What is truly remarkable about two comments in the last two days in the august Financial Times, is that they both say protectionism against China is likely. One actually urges it, the other pretty much says it’s a-comin’ unless China mends its ways. And both pieces were written by reputable economists, the last people you’d expect to be talking about trade barriers as a last ditch option.
But as the articles suggest, China’s intransigence has gone so far that a pushback is inevitable unless something gives, and China has signaled that it has no intention of blinking.
The overly cheap peg for the renminbi is tantamount to having both large export subsidies and substantial tariffs in place. Even though China’s partners have various favored industries here and there, the scope and scale of these interventions pale next to what China achieves through its currency manipulation. Of course, the US has aided and abetted this practice by being unwilling to call China a currency manipulator long ago, before they got so deeply hooked on massive exports and the US became addicted to cheap capital.
But as the sabre-rattling from Robert Aliber yesterday and Martin Wolf today suggests (hat tip reader Michael), relationships come under serious stress in bad times. Yet China seems determined to repeat the mistakes of the US with Smoot Hawley in a different form. China maintaining its peg against the dollar has bettered its position against other exporters (witness the collapse in the Japanese trade surplus in particular) and the US needs the dollar to fall relative to the RMB (as in that is our biggest imbalance, ergo, that is where the adjustment most needs to occur). Aliber puts it bluntly:
Beijing’s unprecedented accumulation of $2bn (€1.4bn, £1.2bn) of US dollar securities is the product of its “beggar-thy-neighbour” policy in importing jobs. The undervaluation of the renminbi has the same impact as an import tariff of 50 or 60 per cent.
A principal motive for the cheap renminbi policy is Beijing’s concern that domestic unemployment will increase if the currency strengthens….
China’s large holdings of US securities have enhanced its political clout and given it the standing to comment on US interest rates and the US fiscal deficit. And as long as China’s trading partners are focused on the huge trade surplus, their other demands on Beijing are modest.
Americans have been patient – too patient – in accepting the loss of several million US manufacturing jobs because of China’s determined pursuit of mindless mercantilist policies…The US can help China make the necessary adjustments toward a reduction in imbalances by adopting a uniform tariff of 10 per cent on all Chinese imports, based on their values when they enter the US. Six months after the establishment of this tariff, the rate would increase by one percentage point a month until the Chinese trade surplus with the US declines to $5bn a month.
The precedent is clear. In August 1971 the US adopted a 10 per cent tariff on dutiable imports to induce Japan and several European countries to allow their currencies to float. The measure quickly accomplished its goal – the European countries stopped pegging their currencies immediately and the Japanese allowed the yen to float a week later. The tariff was eliminated after a few months….
It should not take long for the Chinese to learn that they are much more dependent on access to the US market than Americans are dependent on Chinese goods. Virtually all of the goods that the US imports from China could be sourced at home or in Indonesia, the Philippines or South Korea. China would find it difficult to find other foreign markets for the goods that it no longer sold in the US…. Such an initiative by the Obama administration would be much more significant as a jobs-creation measure than anything else it could adopt.
Yves here. I guarantee this will never happen under Obama. Nixon, for all his faults, had balls. Obama does not.
Martin Wolf is far more measured but just as troubled:
Wen Jiabao, the Chinese premier, complained about demands for Beijing to allow its currency to appreciate. He protested that “some countries on the one hand want the renminbi to appreciate, but on the other hand engage in brazen trade protectionism against China. This is unfair. Their measures are a restriction on China’s development.” …
We can make four obvious replies to Mr Wen. First, whatever the Chinese may feel, the degree of protectionism directed at their exports has been astonishingly small, given the depth of the recession. Second, the policy of keeping the exchange rate down is equivalent to an export subsidy and tariff, at a uniform rate – in other words, to protectionism. Third, having accumulated $2,273bn in foreign currency reserves by September, China has kept its exchange rate down, to a degree unmatched in world economic history. Finally, China has, as a result, distorted its own economy and that of the rest of the world. Its real exchange rate is, for example, no higher than in early 1998 and has depreciated by 12 per cent over the past seven months, even though China has the world’s fastest-growing economy and largest current account surplus…..
Unfortunately, as we have also long known, two classes of countries are immune to external pressure to change policies that affect global “imbalances”: one is the issuer of the world’s key currency; and the other consists of the surplus countries. Thus, the present stalemate might continue for some time. But the dangers this would create are also evident: if, for example, China’s current account surplus were to rise towards 10 per cent of GDP once again, the country’s surplus could be $800bn (€543bn, £491bn), in today’s dollars, by 2018. Who might absorb such sums? US households are broken on the wheel of debt, as are those of most of the other countries that ran large current account deficits. That is why governments are now borrowers of last resort.
Yves here. Did you catch that, sports fans? The US will not be able to deleverage (absent explicit default) unless we move to a trade surplus. As long as we run a current account deficit, we need to run a capital account surplus. That means (if the deficit and therefore corresponding surplus are more than trivial) rising levels of debt, and high odds of speculative asset bubbles. As Wolf warns:
China’s exchange rate regime and structural policies are, indeed, of concern to the world. So, too, are the policies of other significant powers. What would happen if the deficit countries did slash spending relative to incomes while their trading partners were determined to sustain their own excess of output over incomes and export the difference? Answer: a depression. What would happen if deficit countries sustained domestic demand with massive and open-ended fiscal deficits? Answer: a wave of fiscal crises.
Neither answer is acceptable; we need co-operative adjustment. Without it, protectionism in deficit countries is inevitable. We are watching a slow-motion train wreck. We must stop it before it is too late.
This looks like it will get a lot worse before it gets better….and I hope I am proven wrong on this one.
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Ha ha. How do you retaliate against your masters? They hold the purse strings of the USA. We don’t have much leverage. When you sell your soul to the devil, you become an indentured servant.
But China might be getting worried about getting paid back.
See: [lol]
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President Obama press conference with China’s President Hu Jintao
http://www.nbc.com/saturday-night-live/video/clips/china-cold-open/1178451/
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Oh, and China has a MUCH larger military than we do and they are not very concerned about dead citizens.
Jojo,
If we don’t run a trade deficit, we don’t need their money. And if we run a deficit with other countries, we also don’t need their money.
The deficit countries defaulted in the Great Depression and did much better than the big creditor countries. And we are closer to an autarky that, say, Great Britian was, which defaulted in the 1930s. We might need to send some nuclear subs to Taiwan to make sure we get enough chips…
It’s good to see somebody else acknowledge that America does in fact have the autarchy option (with just a bilateral trade deal here or there), whose costs and benefits should be weighed like any other.
Yves: If we don’t run a trade deficit, we don’t need their money.
I am afraid we do need their money to continue floating our Treasury debt at today’s interest rates. What about this little detail?
why do we need their money regardless of the trade deficit?
I quit studying economics because I couldn’t believe, in the religious way required, in the absolute necessity of free trade and in the rationality of market participants. I couldn’t see the point of the beautiful edifice with sponge for initial assumptions at its foundations. I dislike the unrelenting drive to treat humanity as an externality.
What amazes me most is that some economist is openly saying “these are structural problems requiring an intervention of a protectionist nature.” While it’s based in their argument on others distorting the perfection of free trade, to which we must respond, it’s mighty close to heresy in the neoliberal paradigm.
Ina Pickle,
No truly democratic nation has ever freely accepted neoliberalism. Neoliberalism is always enforced at the point of a gun. That’s why neoliberalism, along with its economic prescriptions (including, but certainly not limited to, free-trade and free-capital-flow absolutism), always comes joined at the hip with its muscular twin, neoconservatism, and its military might.
Almost 20 years ago, the Mexican writer Carlos Fuentes wrote that “Our perception of the United States is that of a democracy inside and an empire outside: Dr. Jekyll and Mr. Hyde.”
As Fuentes goes on to point out, Americans never had much reason to be concerned about Mr. Hyde. As long as neoliberalism was inflicted upon someone else, it was a doctrine easy to embrace.
But somewhere along the way, America’s plutocrats decided they could completely kill off the goodly Dr. Henry Jekyll, letting Mr. Edward Hyde have his way with not only those outside America, but those inside as well. And of course most Americans, now that they’re getting a first-hand taste of neoliberalism, are finding they don’t like it. Neoliberalism is, after all, a doctrine that establishes a small, privileged elite, and everybody else suffers.
So I perceive this to be a test of American democracy. Will American oligarchs be able to permanently kill off Dr. Jekyll, as was the case in Stevenson’s novella? Or will the American people be able to stage a recovery, to recreate the exact formula of the potion that turns the evil Mr. Hyde back into the goodly Dr. Jekyll?
I think not. It’s a youn can’t go home proposition be cause while home is geographically still there, it culture has been blown away like so much dust. Moreover the Americans who might have set the society right are now to small in number to be a political force. Also our culture has been diluted by immigration so much that where we once were democratic republic we are now acting like a social democracy.
There is no need for protectionist trade barriers. The more expedient course of action would be to repudiate the debt by a massive devaluation. Now that might start a war.
Agree completely, and believe our utter failure to examine and correct (eg: get some basic truths re-established) portends our future. Everything else in tinkling brass.
Yes!!! The critical mass which moves things has tipped into ignorant absurdity.
Nor has there ever been a “true” democracy, or a neoliberal regime as you describe it. And every policy adopted by every binding government is, as you put it, “enforced at the point of a gun”. And a cynic would argue that democracies do not generally prefer free trade, because people do not generally prefer competition, and will vote themselves money and business if given the chance, resulting in precisely the kind of special-interest oligarchy that you mention.
But I’ll bite. Netherlands in the 18th century. Modern Taiwan and Singapore. Post-ww2 Japan. Relatively democratic, peaceable nations with open trade. Not perfect examples by any stretch, but then it’s wise to remember that history, which rarely follows theory, is always a poor means for theoretical validation.
Costard,
You assert that “people do not generally prefer competition, and will vote themselves money and business if given the chance, resulting in precisely the kind of special-interest oligarchy that you mention.”
This is a gross generalization of human nature which leads to an extremely simplistic, and erroneous, worldview, and if applied to public policy brings social disaster.
In any given population there are indeed a certain percentage of people who behave as you say. They are called “free-riders.”
If a society fails to punish and keep free-riding to a minimum, then the society does indeed become dysfunctional. But a properly functioning society has all sorts of cultural and legal mechanisms in place to identify and punish free-riders.
Neoliberal ideology, with its free-market and anti-regulatory absolutism, undermines the cultural and legal mechanisms that punish free-riders. It is a recipe for economic and social chaos.
“This is a gross generalization of human nature which leads to an extremely simplistic, and erroneous, worldview, and if applied to public policy brings social disaster.”
Are you saying that I am wrong, and that in fact people *do* prefer competition and, if given the chance, will *not* vote for policies that benefit them? I may be erroneous – I accept that – but at least I don’t make the mistake of gross naivete. Regardless, if you present an actual argument I’ll happily address it.
The free rider problem is something else entirely, pertaining to goods which are by definition public and so are enjoyed even by those who do not pay for (or want) them. Would you like a link, or shall I be forced into the role of educator?
I believe you are the first person I’ve ever see equate free markets and anti-regulation with absolutism. Thank you for the laugh, my friend.
I am most definitely, without any scintilla of doubt, saying you are wrong.
People love competition. Have you ever heard of something called sports?
And there’s nothing new about this. People are far from being the rational actors as prescribed by classical economic theory. As Hannah Arendt observed of ancient Greek society in The Human Condition: “To belong to the few ‘equals’ (homoioi) meant to be permitted to live among one’s peers; but the public realm itself, the polis, was permeated by a fiercely agonal spirit, where everybody had constantly to distinguish himself from all others, to show through unique deeds or achievements that he was the best of all (aien aristeuein).
You live in what Reinhold Niebuhr called a “paradise of innocence,”–a “society which achieves social harmony by prudence and a nice balance of competitive interests.” As Niebuhr goes on to explain, this construct entails “the bourgeois notion of a discrete and self-sufficing individual with the concept of a society so perfect and frictionless that each individual will flower in it, and have no desire, ambitions and hopes beyond its realities.” Niebuhr concludes:
Such a society regards all social relations as essentially innocent because it believes self-interest to be inherently harmless. It is, in common with Marxism, blind to the lust for power in the motives of men; but also to the injustices which flow from the disbalances of power in the community.
[The privileged classes try] to preserve the illusion of classical liberalism that power is not an important element in man’s social life. They recognize the force of interest; but they continue to assume that the competition of interests will make for justice without political or moral regulation. This would be possible only if the various powers which support interest were fairly equally divided, which they never are.
–Reinhold Niebuhr, The Irony of American History
aaaag! Look what I’ve done!
I should have said “many people love competion” or “most people love competion.”
When I said “people love competition” I’ve engaged in the same sort of abusurd reductionism that you do.
You are both probably correct. I think your definitions need refining.
What (most) people love is novelty. Choice. Options.
We tend to equate these with competition. Goods and services of slightly differing composition or cost set side by each, and then we choose. And all goods will eventually sell, because there are differing opinions among buyers, and the market can be both wide and vertical.
