One of my blog readers, Kalasend, responded to Thursday’s entry by asking about the composition of US-Chinese trade, and I think the question is interesting enough to be discussed in a separate entry, rather than in the comments section. In his response he pointed out that “China’s exports are mostly light manufacturing goods like toys, garments and other labor intensive goods which the modernized west simply lack the competitiveness and the will to do.”
I have heard this statement many times before, usually as part of a broader argument that since China is mainly exporting things that the US and Europe can’t or don’t want to make, macroeconomic policies aimed at adjusting the trade relationship are unlikely to make a difference on the actual trade balance. We are stuck, in other words, with the current trade relationship and probably for very good reasons.
Although I think there is a lot to be said for this argument, I nonetheless think it is fundamentally wrong for at least three reasons. The first reason is just the obvious point that macroeconomic policies that alter the factors that affect production and consumption necessarily affect the balance between the two, and the trade account is simply that balance. If the United States, for example, decided to provide large amounts of very low-cost credit to the US manufacturing industry, US production would automatically rise faster than US consumption, and so the US trade deficit would shrink. It may not be easy or possible to predict in advance the actual changes in the composition of the trade balance, and those changes might even be harmful in the longer term, but they would nonetheless occur.
By the way, any country that engages in any form of industrial policy must, at the very least, believe that my first objection to the argument above is correct, otherwise industrial policy aimed at altering the mix and structure of industrial activity would simply be a waste of time. I would also add that the none other than one of my great heroes, Alexander Hamilton, understood this very well when he designed the policies – especially in his 1791 Report on the Manufacturers – that virtually created the US as a manufacturing power and which were subsequently copied, very explicitly, by Germany after 1870 and Japan shortly thereafter. This is from the first paragraphs of his Report:
The expediency of encouraging manufactures in the United States, which was not long since deemed very questionable, appears at this time to be pretty generally admitted. The embarrassments, which have obstructed the progress of our external trade, have led to serious reflections on the necessity of enlarging the sphere of our domestic commerce: the restrictive regulations, which in foreign markets abridge the vent of the increasing surplus of our Agricultural produce, serve to beget an earnest desire, that a more extensive demand for that surplus may be created at home: And the complete success, which has rewarded manufacturing enterprise, in some valuable branches, conspiring with the promising symptoms, which attend some less mature essays, in others, justify a hope, that the obstacles to the growth of this species of industry are less formidable than they were apprehended to be, and that it is not difficult to find, in its further extension, a full indemnification for any external disadvantages, which are or may be experienced, as well as an accession of resources, favorable to national independence and safety.
My second reason for arguing against the claim – that trade and macroeconomic policies can’t affect the trade balance because China produces things the US won’t – is that both the US trade deficit and the Asian trade surplus have grown sharply in the past decade. Unless we make the argument that rising US asset prices caused US households significantly to increase their purchases only of things that Americans never made before, it is hard for me to see how this could have happened without some process in which US producers of those goods were replaced by foreign producers of those goods.
And if this only happened in the past ten years, I find it hard to be believe that this process of foreign producers replacing US producers is irreversible (I don’t even bring up the impact of Chinese textile producers in recent years on the southern European textile industry). Could it really be true that the decline of the US car industry or parts of the steel and chemical industries reflects refusal by Americans to continue their production, and so is irreversible? Can it be true that this process was not speeded up by specific policies affecting the car, steel or chemical industries in the exporting countries? On a related point, the Chinese government has recently announced that China plans to build a domestic competitor to Airbus and Boeing, but if the trade balance was simply a function of China making things that the US or Europe are no longer willing or able to make, wouldn’t this whole airplane-manufacturing strategy be a complete waste of time and likely to have zero impact on Chinese purchases of foreign airplanes?
Notice I am leaving aside the issue of whether or not it is in the US long-term interest to continue manufacturing things that can easily be manufactured in much less developed countries. I happen to believe that the future of the US, and indeed its great strength, is the fact that it is at the forefront of technological innovation and that it always skips forward to higher levels of productivity, and perhaps there is enough of a social Darwinist in me to wonder if the pressure placed on the US by industrial policies in less advanced countries might, while causing undeniable pain in the short term, actually speed up this brutally innovating process. That, however, is more of a normative judgment (I think I am using the word “normative” very loosely) than a statement of fact.
