Sino-American Economic Relations Have Reached Ridiculous Levels
And That's Saying Something
By Pejman Yousefzadeh Posted in Economy — Comments (22) / Email this page » / Leave a comment »
So writes Philip Levy. And the man has a point:
While a currency appreciation would help China, it would do relatively little for the United States. China is large enough that a revaluation could bring down the U.S. trade deficit a bit, particularly if the move prompted other Asian countries to let their currencies rise. But the U.S. trade deficit is spread across partners in Asia and the Middle East. If China were to recede as an exporter into the U.S. market, Asian neighbors would largely fill China's spot. This is also why Chinese currency revaluation would do relatively little for American manufacturing employment. China may be the cheapest producer of imported manufactures, but it's not the only producer. And much of the American job loss in manufacturing is traceable to technological change rather than imports.
Yet Congress remains obsessed. Bills have been blossoming across Capitol Hill threatening to adopt trade protection if the Chinese don't move. Before last November's election, these bills were suppressed through Republican Party discipline. Now they are enjoying bipartisan and possibly veto-proof support. If such measures are adopted, the likely outcome will be increased American tariffs on imported Chinese steel and other products.
This prospect has alarmed the Chinese sufficiently that last week they issued an unofficial warning. If America chooses to damage itself with tariffs, in effect, they threatened to retaliate with financial self-immolation in the form of a massive bond sale. It's not immediately clear how China would go about doing this, but any approach has its problems. If they sold the bonds and took Chinese currency in return, this would cause the yuan to appreciate--just what Congress wants! If they simply exchanged dollar reserves for euro reserves, the question would be whether they manage to spook markets or not. If they don't, then there's little impact on the United States. If they do, they could drive up U.S. interest rates but the value of their massive hoard would crumble as the price of bonds plummets.
I wrote in the past that from an American standpoint, it is clearly best to leave the yuan alone. Levy's piece only serves to reinforce my conclusions. Oh, and the trade deficit is meaningless.
(Thanks to Greg Mankiw for the link to the Levy piece.)
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What a dumb quote. Gee Philip, could it be because 22% of the cost of all goods made in America is embedded taxation!
Eliminate the income/payroll taxes and the USA will be able to compete.
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Eliminate the IRS and all payroll taxes! http://www.fairtax.org
Global capitalism is a good thing. It is helping to keep the super powers at peace with each other, because their economies are tightly interlinked now. It is also lifting the third world out of poverty by giving them access to markets. Only a fool (in the USA or China) would mess with this system and make an enemy of China.
Two guys with guns pointed at their own heads each shouting NO SHOOT ME NOW.
______________________________
"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777
We may not be so fortunate.
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777
Even though the U.S. forcing the Chinese to make currency revaluation will have a small impact on domestic manufacturing, it would force China to compete will other countries in manufacturing and foreign investment, and take away a lot of their current economic leverage they have over the U.S.
We have concerns beyond our trade surplus with China. The Chinese government has repeatedly shown it has hostile intentions towards the United States, both economically and militarily.
When a country like China threatens to "crash" our dollar, and ruin our economy,(and has the ability to do so) we need wake up and understand what we are up against.
"Back in the thirties we were told we must collectivize the nation because the people were so poor. Now we are told we must collectivize the nation because the people are so rich. "
William F. Buckley, Jr.
Mankiw is the genius who thinks offshore outsourcing of US jobs is a good thing. He is a globalist whose fairy tale world exists only on paper.
http://www.wsjclassroomedition.com/archive/04apr/econ_freetrade.htm
America is not "theory". America is the sum of its parts -- you and me and the other 300 million people living here. People like him and Levy have no idea of what's best for THAT America.
We are not USA, Inc. We are a country with borders and laws. We are a country of citizens who have hopes and dreams and who need decent jobs (not McJobs) to buy goods and services.
China employs unfair trade practices. Our feckless leaders have sufficiently sold out our country to the point that China has us by the short hairs. I only pray that we never have to go to war with them. I doubt they'd loan us the money that we would surely need to finance such a war. Of course, we couldn't make any of the materials or weapons we'd need, anyway. They're all made in China.
Articles like this illustrate precisely why the Republican Party has alienated people like me (reliably conservative in almost all respects). Too many of its denizens worship at the altar of the dollar and free trade (as opposed to fair trade). If it ever wants to start winning elections again, it needs to stop stepping on the necks of its natural constituency and stop puckering up for the likes of Levy and Mankiw.
and in a manner that is in their rational best interest.
Their middle class is exploding, and along with that growth comes domestic demand. The 11% GDP growth in China is real, and over the next 4-10 years, their domestic market (the new "Chuppies") will eclipse the importance of their export market.