However we do NOT like cultural competition, and revert to the norm. We tend toward mono-culture because culture meets our basic needs for security, identity, self-worth, communications etc. and too much flexibility reverts to confusion, defeating the purpose of culture and norms.
The confusion that you can “market culture” is part of what got the West in conflict with Islam. Then the notion that culture is transported around the world in finished goods (read; blue jeans and tennis shoes) got industrialists all fired up to push culture exports to the limits of the earth. Much insecurity has been the result.
On the question of will actors “grant” themselves riches in a non-competitive environment … of course they will. That’s called greed. But it’s all greed, and all it means is that greed clouds our thinking, and makes us do reckless things.
cougar
IMO, the economics profession has completely missed the true lessons the 20’s, 30’s, and 40’s in America and at least five centuries of European history before that. Mercantilism leads to war.
The great depression was more about the collapse of the world economy as a result of the trade imbalance, with America playing the current role of Germany, China and Japan. America’s export juggernaut collapsed with the collapse of the trade deficit countries leading to world wide deflation, depression, and war.
America faces deflation. The jobs have been hollowed out by foolish, or non-existent, trade policies with predictable results. Just like the path from here is predictable.
Without policies, in place, to limit predatory import penetration, severe deflation, continuing job loss, and growing poverty in the US is assured. Why wait until war becomes the only solution ?
“What would happen if the deficit countries did slash spending relative to incomes while their trading partners were determined to sustain their own excess of output over incomes and export the difference? Answer: a depression. What would happen if deficit countries sustained domestic demand with massive and open-ended fiscal deficits? Answer:”
exactly what is happening, now.
Agree completely… well said.
The problem with the simplistic trade barrier argument is that it assumes we do it better or will do it better. Does the Japanese car example not out the lie to this myth.no doubt free trade as it is conceived is a myth to mask wage labor arb. And the talk of manufacturing is always ironic in the context of a service economy governed by free trade deals for machinery. Labor is the greatest import and there is nothing free or mobile about it. In the end china is growth and that is why the us will pursue such a course as a desperate last gasp. It will fail as tactic supports a hollow strategy. No endgame other than to default. Then. What? China has shown in the financial services realm and others that you can play but you will be subordinate to homegeown. That is a policy that is not changing. That in the end is the greatest fail of us policy. It is a result of believing the pure fictions of good and right along with the orevailing view that a nickel today is better than a buck tomorrow. Maybe that is an interest rate thing however.
The us runs a trade surplus with how many countries? My recollection is togo and Denmark or a single digit number.ergo the reason the financial comple and its derivatives moreas is encouraged. where else is the capital going to come from?
Apologies if I have posted this here before, but Michael Pettis fleshes this out (along with Martin Wolf) quite elegantly.
http://mpettis.com/2009/04/is-governor-zhou-a-closet-bernanke-ite/
“In either case US consumption must grow faster than US GDP, and the choice for the Fed is whether to target a “normal” growth in consumption, and permit rising unemployment, or a “normal” growth in GDP, and so permit rising indebtedness. The Fed must use US unemployment, in other words, as a tool to prevent Asian trade policies from leading to excess US indebtedness.”
Another damaging consequence of the trade imbalance given this statement (if my deduction is correct using their logic), is that if the Fed brings interest rates to zero and the trade imbalances *persist*, then real interest rates are *increasing* as long as the imbalance persists.
The Pettis post is superb.
However, I question Pettis on this statement:
Given their much more limited economic flexibility and their less ebullient financial systems, those other countries probably would have never been able to sustain the necessary levels of trade deficit, and they would have almost certainly moved aggressively against China to limit the development of unfavorable trade balances. China, in other words, chose to hold US dollars not because the US government has somehow enforced reserve status on the US dollar and denied it to other currencies (Washington could never have prevented China from buying euros or yen or anything else), but simply because no other country is able to run deficits of the necessary magnitude.
Was it a question of “being able” to sustain the trade deficit, or was it a case of US political leadership—the unholy alliance between Wall Street and the security-industrial complex whose grip on America’s economic and political jugular has grown all but absolute over the past 60 years–deliberately sacrificing the interests of a majority of Americans in favor of the interests of a privileged few?
All parties that have embraced the conventions of BWII have had good short-term reasons for doing so. The U.S. has acceded to this arrangement because it has served to boost U.S. asset prices and lower risk spreads, thereby helping to facilitate America’s “guns AND butter” foreign policy. In the absence of its Asian creditors acting as “dollar sub-underwriter of last resort,” it is hard to envisage a chronic debtor country like the U.S. mounting successive wars with little financial strain and an absence of tax increases…
And there is little political appetite for tax increases to fund the military option, given the ongoing willingness of East Asia, Japan and China to fund American wars on the cheap…
The U.S. has been perfectly happy to accede to the current state of affairs in spite of the immense economic damage it has inflicted on its domestic manufacturing sector (and the concomitant evisceration of its middle class) because it has provided the country with a cheap form of war finance, a particularly important consideration as it has gradually militarized its energy policy. If one includes America’s array of privately outsourced services along with a professional permanent military, the costs run around three-quarters of a trillion dollars a year. Chinese, Japanese and other central banks of East Asia via Bretton Woods II indirectly finance this cost.
–Chris P. Dialynas and Marshall Auerback, “Renegade Economics: The Bretton Woods II Fiction”
http://www.pimco.com/LeftNav/Viewpoints/2007/Renegade+Economics-+The+Bretton+Woods+2+Fiction-+Executive+Summary.htm
Thanks for the link.
So I am reading it, and Pettis states:
“Trade surpluses, of course, have to be recycled as investment flows (or reserve accumulation) back to the country against which they are running these surpluses.”
Really? If we pay for Chinese stuff with dollars, the Chinese can’t use the dollars to buy oil, Swiss cheese, or Danish porn?
I would presume the answer would have to do with keeping the value of the Chinese currency low with respect to the dollar???
It appears to me that China (government)is willing and able to increase employment with the very low compensation of Chinese workers. All the “market” mechanisms, such as floating currencies, labor mobility or protections, fall of political party due to inept economic management do not work in a totalitarian society.
When one looks at the total amount of the trade deficit with China (about ???250 ???? billion a month?) – I believe I have read that its about ???6%??? a year of GDP – so I have a very hard time understanding the fetish regarding free trade, or the free trade with China argument. If it is so against our own interest, and apparently world interest, why is such accommodation made to a non-democratic country???
If there were no trade with China, would all our problems be over? Detroit would bounce back??? (yeah, all those Chinese cars we import). Our t-shirt industry would rebound??? American factories would spring up (how much stuff do we get from Mexico, Malaysia, Vietnam, Korea, etc.)?
Another thing I don’t understand is the argument that interest rates would soar without China buying our bonds. Yet, I remember a few years ago Fed funds rate being being much higher. On the other hand, now that the Fed funds rate is much lower, a home loan interest rate for me isn’t any lower, nor are any of my credit card rates.
Now it seems the Fed can manipulate (or to use a less loaded word – set interest rates at what ever rate it chooses) the interest rates. So the question I have is: How long can the Fed keep interest rates low? How dependent is that upon China buying Treasures?
It just seems to me that I read a lot of theories, and they don’t comport with reality.
The Pettis argument … is the Yves Smith argument morphing into the Pettis one?
I don’t think Yves’ argument (not really hers) or Pettis’ hold up. Bernanke doesn’t sit at a desk pushing the ‘unemployment’ button to make the ‘indebtedness’ dial move. He’s busy helping his friends rob the Treasury under cover of open market operations. Trade barriers are rising … who cares? Nobody I know has any money, they aren’t buying anything from overseas … except gas.
The trade def is really more with Russia, Mexico, Saudia, Kuwait, Venezuela, Canada, Angola, Nigeria, etc. People will starve and still buy gas for their giant, bulbous pickup trucks and SUV’s.
China’s trade advantage is and was cheap labor and cheap coal, not cheap money. If the money costs were equal, China’s labor would still be cheaper as would be its coal. China exports cheap energy to us in the form of cheap, plastic, toxic goods. China is no different from Saudia.
The currency crisis is inevitable since the US refuses to live within its energy means, only doing so when its ‘blessed economy’ falls to its knees. Is this happening now, while this tariff discussion is taking place?
Oil prices have declined recently; somewhere, demand is being destroyed …
Money quote there Dan.
Reading comments on this thread, Alber and Wolf articles Yves posted, and plenty from the econ/WS pundits in the same vein (going back several years now, reaching a crescendo just about time mortgage bond collapse began to hit Main street FWIW) seems to me there’s 3 disparate tracks represented in POV(s) expressed by participants here:
a) those who read, coalesce, analyze the “numbers” which purport to represent reality. Let’s call these folks the economists. They see currency values, pegging one against the other, and spread/balance sheets… eg. totals of money coming in against going out. This is, to them, reality.
b) those w/wider spectrum of experience… eg out of the office and in the field. Or at least looking out the office window at the fields, and conscious enough to recognize that even from afar, those fields don’t look quite like what the “reality #s” describe. Some folks in this group it seems are indeed grounded in the fields, and have… by whatever means, culled a look into the office, trying to make sense of these “reality #s” which “the experts”… eg: the “people who are supposed to know”, are telling the worker bees is real reality.
c) worker bees who’s environment has massively transformed around them, and for whatever reason (myopia, willful ignorance, or just too damn busy to keep up) are at the affect of these changes: dwindling income, evaporated savings (if they had any at all), and (despite claims by “experts” of low inflation) rising costs for essentials: food, clothing etc.
Groups A & B are kind’a intransigent here, dug in. Group A is calling group B “ignorant”… not up to speed in the geek-speak of their trade (“trade accounting” and such). Not much mention from these folks of the actual economic activity on respective shores hosting these 2 currencies… eg. breaking it down, who made what or advantages of cost-to-market here or there. Nor does this group describe the process going back 15+ years by which “interests” on both shores took various actions (offshoring, building facilities in China, bribing officials there for lax standards, buying off US lawmakers for accounting/tax rules which either obscured or deceived, etc etc.).
There’s no breaking down of where that money went when profits from offshored operations came back into hands of US biz, what actually was done offshore, the process over this time in China which went something like…
1) starving/desperately poor were happy to work for shit wages, forgo enviro/labor standards because… the concept of being able to eat was attractive.
2) despite shit wages, they managed to save some. And they were pretty damn dedicated to learning, improving, doing things well. Didn’t start out w/much quality expertise, but worked hard to progress, and progress they did.
3) So, 5/6/7 yrs of having enough to eat and saving a few bucks, they begin to ask the question: if US (or whatever) “owner” is paying us xxx coins for our labor, and selling product of our labor at 2-300% (or more) profit, why can’t we (Chinese) start our own concerns, work our butts off, and sell the same stuff for 30-50% profit?
4) item 3 has been well under way since around the millennium. The per-centage of Chinese owned exporters as a total of their exports has quadrupled in last 4 years. So US (or whatever) owners are getting squeezed… this EZ money of theirs is drying up: they have competition!!! And, unfortunately, the facilities/work force they abandoned domestically is gone, dried up. The domestic expertise is substandard, as are facilities.
4) After a near decade of accelerating 1/2/3, profits drying up (or rather going to the workers rather then middlemen), these folks now are leading a barrage of complaints that the currency exchange, which they exploited for great gain of a few, at expense of their domestic society/economic well being, is now the “elephant in the room” responsible for the utter mess US economy (and currency) is in.
So, given what I’ve seen here in this discussion, it is left to individual to cull precisely what is… as you suggested, reality.
I would suggest that, much more than currency pegging, the question of ascertaining reality in these matters… a problem for huge majorities of our population which is peripheral to any national discussion… that is the unacknowledged real elephant in the room. And until (if?) this is meaningfully addressed as a nation, our citizens concepts of reality will be formed by whatever interest has the biggest megaphone.
I think this issue, and citizens as pawns in the reality tussle, is quite profound. And in my mind, this is really what is addressed by the word: fundamentals. As long as fundamentals is defined to our public as the surface readings (numbers/spreasheets designed to deceive), we’re going to continue down the slippery slope, looking externally for culprits in are dilemma.
We could resolve the unemployment problem if we deport every non-US citizen Chinese person in America. As China does not allow dual citizenship, most are on green cards, H1Bs, or student visas, so it should be easy to deport them…
Problem is, can we live without quality Chinese food?…
Vinny
Congratulations: you are either the most subtle, Steven Colbert like comedian or are completely and utterly retarded.
It’s the former…
And thanks — I take that as a compliment…
Vinny
Tariff’s are the responsibility of Congress not the president.
The abdication of responsibility by the legislative branch is one of many underlying problems in US governance.
“The abdication of responsibility by the legislative branch is one of many underlying problems in US governance.”
Agreed, although nothing says the president can’t push congress on this point. Also, foreign diplomacy, including negotiations to stop manipulating currency, are the responsibility of the executive branch. Congress can push the president though.
Bottom line: there’s plenty of blame for both branches.