My third reason for disagreeing against the argument that the US can’t make the stuff it imports from China, so trade policies are irrelevant, is that the hidden assumption in this argument is that trade balances can only change at the bilateral level. But of course this is not true. If US policies or conditions cause a contraction of net demand, and Chinese policies or conditions cause a contraction of net supply, that doesn’t mean that Americans will start producing domestically things that China used to produce and sell to the US.
What is more likely to happen is that the trade accounts of several countries at different stages of productivity and technology will all adjust, so that US producers of high-tech product A end up taking domestic market share away from producers in a slightly less advanced economy, whose producers of slightly-less-high-tech product B then take market share away from an even less technologically advanced economy, and so on down the chain to China. Given the complexity of international trade relations, any significant change in trade conditions or policies is likely to lead to a whole series of shifts among many different countries.
So far it may seem like I am making a case for trade protection, but I assuredly am not. I strongly believe that the US, and most other countries, generally benefit from open trade, and that it is in the best interests of the US, Europe, Japan and China to understand and work out those benefits within a stable institutional framework, but I also think the ease with which people who oppose trade protection make muddled or easily refutable arguments does no good to their position. In my opinion policies do matter to trade, and if we reject those policies it should not be on the specious grounds that they will have no impact.
But to turn from the airy world of abstractions to the real world, what is happening in the world of trade? Today’s Xinhua has an article urging Argentina to lift recently-imposed trade restrictions on Chinese goods.
Chinese business circles are deeply worried about the protectionist measures against Chinese products that the Argentine government has taken, a senior diplomat at the Chinese Embassy said in an interview published in La Nacion newspaper Sunday. “These import measures are discriminatory,” said Yang Shidi, economic and commercial counselor of the Chinese Embassy in Argentina.
The measures that Argentina has adopted since 2008 have affected many Chinese products and run contrary to the memorandum of understanding signed by China and Argentina in 2004, in which the Argentine side recognized China’s market economy status, Yang said. Argentina calculated the dumping margin for the Chinese products on the basis of the prices of a third country, he said.
“It is not fair,” because the costs of raw materials and manpower as well as productivity in China are different from those of other countries, Yang said. He stressed that a World Trade Organization member must respect related rules and regulations while introducing measures to protect its own trade. China stood firm against trade protectionism and urged to solve trade frictions through international consultation and cooperation, Yang said.
I checked out the original article in La Nacion and then wrote to an old Argentine banking friend of mine to ask what he thought about the article. He sent me the email equivalent of a grimace and said something unprintable about China’s standing firm against trade protection. I suspect that given the wide-spread perceptions, whether fair or not, of forceful Chinese intervention in trade matters, it probably doesn’t help China’s case to lecture too smugly against the evils of protection. From my friend’s reaction, and many, many conversations I have had and emails I have received, I am willing to bet that these lectures mostly just infuriate people.
There’s more, and bigger, on the trade front. Japan posted its first monthly current account deficit in 13 years (since January 1996) and its largest since the data first became available nearly 25 years ago. The deficit was $11.3 billion, with the merchandise deficit totaling $8.7 billion – largely on the back of a whopping 46.3% drop in exports (imports were down a very scary 31.7%).
These extreme conditions, not just in Japan but throughout Asia, are not going uncontested. Bloomberg today had another very worrying article about the response of Asian central banks:
Asian central banks are abandoning a six-month campaign of defending their currencies, reversing course to cheapen exports that are falling the most in a decade. Policy makers from India to Malaysia to Taiwan are letting their currencies depreciate after South Korea gave companies an edge by allowing the won to weaken 19 percent against the dollar this year. Shipments from South Korea, Indonesia, Taiwan and Malaysia fell 17 percent in January to $79 billion, twice the drop of April 1998, when the Asian financial crisis was wiping out a third of the region’s economy, according to data compiled by Bloomberg.
It seems that we may be on the brink of a series of competitive devaluations, and it’s no good for all us rational people to agree that competitive devaluations are useless. They are only useless in the aggregate, but individually it will be very difficult for policymakers to continue withstanding the pressure for more depreciation.
If we see a lot more weakness in Asian currencies, and a partial reversal of the trend so far in which other Asian countries have had to absorb far more of the global contraction in demand than China, I wonder how significant the pressure will be on China to allow some depreciation. My guess is that policymakers will hold off on devaluation pressure as much as they can while using every other means to achieve a similar effect – via subsidized labor, credit, and other costs to manufacturers – but ultimately the howling of the export sector is likely only to increase.
But not everybody is as pessimistic about trade as I am. Daniel Ikenson, at the Cato Institute, had an Op-Ed piece in today’s South China Morning Post arguing that fears of trade protection are seriously overstated.
