A story in China Daily indicates that the Chinese offiicaldom foresees a record trade deficit for March:
The country will probably see a “record trade deficit” in March thanks to surging imports, Minister of Commerce Chen Deming said on Sunday, while warning that Beijing will “fight back” if Washington labels China a currency manipulator.
Speaking at the three-day China Development Forum that ends on Monday, Chen said: “I believe there will be a trade deficit in March” – which will be the first since May 2004.
Yves here. Note that a trade deficit would seem to undercut the US’s argument that the renminbi is undervalued (or to put a finer point on it, it may have been undervalued, but is no longer). If true, this may bear out the contention made here by Marshall Auerback in earlier posts, namely, that domestic inflation is running at a high level. The effect, of repricing goods upwards in renminbi terms, would have the effect of making prices less competitive globally.
Cynics may argue that China’s suddenly showing a trade deficit, on the eve of when the Obama administration is under pressure to brand China a currency manipulator, is just too convenient an outcome to be believed. China’s salvo about its notoriously crappy, politically manipulated statistics, in “the lady doth protest too much” fashion, only serves to bolster those doubts:
The ministry also said on Friday that Washington’s method of evaluating trade figures magnifies the deficit with China.
“The deficit has been vastly overestimated based on American statistics,” and according to the latest report prepared by both sides, the US deficit for 2006 is “26 percent higher than it should have been,” Chen said.
Yves again. No matter how you look at this, the pre-announcement is significant. If China appears to be fudging its data, it sets the stage for a full blown trade war. Regardless, this salvo makes the idea Auerback discussed more than a month ago, which was hooted down at the time, that China might devalue the renminbi, suddenly look like a real possibility.
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China’s Bad Debtor
http://www.project-syndicate.org/commentary/yu2/English
Maybe someone should explain to Mr Wu that upon finding yourself in a hole the usual policy response is to stop digging?
They treat their own people as expendable components. Only genuine morons in the legal sense – of which we have a vast surplus at all levels – would expect anything better for themselves.
And the difference to the US is? None.
“Alexandra Hamilton”,
I’ll make this very blunt and very rude. I’m not interested in the opinions of a middle aged dilettante female Islamist indulging herself from the safety of Switzerland. If I could have my way I’d put you a one-way transport to Saudi Arabia, Iran or Afghanistan. There you could experience the “joy” of Islam for women full strength and forever undiluted.
If there is any way I can make my disrespect for your savage religious cult any clearer, please let me know.
Yves Smith: “Cynics may argue that China’s suddenly showing a trade deficit, on the eve of when the Obama administration is under pressure to brand China a currency manipulator, is just too convenient an outcome to be believed.”
Not at all, I’m sure you can find evidence for China’s trade deficit filed right next to Bush’s evidence for Iraqi WMD’s and down the hall from Lehman’s accounting archives. Say hi to the Tooth Fairy for me.
Yves Smith: “If China appears to be fudging its data, it sets the stage for a full blown trade war. Regardless, this salvo makes the idea Auerback discussed more than a month ago, which was hooted down at the time, that China might devalue the renminbi, suddenly look like a real possibility.”
We’re already in a trade war – it’s just that only the other side is fighting. If China is fudging the data or talks about devaluing the renminbi, then they’ve decided to go nuclear in a one sided war that they’ve been waging.
I’d really hoped a trade war could be averted by coming to an agreement on gradual renminbi revaluation. Nobody benefits from a trade war, but if the other side is not only waging it but escalating it, what choice will we have?
Michael Pettis: “That suggests that if we want to resolve the global imbalances in an optimal way that maximizes global growth and equity, we would need all the major problem countries to work out a program, perhaps over 8 to 10 years, in which China, Japan and Germany take concrete measures to shift subsidies away from manufacturers and return the income to households, and the US, the UK and other deficit countries shift income from households to investment.”
I doubt other countries will have the patience to wait 8 to 10 years.
http://mpettis.com/2010/03/how-will-an-rmb-revaluation-affect-china-the-us-and-the-world/
Yves:
Higher inflation than RoW with a fixed currency peg amounts to de facto upward revaluation, in general: the rise in export cost-prices is mirrored in a fall in import cost-prices. Hence if Chinese domestic inflation is really higher than officially reported or admitted, (which means that sterilization is increasingly leaky), and such domestic inflation is officially seen to be a dangerous problem, the obvious cure would be to raise the RMB, to match what is de facto happening anyway. Lowering the RMB would in fact exacerbate domestic Chinese inflation. Further, since much of RoW is verging on outright deflation, (whereas China has had a proportionally massive domestic stimulus), it stands to reason that import cost-prices, as much as declining foreign export demand, would be a source of pressure reversing Chinese trade surpluses.
The causation here is wrong. You are correct that inflation erodes the terms of trade, much as an RMB revaluation would do.
HOWEVER, you now have an increasingly unprofitable tradeable goods external sector, along with a domestic sector, which has long been a dumping ground for unsold exports, the products being sold with no margin to speak of (or, indeed, a loss). If both those factors go on long enough, then clearly this puts more downward pressure on the Chinese economy, a consequence of which might be a devaluation.
There’s another factor, namely FDI, which has been the main source of dollars, NO exports. Higher inflation, slower growth…not exactly a recipe for a big increase in FDI, is it?
That higher domestic inflation with a peg is de facto appreciation is axiomatic and can’t really be argued with. Economic causality is a dicier matter, since it involves interlocking feedback loops with offsetting flows. But all that vast array of export-producing manufacturing SMEs in Guangdong were always low-margin to begin with and subject to intense competition: they were basically servicing the supply chains of foreign MNCs, who reaped the largest share of any productive surpluses, with an ancillary strategy of serving to supply cheap goods to domestic and other developing country markets. If that’s no longer viable, it’s hard to imagine the Chinese regime would want to preserve that sector sine qua non at the expense of the rest of the economy, rather than allowing the consolidation that needs to take place, to boost productivity and thus margins. (After all, pre-crisis, the Chinese were pursuing a strategy of climbing the productivity and value-added chain and manufacturing employment there actually was declining rather than rising during the export-led boom of the last cycle: so why would they suddenly begin subsidizing lowered productivity, against earlier policy?) For that matter, appreciation would lower raw materials and high-level components import prices for Chinese manufacturers, so it’s hard to assess exactly how it would all shake out in terms of Chinese value-added and output prices. Further the RMB is quasi-pegged to the U.S.$ whereas $/Euro and other for-ex ratios have been highly volatile in the crisis, so it’s hard to figure exactly how that effct Chinese export prospects, except that such volatility is damaging to planning processes all around.
So I don’t see that you’ve made any argument for an actual RMB devaluation, (which, for that matter, would increase already large implied losses on for-ex reserve accumulations). FDI would be decreasing in the face of a global downturn anyway, but having to fend off foreign speculative flows through leaky capital controls with sterilization has always been a big headache, which an appreciation would lessen.