Ah yes, the protectionism stage …
Wealthy ruling elite scamerican gang leaders unleash their media propaganda shills on rape victim’s gang leaders … this is a particularly funny line from FT ‘s Alber — what a butt sucking piece of crap bone head he is …
“Americans have been patient – too patient – in accepting the loss of several million US manufacturing jobs because of China’s determined pursuit of mindless mercantilist policies…”
Ha! Ha!
Who created the conditions for, and strongly encouraged and facilitated, “China’s determined pursuit of mindless mercantilist policies”, that sent all of those jobs to China in the first place? Yes, you know who …
The intentional gigantic global bubble with the amazing geopolitical twist continues … the marks remain clueless as they are propagandized with divisive anger … “let’s deport all of those nasty Chinese people” … get those wetbacks out of here and all will be nirvana …
Deception is the strongest political force on the planet.
Indeed. To my eye, nearly every sentence in article you quote is similarly loaded w/obtuse delusion.
Hey, I on the ball patriot,
I was joking about deporting the Chinese. Personally, I hope they all move here, because I certainly don’t have plans to retire in this crazy place. They can have it, for what I care.
Vinny
Got the joke, bounced off it as a serendipitous accent. Greece is not looking so hot right now Vinny — or maybe its looking too hot!
It is the US practicing beggar-the-neighbor, China is just going along for the ride.
Little is left of American owned and operated manufacturing except for small business as the rest is part of the international corporate financial sphere. International money flows and corporate profit seeking are what drives so called trade issues. Protectionism is always held up by the financial press as the end of the world as we have known it but in reality its probably the only way out of the current global economic crisis and a return to local control over our economic lives.
I’m sorry, but this is illogical. The US has a choice to “lose jobs” to either China OR Indonesia, Philippines, or South Korea. It can not cut off China and GAIN jobs by importing from South Korea.
This also assumes that manufacturing (moving plants and what not) can be moved as simply as financial accounts. They can not.
And what exactly is the US going to trade in order to obtain this trade surplus, other than agriculture? Default is really the only option at this point. Might as well do it now and get it over with.
I think what a lot of these protectionist types seem to imagine a world where the United States trades freely only with countries that have similar costs — so Europe and Canada and Australia and Japan. And everyone else can fuck of.
Even if that were the case, the other countries that trade with low-cost suppliers (eg: Canada and Australia) would reduce their cost base and still be able to compete on price.
If China wants to basically subsidize US consumers, all the power to them. Had the US consumer chosen to buy something useful and produce some tangible gain from it, and all would have been well. That didn’t happen, of course, but to blame China for America’s (and Europe’s) stupid consumption habits is bizarre, to say the least.
Had the US consumer chosen to buy something useful and produce some tangible gain from it
I think this is the point. That is not “consumption”, or at least it wasn’t in Yves’ Dark Ages (Yves and I are pretty much age contemporaries based on her bio).
“Buy something useful” used to be deemed “capital investment”. It was not “consumption”. A simple example would be buying (or building) machine shop tools to make dies and plastic die injection machinery to produce wanted by other people. And this definition was held in common by nearly all economic ideologies at one time. Communists, socialists, Nazis, American robber baron capitalists, British Imperialists and libertarians were united on this point. Also the buggiest balanced budget gold bugs to the most free-spending there’s-no-tommorow Keynesians.
I think it’s also true that real investment opportunities in the USA have been disappearing on the buy side for several decades. Mrs. Fields’ Cookies and Starbucks were only relatively attractive as stocks, never absolutely. Even investment managers of limited intelligence realized that it was impossible to monopolize and economically scale cookie baking and coffee brewing to the point where major returns were possible.
Back when Pension Fund Leo was here I used to routinely torture him with a single question: “Where are safe 8% returns available to the average fund manager?” And without which return his fund is heading for slow and certain actuarial failure.
It was this dearth of real investment opportunities that set the stage for faux investments like sub-prime mortgages packaged in a way that they’d perform like AAA bonds.
This is still a chicken or the egg answer.
At what point did the US run out of things to invest in? 1980s when we invented junk bonds? And more importantly why? Where the citizens in the 1950s or 60s more responsible in their consumer habits? And what changed?
Your questions lead me to another question, though: given ultra low rates and easy credit, why did so many people choose to “invest” in stocks and houses and why did so few people try to setup their own companies? The risk/reward would be very high, assuming that people had something of worth to offer.
I suggest we start with Maui, followed by Oahu, Lanai, Hawaii, Alaska, and finally California.
With the cash we raise this way, we can continue to buy all sorts of wonderful plastic trinkets from China for at least 5 more years.
Vinny
China is very keen on US’s oil companies and high tech products like aircraft carriers, advanced fighters, subs, destroyers…if US care to sell.
All in favor of the Aliber-Wolf proposals.
I guarantee this will never happen under Obama. Nixon, for all his faults, had balls. Obama does not.
I think it’s safe to say that most, if not all, of Obama’s key backers are disproportionate beneficiaries of the current trade regime and gross imbalances. Goldman-Sachs has prima facie done very well out of it. Example: even during the depths of the latest “Crisis” Henry Paulson never gave the slightest indication the US-China trade imbalance might have played any role, let alone the key role.
The current trade regime with a one-party dictatorship have been integral to promoting so-called neoliberal/neocon “autarky”. I think it’s a prime foundation of their power.
http://www.rivertwice.com/superfusion.htm?gclid=CODbzYHEyZ4CFRQhnAod0nnGsA
As I was writing this post, that Google ad for a book on US-China economics was appearing at the bottom of the page. No shortage of profiteering advocates. Yves’ old buddy Daniel Gross is cited as one reviewer. So was the Los Angeles Times.
The policy advocated by Aliber & Wolf cannot be carried through without profound changes in both political parties. Or the displacement of one of them by a successor party ala 1860.
Yve, I don’t understand why you and some economists keep blaming China for American’s deficit. No one as far as I know has a gun pointed at any Americans to spend beyond their means. US spends at least hundreds of billions of dollars in Afghanistan and Iraq and counting. Hundreds of billions more on the about 720 oversea military bases overseas. Who knows how many trillions $ on the military? If China were to do similar things as the US, there wouldn’t be any surplus(and probabaly a deficit) left for China. To argue that reminbi is undervalued because the US spends beyond its means (or conversely, reminbi is overvalued because the US spends within its means) is illogical. In science, this way of reasoning could not get a pass). I could see(in comment section to Martin’s article) that quite a few economists hold cantrary view to Martin’s and yours.
Yve, I don’t understand why you and some economists keep blaming China for American’s deficit.
I think you misunderstood Yves’ post and article. I took her post and the underlying F-T article to blame “the Administration” for fostering the present state of affairs.
This however is code-talk for the current elites. Does anyone suppose the Walton family, for instance, sees any need for change? Does anyone at high levels at Walmart HQ see a need for change? Goldman Sachs?
You make the common mistake of confusing trade and spending deficits. The two are related in this case – in order to depress their currency China buys dollar assets, meaning treasury bonds, thereby one deficit facilitates the other – but the trade deficit is not a function of anyone being irresponsible, anymore than osmosis is a function of particles hating each other.
AC,
With all due respect, did you read the post? China has, since 1994, manipulated the level of its currency, first with a fixed peg, more recently with a “dirty float” which simply means it lets its price move a teeny bit on a day to day basis but still controls the overall level. China has, deliberately, for well over a decade, set the value of its currency low to give it an advantage in trade. The Chinese accumulated TRILLIONS of dollars buying US paper to keep the value of the RMB low! Had it allowed the RMB to rise, the US would NOT have overconsumed and China would not own tons of US Treasuries and be complaining about it.
You want to airbrush out the elephant in the room, the sustained currency manipulation.
And many readers are simply incorrect when they speak about labor costs as a % of total costs in manufactured goods. When you factor in raw material cost, transportation (often to and from, for example, in the case of furniture, since the raw material comes from the US), inventory costs (you need more buffers if you are dealing with a remote supplier), capital costs, and high reject rates (and I am told they are still VERY high from China), labor is often NOT the driving cost in manufacturing. I have had multiple US executives tell me there was not a very strong case for their company to outsource to China (the economics were not compelling, and typically fell short of what was expected), but Wall Street wanted it.
“Had it allowed the RMB to rise, the US would NOT have overconsumed and China would not own tons of US Treasuries and be complaining about it.”
Yve, I don’t see any logic here. Why couldn’y Americans Not overconsumed? Are Americans not free to do so?
“And many readers are simply incorrect when they speak about labor costs as a % of total costs in manufactured goods.”
Thank you!
It drives me nuts when armchair philosophers (and worse, professional economists) talk as though China’s labor rates give them an unbeatable advantage (and ignore all the other factors you mention). These people clearly know nothing about manufacturing, and assume that direct labor costs are a major component of manufacturing costs for all goods.
Ok folks, assembling toasters is probably not something the US can compete in. But what about making computer chips or other electronic components. How about the specialized glass needed for LCD screens (largely made by Corning, but of course they decided to put the plants in Japan). Cell phones? Generally untouched by human hands (which is why they can be profitably made in places like Germany). How about capital goods like industrial robots, which are made in small volumes (compared to consumer goods) and sophisticated enough that offshoring the factory is a nightmare. What about airliner wings (now made in Japan thanks to the outsourcing policy that even Boeing now admits was a mistake).
Don’t believe high wage countries can successfully and profitably manufacture certain products? Then please explain Germany.
BTW, a similar argument goes for IT and engineering outsourcing. The mad mania to offshore it has not proven as profitable as predicted. But stock “analysts” insisted every company had to have an offshoring policy.
When you factor in raw material cost
China has little advantage in this and is often at a disadvantage. Consider the cost of scrap steel purchased in the USA, or anywhere outside China and then imported. Or iron ore.
transportation (often to and from, for example, in the case of furniture, since the raw material comes from the US)
More like Southeast Asia and South America. The US exports little hardwood anymore. ATTENTION Friends of the Earth! Save the rainforests! Support CO2 sinks! Oppose Chinese furniture!
Still, container transportation costs are very little relative to product sales prices. Especially if your name is Wal-Mart, Sears, Home Depot or JC Penney.
high reject rates (and I am told they are still VERY high from China)
This is variable but far more common. Black & Decker for instance has offshored its consumer power tool production plants to China while retaining its engineering R&D in Maryland. And of course keeping relative control of its branding and marketing channels. Name brand companies get better results than importers dealing in generic bottom of the barrel Made In China items.
“Harbor Freight” consumer tools come to mind here. Or 3 person offices “importing” 1,000,000 rolling death trap Chinese tires by drop shipping them in container size lots to local distributors. And of course completely incapable of conducting a recall campaign when the inevitable corner cutting appears.
I have had multiple US executives tell me there was not a very strong case for their company to outsource to China (the economics were not compelling, and typically fell short of what was expected), but Wall Street wanted it.
Is there more specificity here? Surely this must have been particular people in the investment community called “Wall Street” who were saying this? And not talking pavement and street signs? Is it possible to trace these ideas to specific analysts, managers and houses? We know Henry Paulson has long promoted offshoring domestic production to China. Has Goldman Sachs collectively been following a corporate line to promote off-shoring on all occaisions?
You raise a salient point here. Long before The Crisis became manifest Paul Craig Roberts was highlighting and red flagging this “difference”. Companies were offshoring their former domestic production for domestic US markets, rather than offshoring production for offshore markets. This point is frequently missed even now, and even in this thread.
charcad: “Is there more specificity here? Surely this must have been particular people in the investment community called ‘Wall Street’ who were saying this?”
Yves, I’d like to second this. I know you can’t always name names, but I suspect that the (often irrational) promotion of the offshoring fad by Wall St. is a much overlooked factor. Any information would be much appreciated.
Also, any insight you have on the argument that a “strong” dollar, while bad for manufacturing, is good for finance. If true, I think this explains Obama’s (and perhaps Bush’s and Clinton’s) reluctance to do anything about this, more so than your testicular fortitude argument.
And I third the request.
You should be a bit careful in your economic thinking here. If you take any specialized slice of advanced industrial production then, indeed, labor costs are only a margin. The contrast would be between extremely low-wage labor-intensive production and highly capital-intensive production, which, given the gap in labor skills, is virtually incommensurable. But if you consider the sum total of the vertically integrated production supply chain, then, indeed, labor is the lion’s share of the “cost”.
john c. halasz: “But if you consider the sum total of the vertically integrated production supply chain, then, indeed, labor is the lion’s share of the ‘cost’.”
Please cite evidence.
And are you talking toasters, cell phones, or silicon boules? Manufacturing is about as far as you can get from homogeneous. Furthermore, it’s entirely reasonable that in many cases components would be made in a country like the US and assembled into final products in countries like China.
It’s conceptual. Every item in the production supply chain from raw materials extraction to parts to final assembly to capital goods has a labor-cost attached, and when you sum them up in aggregate, they are the largest cost that capitalists/investors face in aggregate. I don’t have any immediate link, but I have read studies that show strong correlation between labor input costs and output prices in aggregate. That they were not written by mainstream economists does not render them any less empirical for all that. (Especially if you ignore the trick of redefining skilled labor as “human capital”).
