Correction: Two days after I posted the entry below I received a rather testy email from John Frisbie. In the USCBC statement to which I was referring he claimed that the EPI report was “built on the faulty assumption that every product imported from China would have been made in the US otherwise.” I foolishly responded, without having read the EPI report, that “I am pretty sure that the EPI did not make that assumption. In fact I am reasonably sure that no one in the world has ever made that assumption. It is just too silly to be plausible.”
Well, silly it may be, but Mr. Frisbie sent me the report and highlighted the methodology section, and it seems to me that perhaps this is what the EPI did. They may be indulging in very good politics, but it is certainly bad economics. I apologize profusely to Mr. Frisbie and remind my readers that, as I said in the entry, most of the rest of what the USCBC said in their statement seems pretty reasonable to me. So I guess my main point remains intact, people who make the assumption that trade issues can be fully understood and resolved at the bilateral level have failed to understand how international trade and the global balance of payments work, but I attacked the wrong target. Serves me right. Snarkiness is always a sign of intellectual insecurity or confusion, and never an indication of insight.
——-
A report just came out from the US-China Business Council that seems to be getting a lot of play in the press. Among other things the report repeats a widely accepted claim that since the US no longer produces the kinds of goods that it is importing from China (the evidence for this is always anecdotal, so I have no idea if it is true), any attempt to contract the US trade deficit by getting the Chinese trade surplus to contract could not possibly succeed. Here is how the report starts:
“Think about the television in your home. The label on the back probably says ‘Made in China.’ Fifteen years ago the label likely would have said ‘Made in Japan’–but it was still an import.” Frisbie continued, “Much of what we import from China replaces imports from other countries, not products we make in the US today. A jobs impact study that ignores the facts undermines its own credibility.”
As of the end of 2008 (the latest data available), the United States was the world’s largest manufacturer–and likely remains so today. US manufacturing jobs, on the other hand, have been in a long decline over the past four decades, long before China came on the scene, and now constitute about 9 percent of total US employment. “The main reason for the decline in manufacturing jobs is productivity, not China. The US makes more with fewer people, primarily because of productivity and technology advances,” continued Frisbie.
Although I agree with much of what the report recommends, and some of what it asserts, I have to say I am more inclined to blame the SCBC for “flawed analysis” than the EPI. Mr. Frisbie claims that the EPI’s estimate of job losses is “built on the faulty assumption that every product imported from China would have been made in the US otherwise.”
I think he is making two mistakes. First, the contraction in China’s trade surplus need not be the result only of a contraction in Chinese exports. It could come about just as easily as an expansion of Chinese imports, in which case it wouldn’t matter whether Americans can produce what the Chinese produce, but rather whether the Americans can produce what the Chinese want. This line of reasoning suggests, by the way, that an RMB revaluation is probably better for the US than import tariffs on Chinese goods, since a stronger RMB should stimulate Chinese demand for imports.
Second, and much more importantly, I haven’t read the EPI report but even without reading it I am pretty sure that the EPI did not make that assumption. In fact I am reasonably sure that no one in the world has ever made that assumption. It is just too silly to be plausible.
For that reason it is also pretty easy to refute. I think this this what they call a straw dog — an argument you set up largely because it is so easy to knock down. The EPI’s real assumption, I suspect, is that adjustments in the global balance of payments occur on a multilateral basis. Rather than assume a one-for-one replacement by US manufacturers of Chinese imports, they actually assume a global adjustment in which China produces less in the aggregate and the US produces more.
If that is the case, then they are right — although before I get accused of defending the EPI report remember that this doesn’t necessarily mean that the aggregate increase in US production will match the aggregate decrease in Chinese production. China’s trade surplus can very well shrink without a corresponding shrinking of the US trade deficit, but just not for the reasons the USCBC says.
The failure to recognize that adjustments are more likely to occur via shifts in multilateral trade than shifts in bilateral trade is, I think, the basic problem with the USCBC’s report. The real flawed analysis, in other words, is likely to be the USCBC’s focus on bilateral trade between the US and China as the only thing we need to consider when looking at global balance of payment adjustments. (As an aside, I remember one of my professors in graduate school begging his students never to look at bilateral trade numbers because they generally obscured far more than they revealed.)