They can't support an artificially low currency indefinitely. While they try to manage inflation through sterilizing inflows, even that process has limits.
But they don't need to support an undervalued RMB indefinitely. They just need to support it until they've "primed the pump" of domestic demand. At that point, China transforms from an exporter of cheap goods to the world's most voracious consumer.
And we'll be competing with their 1.3 billion consumers for goods and services in the global market with a currency that's at least 10-20% less valuable relative to the RMB than it is today.
There's a great series of Deutsche Bank articles referenced in this blog post if you'd like to learn more:
Isn't it the PRODUCERS who compete, and once China has a higher standard of living, their competitive advantages in manufacturing go out the window?
and consumers compete to create demand.
China's primary competitive advantage in manufacturing is a vast pool of underutilized human capital:
"China has about 200 million unemployed or underemployed workers to bring into the modern labor force. For political stability, there is a need for 10-12 million net new jobs per year in the urban centers. A growth rate of around 8+% has served to employ about 10 million new workers each year. About 3 million have been in the export sector."
(Again, don't take my word for it, check out the Deutsche Bank report referenced in the blog posting here:
http://bhday.wordpress.com/2007/08/12/the-china-conundrum/ )
That competitive advantage is a secular, demographic trend that does not go away with the emergence of a new Chinese middle class. China has 1.3 BILLION people, we have 300 million. China could have a workforce the size of our COUNTRY that remains in poverty and willing to work for cheap wages in their form of managed capitalism, and that would still leave them with 1 billion Chinese eager to buy the iPods, cars, gasoline, wheat, rice, beef, etc. that those 300 million on the production lines are creating.
There has never been more economic opportunity for folks in China. People who are educated and upwardly mobile are incredibly optimistic about their situation, given its contrast to the stagnation of the Cultural Revolution.
As their standard of living rises, I haven't found any evidence that their competitive advantage in manufacturing will go out the window. (But if you find some, let me know!)
As their standard of living rises, however, and they consume more of their own goods, the People's Bank of China will have less of a reason to maintain their currency's inflationary undervaluation relative to the dollar. At that point, when they allow the RMB to seek it's proper level, they will lose their competitive advantage in *exporting cheap goods to the United States*. They will not lose their competitive advantage in manufacturing them.
That's what I mean when I say we won't be able to buy their inexpensive goods any more -- not only will they have domestic demand, but the "advantage" given to their exporters by a cheap currency will go away so things will be more expensive for us.
Is there a happy ending? Well.... it depends on what WE do. Not what they do. Again, read the Deutsche Bank papers. These imbalances don't HAVE to end in a disaster, they can ebb and flow. IF we have an economic environment that attracts capital for investment (low taxes and regulatory burdens), then potentially China's businesses and citizens would choose to turn around and invest in *us* as their currency system further liberalizes. That's typically how these bubbles deflate without damage.
BUT, we've created an environment that is frankly hostile for investment: a confiscatory tax system, ridiculous regulations (http://bhday.wordpress.com/2007/08/16/preventing-economic-growth-101-sec... /), and a federal government that is incapable of living within its means and has taken our deficit to unprecedented levels. Unless we deal with those root causes, we're on an unsustainable trajectory.
BD
You really think that the Chinese market is going to become a more reliable investment than ours anytime soon?
China's purchasing power parity GDP in 2006: $10 trillion, or about $7,500 per capita.
USA's PPP GDP in 2006: $13 trillion, or about $43,000 per capita.
Source: CIA World Factbook
They have a long way to go before their internal market matches ours, in terms of their consumers having enough to consume like we do. You see, that's part of the problem: they're attracting investment, but a lot of the investment profits are coming back home to the foreigners investing over there.
Neil -- The key words are "per capita". They have a LOT of people over there, and their GDP is already approaching ours. Not only that, we're "leveraged" to the tune of 65% of that GDP with our (2006) $8.5 trillion national debt (much of which is held by them).
Look, you don't need to believe me. But I recently spent some time over there, and have had the chance to talk with lots of folks who know the situation pretty well. There are some great references such as the 140-page Deutsche Bank report that I already mentioned. It's deep, important stuff.
When you visit the shopping centers in Shanghai or Beijing, you might as well be on Rodeo Drive -- Prada, Gucci, Chanel, the whole bit. The wealth created over there is astonishing, and they're just starting to spend it.
Ultimately, it's a demographics game. They've got the bodies, we've got the Boomers. And while our multinationals are extracting some of the profit from their growth, they're ALSO exporting intellectual capital at an astonishing rate.