Yes, India did recently raise tariffs and place other restrictions on some imported steel products, and Ecuador raised tariffs by 5 per cent to 20 per cent on 940 different products. There have been similar actions in other countries and more are likely in the months ahead. But that kind of “backsliding” is permitted under World Trade Organisation rules. The WTO affords some flexibility to governments to occasionally indulge protectionist pressures, which allows the system to bend rather than break. The risk of such measures causing a perceptible drop in global trade flows is remote.
According to recent estimates from the International Food Policy Research Institute, if all WTO members raised all tariffs to their maximum allowable rates, the value of global trade would fall by 7.7 per cent over five years. That’s a substantial decline from the 5.5 per cent yearly rate of growth during this decade, and would be quite painful.
But, to put matters in perspective, global trade plummeted 66 per cent during the protectionist pandemic in the first half of the 1930s. The absence of rules in the 1930s meant that there were no proffered courses of action, no sources of adjudication or remediation, and no limits to the actions governments could take in response to external economic policies. Today, we have rules and respected institutions that have worked reasonably well to ensure the integrity of the trading system. Nearly 400 disputes have been resolved successfully during the 14-year history of the WTO, and there have been no trade wars.
In the 1930s, there were far fewer domestic constituencies advocating against protectionism. Today, there are burgeoning interests in a diversity of countries who favour lower tariffs because their livelihoods depend on access to imported raw materials, components and capital equipment. The fact that most WTO members’ tariffs are well below their maximum allowable rates suggests that something besides the rules compels openness to trade.
He may be right, of course, but I am not comfortable with comparisons between the relatively benign trade environment of the recent past and that of the 1930s. The recent past should be compared with the 1920s, when the trade environment was also relatively benign, but it changed sharply as unemployment rose and net demand contracted. We need to wait to see if this happens again.
By the way, while on the subject of trade, there are big rumors that February’s trade surplus has collapsed to $7 billion. If this is true (and these sorts of rumors often are), it would broadly be a very good thing, I think, and would certainly relieve trade friction pressure, but the real trick will be to see why it declined. One suggestion making the rounds: China has significantly increased its import of commodities to rebuild commodity stockpiles. That would be a less-than-good reason for a drop in net exports. Let’s see what the number is.
Meanwhile whereas many people are happily celebrating the “recovery” of the Chinese economy, I continue to be extremely skeptical and worry that whatever short term boost we have recently seen may be coming at the cost of a reduced ability to engineer expansion later (and to tell the truth I am not really sure what that boost was, since it seems to me that the best and most widely celebrated “indicator” of economic recovery has been that the contraction implied by PMI was less in January than in November and December – a weird indicator of recovery). I increasingly think Nick Lardy was remarkably prescient when he argued that the hard-landing/soft-landing debate (was it two years ago?) had it all wrong – what we were going to see is a long landing.
For example the steel industry isn’t looking all that good. On Friday Bloomberg published an article which began:
Baosteel Group Corp., China’s largest steelmaker, said prices are close to its production costs, indicating that the country hasn’t had a “real” demand recovery. Baosteel is “cautious” about the demand outlook, Wang Jing, the company’s general manager for international trading, said in an interview in Beijing, while attending the National People’s Congress.
Benchmark steel prices in China jumped 46 percent between November and February on optimism that the government’s 4 trillion yuan ($585 billion) stimulus package would revive metals demand. The price recovery was because of traders replenishing inventories, Wang said today. “Demand hasn’t had a substantial recovery, but output rose faster because of higher prices,” Wang said. “Our prices are on the verge of production costs.”
Also, in spite of all the eagerness to boost consumption, it seems that old habits die hard. Last weeks’s China Daily had an article celebrating the return of thrift to China’s feckless youth:
Many Chinese are tightening their belts during the country’s economic downturn despite government efforts to boost domestic consumption and replace evaporating export orders.
Wang Hao, 24, a Beijing office worker, made a public resolution in June last year to limit his weekly living expenses to 100 yuan ($14.6 dollars). That’s the cost of eight Big Macs in China. “The financial crisis has taught a spending lesson to young people in China, including me,” said Wang.
Bizarrely enough, the article concludes with:
The frugal lifestyle seems to be endorsed by authorities. In a commentary published last week in the People’s Daily, the writer said frugality did not conflict with the government’s demand-stimulating policies, as it called for reasonable rather than reckless spending. Frugality could also help people spend their limited money on the most needed things. “The neo-frugal way of living should become a fashion, especially in the financial crisis,” said the writer Wang Jinyou.