(my labels added)
re: point a), that’s continued to present.
re: point b), there has been significant shift there from low value added to high in industrial/manufacturing… continuing pre-crisis to now. EG: point being, their industrial workforce is considerably more skilled than even 2 years ago.
I am not convinced the timing of posting a deficit is “too convenient to be believed.” This kind of “tit-for-tat” tensions escalate near the expiration date of timetables, such as the one coming due for the US labeling China a currency manipulator for the umpteenth time.
To conveniently offset this labeling, it is quite simple for China to create a trade deficit to put the US in a bad light for protesting too much and too loudly. I have to view Congress’s protest with regard to Chinese currency manipulation as scapegoating, and trying to be seen as doing something about nothing.
How China can conveniently create a trade deficit when it suits them to do so is as I said quite easy. All they need do is stockpile raw materials in a given month. Now, I do not know how much stockpiling they have done in March, but if they have I can tell you that they have been paying a pretty penny for these raw materials at a time when global demand for their goods remain severely dampened.
For example, crude oil (in dollar terms to which their Yuan is pegged) has averaged roughly $80 a barrel the highest it has been since Sept 2008. Copper is averaging $3.37 in March 2010, the highest it has averaged since Sept 2008.
Curiously too China is running stress tests on the ability of re-export subsidized companies operating on paper thin 2 to 3% margins to absorb an upward revaluation of the Yuan.
The results of the stress tests are to be released on April 27. It is possible that China determines that these subsidized re-export companies can absorb say a 5% higher Yuan trading band. So rather than the Yuan trading at 6.83 to the dollar, it might be allowed to trade at 6.5 or 6.6 to the dollar.
I mean the purpose of running stress tests on re-export companies is not to increase their margins, because the MLC’s and WMT’s of the world would just squeeze that right back out of them!
Alex is right on.
The question of whether China is manipulating it currency is answered by looking to see whether it is intervening in exchange markets, not on whether it is running a trade surplus or deficit. Currency purchases is not the only way to achieve their goal, but it is the easiest and most effective. Alternatives would be to stockpile commodities or buy assets abroad.
That said, if China really is running a deficit, the extent of the reversal in its CA balance will be the measure of its contribution to helping maintain global aggregate demand.
I would expect if China experiences a serious downturn that it may well depreciate its currency.
Yves, the magical Chinese trade deficit is statistical BS.
http://www.economicpopulist.org/content/china-killed-imf-report-their-currency-manipulation
While we can conjecture on China’s manipulation of official metrics, closing down the country’s factories for two entire weeks, half the month, along with a host of other shut down activities will magically temporarily stop the flow of exports.
I’ll try to dig around into the details to prove/disprove this defacto later, but come on, a mercintile economy with a 9.5% GDP growth projection?
Literally China is so overheated they have a worker shortage, I kid you not.
http://www.economicpopulist.org/content/china-running-out-workers
The real value of the renminbi doesn’t really matter per se. If it is undervalued or overvalued is besides the point. China is interfering with that value by massively intervening in foreign exchange rated by buying treasuries. THAT is what has to stop. It stoked the fire of the credit bubble and removes from the fed any traction on monetary policy.
Simple solution would be to float the currency.
I say that instead of putting a tax on chinese imports the FED should start buying massive amounts of Renminbi. See how they like that.
U.S. investment and monetary policies were made-in-the-U.S.A. and China doesn’t bear any responsibility for that. Only with respect to the trade deficit can some co-responsibility be imputed, but then China following its own national interests in development is scarcely surprising, whereas the lion’s share of the surpluses reaped from China’s export surplus has been reaped by foreign MNCs and investor-classes, not by Chinese locals, (and they already face huge implicit capital losses on their for-ex reserves, which renders the continuation of the policy increasingly dubious, now that U.S. and other foreign consumers are tapped out).
But then the RMB is not a convertible currency and maintenance of capital controls to maintain Chinese control over Chinese domestic policy is as much a part of their aims as any trade surplus. So there is no currency market from which the U.S. Fed could buy RMB. Please inform yourself before randomly mouthing off, based on prior ideological attitudes.
Another way to show a trade deficit with US is for China to cancel/delay orders, may be across the board.
All this talk about the trade deficit(surplus) with China is nonsense. Capital flows are the dog wagging the tail. Corporations need cheap labor and American consumers need cheap drek and that isn’t going to change. Capital is flooding into China and the Communist government is sterilizing it as much as possible while stockpiling commodities and building up industry and hoping not to become the next Tailand or Malaysia.
jake,
With all due respect, the fact pattern is inconsistent with your argument. China has been accumulating unheard of official reserves as a result of its own government maintaining a peg to the dollar. If it were not intervening (buying dollars) its currency would have been considerably higher from 2004 onward.
Further supporting evidence comes from what happened during the crisis. When global trade collapsed, every major exporting nation, save China, saw its trade surplus shrink substantially, and in the case of Japan, actually become a deficit. That is not the result you would see if its currency were fairly priced. You would see China showing a narrowing trade surplus along with everyone else.
As for “capital rushing in” presumably for investment, that too is contradicted by facts on the ground. If China was such a great destination for investment, why is the government engaging in aggressive pump priming, via lending to local bodies, which in turn goes heavily towards land speculation, which as Victor Shih has pointed out, is pretty certain to lead to a lot of bad debt? The money that is going into the RMB (to the extent it can, you also ignore that China has currency control) is almost entirely hot money trying to play the expected revaluation, not money going to fund domestic projects.
China seems desperate not to allow the RMB to rise, and some in comments find it plausible that China might be engaging in stockpiling to show a deficit to prove its case.
This comes from a post by Chevelle, which I suggest you read in its entirety:
The ludicrous took center stage last week after a key figure in the Chinese leadership suggested that the renminbi is not undervalued.
Shortly after, two of the most loyal Ambassadors of Ludicrous—top economists at a couple of brand-name investment banks—argued that “the renminbi is not particularly undervalued…. China is importing a lot”; or that the US should mind its own business and save more.
Needless to say, these claims are, well, ludicrous.
Starting with the US savings argument… Since the third quarter of 2006, the US trade deficit has declined by almost 3% of US GDP—i.e. US national savings have risen by as much. And yet, the bilateral trade deficit with China has NOT. MOVED. (in US GDP terms). All the adjustment in the US external imbalance has been borne by other countries, notably oil/commodity exporters, Japan and the eurozone. China’s own contribution has been practically zero so far.
On top of that, most people refer to the global imbalances as a US vs. China problem. Not true. The eurozone, which has been running a trade surplus, has seen its trade deficit with China rise almost uninterruptedly for years now. Indeed, the increase in the bilateral deficit with China accounts for 70% of the deterioration in the eurozone’s trade balance since end-2001 (when China joined the WTO) and for one third of the deterioration since mid-2005 (when China began to appreciate its currency).
http://modelsagents.blogspot.com/2010/03/ludicrous-claims-about-renminbi.html
So Yves, what should be done? This:
http://www.nytimes.com/2010/03/15/opinion/15krugman.html?partner=rssnyt&emc=rss
is long on anti-Chinese punitive action and very short on pro-USA action. His analogy to a few months of 10% tariffs on core allies in far-off days in 1971 is absurd.