The point here is the difference between particular micro-level decisions and systemic macro level interests. Lowering labor costs systemically and in aggregate boosts the rate-of-profit and the value of capital. Unfortunately, it also lowers levels of aggregate demand and reduces the incentive to innovate in improved productivity of capital stocks. It’s also conducive to generating instances of “Baumol’s cost disease”, whereby productivity gains in one sector, due to a lack of opportunity for expanded investment, end up accruing to lower productivity sectors.
All of this goes back to Ricardo with the inverse proportion of profits and wages and the theory of economic (originally agricultural) rents. Mainstream “free market” economists largely ignore or underplay the role of rent-seeking in the corporate, oligopolistic economy. But it’s a key driver of corporate behavior, even as it amounts to a private “tax” on the real economy, which drives it away from some supposed social welfare optimum, (though one should be careful to distinguish the quasi-rents that derive from high fixed-cost, large-scale capital-intensive production, which have some degree of functional “justification” from the sheer rents extracted from the financial manipulation of extant productive assets). Hence, the above goes toward explaining why there is pressure from Wall St. to off-shore production and cut wage costs, even if on a micro-level, such decisions don’t make cost-effective sense. Because on an aggregate systemic level, the accumulation of such micro-decisions favor the extraction of rents through cutting costs, lowering inflationary pressures, (which boosts capital gains), and inflating asset prices by boosting and capturing short-run profits, as opposed to the competitive risks of real long-run productivity enhancing investment. The interlocking of MNC “platforming” and Wall. St. financial interests should never be underestimated.
John,
You are just wrong here. Your statement is far from true across a whole swathe of capital intensive industries. Look at the entire manufacturing base of Germany, for starters. Chip fabs. Coated paper. Alex above provide further examples:
It drives me nuts when armchair philosophers (and worse, professional economists) talk as though China’s labor rates give them an unbeatable advantage (and ignore all the other factors you mention). These people clearly know nothing about manufacturing, and assume that direct labor costs are a major component of manufacturing costs for all goods.
Ok folks, assembling toasters is probably not something the US can compete in. But what about making computer chips or other electronic components. How about the specialized glass needed for LCD screens (largely made by Corning, but of course they decided to put the plants in Japan). Cell phones? Generally untouched by human hands (which is why they can be profitably made in places like Germany). How about capital goods like industrial robots, which are made in small volumes (compared to consumer goods) and sophisticated enough that offshoring the factory is a nightmare. What about airliner wings (now made in Japan thanks to the outsourcing policy that even Boeing now admits was a mistake).
Moreover, the ADDITIONAL coordination costs (which ARE a labor item too) of extended supply chains are a substantial offset even when labor IS the main cost. You completely ignore this issue.
To wit: IBM decided to shift its computer software writing to China. The cost of writing the code would be only 20% of writing it in the US. But how much did they expect to save? Only 15-20%. In other words, the 80% savings was offset by 55-60% of OTHER COSTS, in this case, extra layers of project management. This was a front page WSJ story. BTW, clearly based on a leak of internal documents.
Now if China’s currency were 20% more expensive, the labor savings would not be 80%, it would be 72%. The total savings would be only 7-12%. It was looking marginal to begin with, and it looks even more marginal if the RMB was priced realistically. And this is for a product where virtually ALL the costs are labor. Against these savings you have increased rigidity and risk.
And that assumes things all work out as planned. If you read the periodic surveys of outsourcing and offshoring projects, the dissatisfaction rates continue to be very high, typically well over 50%.. These are surveys of the very biggest companies, the ones with the most experience and bargaining leverage.
I have had executives (non-manufucturing, BTW, so they had no axe to grind) tell me, with considerable cost data to support their views, that there was NO reason for the US to have ceded as much of the shoe industry and furniture manufacturing as we did. We could easily have retained high end, short run products that relied on moderately high to high quality with flexible manufacturing approaches. But Ethan Allen in particular had been LBO’d and the CEO wanted the “outsourcing” story because he thought it would get a better multiple when he went public. We lost most of our domestic shoe industry when Interco when bankrupt (it had been LBO’d and was seen as a viable business that had had too much debt piled on by the financiers, but in the depths on the 1990-1991 downturn, which was very nasty, a key restructuring deal fell apart and the company wound up being liquidated). And before you assert that US shoe manufacturers could not possibly compete with China, consider this comment from reader Walter:
And a result, the whole mid-tier shoe market is gone. You either buy crap that falls apart on you in no time at all, or you pay $500+ for a pair of shoes.
I used to buy a new pair of Dexter shoes ever 18 months. When they moved to China the life-span dropped to 3 months (this is not just one pair; I tried several before giving up). As they did not drop the price, this was a 6x increase in total cost of ownership. They lost a lot of loyal customers in that move.
replying to yves.
“To wit: IBM decided to shift its computer software writing to China. The cost of writing the code would be only 20% of writing it in the US. But how much did they expect to save? Only 15-20%.”
Well, that’s still a 15-20% saving, quite a lot in today’s world. And is that just the savings due to cheaper labour?
Software isn’t a particularly good example anyway – it doesn’t require significant capital investment and is pretty much all about personnel (hence the requirement for so much management – which wouldn’t be required for factory workers). And I can tell you from experience in India that they don’t end up with great people. With so many jobs to choose from you can’t keep the best around, so you end up with coders who use each job as a stepping stone for better things. It is a real wasted investment trying to get any of them skilled up since employee turnover is so high.
But there’s much more than just labour costs that attract business to China (or indeed anywhere). Cheap money and (tax) incentives are one. Perhaps lower regulatory standards for emissions and the like? Access to local markets too. And with out-dated plant and equipment making shoddy products (think: usa car industry), i bet it would be far cheaper to setup a new factory in China than to retool and modernise locally (and much of that cheapness is to do with local wages).
Which is why Germany doesn’t have this problem – yet – I’d bet they’ve continued to keep their plant modern instead of making money by playing with money, and so they keep turning out quality product with a fairly paid workforce.
Nope, Yves, I’m not simply wrong. I’m just noting the difference between a B-school, managerial perspective, emphasizing specific and punctual decisions about costs in some specialized slice, and a broader economic perspective, systemically and over time. It’s classical economics. The distributable surplus-product is the total product minus that part used up in production and, regardless of the empirical labels attached to various payment streams, the distribution of the surplus occurs between 3 basic categories, wages, profits and rents. And there is a large difference between increasing profits through investment in improved capital stocks, which raise the productivity of labor and lower output costs, thus increasing potentially and actually the distributable surplus product, and raising the rate-of-profit by altering static distributions. And, yes, looked at systemically and in aggregate, labor input costs and output costs do correlate, unsurprisingly, highly.
Labor costs for auto assembly are perhaps 10% of production costs and labor productivity has probably increase 5 or 6 times in the last 35-40 years, due to technical change/increased capital intensity. But if you add up the labor costs throughout the production supply chain from beginning to end, *including* the capital goods that have raised immediate labor productivity, and the ancillary services of “unproductive” labor, then the labor cost component is far higher, indeed, a determinative consideration. The only issue here is how to account for the knowledge and skill involved in the generation of high capital intensity production, as to whether that is accredited to labor, “human capital”, or capital. Studies in growing income equality might serve as a hint here. Inequality has not just been markedly increasing between cohorts, but also within cohorts, so that, e.g., income inequality among lawyers has been increasing in a pattern not dissimilar to that of the general population. And those who actually produce technology, engineers, programmers, technicians, etc., though they haven’t necessarily been hurting, have not been those who’ve reaped the lion’s share of the gains, who are rather those who are strategically placed within systems of management and distribution, such as certain of the aforesaid lawyers. And, in general, wages have been stagnant for almost 40 years in the U.S., even as the E/P ratio has increased and productivity increases mounted. More labor has been producing more for a lesser share of the total surplus, which is a large long-run fact that needs to be explained.
Probably a couple of corrections need to be made about the whole optics of this post and thread, (since I’m not in the China-bashing camp). It’s not just a matter of a low RMB. It’s much more a matter of a high $ policy of long standing, which has advantaged Wall St./MNC platforming interests under the neo-liberal “consensus”, by “opening” foreign economies and buying up assets on the cheap during inevitable periodic crises. China has been piggy-backing/free-riding on such “global” policy for good while, while refusing, correctly, to open up its capital account, in accordance with the neo-liberal “consensus”, just as Japan, through ZIRP and the yen carry trade, also suppressed its currency, until now, when it apparently chose not to intervene with its massive $ reserves as a losing bet. Secondly, China is important because it’s the first mover in any greater east Asia currency appreciation. But it’s the east Asian economy as a whole that is underpriced in currency terms. At the beginning of this cycle, the estimate was that the Chinese value-added of “Chinese” exports was only 15-20%. No doubt that has risen since with rising productivity, just as the Rogoff/Obstfeldt estimate of a 30% undervaluation of the RMB early in this cycle, inspite of the 20% appreciation against the $, has now risen to an estimate from the Peterson Institute of 40%. But Chinese value-added in nowhere near 100% and the lion’s share of the gains from the “China price” have been foreign MNCs, whose infra-corporate transfers directly comprise some 40% of global trade and indirectly no doubt a larger share. China, in other words, though astute, has not been wholly in the driver’s seat here. The problem with China’s peg/de facto forced savings policy, in global macro terms, is that it amounts to a form of Keynesian hoarding, subtracting from global aggregate demand. But that not the whole of the global demand problem and appreciating the RMB would largely just have the effect of shifting low-wage production elsewhere in the “developing” world, rather than rectifying all our problems.
Which is to say, that global trade imbalances are not the only source of the global crisis. As well, a declining wage share in global output, resulting in deficient demand and excess capacity, is concomitant with it, and that is a result of strategic policies that didn’t largely originate in China. Though in China, even as wages and productivity have been steadily rising, in fact, actual manufacturing employment has been declining pre-crisis and the wage share of Chinese output has been declining, (from memory, from 40% to 35%, though I recently saw a chart putting at from 50% to 40%, no doubt using different statistics and measures).
Lastly, the role of corporate rent-seeking activities is hugely underplayed in mainstream neo-classical economics, for which every thing is a matter of nominal prices clearing in accordance with the truism of the supposed law of supply and demand resulting in GE optimum, which is realistically wrong in a thousand and one ways. Just to consider one example, how does one explain Walmart establishing a quasi-monopoly in the highly competitive, low-margin retail sector? It can’t just be due to collapsing the wholesale distribution function into the retail chain, though that might be part of its early rise in the underdeveloped low-wage South. Rather, it’s a matter of leveraging its monopsony power over suppliers into price-squeezing retail domination, or, in other words, Walmart is a virtual industrial oligopoly through organizing its global supply chains in depth. Now, there are myriad ways of organizing market structures and power to tilt the “factors of production” so as to squeeze out such rents. But ignoring their systemic “force” and effects, and the policies which enable them, in understanding what’s “really” going one is naive, or worse. Your own examples emphasize the loading of otherwise viable production with LBO debt. Which is just another way of “judging” that profits from production, with their attendant labor “costs” are deemed insufficient, when rents seem so readily available elsewhere.
replying to john c. halasz at 10:08 pm:
“I’m just noting the difference between a B-school, managerial perspective, emphasizing specific and punctual decisions about costs in some specialized slice, and a broader economic perspective, systemically and over time.”
I think what you’re missing is we’re not talking about a completely American supply chain vs. a completely Chinese one. Chinese factory with American made machinery? Fine by me. Capital goods like that should be available in both countries at roughly similar prices. Advanced economies like ours should arguably specialize in sophisticated capital goods and components. Leave toaster assembly to China.
More directly, the “B-school, managerial perspective” is how the actual decisions do (or should) get made. Beware the fallacy of composition.
“But if you add up the labor costs throughout the production supply chain from beginning to end, *including* the capital goods that have raised immediate labor productivity, and the ancillary services of “unproductive” labor, then the labor cost component is far higher, indeed, a determinative consideration.”
Basically a Sraffian view of capital goods I believe, that they largely represent “stored labor”. And I tend to agree with it.
“The only issue here is how to account for the knowledge and skill involved in the generation of high capital intensity production”
You say it’s the only issue, but I say it’s the most important issue. Much of the advantage of that knowledge and skill should accrue to labor. Industry doesn’t pay for much education, and that knowledge and skill was developed to a large extent with public support.
“since I’m not in the China-bashing camp”
“China-bashing” is a reflexively overused term. Does simply criticizing their currency policy constitute “bashing”? I’d reserve that term for nut jobs talking about the evil yellow hordes or something.
“It’s not just a matter of a low RMB. It’s much more a matter of a high $ policy of long standing, which has advantaged Wall St./MNC platforming interests under the neo-liberal ‘consensus'”
Yup, talk to Robert Rubin and Larry Summers – the Clinton administration’s staunch proponents of a “strong dollar” (and only coincidentally personal beneficiaries of millions from the FIRE sector).
Nevertheless the yuan is the 600 lb. gorilla, and many smaller countries are compelled to follow the peg lest they loose all their production to China.