Before closing, as if I need to extend an already too-long post, I thought I might throw in something a little bit lighter. Today’s People’s Daily has an article on the recent development model, from which I quote:
As some Western media questions why China works, the world’s economic experts and scholars are also wondering the same thing: What tools China has to keep its economy resilient and why it is well-positioned to weather the financial crisis?
The answer lies in the nation’s unique growth mode featuring a “scientific outlook on development.” Over the three decades of reform and opening-up, China has evolved its own growth mode that aims to achieve development through scientific approaches based upon China’s national conditions and the international situation, analysts said.
The essence of such a growth mode is to seek a balance between development, stability, equity and clean environment, they said.
Why do you think the China Daily article about the spending habits of China’s youths comes to a bizarre conclusion?
After reading the article, I would say it’s quite balanced and reasonable. All it seems to say is that money has become tighter for the young generation, and many of them might need to cut back out of necessity, if they don’t want to overextend themselves.
If China’s economic recovery relies on the 20-something generation recklessly spending money they don’t have, then China’s economy is in dire straits indeed.
Is the US leading us down a protectionist path? Bank of America just withdrew job offers from MBA graduates who are foreigners because of a specific requirement in the TARP legislation and Senator Grassley sent Microsoft a letter telling them they had an obligation to employer Americans instead of foreigners….is this a trade policy….certainly has implications for trade. Quite disappointing but probably understandable given the environment in the US
China has other forms of stimulus at its disposal. Monopolistic practices, via export restrictions, come to mind. As China does with coking coal and steel plates they now will do with rare earth metals.
As jobs overtake any and all other concerns, the US will not be able to overlook such transgressions of free trade. China cannot claim any legitimacy in its arguments.
http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article5870223.ece
“Although China has the resources and refinery capacity to produce enough lanthanum, terbium, neodymium and dysprosium to satisfy a global demand that is rising at 10 per year, its rare earth export allocation for the whole world this year is expected to be about 38,000 tonnes — less than the quantity required by Japan alone. “
American producers should adopt a slogan similar to President Obama’s “Yes We Can”, I suggest “Yes We Could”.
“Yes We Could”, produce steel cheaper if we could buy coking coal at half price.
“Yes We Could”, make shoes 20% cheaper if we could house our workers in dormitories and charge them rent for the privilege.
“Yes We Could” reduce the cost of electricity by restricting coal exports and allowing for unsafe mining practices.
“Yes We Could”, make pharmaceuticals cheaper if we ignore quality control (Heparin)
“Yes We Could”, make building materials cheaper if we don’t care what goes in them (sulphur and lead).
“Yes We Could”, increase exports dramatically if our government intervened to lower the value of the US dollar by 40%.
Sorry for being abrasive, but the truth is that a large portion of the price advantage that China has on the west is a result of different regulations, enforcement and manipulations.
As a society we applaud rules and regulations that allow for cleaner production methods and enhanced worker safety. Yet these cost are not inextricably linked to production but to geography. This because they can be circumvented by moving production to areas where such rules, regulations and enforcement do not exist.
The article quotes a previous commenter: “China’s exports are mostly light manufacturing goods like toys, garments and other labor intensive goods which the modernized west simply lack the competitiveness and the will to do.”
I believe that this quote is substantially out of touch with reality. Chinese exports have expanded well beyond these types of products and many more industries continue to decline in response to the unrelenting pressure. As a consumer who routinely checks country of origin prior to making purchases I offer some examples where there is still US and European production, but where Chinese imports are contiuing to be a larger and larger presence in the places where I shop. For many of these, it has become difficult to find products that are not made in China. These examples go well beyond toys, garments, christmas lights, and cheap knick naks:
Automotive tires
Auto parts
Light fixtures and electrical hardware.
Fasteners (nuts, bolts, screws, etc.)
Harware (hinges, handles, door latches, etc.)
Metal pipe, fittings, valves and plumbing components.
Toilets and sinks.
Furniture (starting in the low end and more recently moving more towards the middle and upper end).
Small and medium size kitchen appliances.
Dishes, cookware, flatware, knives, and all types of kichen accesories.
Vitamins and food additives
Foods (not large yet but begginning to see more. For example, I recently noticed apple juice, tilipia (farmed fish), and organic canned beans)
Wooden doors (especially mid and higher grades)
Fabricated metal items of all kinds (ranging from fairly crude handicraft items to sophisticated precision machined items).