Krugman’s stated rationale is so short on positives for the USA one suspects an ulterior agenda might be at work. Such as bludgeoning Beijing into anti-Iran votes at the UN Security Council.
I am far from any friend of either the Beijing regime or the free trade cult in general. Still, I’d rather focus first on developing positive policies and goals for the USA, and then adjust trade policy with China (and everyone else) as needed to support those positive goals.
“long on anti-Chinese punitive action and very short on pro-USA action”
No “pro-USA actions” by themselves can overcome big currency manipulation.
Alex,
What if the Chinese decide to roll with the punch? That is, they accept Krugman’s 25% punitive tariff and maintain their USD peg or even devalue? And then focus on developing their many other markets world-wide? What then?
Presumably the dominant groups (i.e. the net producers) of the EU will tire of that soon enough and decided to take anti-Chinese action as well. Afterwards it’ll be a straight competition for natural resources.
What’s the end game?
Charcad,
First, that’s why the first step the US should take is to enlist our natural allies in the currency debate, which is most of the world. Europe is affected by this too, as are many Asian countries (e.g. Vietnam) that have to keep their currencies down in order not to loose market share to China. Even India complains about Chinese mercantilism.
Then, even if a trade war erupts, it will be more the world vs. China rather than the US vs. China. We needn’t have a trade war with everyone.
Second, I doubt that China can quickly or easily shift away from their dependence on US markets. Nobody these days is buying lots of stuff.
None of these things are guarantees that China won’t shoot itself in the foot (certainly the US and other countries have done it plenty of times) but it’s our best shot, and leaves us in a better position if a trade war erupts (or as I put it, China refuses to stop fighting the trade war they way they have been for years).
There are serious potential down sides to taking action, but continuing to do nothing is probably the worst course of action.
Alex,
and leaves us in a better position if a trade war erupts (or as I put it, China refuses to stop fighting the trade war they way they have been for years).
This is precisely what I want for USA workers from this: a better position. But what are we “fighting” over? Foreign markets for die-injected plastic and Zamac? Apparel factories? The reason Bill Clinton is leading Haitian relief efforts is he was already down there trying to organize piecework apparel and shoe factories.
On other blogs Krugman is being hit up over why substitute imports from India, Thailand, Cambodia or Vietnam are necessarily better. It’s a good question.
We really need a clearer vision of where we’re going than merely slapping punitive tariffs on China on a global basis. Wouldn’t an outright naval blockade be more likely to work? This would have the advantage of cutting off their imported oil, too.
My own plan would be a Made In USA heavy infrastructure effort. Start 10 – 20 nuclear new plants per year and also convert the freight railroad mainlines to external electric power. Then alter policy to push most interstate freight back on the rails. This starts to seriously address real fuel independence.
In any event this will require a very large training and retraining effort in the USA. Means are needed for creatively doing this affordably. The current university and vo-tech system is not affordable.
Charcad,
We’re probably not, and probably shouldn’t try to, bring back much labor intensive low markup manufacturing to the US. What we need is capital and know-how intensive industries like car parts, machine tools, semiconductors, capital equipment, etc. I don’t care about China’s clothes, but when they move up the value chain and don’t sufficiently revalue their currency it’s another story.
“Wouldn’t an outright naval blockade be more likely to work?”
We’re really good at that, WW2 even gave us some Asian experience, and we still have the world’s most ass-kicking navy.
“My own plan would be a Made In USA heavy infrastructure effort. Start 10 – 20 nuclear new plants per year and also convert the freight railroad mainlines to external electric power. Then alter policy to push most interstate freight back on the rails. This starts to seriously address real fuel independence.”
I’m in favor of that, but we still need things to export. Modular nuclear plants, wind and solar stuff? BTW it won’t do much for energy independence as only about 2% of US electricity is oil generated (mostly in my back yard). Might help with natural gas imports (more Canada than Saudi Arabia), but then again we’ve found lots of good domestic sources for that (though still a net importer IIRC).
Freight railroads are great. Even without electrification they use about 1/3 the oil per ton-mile as trucks. High speed passenger rail always sounds cool, but I have to question the economics (IIRC Europe’s high speed rail only survives with big subsidies). Freight is economical now, which may explain Berkshire-Hathaway’s railroad investments.
Interesting tidbit: while Europe’s passenger rail service is great, their freight rails lag behind ours in many ways (smaller percentage of freight transported, higher costs, country-to-country incompatibilities in the EU, lower permissible axle loadings, etc.).
“Zamac?”
Had to look that one up. Does your reference mean that there’s still at least one other person in America who knows a little about industrial techniques?
Edward Alberts of Societe Generale suggested a China trade deficit last fall.
http://www.scribd.com/doc/22776263/Societe-Generale-Worst-Case-Debt-Scenario-Fourth-Quarter-Nov-2009
China imports 3.5 million barrels of crude per day @ $80 US per barrel. Thats real money out the door.
That’s real money, get it? The entire China currency issue orbits around the newly hard dollar – pegged to crude by Saudia and circumstances. The real issue for Obama et Cie is those reserves; we Americans want them since they are what are needed for ourselves to get more fuel.
At the same time the Chinese have the advantage of gaining dollars over Americans as their businesses are cheaper to run plus the Chinese have lots of dollar denominated securities it can sell for dollars. Dollars in the US wind up in liquidity traps or in bank accounts held by Wall Street insiders in overseas tax havens.
China can jump up or down the yield curve … they can raise cash just as easily as can the Treasury. They can borrow short and lend long and earn dollars from the carry. That is what deficit spending is, anyway … a form of carry trade.
This won’t last since the dollar is now worth something and the entire world’s economy will soon enough become buying and selling money to gain dollars. Japan will want dollars along with Uncle Sammy. You can figure out how that ends up by yourselves. One outcome that is certain is that most other kinds of businesses will fail. I can say this because what is happening now is almost a blow- by- blow recap of 1931.
China is on the hook, they need dollars for fuel (to waste) yet need desperately to shed the dollar peg and are indeed frantic to do so. The peg means every dollar brings along with it from Washington deflation … which the Chinese establishment cannot tolerate. They have too much invested in their real estate bubble.
Consider the dollar this way; every dollar is worth a half gallon of crude oil. What each dollar must do is to substitute a productivity return better or equal to what can be gained from that half gallon of crude oil. Dollar deflation is amplified bv increasing incentives to ‘grow’ consumption which accelerates crude oil depletion. The dollar is conserved as a proxy or in place of available fuel. There is no escape from this fuel/dollar trap. If there is dollar inflation, crude prices rise and demand is consequently destroyed, which then brings dollar prices down and reestablishing the dollar/crude peg. It’s a fiendish vicious cycle. China is caught in it. So is Obama, although him and his denialist advisors cannot see it that way or refuse to do so.