“Lastly, the role of corporate rent-seeking activities is hugely underplayed in mainstream neo-classical economics”
You mean like “American” MNC’s shipping know-how that was developed in the US (often with public support) to low wage countries wholesale? And let’s not forget that when “American” MNC’s do that, it makes the specialized education that many American college and technical school graduates spent their time and money for useless. In other words it’s a loss of a capital investment that the company didn’t have to pay for. Socialize the losses and privatize the profits!
Firstly, while labor costs are what is peddled as the savings and if directly correlated would imply a significant savings, as you can see from Yves citings as well as this study, it can actually cost more, even though wage ratios are a 10:1 scale.
Secondly, I believe you are citing the international tax deferral manipulation by MNCs, but…..it is China who demands, requires advanced R&D be offshore outsourced….in order to gain any access to their 1.3B consumer market.
See, the offshore outsourcing of innovation for the general momentum to moved advanced R&D offshore and the various reasons, including China state demands and India’s clinical trials with more lax standards.
On China itself, they are not only manipulating their currency, they also use a VAT, dynamically adjusted, almost daily, per export. See this report from the U.S.-China Security Review.
83% of the U.S. non-oil trade deficit is with China. Links in this post show that almost all of it can be attributed to China’s currency manipulation.
Robert Oak:
China did not steal “our” jobs, manufacturing capacity, R&D, etc. They were never “ours” to begin with. Again, much of the policy tilt was manufactured right here in the U.S.A., with China only playing its straightened hand deftly. And the 83% figure is only now, in the midst of the global trade collapse. Further, in global macro terms, it would make no difference if we ran a huge trade deficit with China, while our overall trade was balanced.
And as to tax manipulation, have you forgotten that tax bill under Bush and a Republican Congress that permitted repatriation of profits from abroad with only a 5% tax rate? Which, of course, was trumpeted as putting a dent in our evil fiscal deficits, under the same leadership.
Less reflexive “populism”, more class analysis, please!
“They were never ‘ours’ to begin with.”
Then whose were they?
“much of the policy tilt was manufactured right here in the U.S.A.”
No argument here.
“in global macro terms, it would make no difference if we ran a huge trade deficit with China, while our overall trade was balanced”
In terms of simple first order economic theory that’s true, but it seems to overlook some of the very factors that you yourself complain about being overlooked. The world is not a linear time-invariant system.
Furthermore, if you’ve got 83% of your non-oil trade deficit with one country, doesn’t it make you wonder just a little? China is not the only place in the world where they make things. And how much of a trade surplus would we have to foist on Europe and elsewhere to get that trade balance? They’re already itchy about the Euro/dollar ratio, do you think they’d stand for that?
john c. halasz:
Firstly the trade data is not recent, it’s aggregate and secondly, I suggest reading the studies quoted and cited which are referenced and overviewed instead of posting claims there is no “analysis”.
Yes, I am aware of the 5% tax rate but that does not come close to the imbalance caused by pegging the RMB.
As far as allowing the trade imbalance to continue as if the entire world global trade can make up for it elsewhere, nice fantasty and perhaps you are personally working or investing or vested in China continuing their currency manipulation. Hence the emotionalism.
Robert Oak:
Please note according to your own posted chart, the 83% figure was 2009ytd, whereas in 2007 the figure was 54%. In 2007 the non-oil U.S. trade deficit was ~$420 billion, so China’s share was ~$219 billion, whereas in 2009 the non-oil U.S. trade deficit is ~$180 billion, so China’s share is ~$150 billion. The U.S./China trade deficit has actually come down. Why has it come down less than the deficit with Row? Well, aside from emergency measures to subsidize their exports and their massive fiscal and credit stimulus program, 1) China is exporting cheap stuff to Walmart and component parts still needed in the supply chain, not high-end luxury goods and capital equipment, and 2) some portion of Chinese exports are merely finished in China from imported high-end components, so a large chunk of the value-added of those exports should actually be accounted to other, mostly east Asian countries.
U.S. employees have little, if any, property rights to their employment and there is little public interest enforcement of employment rights and employment levels. The situation of the broad working class in the U.S. as been steadily degenerating for a generation now. This is not news. Maybe it would be good if the situation were otherwise and public policies could be implemented to redress the matter. But it also would be good to maintain a clear head about one’s analysis, rather than obscuring the reasons why it is not a matter of “our” jobs, “our” R&D, “our” profits, “our” manufacturing base, etc.
The point about trade with RoW needing to be balanced, not bilateral trade, was not a static, nor an immediate consideration, but is a general dynamic and global consideration, which needs to be taken into account in redressing the problem. If one focuses exclusively on China and makes it a nationalistic matter, then one misses the actual dynamics and interests involved in neo-liberal “globalization”. And then resolving the problem with China might only result in the same sort of problem popping up elsewhere. It’s a broader and historically rooted problem with the global trade and FX regime that has been sponsored under U.S. $ hegemony. Heuristically, go back to Keynes’ original conception for Bretton Woods with his Bancor proposal and the 1948 Havana Charter, and consider why that conception was not adopted and why Bretton Woods eventually failed. That would be the best first step in considering a new alternative global trade and FX regime.
The long time US trade partners Germany and Japan also have significant surplus vs the US while the Euro and Yen are floating and mind you, both Germany and Japan think the US$ is undervalued…(yet the US deficit). What is your argument in these cases of Germany and Japan having surpluses vs US?
AC,
The experience of Japan proves the point. The yen went from 115-120/$ to over 90. Its trade surplus has collapsed and it is now running a trade deficit. As the dollar has fallen, so has our trade deficit with Germany, which has dropped by 50% in the first half of 2009 versus 2008.
Yves, Just to get a refreshed perspective here.
1. Assuming the Chinese yuan get revalued upwards to the extent that all chinese products would be too expensive to be not imported into US. What US problems would be solved by such a scenario? Would US deficit come down assuming US consumers keep the same level of comsumption appetites?
2. If China spend more than their trade surplus with US by buying American products, goods and services, would you still consider the Chinese yuan overvalued?
Could Japan now blame US for manupulating its currency now that US has a surplus against them?
Not totally buying what your saying.
Back to the analogy of of an addict and his supplier, while the dealer is definite committing a crime by supplying the addict with his fix (moreover is morally corrupt in doing so) and should be punished, this however does not relieve the addict of responsibility in the affair. I won’t argue that China (with Wall Street always seeking ‘the edge’) is guiltless, but that the problem goes beyond China’s manipulation of currency.
When Freightliner says that it can be more competitive in North America by moving its manufacturing facilities to Mexico, thereby saving $2,000 per unit, I’m not arguing that’s not true. I think the company is, as most if not all U.S. companies, is considering the bottom line, which is the best way to reduce costs and deliver a product to market. Reduction in labor cost is unfortunately, when others fail, a time proven way toward competitive advantage. In the age of robots, automation, et al. labor is still a substantial aspect of production costs, even when balanced against non-localized manufacturing. (I would also add that costs of goods made in other countries, such as Vietnam, Indonesia, India etc. are also very low).
More importantly, the U.S. doesn’t need to consume all it consumes. A minor portion of world population cannot continued to swallow such a disproportional chunk of its resources; it happened after WWII based largely on monopoly of production wrought by war and other ‘timely’ phenomena, and in a large part most recently, on the unreasonable (if profitable) expansion of credit.
I won’t go into anecdotal evidence of abandoned (new) homes whose backyard is graced with abandoned imported stuff, evidentially too cheap to even bother with moving. The age of consumption, is woefully in contradiction with philosophic ideas on a goal of personal happiness and fulfillment through material acquisition (which nevertheless enjoys such rampant lip service) ; if the acceptance of less (a form of material ‘hardship’) is the solution to problem then we are in dire straits with that consideration alone, even if we punish the dealer.
“And many readers are simply incorrect when they speak about labor costs as a % of total costs in manufactured goods. When you factor in raw material cost, transportation (often to and from, for example, in the case of furniture, since the raw material comes from the US), inventory costs (you need more buffers if you are dealing with a remote supplier), capital costs, and high reject rates (and I am told they are still VERY high from China), labor is often NOT the driving cost in manufacturing. I have had multiple US executives tell me there was not a very strong case for their company to outsource to China (the economics were not compelling, and typically fell short of what was expected), but Wall Street wanted it.”
You neglect to factor in the EXTREME benefit the wealthy elite corporate scamerican gangs derive (and other western nation gang leaders) from playing a cheap labor force in China against an expensive domestic labor force in this global credit bubble/counterfeit derivative financial coup with the geopolitical twist.
They are now very successfully playing the bankruptcy game here in scamerica to cripple unions and labor and diss on their pension obligations. Social security benefits have been frozen and health care and medicaid are also under pressure from this contrived disparity. Social security will be incrementally eaten away to nothing. And a few million homeless scattered around on every street corner in every city in scamerica provides a great incentive for those who do have jobs to work longer for less.
Not the fault of the Chinese people, rather it is the the sell out Chinese gang leaders working in concert with scamerican gang leaders who bear sole responsibility here. The Chinese gangs have been prudent with their currency peg, and we all know that the deceptive among us always want the prudent to step in and pay for their excesses.
Deception is the strongest political force on the planet.
you run a great blog Yves, do a great service.
But…
huh? The Chinese saved… period. They parked their money in USD… period. So Japan, Russia et al… what was there evil motive for buy Treasuries etc.?
Oh c’mon… it’s the culture here. So, you’re saying the “Chinese made us do it?” You don’t think W’ was grateful for the Chinese financing Iraq/deficit?
With all due respect, you very much need to do your homework on China’s currency policies to the US and trade accounting. China set a fixed peg in 1994 and has only modestly revalued its currency, starting in 2005. It still remains, by any calculation, substantially undervalued.
You have the equation backwards. The savings result from the cheap peg. The currency accumulation results from the cheap peg. In all honesty, you clearly do not know this terrain at all.
I’m shocked by your sweeping generalizations, used dismissively against what not just myself, but as others have now commented… to be true.
Oh, but I do… intimately.
Your statements…
* w/out the peg there’s no Chinese savings
* your utter naivete in citing a couple US mfg managers (Ethan Allen & ???) as representative of a process, actually begun before the peg, which has morphed and changed many times over. The conclusions you draw are just plain false.
* your assertion that Chinese lbr costs were the differnce in trade balance, totally accounted for in currency peg… unbelievable.
My take on your position: you’ve gotten out on the skinny branches into areas far removed from your expertise. You’ve talked to a few people here and there, not familiarized or investigated how current Chinese industrial capabilities came about, nor seemingly made any effort to comprehend the massive total cost savings (now dissipating for a number of reasons) in getting product on the USA shelves.
It’s certainly not reflected in any of stats you cite… geezus, you look at snapshot of balance of trade here at the endgame, draw conclusions you arrogantly state w/out any insight (at least as evident in your words) into what has actually happened on each respective shore.
The charactar of our decline is evident, however, on response to our policies on nearly every continent. Through hubris of Bush years, we lost So. America completely… they’ve abandoned any alignment w/our IMF dictates and in fact as of ’05 (could have been ’04) stopped inviting us to their annual econ summit.
Why do you think this was, Yves? Why do you think Brazil elected Lula? Why do you think Bolivia sent our Harvard Educated Bechtel pawn president packing?
The pattern is the same in all of ’em, and the dimunation of US influence commensurate in all of ’em as well.
After Perestroika… a bloodless coup & crumbling of Soviet state, we (Reagan) had an unbelievable opportunity to lead Russia… teach, demonstrate, assist in building an economy that worked. The obvious basics: getting transportation from productive but utterly isolated rural areas was probably the first item.
Instead, Reagan’s free-market guys got hold of the initiatives and, essentially, the manifestion was not much more then opening MacDonalds and Jack in the Box on every corner of St. Petersburg. A nation lost, with leaders willing to follow our lead… we sent ’em fucking Big Macs.
We’ve lost Russia completely. The general populace knows we’re here, the don’t hate us or anything, but they’ve had a taste of what our free-market-capitalism looks like and they don’t want it. Who can blame ’em.
Through the Bush years, we’ve accelerated this decline globally. We’ve diminished reinvestment into most everything that matters. Our domestic resources for econ development are an empty shell. Our people have been dumbed down, convinced of all kinds of shit that’s not true.
The Chinese worked. They are educating the people.
Have you been to Beijing Univ (BU)? It has become an incredibly dynamic, cutting edge place… kind’a like Ca’s Univ system used to be 20 yrs ago. BU is doing cutting edge research in all kinds of technologies demanded by needs of coming decades. Comparatively, UC Berkely for example is a carcass: their CS classes (even graduate) are mostly taught by TAs now, w/no experience whatsoever in field their “teaching”.
I could go on & on…
Not trying to start a pissing match or anything, but your statements in this thread are off the mark by a light year.
jd,
Have you EVER done any work with manufacturers, international shippers, or extended supply chains? From the sweeping generalizations in your remarks (and that of many others) it appears not.
Acting as if the name of the game is simply labor costs in the home location (the ultimate sales market) versus another at a great remove is a massive distortion of the economic and the risks. I gave the example of software, where there are no shipping or inventory financing costs, yet the additional coordination costs were 55% to 60% of total product cost. Plus you have a ton of intangible costs, ranging from greater rigidity and risks, to training future competitors.