Leather products: gloves, shoes, boots, coats, handbags etc. including low, middle and upper end price/quality ranges.
Hand tools and power tools of all kinds(increasingly moving to higher grade and industrial grade items)
Eyeglass frames
Small gasoline powered generators
Electronic components, subassemblies, and complete finished end products.
Bicycles and components (including low, middle and upper end price/quality ranges)
Another insightful post…
My comment will sound very pedestrian and perhaps not terribly relevant.
In regards to the U.S.’s ability to substitute domestic production for Chinese imports, I think this will occur with a lot more alacrity than some seem to think. Much of this production only moved to China in the last few years.
Here’s an article from a local, western Massachusetts, newspaper’s site:
Hasbro to lay off 200 workers, invest $40 million in its plan
January 09, 2008
“Hasbro Games plans to cut 200 jobs from its 1,350-strong workforce and invest about $40 million in its plant here if it can get union agreement to change some work practices, the company announced today.”
http://blog.masslive.com/breakingnews/2008/01/hasbro_to_lay_off_200_workers.html
So even toys are still made in the U.S., even in high-wage New England.
And a personal anecdote. We bought an old farm house several years ago and spent way too much fixing it up.
We installed new cast iron radiators. The first dozen we bought, in 2002, came from Connecticut. The last two, bought in 2005, came from China.
I think it’s a little unlikely the skill set needed to make a cast iron radiator has been lost forever in the space of seven years. And there is no shortage of blue collar workers in need of a job or empty industrial space even in Connecticut.
Of course, the fact is there is probably zero demand for cast iron radiators where ever they are made.
Well known on this blog and evident to the careful reader is the blogger’s respect for the French baguette, as stated by the blogger one time in recent months.. Extrapolating, one can guess that baguettes must go with something, and not be eaten alone. Probably some sort of shell fish are equally delectable to the blogger. or maybe some mollusks, also.
So, the point is, why is the blogger not paying more attention to the economic conditions in China which are directly leading to, possibly, the end of shell organisms in our oceans?
For example, how is it that such smart guys, such as economists, still have so much trouble reading the plethora of peer reviewed articles which demonstrate that the increased use of coal fired power plants in China directly leads to acidification of the oceans which leads to future depletion of shell organisms, due to Ph changes, and in the future nothing good to eat with a baguette and a bottle of wine?
It would really seem reasonable that anyone from Spain, enjoying wine and the good life, might want to put much more time into blogging about protecting these final good days of wine and roses.
Any idiot can read the research, which is, most of it, peer reviewed. And any very smart guy, might want to change his tune to use his brain to get on the bandwagon to make a last ditch effort to try to save what is left of the world. Or to use his blog to try to tell people about what he must know is happening.
Blogging about China economics is extremely worthwhile if done in the right way. Much info needs to be passed on to the people who most need it, the migrant workers who sorely need this information, the people left back on the farm, and the college grads, millions of them, who have limited knowledge of their own history and who could make a big difference towards changing China for the better.
Obviously the blogger knows much more than he is writing about. So why does he not cast caution to the wind and finally state important democratic issues. Why not state important things? Is he pulling punches? Or is he really so very happy with the present status quo in China?
One guess might be that the blogger has a very good sense of humor. And the best sense of humor is to look at the world as some sort of ongoing satirical Heller punch line.
Maybe thats it.
I never understood how the furniture industry diappeared from North Carolina. The value per lb. and higher crude oil prices should have kept it here. I am sure there are other similar examples.
Michael,
From today’s Bloomberg:
“Yuan should gain 3% in 2009 to stop outflow of funds, Wang says. Wamg Jian, researcher linked NDRC, spoke in an interview”
Mr Pettis,
Good or bad,trade policies always have impact.One thing you haven’t clarified is how much impact and in which direction(good or bad).
The Buy American act has been attacked by many analysts in the US.Yes,Buy American will boost employment at home,but that is based on the assumption that other countries will do nothing about it.What if they retaliate???So you may create one job in low-end industry,but lose five jobs in your high-end industry in which lies US’s competitiveness.
Trade protection can be used for domestic good.America’s heavy subsidies on agricultural products prove good for domestic interest,though miserable for the other developing countries.But I cannot see why recent policies make any sense.That’s why gov officials are always considered STUPID.I think history proved that again and again.
Much of globalization has been based on labor arbitrage: corporations seeking low wage labor in the developing world. But the ultimate growth driver was the American consumer market, which depends on decent American wages. Over the decades, as jobs went overseas and wages stagnated, credit took the place of wages. There was a credit bubble, which allowed Americans to gorge on imported goods, despite stagnant wages. Then the bubble burst.