Productivity not consumption. Think about it. USA and China both deny peak oil … Saudi Arabia does not, they are living it. That is the real issue not the value of the renmimbi.
Yves, you are drinking the Kool Aid and barking up the wrong tree with this trade balance stuff. Fiat money is essentially infinite and circles the globe at the speed of light. A few million tons of drek cross the oceans in containers and eighteenth century economists think this is a big deal. Follow the money and ask yourself what is China’s political motive in enabling this game? The answer is simple: catching up. The motive of America’s entrenched elite is also simple: cashing in up to the day the shit hits the fan and people are no longer satisfied with a choice of captured two faced idiots every four years.
Suppose China doubled the value of its money? What would change?
“Suppose China doubled the value of its money? What would change?”
Amongst other things, the US-China trade imbalance would change.
I agree with your grand theses about the Chinese and US interests, but you’re wrong to dismiss currency valuation as an important part of how these are pursued.
How would it do that?
Why would it do that?
Port congestion and delays from Chinese New Year might account for some imbalance. Container vessels to and from China are booked 3-5 weeks out right now with backlog at the major Chinese ports. Usually it clears up a week or two after Chinese New Year but that didn’t happen this year. Bulk vessels of raw materials would also have been delayed for after the holiday.
It would be difficult to stockpile raw materials on short notice. Bulk vessels are usually booked at least three months out, sometimes more.
I am beginning to think if we inivite everyone in China to move over here, we would never hear any trade deficit complaints with them again.
They fully intend to come. They just don’t feel a need for any invitations fro people or groups currently here.
Most PRC citizens have a lower standard of living than Americans. Some part of our standard of living is subsidized by this discrepancy. The most important problem of the current US economy is the failure to deal with our de facto insolvent banking system by wiping out its shareholders and writing down the its bondholders. Regardless of China’s trade policies, the US won’t ‘recover’ in a real way until our financial supply system is cleaned up. Ergo, I suggest that we allow the PRC to continue on its current path and clean up OUR OWN MESS first.
In 30 years China has gone from the dreary leveling of the Iron Rice Bowl to the excitement of the most unequal national economy in existence. The PRC oligopy is nervous at the prospect of social unrest if this experiment goes wrong, leaving hundreds of millions indigent.
An American government with its house more in order than it currently is, could deal with China in more collegial fashion, perhaps helping them to find another pattern of development. We also have to realize that we cannot continue to consume such a disproportionate share of the world’s goods and services.
However unworkable and idealistically this reads, the current rush toward trade conflict reads worse. Given that our domestic and trade policies contributed to the current conundrum, it behooves to help unwind it.
we cannot continue to consume such a disproportionate share of the world’s goods and services.
Very good. And what was or will be your adjusted gross income on your 1040 this season? And this being a census year I’d also like to ask you the square footage of all residences you own or use, their appraised value(s), what vehicles you own or are provided for use, how many miles you drive them each year and an itemized list of all assets over $100 value.
The reason for this inquiry is to open for general discussion the extent of the reduction in living standards that should be imposed on you, personally, in consequence your prescriptions for “we”.
It may be you are an exception to the rule. And that rule is the Gore Rule. This is when two-faced self-righteous assholes like Al Gore advocate privation for their fellow citizens while maintaining a private jets, yachts and mansions for themselves.
1) You’re invited to spend a night in my palatial spare bedroom. Just hope it doesn’t rain.
2) I live 1 1/2 miles fr/ SF Bay. You’re invited to sail my (imaginary) yacht as far into the Bay as you like. I understand drowning is supposed to be painless. I’ll splurge on a $5 dollar bottle of sparkling wine @ Trader Joes it’s on the way, convenient huh?) and enjoy the show. Buon Voiaggio.
Well, around the globe reduction in living standards are being “imposed”. And the reasons are not decisions on high, rather airy-fairy faux balance sheets coming due: all the “stuff” you seem to allude to as a measure of “standard of living”, well, the US credit card is coming due.
The pipeline for all this “stuff” is drying up because real earnings are not being generated here to pay the bills.
And the standard of living decrease has already hit our shores. It just gets pushed aside (that 19% unemployment, state budgets upside down, worker wages halved or more, etc. etc.)… so much easier to focus on return to bubble earnings by any means possible.
No Chinese revaluation is going to put these people back to work, make up for the evaporation of meaningful US investment, or change the dynamics which have bankrupted America. It almost seems like pushing all this aside, ignoring US economy’s utter lack of addressing basic domestic needs, the evisceration of our 2nd’ary education… it’s just more accounting chicanery in another domain.
US diminished standard of living has already happened, not withstanding it hasn’t reached your doorstep yet.
Well said… The first phase of AUSTERITY – deleveraging, limited access to credit, and unemployment – are already upon us.
I have paid particular interest to your comments regarding the Chinese moving up the ladder or “catching up” with/to world standards. As you have suggested the illusion that the Chinese just make “junk” belies this reality. It no longer takes new entrants as long… This to will affect trade and current account balances as Chinese goods, much like Japanese or Korean, become desired for quality as well as price. Then what wiil WE do? Blame competition?
“No Chinese revaluation is going to put these people back to work”
Wrong. Simply, factually wrong. While revaluation is not a panacea (there are certainly lots of other important things to fix) revaluation will put many Americans back to work. By raising the cost of Chinese goods it makes American goods more cost competitive. Hence US manufacturers will employ more people. Nor is that a pull-it-from-your-posterior theory – historical evidence for this effect is abundant (see, for example, the Plaza Accord). The explanation is as simple as that, an elementary matter of price, and does not require recourse to morality tales, grand themes of history, or conflicts of culture.
Ok, I’m wrong.
Current Chinese blue collar (manufacturing) labor get’s less than $0.70 p/hr USD. So 20% bump pushes that to $0.84 p/hr. This wage in China is upswing… workers are happy w/that as it’s best they’ve ever had. Most of ’em work upwards of 70 hr weeks, w/no perks.
So ok, China revalues to avert war and US somehow reconstitutes our ghosted manufacturing of 2-bit consumer goods. Anybody telling these potential US workers their wage is not quite gon’a be what all this propaganda suggests?
Or maybe US workers gon’a have to take one for the team and bring their kids in to do the night shifts?
Going to take a whole lot of damn energetic US blue collar patriots cranking out TV’s, Mr. Coffees and motherboards before there’s enough “liquidity” to move all those toxic assets off the black-hole balance sheets at valuations commensurate with presumed standards of living.
Yes, I see what you mean… a little revaluation across the pond and prosperity is just around the corner!!!
…
I don’t know, your “(there are certainly lots of other important things to fix)”… all totally ignored both in this equation (China revaluation) and current US policy… looks to me like that’s the 99 per-cent difference maker that our economic captains just don’t have the kahunas to talk about.