As for your paens re universities in China, this sounds like exactly what I heard about Japan in the 1980s. And unlike Japan, this is a country that also is destroying the environment on an unheard-of scale (try Googling the effects of cadmium in the soil, for starters). We should be putting a massive tax on all Chinese good based on the externalities of the environmental destruction (starting with coal fired electrical plants, which they continue to erect at a rapid pace).
Problem is, what is an export subsidy for China is an import subsidy for us. Even if we could put an end to this without starting a trade war – unlikely – the effects would still amount to a tax increase on the most widely-used consumer products. Or to put it another way, the inflation we managed to escape (in everything but asset classes) by exporting our sovereign debt would hit us like a hammer.
A better time to act would have been before we needed to finance trillions in new debt, and before US consumers were struggling just to maintain. I don’t like protectionism, but this situation has the potential to kill both nations. China by becoming (even more) dependent upon a false equilibrium, and the US by allowing us to deficit spend with what will eventually be very inflationary consequences. The situation is already critical, IMO, and at this point the solution will be extraordinarily painful regardless of whether it happens tomorrow or in ten years’ time.
The situation is already critical, IMO, and at this point the solution will be extraordinarily painful regardless of whether it happens tomorrow or in ten years’ time..
This is not right.
It will become progressively more difficult and eventually impossible.
Genuine capital (most importantly trained people) takes far longer to accumulate and organize than monetary metal or paper “capital”, or the recent innovation of streams of electrons and phosphor dots representing money.
AC what are you talking about? What “logic” are using? Yves, Martin Wolf, and Peter Morici are using this thing called arithmetic. Current account deficits and and surpluses are simply accounting arithmetic. If one is +100, then someone else has to -100. The only way China can maintain its peg of the Yuan/Reminbi to the dollar when it is running a huge current account surplus is by buying U.S. credit instruments and therby creating a Current Capital Deficit toward the United States. And that surplus credit has to go someplace. But it won’t go into U.S. business investment since there appears to be no profit in that when China is exporting to the U.S. at 30% subsidty. So it went into commercial and residential real estate. That has worked out well has it not. The surplus exported to the U.S. then pays for us to “spend beyond our means” as you call it. Although, if you actually look into it, as Elisabeth Warren has, most of that spending “beyond on means” as on health care costs and housing prices, caused by folks spending a preminium to get near good schools for their kids.
And of course, a lot of the Government deficit of the last 8 years was for wars and tax cuts for very rich people. And as example, Tiger Woods has used his surplus income as it appears he has enriched most of the party girls of Las Vegas.
But when folks like you AC start talking about “spending beyond our means” I know that it is Medicare and Social Security you have in your sights. The working classes need to be motivated by the prospect of destitution to keep their noses to the grindstone at $10.00 an hour.
When I saw this post, I knew that David Malpiss, Kudlow, and guys at Real Clear Economics must have blown a circuit at this dissent from the True Religion of Free Trade. Kudlow and them want U.S. interest rates to raised to “strengthen the dollar,” and they look at the resulting Current Capital Surplus not as a mere Arithmetic balance to the Current Account Deficit, but as “evidence” of the World’s belief in America. And they would not mind the resulting 15% unemployment, especially if the political consequences would put the Cheney-Palin Republicans back in power.
“And as example, Tiger Woods has used his surplus income as it appears he has enriched most of the party girls of Las Vegas”
sounds something like ‘trickle-down’ economics.
But if the renminbi is allowed to rise, so will the prices of Chinese products in the US, leading to inflation, and an immediate decrease in our standard of living.
We have to thank cheap Chinese products for being able to maintain a reasonably high standard of living these past 30 years, despite things like outsourcing, downsizing, and salary stagnation.
Vinny
It’s not so much trade protectionism as protecting us from a country with no environmental and no consumer laws. They produce cheap stuff that more often than not is toxic or stops working. I have given up buying electric can openers; all three made in China, all stopped working in three months. The first internet connection box wouldn’t turn on and off (made in China) and I refused to follow the phone company’s advice of never to turn it off as a precaution; the second one seems to be lasting. The refrigerator with foreign parts–the compressor died in less than a year. The new microwave oven–it would turn itself on in the middle of the night. My dvd/vhs recorder/player–the dvd no longer records after a year. The list is endless. Not to mention having to track down the pet food distributor to make sure the contents didn’t come from China and kill my cats and dogs. I refuse to buy any food that comes from China as a matter of course. I bet there are huge numbers of Americans who do the same thing.
Oh freaking please! More of the ‘Its China’s fault’ crap! Duhmerican’ts never accept responsibility for their screwed up ideas and the results of them.
Pot. Kettle. Black about currency manipulation. Duhmerica manipulated the worlds currency when it decided the USD to be the ‘reserve currency’. The rest of the world has had to live under the Duhmerican’t thumb since.
Grow the eff up Duhmerica!
We need tariffs against all imported Chinese products, immediately. Stimulus will do no good if we keep exporting our wealth to the currency manipulators.
Do import tariffs cause prices to rise?
The incorrect simple answer is yes as the additional cost is passed on to the consumer.
IMO, the more accurate answer, however, is that since the American consumer is tapped out, the cost of tariffs will be borne by the manufacturer and those in the supply chain with smaller profit margins. If margins turn negative and impact the viability of these companies, then capacity will be dumped. This might ultimately cause higher prices, but with a more balanced economic equilibrium.
In addition, the US gets some free money to pay toward a burgeoning deficit and may even find some manufacturing jobs at home to build the tax base.
I’d love to hear the counterargument.
Yves – Martin Wolf actually posted an article in November similar to Aliber’s, indicating that we’re getting near the point that the US should impose tariffs to get China moving
Emphasis on the last 3 paragraphs:
http://www.ft.com/cms/s/0/7e8bfed6-d3b2-11de-8caf-00144feabdc0.html
Why is this discussion only about the US? Japan and the EU are also impacted by China’s peg to the dollar and are big enough players on the world scene to do something about it.
Which is why the US, if it ever decided to press the currency manipulation complaint, would find plenty of allies.
Historically the US has been the one most hurt. But the dollar has fallen so far against the Euro and other currencies that they’re now getting hurt by it.
Does anyone know what China’s current inflation rate is? Because high Chinese inflation with a fixed peg vs. minimal U.S. inflation is already a de facto RMB appreciation. Conversely, high Chinese inflation would be an incentive for them to raise their crawling peg.
But it’s in general a mistake or fallacy to blame the whole situation on China’s $ peg, as if China were in the driver’s seat all along and not rather trying to make the best out of their own difficult situation. Much of the basic decision making leading to this impasse has been clearly made-in-the-U.S.A. And China’s aims are only partly covered by the concept “mercantilist”. More fundamentally, the peg is part of a development strategy, in which maintaining capital controls and domestic control over the financial economy and fiscal/monetary policies, and acquiring technology and world-standard production know-how are deemed well worth the price of underselling their exports and taking an eventual large capital loss on their accumulated FX reserves.
But the flip side of the China peg is that it has been enormously profitable for U.S. MNCs and the wealthy investor class. (In fact, the immense profitability and appreciation of U.S. owned foreign assets vs. U.S. assets has been the principle reason why the immense CA deficits have seemed sustainable up to now: as of 2008 the official measure of the U.S. external debt, the NIIP, stood at $2.6 trillion, which means that if you add up all the CA deficits since 1990, some $2.9 trillion is “missing”). The fact that it comes at the expense of the broad U.S. working class and the latitude of U.S. government discretionary policy and social welfare/insurance with mounting wealth and income inequality is not a bug, but a feature.
A PPP tariff against China would, in fact, be the solution. (My version would start at 10% and add on 5% every six month for 3 years until a 40% level was reached, which is the current estimate for RMB undervaluation vs US$. What’s important is that the change occur gradually to permit time for mutual adjustments). That it would cause a bout of one time U.S. import inflation and amount to a quasi-permanent lowering of U.S. relative standards-of-living is not a counter-argument, since the looting of the U.S. household sector by the Wall St. induced housing bubble has already made that de facto the case anyway, as was readily foreseeable. It’s just a matter of exactly how that realization occurs. Which is, of course, why a PPP tariff will not be imposed. It is far more preferable to the Wall St./MNC elites to pursue adjustment through unemployment stagnation and the corresponding squeeze on households, labor, and government budgets than to lose hold of their rent streams.
It should be remembered that China did appreciate the RMB by some 20% already and only stopped in the midst of the uncertainties of the GFC. Imposing such a tariff would result in a burst of xenophobic outrage in China and a WTO dispute, but likely, were such a tariff authorized, it would not have to be imposed, since it would force China to the bargaining table and cause them to re-appreciate on their own terms.
Yves, your post seems far more emotional than usual (you are normally remarkably level-headed, or at least come off that way through text). Anyway, I still don’t understand your arguments:
And by keeping their currency low and creating the effect of low interest rates, China essentially paid a fortune for the privilege. I can see why Chinese savers would be mad about this, but I don’t understand the American anger.
The US could have done plenty of things to have avoided “overconsuming”. Given these cheap rates and free money, the government could have tried to pay down debt. It could have also encouraged businesses and homeowners (via the tax code) to reduce debt. To blame the Chinese government for US policies is really stretching things, though. It’s not like one government is the responsible adult and the other is a reckless teenager–they’re all reckless and short-sighted.
Now you’re losing me completely. If labor is not the driving cost, then China has*really* shot itself in the foot, because is paying heavily for its artificially low currency by overpaying (in effect) for raw materials and transportation,which are priced in USD.
Well, why would Wall Street want this? Why would these US executives listen to Wall Street (perhaps they were interested in their options values)? How is this the value of the Yuan at fault for this?
sorry–reposted with Yves’ comments included. Please delete the last post.
Yves, your post seems far more emotional than usual (you are normally remarkably level-headed, or at least come off that way through text). Anyway, I still don’t understand your arguments:
//China has, deliberately, for well over a decade, set the value of its currency low to give it an advantage in trade. The Chinese accumulated TRILLIONS of dollars buying US paper to keep the value of the RMB low!//
And by keeping their currency low and creating the effect of low interest rates, China essentially paid a fortune for the privilege. I can see why Chinese savers would be mad about this, but I don’t understand the American anger.
//Had it allowed the RMB to rise, the US would NOT have overconsumed and China would not own tons of US Treasuries and be complaining about it.//
The US could have done plenty of things to have avoided “overconsuming”. Given these cheap rates and free money, the government could have tried to pay down debt. It could have also encouraged businesses and homeowners (via the tax code) to reduce debt. To blame the Chinese government for US policies is really stretching things, though. It’s not like one government is the responsible adult and the other is a reckless teenager–they’re all reckless and short-sighted.
//And many readers are simply incorrect when they speak about labor costs as a % of total costs in manufactured goods. When you factor in raw material cost, transportation (often to and from, for example, in the case of furniture, since the raw material comes from the US), inventory costs (you need more buffers if you are dealing with a remote supplier), capital costs, and high reject rates (and I am told they are still VERY high from China), labor is often NOT the driving cost in manufacturing.//
Now you’re losing me completely. If labor is not the driving cost, then China has*really* shot itself in the foot, because is paying heavily for its artificially low currency by overpaying (in effect) for raw materials and transportation,which are priced in USD.
//I have had multiple US executives tell me there was not a very strong case for their company to outsource to China (the economics were not compelling, and typically fell short of what was expected), but Wall Street wanted it…
Well, why would Wall Street want it? Why would these US executives listen to Wall Street (perhaps they were interested in their options values)? How is this the value of the Yuan at fault for this?
Obviously I can’t speak for Yves, but my own views may be pertinent.
This isn’t about blaming the Chinese government as though the US government was some babe-in-the-woods that isn’t responsible for its actions. Often when I complain about Chinese currency manipulation people accuse me of “China bashing”, when in fact what I’m really doing is bashing the US government policy of tolerating (or perhaps even fostering) this.
The point is that this is an unsustainable situation, and the longer it goes uncorrected, the more detrimental it is to the US. It needs to be corrected, and I expect (ok, hope) the US government to do something about it. If the Chinese government’s attitude was an unabashed “screw the US” I wouldn’t blame them. Even if they could claim to be representative of their people, their job is to watch out for Chinese interests. It’s the US government’s job to watch out for American interests. And yes, despite China being our bank, we have plenty of leverage. There is no excuse for the US tolerating this as though it was helpless.
As far as other aspects of US policy, we have many sins. I’m not going to claim that currency revaluation is a panacea, but it is an essential step. Even if we revamped our policy so that the US magically became a nation of inveterate savers, without currency revaluation the effect would simply be a greater recession. So we’d wind up with a situation where our debts were being paid but lots of people would be out of work. Not good.
“If labor is not the driving cost, then China has *really* shot itself in the foot, because is paying heavily for its artificially low currency”
Not necessarily. China wants the development and to obtain the know-how, and it may be worth it to them to pay a high short term price for this. Saying that they can’t benefit in the long run is like saying that Standard Oil couldn’t possibly have profited by selling below cost in certain regions to kill regional competitors. If you have deep enough pockets (and China does in the sense of enormous pools of cheap labor) you can do well in the long run by selling at a much lower price until you kill the competition.