Now, jobs are going to be really, really important. The past is catching up. I predict, over the course of this year, a showdown of some sort on ‘global imbalances’. The reason it will come is an unemployment crisis in the USA.
As of now, nothing has changed to challenge the advantage of outsourcing for American companies. There’s no reason to keep productive capacity here, or to bring it back. Before we see the end of this crisis, that will change.
“Sorry for being abrasive, but the truth is that a large portion of the price advantage that China has on the west is a result of different regulations, enforcement and manipulations.”
That’s not abrasive, Glen… that’s just delusional.
I am going to shock you one more time with a simple answer to a complex question of why goods are made in China instead of the US. Credit and the dollar is more dear in China. I will give you an example. Part of my job is managing houses for rent. The local housing authorities rent generally to single women with children. One housing authority routinely issues vouchers for $1400 a month. This is free stuff and a lot of it is institutionalized to the point that it is part of a life plan in some areas. Now, the Chinese guy says he is going to live on $14.8 a week. The subsidy to get a home for someone to sit on their ass here is worth 100 weeks of this guys lifestyle. Who is going to buy from whom.
When you substitute credit and home equity for welfare, you might suddenly realize that the credit system together with the reserve currency is what has destroyed US manufacturing. Where else has this happened? Great Britain of course. If the Chinese made credit to consume this easy and shelled out money to women to raise illegitimate kids they had so they didn’t have to pay rent, there might be some goods going that way. Thus in the US, the amount of money people can get their hands on at a given time or over a given amount of time can far exceed what they produce. I don’t believe this is so in China.
Thomas, bizarre because they say that the authorities endorse frugality, when authorities are doing all they can to expand consumer spending. I am not sure that with its very high savings rate, and in a world awash in rising savings and declining consumption, frugality is what China needs now.
PB, I don’t know about these hiring practices but it would be hard to categorize them as trade protection since it is not clear that they affect the balance of trade in any way. If we did include them as instances of protection it would probably only exacerbate international trade conflicts since many financial institutions in other countries, for example China, have never really encouraged or permitted large domestic financial institutions or corporations to hire foreigners except in a few, highly visible but often largely ceremonial positions. The US is one of the few countries in which foreigners have access to top jobs in financial institutions and large corporations. At any rate one of my Peking University students just sent me an email today saying that he got an offer from BoA’s Merrill Lynch.
Peter, I saw the Bloomberg article about RMB appreciation and found it interesting. I wonder if it is response to concerns about hot money outflows.
MoneyIllusiomnist, you are right of course that Buy American policies might invite retaliation, but I would argue that it is not the large trade deficit countries who have to worry as much about retaliation as the large trade surplus countries, so my guess is that the US can discuss these Buy American provisions without much worry. Who is going to retaliate? At any rate many Americans argue – all too correctly, perhaps – that a Buy American provision will simply move US policies closer to the very implicit and sometimes explicit provisions that some other countries have on buying. For example too many foreign businessmen I meet in China have complained about how difficult it is to get SOEs to buy foreign products when Chinese products are available, and they tell me that often their counterparts at the SOEs apologize but explain that they are under pressure to buy only Chinese-made goods. Of course the government would never publicly announce a Buy China program, but the real issue is likely to be not whether something is publicly announced but rather to what extent it is actually happening. My worry is that Buy America is bad for the US economy in the medium term because highly advanced and productive countries benefit from free trade and international specialization, but in the short run it is too easy to point to policies by China and other countries to justify increasing protection. Perhaps that is why I am such a pessimist about trade.
Slightly off-topic:
The WSJ reports today that Taiwan’s exports to China were down an incredible 50 % yoy in Jan/Feb. Taiwan’s exports to Japan and the US were also down, but far less so (-14 % to Japan, -26 % to US; Taiwan’s total exports were down 37 % yoy).
Sounds like China’s economy may be doing quite a bit worse than expected…
Prof Pettis,
In your response you said that”For example too many foreign businessmen I meet in China have complained about how difficult it is to get SOEs to buy foreign products when Chinese products are available, and they tell me that often their counterparts at the SOEs apologize but explain that they are under pressure to buy only Chinese-made goods.”
I think that SOE buy from Chinese suppliers simply becoz they offer the cheapest price.Even if SOE is under pressure,believe me,they will not openly tell foreign businessmen this.Opaqueness is kinda Chinese culture.