Not so hard to see the next bubble on the horizon, although I suspect horizon is getting a little bit closer all the time.
jdmckay: “Current Chinese blue collar (manufacturing) labor get’s less than $0.70 p/hr USD. So 20% bump pushes that to $0.84 p/hr. This wage in China is upswing… workers are happy w/that as it’s best they’ve ever had. Most of ‘em work upwards of 70 hr weeks, w/no perks.”
What you’re missing is that labor costs are a small part of most manufacturing, often less than 10%, depending on the item. Furthermore, American workers are more productive (a hard statistical fact, not jingoism). Were these things otherwise, then everything would be made in China – yet the US is still the worlds biggest manufacturer.
We’re not going to bring back labor intensive low margin manufacturing to any great extent. Most of our clothes will still have foreign labels. But what about capital intensive stuff like car parts and semiconductors? That’s where the problem is.
“Going to take a whole lot of damn energetic US blue collar patriots cranking out TV’s, Mr. Coffees and motherboards”
Forget most consumer goods – they’re what you see in the store, but components and capital goods are more what a typical developed country exports. They’re generally more capital/know-how intensive than consumer goods.
“Yes, I see what you mean… a little revaluation across the pond and prosperity is just around the corner!!!”
The 2009 trade deficit with China was $227 billion. Furthermore, China’s currency manipulation (buying lots of USD) drives up the dollar vs. other currencies. Our total 2009 trade deficit was around $380B, and that’s only because of the recession. A few years earlier it was something like twice that. Imagine a $400-800B stimulus every year, debt free, as opposed to the $700B stimulus bill that was spread over several years.
Alex:
with all due respect, that is a gross generalization to the point of being meaningless. I’d like to see your references/citations. If they are Yves’ (IBM example), it was wrong on most every level, I just never had time to break it down point by point.
But it’s wrong.
Again, citations? From what I know that’s not correct, and by a significant margin in opposite direction you suggest.
And FWIW, my view of this does not come from some blog or backpage WSJ article… I’ve been involved in several capacities, on 3 continents, on the front lines of this for over a decade.
Your claim would have been true in early 2000’s, but not anymore.
Anyway, getting from your 2 generalized assertions to your summary statement:
… again with all due respect, it’s a pipe dream. AFAIC, really, it’s the same kind of sloppy/ignorant stuff that’s driving this entire China bashing debate, and the nuts/bolts of comparative processes, at every step of the way, do not add up to to numbers anything like what you suggest.
China has invested heavily in fabs (you talk about resurrecting US semiconductor manfacturing), they are now world class… to the point of putting a sqeeze on Taiwan in this area.
We don’t have these facilities on our shores, we just don’t. We ceded that a decade ago. And the financial incentive to restablish that here does not exist, at least from private $$. Along the way, China has built a considerable skilled workforce in this area… again, something they have invested in.
Where ever you get notions you have stated I don’t know, but they are not reality based.
And lastly, your comment:
… is just incorrect on several levels.
Their “currency manipulation” does not equate with “buying lots of USD”. Nor does their buying USD equate (as you said in another comment) with “cause and affect” of disappearing US domestic “liquidity”.
US put up treasuries for sale to raise money. We had a decade of fiscal policy using those sales to finance all kinds of non-productive activities, while simultaneously using full force of federal gov (WH & congress) to promote offshoring… period.
This happened… it’s done. China bought those things, just as institutional investors, Japan & Russia, because at the time they were believed to be about the safest haven on earth. The powers that be here did what they did, not at affect of these purchases (loans), they what they did because they chose to… period.
By any measure of legal agreement, China bought those things fair & square under clear terms understood by all, and US chose to (essentially) burn through it.
Now, after we’re underwater everywhere, entirely unable to even begin constructive national discussions on corrections (much less thorough evaluation of just what happened), with all the crooks who more or less scammed US economy for all it’s worth… with no leading edge economic engine left, and the country broke…
I don’t know. My eyes see delusion all about here. And I know, having relationships w/folks in meaningful business all over EU/ASIA/SA, that is the collective view there as well.
Capital is in short supply right now, and likely to remain so for some time. Given absurdity and unpredictability of US governing/leadership/policies, not to mention utterly uncorrected corruption on near saturating scale, those international investment $$ are not looking at US as anywhere near primary destination.
I mean, we’ve been a torture nation the last decade and can’t own up to that. Look back into recent history (2-3 decades), read up on why at that time US investment would not go places that did the same… it’s quite obvious around the world really, just not here. This stuff is only symptomatic, however.
The days when US spoke economics and the world followed are (at least currently) in suspension: that’s just not happening right now. The main extent of our influence in this regard is the stick of default and nukes from what I see, and we have enough crazies in halls of power to do really stupid stuff like that, as last decade clearly illustrates.
We got a lot of cleaning up to do here, but no will or intent. That’s where we need to begin.
jdmckay,
“that is a gross generalization to the point of being meaningless”
Of course it’s a generalization, which is why I made the point that it depends on what you’re manufacturing.
“I’d like to see your references/citations. If they are Yves’ (IBM example), it was wrong on most every level, I just never had time to break it down point by point.”
So you want citations from me, but you “just never had time” to refute Yves’ supposedly incorrect example? (BTW I added a number of examples to Yves’). Ok, labor costs in car manufacturing are 8.4% (http://www.uaw.org/barg/07fact/fact02.php). Even 15 years ago labor costs in semiconductors were 11.5% (http://smithsonianchips.si.edu/ice/cd/CEICM/SECTION2.pdf).
“Again, citations? From what I know that’s not correct, and by a significant margin in opposite direction you suggest.”
Again the double standard. I need citations but you can cite “from what I know”? Can my “from what I know” equal your “from what I know”?
“And FWIW, my view of this does not come from some blog or backpage WSJ article… I’ve been involved in several capacities, on 3 continents, on the front lines of this for over a decade.”
Ah, so you are an outsourcing functionary. That’s ok, everybody talks their book.
“again with all due respect, it’s a pipe dream. AFAIC, really, it’s the same kind of sloppy/ignorant stuff that’s driving this entire China bashing debate, and the nuts/bolts of comparative processes, at every step of the way, do not add up to to numbers anything like what you suggest.”
Again, your argument lacks any substance. How is it a pipe dream? How do the numbers supposedly add up?
“China has invested heavily in fabs (you talk about resurrecting US semiconductor manfacturing), they are now world class … to the point of putting a sqeeze on Taiwan in this area.”
So what’s you point, that we should just give up because we now have competition? Sounds like the pre-1985 attitude of some Americans, who essentially said “quick, give up, we stand no chance before the Japanese juggernaut!” But that didn’t happen precisely because the Plaza Accord addressed Japanese currency manipulation.
“We don’t have these facilities on our shores, we just don’t. We ceded that a decade ago. And the financial incentive to restablish that here does not exist, at least from private $$. Along the way, China has built a considerable skilled workforce in this area … again, something they have invested in.”