Do you know anyone whose job has been restructured to China? I know several folks in US industries who are now effectively training their Chinese replacements. Talk about an awkward situation: "Here, let me teach you how to do my job so you can do it at 10% of the cost and the corporation can keep the profits."
And what happens after those Chinese engineers, scientists, and managers learn from the U.S. mentors? Do they stay with the U.S. or multinational corporation? They might, but the entrepreneurial spirit runs pretty deep in China, and they are RABID imitators. A lot of these skilled folks then leave to start their own gig.
But don't believe me. You're probably right, China will always be a backwater and we'll be just fine growing at 3% with 40% tax rates and a federal government that borrows $1-3 billion per day. If I were you'd I'd hold all my investments is U.S. securities levered to the growth of our fantastic economy. Because we're the free-est, most powerful, and most intelligent empire ever created, and ain't nothin' ever gonna change that!
BD
Respectfully, you seem to be misled about what's going on in China. The country is far from monolithic, and even in the biggest cities, there are different areas where different economic activity is going on.
You juxtapose special areas loaded with foreign money, with their dirt poor native population, and imply the two are working together to build a solid, independent economy with many millions of buyers just like the US.
But it's not working that way. The wealth in Shanghai isn't trickling out to the rest of the country, because a lot of iot is held by foreigners and being pulled out as profits. The rest can't get invested in the rest of the country because the government only allows quasi-free enterprise in those select cities.
I wouldn't worry about China exploding into a new US-like market until that evil government is taken down.
There certainly is diversity to the nation's economic activity. I spent time in Shanghai, Beijing, Shenzhen, Guangzhou, and Hong Kong, among other places. The folks spending the money are part of the growing Chinese middle class ("Chuppies"). You're right in that the interior of the country is still underdeveloped with a LONG way to go. Even the cities have extremes of wealth and poverty that would be unimaginable here.
I wouldn't call the native population "dirt poor" until you visit yourself and meet a few in tea rooms and hotels. These guys have more MBs, BMWs, and Lexuses than Southern California. (For some reason, though, Buicks are also a desirable brand... must be Tiger Woods.)
I think you're dead wrong with your assertion that "... the government only allows quasi-free enterprise in those select cities." The government is especially eager to encourage economic development *outside* these already packed cities since the surreal growth they've already experienced have strained the infrastructure. Tax incentives are being offered to relocate factories, etc., outside of these current boomtowns and further into the interior, along with other development incentives.
For the "dirt poor" natives that remain, well yeah -- that's the tremendous pool of human capital.
And if you think the wealth is being created only by foreigners, you've clearly never heard of CTRP, CHL, ACH, LFC, MR, or CEO to name a few. These are well-managed, rapidly growing companies. Some are formerly "state owned enterprises" that have been converted to function in a market economy, others are completely new entrepreneurial ventures making their mark in the Chinese economy.
Don't get me wrong -- I couldn't live in mainland China. You can't drink the water, you can't breathe the air (at least in the North), and the culture and current government have no history of respect for individual liberty. But the Party (as you say, "evil government") is completely aligned economically with the growth that is occurring, and so far has been adept at working the international economic system to its advantage.
Again, China isn't the problem. We (through our hostility to entrepreneurial activity and our government's profligacy) are the problem.
...we should possibly note that the male/female birth ratio in the PRC is not conducive to long term population stability. It's 136 to 100 in some parts of China these days.
The Fuzzy Puppy of the VRWC. I've been usurped!
A good friend of mine (who is a native in Shanghai) and his wife just had their first child. They had a daughter, and are extremely excited. They know how tough things are for males with the current demographics, and at the same time old cultural barriers against females are being removed with education. So daughters are much prized among upwardly-mobile and educated Chinese couples.
Over the past 30 years or so we've signed "free trade" pacts, cut taxes, de-regulated and de-unionized. We were told that this path was leading to a golden age of a stronger economy, higher living standards and debt elimination.
This age never arrived.
In fact, indebtedness grew, our manufacturing base eroded, the middle class shrank and, now, we're in danger of having China dictate term to the American public.
Yet, we get true believers telling us we need more of the same. I'm sure there were many folks like this in the waning days of the Soviet Union, "just give it a chance, comrade".
Its time to stop fighting for dying (neoliberal) regime.
So doubting the endlessly-touted orthodoxy makes me a nut? (Does this kind of argument work with global warming?)
If you're done poisoning the well, maybe you can explain to me how we've benifitted from NAFTA, GATT and an unregulated funny-money financial system.
The craps hitting the fan right now, the burden of proof is on you.
if they tried that. Also it would probably cause irresistible movement in congress towards protection.
"Nothing works like freedom, Nothing succeeds like liberty"
Kyle