Glen M: “Americans producers should adopt a slogan similar to Obama’s “Yes we can”.
I have a better slogan for all Americans which will end the financial crisis, ” Only in God we trust but all American should pay up their mortgage and credit card arrears within 7 days”. I bet this will end the financial crisis in 3 months.
Isn’t it curious that the Chinese are using the FX reserves domestically to the full extent possible? They know it’d increase money supply dramatically and cause rampant inflation.
So why did the Chinese build this FX reserves in the first place? Why, of course, to act as a lender!
But why would they anticipate acting as a lender?
1997.
So you’re saying the Chinese foresaw this crisis?
$2T says, “yes!”
What ARE the Chinese doing with their FX reserves?
Oil, copper, iron ore, and issuing credit abroad to LDC’s and NIC’s to import goods and services from China.
CCT,
I am sorry that you don’t follow. I will give you some examples. The manufacture of fasteners (screws, nails, etc.) is highly automated. Labour cost in the production of which is infinitesimal. Why is it that China can under cut western producers by 40-50% (NB. that is why Europe recently placed high duties on such imports)? The reason they can is that Chinese producers do not pay market prices for the raw materials. The same goes for other products. Here is an example that steel pipe producers experienced…..
“In late 2005, early 2006, the Chinese were selling galvanized, finished, threaded pipe for about $580 a ton,” Bolt said. “My company [Wheatland Tube] was paying $600 a ton for steel and $200 a ton for zinc, and and they hadn’t turned on the furnace and a worker hadn’t walked in the door yet. The only way the Chinese could do that was by government subsidies, government interference in the market.”
Fixed food and energy prices also allow China to pay wages lower than they would have to otherwise.
Now Micheal has raised the issue of China becoming a producer of commercial aircraft. Boeing, as a condition of selling to China, was forced to move some production there. I am willing to wager that Boeing and Airbus will share the same experience that train maker Alstrom has……..
“In a Financial Times interview, Philippe Mellier, chief executive of the Paris-based company, also claimed Chinese companies were offering for export trains that used technology derived from western suppliers.
Such technology is usually supplied on condition that it is not used outside China.”
“However, after a period when China signed contracts with several suppliers from other parts of the world to transfer technology to itself, it is gradually insisting that new trains be entirely domestically designed and built.
Chinese manufacturers are also increasingly seeking orders in the European heartland of Alstom, Bombardier Transportation, the world number one, and Siemens, the number three.”
Mr Mellier, whose company builds France’s TGV high-speed train and has exported high-speed trains to several countries, pointed out that tenders for high-speed trains for new Beijing to Shanghai services specified they be entirely Chinese-built and designed.
“In line with our expectations, the market is gradually shutting down to let the Chinese companies prosper,” he said.
“If the market is now closing down, we don’t think it’s a good idea for other countries to open their markets to such a technology because there’s no reciprocity any more.”
China complains about “Buy America”
Pot meet kettle.
G.Stegen: I admire your patience in lisitng out those stuffs made in China and being exported to the US and around the world. You have missed out a rather important “made in China” stuff and this is condum aka “French Cap”. Most of them are being exported as Chinese don’t use them (LOL).
Did you know China is the major importer of America’s scrap from scrap metal to used condums. China recycles those used condums and make chewing gums out of them and export them to the US.
Dr. Lo,
I think that a better way to end the crisis is to do what Peter Morici, Paul Krugman, Paul Vloker, Warren Buffet, Martin Feldstein, Michael Pettis, etc. suggest. That is to fix the BoT and the crisis will take care of its self.
I agree with you that the US has to save more and spend less. The day of reckoning for that mistake has long gone. The question that remains is why would anyone want to fund that? Specifically why did China step up its purchases of US treasuries at the end of 2008? It is like a drug dealer selling on credit to its one and only customer who’s lost his job from being high. Hardly good business sense.
IMO the way this will enevitably play out can be surmised by Brad Snow’s comment “the dollar is our currency, but your problem”.
China can not change the FX reserve to oil/gold or anything else,only if allow the yüan to be stronger.Much stronger.
Dr.Frank Loo :
I just read that Mr.Warren Buffet recorded a similar slogan during his earlier days on the wall of an restaurant:
” In God we trust, all others pay cash”
Talking about Argentina, both China and Argentina started to attract foreign investment in the late 1990s. The extent of corruption and cronyism were similar in the two countries. Yet after a dozen years or so, China is sitting on top of 2 trillion reserves, while Argentina is sitting at the bottom of a hole that she cannot climb out. What made the difference was that Argentina followed the advice of IMF closely, allowed foreign predatory banks to decimate their own banking system, while China did not. The barrier the Argentina government put up against China trade will not solve the problem, because the trade imbalance was not the cause of the problem.