OMG, a competitor has invested in something! Quick, roll over for the Chinese juggernaut. First off some companies (e.g. Intel) still have most of their fab capacity in the US, and they’re about as “world class” and bleeding edge as you can get. Second, if you know anything about semis you know that fabs are mostly depreciated in a few years due to the fast technological change, which means we can rebuild our capabilities faster than in industries with longer term capital investments.
“Their ‘currency manipulation’ does not equate with ‘buying lots of USD’.”
Huh, are you familiar with the concept of supply and demand? Works for currencies just like anything else. And what are they doing with a few trillion in USD? Are they just fond of pictures of dead presidents? Are they just trying to help us poor impoverished Americans by letting us buy lots of Chinese goods on credit?
“By any measure of legal agreement, China bought those things fair & square under clear terms understood by all”
In fact that sort of currency manipulation is specifically prohibited by the IMF. However, unlike the WTO, those agreements have no teeth.
“those international investment $$ are not looking at US as anywhere near primary destination.”
So they’ll sell, or at least stop buying? Good, then there’s no problem – that’s what we want them to do.
“We got a lot of cleaning up to do here, but no will or intent. That’s where we need to begin.”
And how is addressing an unsustainable and destructive trade deficit not a part of “cleaning up”?
Ironically all your pessimism about US manufacturing is an indication that the USD exchange rate needs to drop even further than I think. Trade must ultimately balance (absent default or forgiveness) and manufacturing is the only realistic path. Our services surplus is a joke, we’re not going to become a raw materials exporter, and the ag surplus potential is limited (particularly with competitors like Brazil). Or do you believe that China and the rest of the world will endlessly sell us things in exchange for pictures of dead presidents?
“Regardless of China’s trade policies, the US won’t ‘recover’ in a real way until our financial supply system is cleaned up. Ergo, I suggest that we allow the PRC to continue on its current path and clean up OUR OWN MESS first.”
Why do you act as though it’s an either/or issue? Of course we need to clean up our financial system, but that’s no reason not to tackle other critical problems as well. In fact the two issues aren’t even separate – the cheap dollars for the housing bubble came in large part from China.
“An American government with its house more in order than it currently is, could deal with China in more collegial fashion”
As though China had shown any inclination to deal with this in a collegial fashion.
“perhaps helping them to find another pattern of development”
The Chinese are neither stupid nor ignorant – they’re quite well aware of other potential patterns of development.
“We also have to realize that we cannot continue to consume such a disproportionate share of the world’s goods and services.”
Chinese currency manipulation increases the share of the world’s goods and services that we consume. We actually want them to consume a bigger share, but Chinese policies prevent it.
“Given that our domestic and trade policies contributed to the current conundrum, it behooves to help unwind it.”
Yes, our trade policies did help cause it. Those policies included tolerating Chinese currency manipulation for at least a decade and keeping our tariffs low while China kept its high.
As the wealthier nation that’s prospered for longer and extended its ‘prosperity’ unnaturally we’re more culpable. I don’t think my little homily made the PRC out as a blameless, innocent bystander. Their ‘subtle’ threat to devalue the Renminbi shows that the oligarchy feels endangered to the point that they’ve lost their reason–a la’ our right wing loonies. If we put our house in order, however uncomfortably, we can also deal with them from a position of strength, incrementally, and more likely successfully. Right now it’s two bellicose, scared opponents both acting from a position of weakness, fear, and the accompanying irrationality. The American punditry needs to stay with the fight for financial sanity here, and not fight two simultaneous wars.
“As the wealthier nation that’s prospered for longer and extended its ‘prosperity’ unnaturally we’re more culpable.”
Again you view this as a morality tale instead of an issue of the realities of international trade. Chinese government (PBoc) accumulation of trillions in USD reserves does reduce the value of their currency and boost ours. This leads to an unsustainable trade deficit. No moralizing, just a simple case of how central bank policy affects international trade.
“If we put our house in order, however uncomfortably, we can also deal with them from a position of strength, incrementally, and more likely successfully.”
Again, the moralistic view that we sinners cannot ask for forgiveness before we repent. Right, wrong or indifferent, we are in a position of strength – China needs US markets more than we need Chinese goods.
“The American punditry needs to stay with the fight for financial sanity here, and not fight two simultaneous wars.”
As I already explained, it’s not two wars but two fronts in the same war. The trade deficit and Chinese accumulation of trillions in USD reserves are an integral part of the mess that our economy is in. To clean it up, either China has to stop accumulating excessive reserves and revalue their currency or we have to impose tariffs. I prefer the former, but if China won’t budge then financial responsibility requires the latter.
Morality is rigid rules. Fairness is a balancing of interests. China’s harebrained development policies and incredible (by American standards) overcrowding put its economy in significant difficulty. Much more than our own, all things considered. Our immediate financial difficulties can be wound down faster and more easily. The quantity and quality of discomfort we experience would be nothing compared to China’s if its economy implodes. A Chinese implosion would benefit no one, in the long run.
It would be better to wait until the US and Europe are in a stronger position to force a showdown with the PRC.
KFritz: “A Chinese implosion would benefit no one, in the long run.”
Agreed.
“It would be better to wait until the US and Europe are in a stronger position to force a showdown with the PRC.”
Why? How would that help China adjust? The key to minimizing the pain of adjustment is to do it gradually, say over 5 years. Ergo the sooner we start the better.
Are you stating this as causation… “China made us do it?”
Sheesh… we didn’t tolerate it, US business counted on it and built their offshore manufacturing based on the incentives therein, & BushCo/K-Street economics supported and reaped their rewards. That the remains are junk bonds and toxic assetts, well, that’s just the way things work in casino voodoo free market economics.
It took near 7 years for majority of US public to get their heads around fact that Iraq “liberation” was not exactly the endeavor that it was portrayed as. With housing bubble, Americans shifting their income from evaporated jobs in real economy to flipping houses, same thing… took a few years for reality to catch up w/the propaganda and kick people in the ass when the bubble burst.
And it seems to me that US’ sense of acuity is somewhat foggy… acknowledging the bubble has bursted is a little tough to do, rather why not kick a little ass and get some of those evil fur’iners to cushion the crash.
The Chinese “currency manipulation” meme, as you’ve mis-expressed and as seems to be taking hold as more and more media voices (and now BO & co.) put it “out there”… well, that’s just peachy.
Let’s you and I have a little talk in 5/6/7 years and see what this assessment looks like then. I’m guessing it will look exactly like the 2 I mentioned. Kind’a like ENRON, .COM Crash, and all the other WS alchemy cooked books schemes of the last decade.
There’s a pattern here folks… really, there is!!! Hopefully you all will get your thumbs out of your mouths, wake up, stop looking to some mommy, and realize the personal responsibility is not simply a conservative campaign slogan, but rather a standard of behavior that actually makes a difference.
Hell, even Reagan realized that “the truth matters”, even if he was too far in a fog to actually do anything about it.
“Are you stating this as causation … ‘China made us do it?'”