“Well, why would Wall Street want it?”
Herd mentality, shortsightedness, lack of understanding (or concern) about producing anything of value rather than making a buck by being the middle man when billions of dollars are pushed this way or that.
“Why would these US executives listen to Wall Street (perhaps they were interested in their options values)?”
Even aside from options, it’s legitimate for management to be concerned about stock price, since it affects the owners (shareholders). Perhaps it’s about short term vs. long term value. But even if responsible management were concerned about long term value, how long will they keep their jobs while Wall St. says “sell”? The market can stay irrational longer than you can stay solvent.
Sorry, Alex–two more points:
//Even if we revamped our policy so that the US magically became a nation of inveterate savers, without currency revaluation the effect would simply be a greater recession. //
Maybe that’s what is required right now to rebalance the economy. I can tell you that in my field (engineering), an ungodly number of recent graduates and post-grads leave the field altogether to join Wall Street or try to get management-tracked. I don’t particularly have an issue with that, but when I look at the western world as a whole, I am pretty sure that it needs far more engineers right now than financiers and managers. Actually, the entire power industry (my specialization, so I know it best) is in more or less of a constant panic mode due to lack of talent (technicians are also in short supply, incidentally). A prolonged recession may correct that.
//So we’d wind up with a situation where our debts were being paid but lots of people would be out of work. Not good.//
I’m sorry, but I don’t see much alternative–more debt isn’t going to work. And I don’t think people really need more Iphones or blackberries. I really don’t think there are enough “things” to buy right now that will enhance standards of living.
//China wants the development and to obtain the know-how, and it may be worth it to them to pay a high short term price for this. Saying that they can’t benefit in the long run is like saying that Standard Oil couldn’t possibly have profited by selling below cost in certain regions to kill regional competitors. //
OK, but how much is this know-how worth? I’d guess offhand that at $2trillion, they’ve probably overpaid. Again, I am not an economist, and I could be wrong.
C’mon Claire, weren’t you the one wondering why more people didn’t start their own businesses. That’s a fine theory. But do you know what that’s like? I was wandering in Long Island City today, when the sun was setting, orange and red over the Long Island Rail Trackyard and the icy metal blue of the tracks. it’s a strange place, there by the tracks and the metal shops and taxi garages. It is truly poetic, in a refined sense. There are people who make things, real things that you can feel with your hands. Really, thought is cheap. Do you think there’s any way to ratinally think through this? Have you ever dived into a mosh pit drunk off your rear or maybe into a big mud festival after you’ve done about 4 bong hits? Can you ratinalise that? We’re all in the big pit, wrestling like monkeys. But not even monkeys, because they don’t have the imagination you have and can’t make things up like numbers and categories. They can’t make up things like exchange rates and balance of payments deficits and all that, and borders too. What’s a border? I was in an airpolane once and didn’t see any. Maps are big frauds and so are analytical frameworks. There are a billion Chinese people and they all want what you have. So if they all cooperate without rioting into anarchy or killing each other in excess, then can you imaqgine all the backyard inflatiable pools they’ll buy, and the barbecue sets and the cars and the home appliances. They could make them all themselves, but can you imagine 1 billion people cooperating to that degree. I can’t imagne how mcDonald’s keeps all the fry cooks from deep frying each other. It must be drugs. They will need America, they will. This is the big Eshaton. So what if
it’s a bit complicated to get stuff from them — right now? On 2030 earnings it’s all so cheap I can’t stand it and “efficiencies” will be made. Necessity is the mother of invention and the father of crime. Whatever the currency does doesn’t matter or the savings rate or the deficits. It all evens out in the back alleys when the sun sets, somehow it evens out, when the instinct calls. The thought categories are empty, These are shadows of the real Forms — nature, nurture and imagination. It’s a hilarious thing to see it all blow like leaves off trees. And all the words chase after them, and then the numbers, like a big parade to nowhere. It’s just you and the “other” in the pit with mud and the DNA. Can you handle that? I can’t really, because I’m a sensitive person. I know it’s tempting to try to make sense of it all. There are 16 equations and at least 19 unknowns. The more they smash the atoms, the more unknowns they create. They think they’re going forward but it’s backward. The numbers come after the Forms, which only come from Imagination and are the foundation of all Reality. The categories of it all, they are like windows orange in the evening sun, but they are only glass and what’s behind them — that’s the Big Kahuna with the Strawberry Diaquerie.
Claire,
Readers are simply refusing to acknowledge the role of a massively undervalued currency in a system of fairly open trade. Companies WILL shift production there, retailers WILL buy from there or lose customers. Saying “oh we don’t have to consume from there” files in the face of how modern economies are organized. How often have you CHOSEN to pay 40% more to “buy American” to make up for the massive undervaluation of the RMB?
Now I will agree completely that the US leadership, Washington, Wall Street, and corporate executives, were massively complicit. It takes two to tango. But the flip side is that everyone bought into the free trade logic, and for us to deal with China’s flagrant violations of the rules of the game would require either a WTO case or protectionism of our own. We were afraid to stress the system we set up when it looked to be working in our favor (or to i on the ball’s point, to the favor of those on the top of the food chain here) and we has more clout. Now that we are not so powerful, the long overdue redress looks a bit like sour grapes.
And I suggest you bone up on trade accounting, China’s massive purchase of dollar assets to keep the RMB cheap guarantees they will run a surplus with us. And China is not a alone, merely the most extreme. The other Asian “tigers” pegged their currencies cheap so they could accumulate large FX reserves
But the flip side is that everyone bought into the free trade logic
This in turn was based on Ricardo’s comparative advantage narrative. Incidentally, the original English “industrial revolution” occurred behind a wall of mercantilist practice. England’s industrial base was well established before Ricardo came up with comparative advantage and “Free Trade” as a rationale for repealing the Corn Laws.
Can someone cite me even one example of a country that industrialized under a genuine Free Trade regime? As far as I can see the Free Trade story was England’s method for maintaining its industrial advantage after intially establishing it under mercantilist policies.
It’s interesting that the classic example of Ricardo’s comparative advantage theory was about wine and wool. Both are agricultural and mostly influenced by (AGW notwithstanding) immutable factors like climate and soil. Note how the question of what factors lead to a comparative advantage in manufacturing is completely avoided.
Guess that was too sticky an issue. So let’s just assume (as to this day most simple economic narratives do) that what leads to comparative advantage in manufacturing is fixed and immutable, and certainly can’t be affected by policy.
Nope. It was port and textiles. The more relevant point about the original example was that it was just after the Napoleonic Wars, in which Britain and Portugal had been allies, as well as having long established trade agreements, and though Portugal was in turmoil and in desperate straits, it had its Brazilian colony to back it up. And English gentlemen could not do without their fortified wines.
The ideology of equal trade had little to do with the underpinnings of the actual example.
More relevantly, the notion of comparative advantage was derived from Ricardo’s theory of the inverse distribution of wages and profits conjoined with his theory of rents. His concern was that high agricultural rents drove up food costs and thus the necessary subsistence wage and therefore landlord class rents drew profits off from industrial investment and inhibited the formation of industrial capital. By importing foodstuffs in exchange for industrial exports, rents and thus subsistence wages could be lowered, and industrial profits and re-investments increased. In other words, Ricardo was championing a particular sectoral interest at a particular historical juncture in setting up his supposedly universal theory of “free trade”.
Wow..this topic seems to be generating some interest and some very thoughtful perspectives.
First of all, thanks Yves and Alex for taking the time to respond to me.
Secondly, Alex:
//The point is that this is an unsustainable situation, and the longer it goes uncorrected, the more detrimental it is to the US. //
I agree it’s unsustainable. So is so much of the other garbage that’s occuring (0% interest rates, Bankster-friendly policies, houses valued at absurdly high values compared to income expectations, debt/income levels, trillion dollar deficits, etc). I suspect that in the currency valuation issue, though, the US is the one getting a free ride from this, though, because I think that an objective view of its fiscal situation can only conclude that the US will default or hyperinflate its debts away.
I understand that there is a large imbalance, but given the absoutely bizarre monetary (and fiscal) policies being conducted around the world, it’s a little strange that this particular currency pair is being singled out.
Thirdly, Yves:
//How often have you CHOSEN to pay 40% more to “buy American” to make up for the massive undervaluation of the RMB?//
1. You are contradicting yourself. You said that the price difference once everything is taken into account isn’t much.
2. Let’s say I pay 70% less for cheap Chinese goods and then do something productive with the remaining $. Then I (and my country, if there are enoguh of me) should be very happy on average with this situation. However, if I take that cash difference and go consume on stupid things( say, wall street bonuses), then yeah, I’m going to be hurting after a while. Again, though, this is *my* fault for misusing my $, not China’s.
3. Even if China revalues, you are ignoring the fact that the US will simply import from another country instead. So instead of buying some Chinese product and paying 70% of what it would cost in the US, I’ll pay 72% of the US price for some Vietnanese (or Mexican or whatever) product. This is the “problem” of the third world catching up to the first world–there will obviously be an arbitrage in costs. I don’t really believe that you can do much about it.
I’m arguing that protectionism isn’t going to do any good. IF the Chinese government is stupid enoguh to subsidize western goods, the West should be smart enough to capitalize on that.
I don’t know much about Chinese history, but the little I do know is that after being overrun by the “imperialists” before Mao took over and caused even more instability, about the only thing that the Chinese leadership cares for (aside from lining their own pockets) is stability. A quick look at what happened to the Baht and Rupiah and Ringitt and Won and the Ruble in the late 90s probably told them that a floating exchange rate isn’t a good idea. I happen to think that they are wrong, but I’m not an economist.
//And I suggest you bone up on trade accounting, China’s massive purchase of dollar assets to keep the RMB cheap guarantees they will run a surplus with us. And China is not a alone, merely the most extreme. The other Asian “tigers” pegged their currencies cheap so they could accumulate large FX reserves//
Why is Singapore doing so well? Again, China is simply subsidizing Western standards of living, and it will *never, ever, ever* get paid back in PPP terms. This should really piss off Chinese savers, but it shouldn’t bother the US at all.
And what do you think would happen to the US bond market should China announce that they will let the RMB float? Will other countries be willing to hold US debt if China announces that they will no longer buy it? Is they agree to buy enough to compensate for lack of Chinese demand, you’ve just shifted the “manipulator” to another country. If they don’t compensate, interest rates will hit double digits virtually overnight (as will commodities, likely). Are you *sure* that this is going to benefit the US??
Similarly, what if China, like the US, decalres that it wants a “strong currency”, and unlike the US, actually means it. Then it’ll get lots of basically free money and people here will complain that they can’t compete because of China’s cheap cost of capital and thje relatively low input costs of raw materials such as oil, etc.
This is a 2,000 year old problem.
Ancient Roman matrons spend so much on silk, draining the treasury of gold, silver and I suspect cowrie shells, that Rome had to impose a sumptuary tax on all silk products from Great Cathay, greatly hurting those 900% mark-up middlemen like the Sogdians, the Parthians, the Beduins, etc.
Today, we are again over-spending beyond our means, this time on cheap stuff from modern Cathay. Does it not make sense to learn from the Romans and imposed a cheaply-made-goods tax, so people will stop wasting money on all those cheap stuff?
Looking at more recent history, did not Tokugawa Japan achieve unprecedented prosperity and produce those beautiful ukiyo-e block prints of Edo and Fujisan, after shutting her door for 300 years? Sure, it caught up with her at the end, but 300 years is an awful long time, especially if you don’t age and are stuck with another immortal you are not particularly fond of, like your mother in law.
So, I guess nothing is perfect.
“The US will not be able to deleverage (absent explicit default) unless we move to a trade surplus.”
There are 3 possibilities in our situation going forward:
1) Raise taxes and cut spending
2) Inflation
3) Default
1 and 2 are a problem since they more directly affect citizens and voters. 3 is the best option. In order to do that, you need to portray the country you’re going to stiff as having caused your problem and acting unfairly. That’s when nationalism is useful. If you want to default, paint the other country as screwing you first, so that you can screw them now.
By the way, I favor 1.
The problem with (1) is that it only addresses government debt. Private (both consumer and business) is actually a far bigger problem as it’s several times bigger. A current account deficit means that some parties in the debtor country have to go (further) into debt to support it, and as Martin Wolf mentions, US households just can’t do it anymore.
One is into debt if one could not afford to pay for it right now.
Yves,
One quibble. Your headline “Calls For Protectionist Retaliation Against China Rise” suggests that we need to move away from free trade, when in fact we need to defeat foreign protectionism and move towards free trade. Admittedly this is a rhetorical matter, but I think it’s important. After years of being bombarded with commentary on the value of free trade most “right thinking” people think it’s a good idea. I used to complain about our “free trade” policies until I realized that they were anything but. So now whenever someone says we need more free trade, I agree with them and ask how we can fight the currency manipulation that prevents it. The less thinking commentators don’t often get it, but anyone who understands what free trade actually is finds themselves hard pressed to defend the hypocrisy of calling current policies by that name.
