y with the sum sum of X and Y times its corresponding joint probability of X and Y minus the expected of X times the expected of Y. So let's solve this one first here. So the sum sum of X and Y times the joint probabilities will be given by zero times zero, zero times zero times zero point one two plus zero times one times zero point oh two plus zero, zero times two times zero point zero six plus. And we go to the next line. I'm not equal, just the next which is zero. It's one times zero. Since I'm using the Y axis, one times zero, one times zero times the cross-bonding probability, which is zero point two one plus. One times one. Zero point zero six times zero point zero six plus. One times two plus zero point zero three zero three plus. Two times zero zero times zero point zero seven zero seven plus. Two times one. Two times one times zero point zero two plus. Two times two. Two times two times zero point zero one. And you go and find that which will be, which will be zero point three. And that will be, let me write it closer to the numbers. Zero point zero point two. So now let's use our formula because I don't want to rewrite it. So we know what this value is. It is zero point two minus. And did you calculate zero point seven times zero point five? What is the answer? That's zero point three five. Zero point two minus zero point three five, which will be minus zero point one five, right? So that is how you will calculate the values. Maybe let's do one last thing. We can finish it. Godapast, just give me a second while you're still double checking your answers. So you're done with estimates. So you're done with estimates. The only thing that you did today was estimate. Yes. What happened to? Well, I had a whole lot of homework. But if you finished long time ago, that means then you. I had at least nine or 10 pages to do for your estimate. All right. So let's do one last thing relating to duplicate one of this. I'm gonna discard because we do have, and then I'm gonna. So let's create a way is the other one. Find the probability of distribution of X plus Y. X plus Y. So now how you do that, I'm gonna use this site. How you do that, we have all at this table, right? So we go into add because we want to create a table that looks like this. X plus Y because we're creating a distribution table with its corresponding probability of X plus Y. So it means we need to determine what are the variable, the outcomes, the possible outcomes that could be.  And when you add X plus Y, you must also add the probabilities. So the first one we're going to do is say zero plus zero because it's X plus Y, zero plus zero is zero, right? And the corresponding probability of that is zero comma one two. I'm just gonna write it like that. The next one is one plus zero, which is one and the corresponding probability will be zero comma four two. And the next one, two plus zero is two and the corresponding probability is zero comma six. Osles, if you can't see what you are writing. Oh, I didn't share my screen. No. And now? Yes, we can see now, go. Okay, because I didn't cut the thing here now.  Let's share, sorry about that. I thought I am sharing my screen. Well, let's leave it there. So what I'm saying is if we need to find the probability of X plus Y, so we want to end up with a table that looks like this which is the distribution which it has X plus Y and also the probability that corresponds to X plus Y, that's what we want to do. And we need to identify the values that will form part of the outcomes. So we're going to add X plus Y, X plus Y, but when we do that, we also need to add the probability that corresponds to those things. So the first one is zero plus zero is zero and the corresponding probability of, or the joint probability there is 0.12. The next one is one plus zero is one and the corresponding probability is 0.42. The next one is two plus zero, the corresponding probability of two will be zero comma zero six. Now we move to the second row of Y, zero plus Y and the corresponding probability. So zero plus one is one. I'm not going to write one again because I have already one. So I can write the corresponding probability of zero and one which is zero comma two one, zero comma two one. And then I go to the next one, one plus one is two and the corresponding probability is zero comma zero six, zero comma zero six. And the next one is two plus one, which is equals to three. So I can write three because I don't have a three and the corresponding probability is zero comma zero three. I'm just gonna write it on the same line. Then we go to the next one which is the last one, zero plus two is two and the corresponding probability is zero comma seven. And one plus two is three and the corresponding probability is zero comma zero two. And the last one, two plus two is four. We don't have a four, we can write that outcome. And the corresponding probability is zero comma zero one. Now all I need to do is add all the probabilities underneath there because I know that this one is x, x plus one, x plus y values. And therefore here I'm gonna have my x plus y probabilities. So yeah, we'll have, I just bring it down because there is nothing to add there. And yeah, I must just bring it down which will be three, six, zero comma six, three. And yeah, I must also bring it down. That is 12, nine, that will be 19, zero comma one nine. And yeah, two will be five, zero, zero comma zero. Zero comma zero and zero comma zero one. Therefore I have my probability distribution, zero, one, two, three, four. And my probabilities are zero comma one, two, zero comma six, three, zero comma one, nine, zero comma zero five and zero comma zero one. And you can even do more than what I'm just showing you, but I think this will be enough for you to be able to write your assignments or write your exam and everything in between. And that concludes today's session for us. Thank you for being here and for participating. There is nothing more I can share with you. We've done the expected values, the variance, the covariance, the bivariate distribution, and that's it. Thank you, thank you, thank you. It's your problem, you are welcome. Yeah, we'll be able to tackle the marginal problem which is problems now in the assignment three. Yes, you should be able to. I'm gonna stop the recording.