China didn’t make us do anything, and I’m not out to portray the US as some hapless victim of a scheming China anymore than I buy the portrayal of China as a poor victim of the bullying US. We’re both big boys and can stand up for our own interests.
Nevertheless cheap Chinese government (PBoC) money did fuel the housing bubble, so there is cause and effect. Our own acceptance of this policy is what I blame, just as I blame our dismantling of financial regulation.
“Sheesh… we didn’t tolerate it, US business counted on it and built their offshore manufacturing based on the incentives therein, & BushCo/K-Street economics supported and reaped their rewards.”
I completely agree, although you left out the Clinton/Rubin/Summers contribution in the late 90’s of pushing for premature PNTR and WTO membership for China. We have a bipartisan kleptocracy, albeit with the older party pushing a slightly kinder, gentler approach.
“acknowledging the bubble has bursted is a little tough to do, rather why not kick a little ass and get some of those evil fur’iners to cushion the crash”
I recognized that there was a bubble years before it burst. But this has nothing to do with the “evil fur’iners” meme and everything to do with the realities of international trade. By contrast you view this as a morality tale where the US has sinned and we’re trying to blame virtuous China for our troubles.
“The Chinese ‘currency manipulation’ meme, as you’ve mis-expressed”
How have I mis-expressed it? Your criticism lacks substance.
“Hopefully you all will get your thumbs out of your mouths, wake up, stop looking to some mommy, and realize the personal responsibility is not simply a conservative campaign slogan, but rather a standard of behavior that actually makes a difference.”
Whose personal responsibility? I didn’t flip houses at inflated prices, underwrite liars mortgages, sell three letter derivatives that are but fancy scams, fudge Lehman’s books, promote premature Chinese PNTR or WTO membership, or move factories to China. So how did my personal irresponsibility contribute to this mess? Nevertheless I’m affected by the worst economy in 70 years.
“Most PRC citizens have a lower standard of living than Americans… we cannot continue to consume such a disproportionate share of the world’s goods and services.”
Exactly right. Worked for months at a time in Germany, Sweden, Korea, China… you name it. I’ve lived in Canada (house, apartment, condo), USA (large house in San Jose area) and Japan (HUGE 400sq. ft 3room! apato).
Give me a working subway, comfortable and affordable trains and just the stuff I need and love and fresh tatami mat. I take Japan any day, hands down. I’d never felt more relaxed and myself before or since.
“…self-righteous assholes… for their fellow citizens while maintaining a private jets, yachts and mansions for themselves.”
No. You’re an ass. Come back when you know something about other cultures. Lifestyle is not dictated by your level of consumption, it’s not austerity that’s being called for. There is just no need for, and it really doesn’t contribute to your well being to be profligate. In fact, it’s detrimental.
Jeff,
So what are you going to tell me from your vast experience of “months” living in various districts – likely university areas?
I lived for years in South Korea. But not in the environs of Itaiwon or other comfy Seoul neighborhoods. Does Warrior Base and Speedball Inn ring any bells? GP Ouelette? Booku time with my boots in the rice roots. Literally. 400 sq ft out of the rain? I need to remeasure the square footage of a poncho sometime. I think I have you outmanned in the low rent tour sweepstakes.
A bit later another unit I was in deployed to Somalia for an exercise. This was in the later 1980s when Somalia still had a supreme warlord and henchmen masquerading as a central government.
Then came Saudi Arabia and Kuwait. Although I had very little contact with the natives on that one, to be honest. Strict policy of the Saud family and their religious police, you know. The Iraqis however were very friendly after a few days. The ones I met were very grateful for the MREs we handed out to them as they walked north to home.
Then came the Peace Dividend. My two National Review cruises had extended port calls in the eastern Adriatic. This was in the post-affirmative action & post-multi-culti hellhole called Bosnia. The aftermath of the sort of social engineering the EUcrats learned absolutely nothing from. But why would they? It was US troops that eventually cleaned this up.
Pathos was watching shelled out refugees clustering around home made radios in winter time. They were listening hopefully to the BBC World Service and near daily communiques from the Brussels-Paris Axis of Assholes. These were nonstop announcements of “peace”, literally for years. Very much like the near-daily announcements from the same sources that Germany has finally agreed to fund Greek corruption and profligacy so EUcrats can preen and strut like Paul Krugman.
These days I own some property overlooking the southern Volga River. Married to an ex-university Komsomol leader. This is in a pleasant urban university district of the kind you and some other very arrogant people think you can forcibly impose on all of North America.
I expat it part of the time like Vinny does. It’s a-ok, so long as you have that blue passport, hard currency and the knowledge that if things get REALLY bad the C-17s will swoop in to carry you and yours out, just like angels.
Now what I learned about other cultures is once economics tighten down enough everyone falls back on family, clan and tribalism. i.e. the multi-culti Disneylands like NYC, Georgetown and Sodom on the Pacific only work when the cornucopia is bottomless. When real stress appears, as it did in Bosnia and the other pieces of ex-Yugoslavia, or in the ex-USSR, or as it still exists in most parts of Asia, everything goes to hell in a hurry. I realize this is not something that childless American baby boomers will ever understand.
I have heard and even believe that God often takes care of little children, drunks and fools. So there is every chance that KFritz and others may yet escape the “success” of inflicting intentional economic privation on their Rube Goldberg engineered multi-culti society. What awaits them is not the Paradise of Multi-Cultural Disneyland as they fantasize but the Hell of Srebrenica.
Another thing I learned, about my own country, is that it’s teeming with religious nutballs. Creationist Kent Hovind, a/k/a “Dr. Dino” is one example. He thought mouthing the right liturgy so sanctified him above his fellows that he deserved an extra helping.
The amazing part is there are just as many identical nutballs calling themselves “liberals” and “progressives”. These think they’re superior to the Dr. Dinos because they intone different magical phrases about “environment”, “global warming” and all manner of ethnic, racial, religious and gender “equality”.
And they are so sure of their righteousness they feel possessed of God-like powers to dictate for the entire planet.
Ad hominem ranting often trumps incisive it. I guess you believe that difficult service time entitles you to rant on as though some actual thought was taking place. Have a nice imaginary boat ride for me.
GP Ouelette? Man hot coffee straight out of the soup pot sure does freeze fast in those plywood O.P.s
Every thing you just said there, is just more reason to bring the boys home…to me.
Skippy…ever do the out side the train window to window race, on the way down to Seoul from Munsan, between tunnels?
Skippy,
Every thing you just said there, is just more reason to bring the boys home…to me.
One of the prouder days in my life was sometime in February, 2003. My daughter, then a h.s. junior, stood up in her homeroom class and opposed Bush’s proposed invasion. Virtually alone against the masses of the limbaughtomized. Her teacher told me her main justification was “my dad’s retired from the Army and he says…”
Pick ’em all up. High price small items will fit on pallets. Heavier stuff is all worn out anyway. None of this is worth even one of those kids. The Afghans gave the Chinese the contract to develop a huge copper deposit. Screw that.