P.S. Overall an excellent article, and after years of complaining about currency manipulation, I’m glad to see it getting more attention. I’m also pleasantly surprised that, as you make clear in comments, you understand the economics of manufacturing better than many (most?) financial and economic commentators. Perhaps your Midwestern childhood helps.
I wanted to bring up a point that I have not seen mentioned thus far in this post or the comments below. My apologies if it has been mentioned.
Does anyone here know how much of Chinese export to the US is actually produced by companies that are wholly owned or invested in by US or large international firms?
http://w4.stern.nyu.edu/news/news.cfm?doc_id=101052
In regard to China: “Overall, exports from foreign-invested enterprises reached $545 billion in 2008, while exports from private enterprises hit $324 billion in 2008, according to the data.
Overall, state-owned enterprises in China are actually running a growing global trade deficit that hit -$96.3 billion in 2008, down from -$33.9 billion in 2006, according to the data.”
This data suggests 38% of Chinese exports are foreign invested companies, I have heard large figures for exports to the USA like 60-70%.
http://www.foreignaffairs.com/articles/60825/neil-c-hughes/a-trade-war-with-china
“Almost 60 percent of Chinese exports to the United States are produced by firms owned by foreign companies, many of them American.”
“Wal-Mart alone purchased $18 billion worth of Chinese goods in 2004, making it China’s eighth-largest trading partner — ahead of Australia, Canada, and Russia.”
Large US Companies have no interest in letting the Chinese raise the value of their currency, those are our companies, and it would wreak havoc on the competitiveness of American invested or owned Chinese-based enterprises as well as large importers. Pound for pound they have the lobbying dollars it is not going to happen despite what it would do for our economy.
This might be a stretch. But, this is can’t be soley related to benefits from cheap labor (as polemic as that notion may be on nekidcapitalism). I thing it is just as much or more about shifting or shopping around their tax burden to countries with lower effective corporate tax rates. They may have some incentives in place with the Chinese government, or have less regulatory burden to monitor their accounting ‘techniques’.
“Large US Companies have no interest in letting the Chinese raise the value of their currency”
You’re right on the money. Consider how the attitude of large US companies towards “protectionism” has changed over the years. Back in the 1970’s and first half of the 1980’s US manufacturers complained (correctly) about the undervalued yen and other Japanese protectionist practices (e.g. dumping). Of course Japan had little direct foreign investment so US MNC’s couldn’t benefit from a Japanese trade surplus (some say Japan actively discouraged foreign investment, but I’m no expert there). The Plaza Accord fixed the imbalance though.
Going even further back from the start of the Republic through at least the 1920’s US manufacturing companies favored high tariffs as there weren’t MNC’s (at least not on anything like today’s scale). Note that I’m deliberately talking about the period before Smoot-Hawley. While that was a bad idea, even before that in the 1920’s we had IIRC 40% average tariffs. And those tariffs may have contributed to the Great Depression by not letting Europe pay off its WW1 debts by selling to the US. Of course these days China is taking on what was once America’s role, but either way it’s a bad idea.
As a matter of fact, the U.S. has high corporate tax rates, which goes to explain why foreign investment in the U.S. yields apparently much lower returns than U.S. investment abroad. It’s not “dark matter”; it’s a manipulation of reported profits through transfer pricing and other such schemes for tax arbitrage purposes. One quarter of Microsoft’s global profits, for example, ostensibly occur in the Republic of Ireland.
Everyone seems to assume that with fixed exchange rates, there are no adjustments that will bring equilibrium.
The adjustment will come as internal inflation in China and will end up getting exported by making their goods less attractive.
Of course this will not happen on the Americans’ schedule where everyone suffers from short-termism.
The writing is on the wall. The US will threaten protectionism and China will threaten volatility by dumping loads of treasuries on the market.
Honestly, why would China depeg? It would only give the US a clear advantage. China would end up with huge idle capacity while the US starts rebuilding it manufacting base internally or in Mexico.
“The adjustment will come as internal inflation in China and will end up getting exported by making their goods less attractive.”
That’s a lot of inflation. The Chinese may understandably not be thrilled with that approach.
“Of course this will not happen on the Americans’ schedule where everyone suffers from short-termism.”
Short-termism? This has been an issue for 10 years, and just keeps getting worse.
“Honestly, why would China depeg?”
Ultimately because we make them an offer they can’t refuse. That’s not the right diplomatic language, but ultimately that’s what it comes down to. A trade war would be worse for them than depegging (or revaluing). Ultimately all tough negotiations have to backed by some threat.
We also have natural allies in the Euro-zone and elsewhere, who are also being hurt by this.
“China would end up with huge idle capacity”
Or perhaps consume more of their own production. It’s in our mutual interest to do a controlled gradual revaluation (ala the Plaza Accord) so that both sides can adjust. The last thing the US wants, even from a purely selfish point of view, is for the Chinese economy to crash. That would be Asian Crisis redux (and at a much worse time).
It’s also very questionable whether current Chinese policy is in the interests of the average Chinese or just the “coastal elites”. Why would the average Chinese want to work for $1/hr when he/she could get a $1.50? Maybe what that country needs is some good Communists.
When people first traded, it was not to buy cheaper things.
It was to trade for things you didn’t have access to locally or didn’t know how to make: tin mined only in Britain for amphhorae of Mediterrenean wine you didn’t know how to make, or the latest stone tools for obsidian found only in Anatolia, or jars of olive oil for spices indigenous to the Arabian Penisula.
We need to go back to the original spirit of free trade and not use it to trade for things you can make yourselves, and probably better quality as well, just because they are cheap.
East Indies Trading Co pay back, and good on them…doesen’t feel so good does it anglo boys.
Cant wait till anglos make the toys for their meals happy meals bawhahahaha!
I am a weird anglo and so I got a kick out of your comment. And then I thought that if “your kind” is eating happy meals then you have bought into consumerist stupidity just like many Americans. I am sorry for you.
Happy meal made at home (happy is the love of carer incorporated in cooking) and not by clown (clown is thief in costume to hide his intent).
Toy is effigy of fat Anglo being feed by said clown ROFL.
Yves, you missed out this article in last week’s FT by Michael Pettis, which warns that protection is probvably unstoppable at this point.
Competitive devaluations threaten a trade war
By Michael Pettis
Published: December 1 2009 20:22 | Last updated: December 1 2009 20:22
Vietnam’s decision to devalue its currency by 5 per cent last week to protect itself from undervaluation of the Chinese renminbi, and the worried response from Thailand and other Asian countries, suggests the move towards global trade conflict may already be unstoppable. As one group of countries seeks to gain or maintain trade advantage by manipulating their currencies, the historical precedent suggests that countries that are not able to devalue will respond with trade protection, especially tariffs and other barriers, and global trade will suffer.
In the 1930s many, but not all, major economies imposed draconian constraints on trade which sharply contracted international commerce and almost certainly slowed the global recovery. It was widely understood then that the collapse in international trade would only worsen the crisis, and yet countries, seeking to protect their own positions, collectively engaged in behaviour that left them worse off.
American economists Barry Eichengreen and Douglas Irwin recently published a paper examining the roots of the post-1930 surge in protection. They argue that during the 1920s and shortly after the onset of the 1929 crisis, several countries abandoned the gold standard and engaged in beggar-thy-neighbour competitive devaluations. These countries subsequently experienced rapid improvements in their trade balances and suffered much less from the ravages of the global contraction of the 1930s.
But others, most obviously the US and European “gold bloc” countries, were sharply constrained in their ability to adjust their currencies. These countries suffered much of the brunt of the adjustment as imports became more competitive against their domestic industries, especially in relation to countries that were less constrained. These were also the countries that were most likely to resort to what the authors call the “second-best” adjustment mechanisms – tariffs, import quotas, exchange controls, and so on.
“The exchange rate regime and economic policies associated with it were key determinants of trade policies of the early 1930s,” they wrote. “Countries that remained on the gold standard, keeping their currencies fixed against gold, were more likely to restrict foreign trade. With other countries devaluing and gaining competitiveness at their expense, they adopted such policies to strengthen the balance of payments and fend off gold losses.”
That should not surprise us. In a world of contracting global demand policymakers were concerned not just with measures to boost domestic demand but also with measures that allowed them to acquire a greater share of foreign net demand. The easiest way to do this was by devaluation. But countries that were unable to realign their currencies remained under pressure to find alternative ways of helping their domestic industries. They resorted to tariffs and import quotas.
The same thing may be happening again. Of course no currency is any longer tied to gold, so there is no country whose ability to devalue, as in the 1930s, is limited by a commitment to maintain gold parity. But there are countries whose abilities to manage their currencies are nonetheless severely constrained.
The US dollar, for example, is widely believed to be overvalued, especially in relation to the currencies of Asian nations. Because of massive intervention by Asian central banks, however, it is proving almost impossible for the dollar to adjust sufficiently, except against floating currencies such as the euro.
This creates a similar problem for Europe. Although few analysts believe the euro to be undervalued against the dollar – indeed, most believe it is more likely to be overvalued – it is nonetheless forced to bear the brunt of US dollar adjustment by further appreciation. This means that both the US and eurozone countries suffer from currency intervention and competitive devaluations elsewhere, with little room to adjust.
What can the US and Europe do? If Messrs Eichengreen and Irwin are right, they are likely to resort to the same “second-best” options available to them as countries locked into overvalued gold exchange rates in the 1930s. They will raise tariffs or otherwise intervene directly in trade, and it is pretty clear already that as US and European anger over currency misalignment grows, the recourse to protectionism is also growing.
Nearly everyone agrees that a world that retreats into direct and indirect forms of trade protection is a world that is worse off and likely to recover more slowly from the global crisis. But the fact that everyone seems to agree on this point should not allay our worries. In the 1930s, it was also well understood that the crisis would be exacerbated by plunging international trade. This did not stop a descent into protectionism which put the “Great” into the Great Depression.
Once again it seems we are going to make the same mistake. Countries that can expand their share of global demand by competitive devaluations are seeking to do so. Countries that cannot will almost certainly consider more direct forms of intervention. We should worry. Without serious global co-ordination, in which the US and Europe forswear protectionism in exchange for significant appreciation of undervalued currencies, rising tariffs appear inevitable.
The writer is a professor of finance at the Guanghua School of Peking University and a senior associate at the Carnegie Endowment
Not sure I buy the alarmist tone, but it is possible. It all makes me wish that the world had adopted Keynes’ original Bancor proposal at the Bretton Woods conference (ok, it was the US that killed it).
Trade wars not good. Balanced trade good.
IMO protectionism is a sure outcome.
With all countries spending like drunken sailors do you really expect politicians to dole out their country’s money to foreigners?
I did not know the Vietnamese where in the business of supplying male companionship.
http://www.bangkokpost.com/business/economics/28261/neighbours-uneasy-with-cheaper-dong
China is in a box.
If they let the Yuan appreciate against the Dollar, then their overseas holdings depreciate in value.
They have to maintain the overseas holdings to inoculate their economy from inflation. If they don’t issue debt to soak up excess currency (and reinvest that overseas) then they are importing inflation.
The status quo, however, is also a problem since they import commodities like oil and metals. Keeping the Yuan low makes those industrial inputs more costly – unless they have an internal policy of subsidizing those markets (which would require the repatriation of some of the excess assets).
Of course, as noted, there are significant fears of the impact of unemployment increases in China.
The Communist Party in China could lose some credibility with the people if unemployment rose too much.
The economic awakening has been a two-edged sword. Attracting citizens from the country to the cities so they can make their fortune has to be changing the demographics of Chinese society. Would unemployed “immigrants” from the country go back to the farm if they lost their jobs? What would be the political implications within China.
It’s in their interest to slowly extricate themselves from this situation. The question is how they will manage it and whether they would respond against their interests if they feel too much pressure from other countries (the issue of face is very important in Asia).
103 comments so far (including this one). I think Yves struck a nerve here.
vv
The title of this post give away your game, Yves. On the one had China is fudging its GDP numbers, presumably for all these years, and all the dumb people in the business and media buy into w/o question. On other hand China is really rising unchecked and we need to contain it by becoming protectionist.
I know these aren’t your precise view, but your China-basing posts has become desperate and shrill.
Yves, Just to get a refreshed perspective here. (Sorry I repost here)
1. Assuming the Chinese yuan get revalued upwards to the extent that all chinese products would be too expensive to be not imported into US. What US problems would be solved by such a scenario? Would US deficit come down assuming US consumers keep the same level of comsumption appetites?
2. If China spend more than their trade surplus with US by buying American products, goods and services, would you still consider the Chinese yuan overvalued?
This cannot happen until we repay our dept to China.
At that point, individual industries must be targeted if they want to remain U.S. based companies. Go after entire industries with labor standards or purchasing requirements of goods stating they must employ a minimal % employees or purchase minimal % of thier good to operate in the U.S.
Start low and incrementally increase the % to shift the exodus of industry from this country.
It’s the only way.
Yves, you need to know this: US cumulative deficit is around 9 to 10 trillions now. China has 2.3 trillions in reserve(not all coming from US). How would a revalued Chinese Yuan solve the US’s enormous deficit problem?