U.S. companies moved many of the labor intensive, energy inefficient and high pollution production lines to China, which was one cause of China’s high pollution and energy consumption during the past decade. Are those CEOs willing to relocate or rebuild their factories back in the U.S. again, with higher costs in labor, insurance, energy, environment and raw materials? No. When the American companies started to move out at the beginning of the globalism, I guess the slogan was “Greed is good.” Americans were promised to have nice high tech jobs. It turned out that these jobs went to foreigners holding temporary work permits (H-1B).
Really excellent article. I agree that currency devaluations right now are not good for the US. It is a race to the bottom. Regarding the point that US manufacturing went overseas because the domestic bosses did not want to make the stuff anymore due to lack of will or the desire to compete, I think is incorrect. Over the last 30 plus years US manufacturing was slowly moved overseas because there were more profits in doing so. As financial securitization took off and huge profits in capital gains, dividends and rents were gained, the wealth investors saw more profits in making things wherever cheaper labor could be found, and work rules, unions, and other profit-blockers could be avoided. Stockholders and Wall Street were happy to see bigger profits made by putting the US worker on the street or at the mercy of the bosses controlling wages. Once wages were made stagnant, and average workers had to borrow to keep a life style going, the cheaper stuff from Asia bought at Wal-Mart type stores became accepted.
Now that China has become a very big player in manufacturing, there would be no reason for them to start building aircraft to compete with Airbus. China has had enough time to advance their technologies, manufacturing efficiencies, and brainpower.
http://eye-on-washington.blogspot.com
Would have to agree on Glen M’s comments regarding price fixing locally – China, for example, has no good bauxite deposits and not particularly cheap power yet they have a huge aluminum industry including the production of primary alumina. This is going to become more of an issue now that Alcoa 5 yr cds is 1100bps and the market is horribly oversupplied. I think a big part of this problem is that certain large SOEs have become so big that not only are local governments captive to them, the central government is too. The net-net in aluminum is either a trade war and all that entails or the banking system finding itself long a lot of Chinalco credit which is never going to get paid back. Chinese policymakers and people have got to learn to say no to these super SOEs – they’re sucking up an awful lot of capital and exacerbating trade problems all in the name of the ultimate political advantage of their management teams.
To my understanding, the chinese trade surplus, which suppose to have a central role in fostering the global macroeconomic imbalances that fed into the financial collapse, comes from two sources: the saving/cosuming habit of Sino-US and the currency regime. Your critics is mainly focus on the later. My question is, how much would change, even if chinese had a float regime. The gap of imbalance would surely be narrowed, however, not neccessarily fundementally to prevent a finacial collapse, given the unsustainable high leverage in the US finacial system.
My second argument is, demand and supply are the two sides of same coin. Excessive overproduction must be in cooperate with excessive overcosumption.However, the demand of the world economy is so monopoly concentrated in US,which is almost irreplacable. The supply, which is right now mainly dominated by the chinese export, is indeed easily replacable. If we only change the chinese currency regime without adressing the rest of developing countries, a trade replacement would likely happen,without big restrictive impact on the US demand(It has occured during the revaluation period of chinese Yuan). Lot of potental suppliers are willing to repeat the chinese success. They will do the same,peg to the dollor, lending money to US cosumer to buy their products. The party will not end without chinese.
I do agree with some kind of global macroeconomic governance,to smooth the boom and burst cycle. However, this is mainly the job of Fed, who has the ability to regulate the comsuption and debet of US household by raising interest rate(Do you think the Fed also lose its control over money supply as far as the dollor was pegged by the big economy like China,as you have argued for the Chinese central bank?). Fed is the de facto world central bank with a unique ability to shape the unhealthy monopoly demand.
My last consideration is somewhat contradictory to my belive in the proper macroeconomic governance. Is the boom and burst cycle that bad? The fast global growth in the last decades do improve the situation of a large amount of population. The poorest benefit from the big boom. Given that they are always the last to be able to get access to the prosperity from the spill over, the higher the boom the wider is its coverage.
This is a great stuff. i know the trade policies does matter in the trading activities. china made products cheap and best. These products are sell in all over the world. For increase your business the good relations are necessary. so any of the businessman wants to alter these factors which affect the business module economy of business. So thank’s for the information.