If that area starts hosting international terrorism again then start killing Pakistani government and ISI officials until it stops. Yes, Pakistani, not “Afghan”.
Skippy…ever do the out side the train window to window race, on the way down to Seoul from Munsan, between tunnels?
Nope. Always rode a bus back to Ouijongbu and south. I did the Chinese Tunnel a couple times in a jeep though. Usually had to drive around that in the river bed since my main wheels were a track.
I was in the Iron Brigade at Casey. Back when a Buffalo stampede really shook the ground in M113s. One of my company’s claims to fame was David Berkowitz had been in it some years before.
We generally only came over to the western corridor to do our DMZ tour. In summer since armor was road-bound then anyway. We spent most of our time up in the Cheorwon & Yonchon Valleys and adjacent mountains. Fall, winter and early spring. The top of a Korean mountain at night in January put a new perspective on “Cold War”.
If beings don’t come in contact with each other, there is zero chance of conflict.
Take us and the Pledidians for example. We don’t know them and they don’t know us. Have we ever had trouble with them? I rest my case.
Sorry, Pleiadians.
Yves,
The forthcoming “record trade deficit” will be a fluke.
The Chinese Lunar New Year was unusually late this year. Almost all Chinese export factories were closed. Many struggled to reopen at full capacity because Chinese migrant workers were slow to return after the holidays. As a result the flow of goods to export ports sharply slowed, as imports continued.
The PRC is playing with fire here by implying that the deficit is due to “surging imports”. When the normal Chinese trade surpluses vs. the US reassert themselves, the US outcry will be that much louder.
Statistics show that China’s trade surplus with the US accounted for 73 percent of its total trade surplus last year, but China had a trade deficit to other countries, including Latin America and 58 less-developed countries.
A month does not a reversal make.
Nick in Kyoto
I travel to China frequently and often find myself in off the beaten path locations (for example, last week was Ordos). In my anecdotal experience, goods in China generally cost the same or more than they do in Hong Kong. We had to pay about US$8 for a cup of tea in the Ordos airport last week.
I find the case for a RMB revaluation upward weak and based on the coming wave of financial distress I think a RMB devaluation is the next large step (timing uncertain).
I wouldn’t put too much stock in this. If you paid US$8 for a cup of tea pretty much anywhere in China, you’re a mark. Sorry, but it’s true- even as an obvious laowai you shouldn’t be paying more than a couple kuai for tea.
This is hard bargaining in practice. US is saying, “we have the bargaining power, you need our markets, you must give in to our demands. China is saying, “we have the bargaining power, you need our cheap products, we are not going to give in to your demands unless you give us something in return.”
China will not budge unless US lifts the ban on technology sales. China already has enough capital, labor, industrial technology and resources to be the dominating economic power. It just needs that top notch technology to be a military superpower. Let’s see if Wall Street is willing to sell that last piece of US assets.
It’s getting interesting. The US elite may still be thinking China is just another country eager to make dollars. They are staring at a true challenger, not as powerful at the moment, but much more clever.
“It just needs that top notch technology to be a military superpower. Let’s see if Wall Street is willing to sell that last piece of US assets.”
If it were solely up to Wall Street we’d be selling them nuclear weapons, B-2 bombers and Virginia class subs, complete with plans, and opening up manufacturing and R&D centers in China.
The fact that we’re not (yet) doing this is about the only thing that makes me think our financial genyuses don’t control every aspect of this country. If you can think of any others, let me know.
It’s not so much they are not in total control, I think they are. But selling your last most valuable asset is never a good idea.
They’re going to try to milk the American middle class some more, and even the rich folks who are not in their camp.
As far as bargaining with China, this could be a turning point. After this episode China has the upper hand.
“It’s not so much they are not in total control”
Come on, give me something to cling to.
“But selling your last most valuable asset is never a good idea.”
When did that ever stop Wall Street?
“After this episode China has the upper hand.”
Why? (seriously). If anything China has had the upper hand for a while, and we’re calling them on it (not strictly accurate as it’s a jointly dysfunctional relationship, but you get the point).
Of course China already knows that it will have a record trade deficit for March … by March 22! That’s how they do statistics in China – in advance.
Of course, just to make it look good, they probably also told all exporters to hold all shipments for the last week of March … until April. The benefit of government control.
To think the unthinkable, it is quite likely that this huge and unsustainable imbalance in US-China trade will be resolved by tariffs imposed by US, i.e. the protectionist route. This is based on a political analysis.
The Chinese know very well that this can not last. But the adjustment, as everyone understands it, will be very painful. It’s impossible to ask the Chinese government to end the current prosperity and take all the pains and blames to address the imbalance. When US takes the unilateral measure of imposing tariffs, it would still be very painful for China, but the government could at least put the blames on Washington, which is beyond Beijing’s control and is more manageable politically.
The Americans are more impatient with the imbalance, and have the responsibility to be more frugal and control their runaway deficit in both trade and government budget. But politically, it’s impossible to ask the American voters to do belt-tightening and especially to raise taxes for rescuing the financial institutions. Import tariff creates jobs in US, and at the same time, is equivalent to a tax on consumers, which reigns in the imprudent spending and repairs the public finance. The ordinary Americans would suffer a drop in their living standards, but there would be an increase in domestic jobs. Most importantly, it also puts the blames on the Chinese, and is therefore politically much easier.
To make it effective, US will have to impose tariffs not only on China, but also on other countries. Otherwise, the trade imbalance would not be addressed, but would simply shift to somewhere else, which in its effects is similar to the appreciation of Chinese Yuan.
Economically, it’s going to be a shock. But politically, it doesn’t have to be a disaster. While the export industry in China and other surplus countries would suffer, their huge and unsellable reserves in treasuries would be better protected. A world war in this nuclear age is simply unimaginable. US is still the dominant military power. When China puts such a huge amount of reserves in dollars, it actually acknowledges the US leadership by taking a stake in its finance.
The shock will rock the world economy for a few years, with a lot of bitter accusations and finger pointing. But afterwards, when China has a better understanding of the nature of world trade, and US has recovered from the excesses in the last two decades, then everyone could sit down and discuss a withdrawal of tariffs simultaneously with a more flexible Yuan.
This one is quite interesting
Paul “Smoot Hawley” Krugman
http://www.zerohedge.com/article/paul-smoot-hawley-krugman
“This one is quite interesting.”
No, that one sets a record for knee-jerk reactions and a complete lack of understanding. When Smoot-Hawley was passed the US was the big creditor with a trade surplus (like China today). Smoot-Hawley kept other countries from paying their debts to the US (mostly European countries with WW1 debts). The modern equivalent of Smoot-Hawley is Chinese protectionism – precisely what Krugman, et al, want to compensate for.
I would think that China is not in as good a shape as US then when Smoot-Hawley was passed. China is still a developing country with hundreds of millions people still living poverty line.