So, according to the USCBC, if China produces something which the US cannot or will not produce, then contraction in China’s trade surplus will have no effect on the US trade deficit. End of the story, right?
No, not at all. A shift in the terms of the trade between the two countries, whether caused by tariffs or caused by revaluation, can also tilt the balance in both countries between consumers and producers, and this will affect both countries’ trade accounts. Basically, if the cost of US imports rises, Americans will reduce overall consumption and shift their consumption behavior, and this can directly affect American producers, even though neither Mr Frisbie nor I will be able easily to predict which ones.
This can also happen internationally. Even if Chinese exports to the US are fully replaced by exports from another country, let’s call it Mexico, Mexico’s overall trade balance is determined by a number of policies and conditions, including domestic wages, domestic interest rates, and the value of the currency. These are likely to be affected by the new surge in Mexican exports to the US — Mexican wages will rise, or unemployment drop (either of which raises Mexican consumption), the Mexican peso will strengthen, and Mexican interest rates will rise, both of which affect the balance between producers and consumers. The result of some or all of these changes could easily be a surge in Mexican imports or a reduction in other Mexican exports, either of which may be good for US manufacturers.
I don’t want to overstate this argument — just to clear up some wide-spread and very muddled thinking. In my last post I pointed out that I think Beijing may be right to argue that a contraction in the Chinese trade deficit will not automatically lead to an equivalent contraction in the US trade surplus. But the reason has absolutely nothing to do with the USCBC criticism of the EPI study. There are too many other things that determine how a shift in China’s balance of payments position will affect the US balance of payments position, including whether or not a Chinese revaluation will permit other countries, especially in Asia, also to revalue.
But too many people make the same mistaken argument — why focus on the Chinese trade surplus, they say, when the US makes none of the things China makes. Even if this were true, and it probably isn’t, it is irrelevant. So even though I might agree with the USCBC’s conclusion, I wouldn’t agree with their reasoning.
nice freudian slip
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Re- “another wall street bonus”-wsj 25/3/2010.
Build America bonds.
Briefly on article.
Bonds with 7%
-4.5% paid by issuing city(people pay)&
-2.5% paid by fed.(also people pay-through taxes/tariff/land sale/privatization-very clever bankers.)
Us cities,states and the feds have issuued more than 2.5t in ‘08 and 2t in 2010.
Last April,New Jersey turnpike authority sold 1.3b but needed only 250m because great demand.(not because require by project!)
(like geese stuffed to create foie gras.they did this to 3rd world countries/banana republics,etc.)
Wall street pocketed 1b in fees in less than a year.
Goldman has taken out advertisement urging congress to make program bigger and permanent!
…no one mentions the downside:Build America bonds will add hundreds of billions of dollars of new liabilities to the balance sheets of cities,states and uncle Sam.
Let see how bankers carried out the looting.
Looted
(i)directly 4.5% from issuing city gov.
(ii)indirectly 2.5% through feds(privately owned)-multiple earning steams.
Feds turn paper/debts to money.
loan money to treasury in exchange for bonds.
(bonds pay interest to feds/bankers.)
the REAL WINFALL-
feds use bonds as reserve and create 10 times through fractional reserve banking.
(loan some to local gov,cities,states,
some to companies,
some to mortgages,
some to speculators-stocks/commodities/currency,
some to proprietary trading,
some to cronies to take over companies,
some to attack targeted countries’ currency/markets.)
The looting and plunder start all over again.
And when no one believe/trust them,they go to church and said they are doing god’s work
also re-JP Morgan, Lehman, UBS Alleged as Conspring to Cheat Municipalities on Investments
Bena, I caught it and changed it, but as Freud reportedly once said, sometimes a cigar is just a cigar.
hi Michael, it would be great if you could share a little more about why it is not adequate to look simply at bilateral trade numbers, and what sort of data one should look at the contextualise it.
re: (As an aside, I remember one of my professors in graduate school begging his students never to look at bilateral trade numbers because they generally obscured far more than they revealed.)
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I know it isn’t your point, but the argument that there will be no substitution of domestic manufacturing is nonsense. Here, in semi-rural western Massachusetts, there are dozens of small manufacturers.
A plastics plant just a half mile away was operating until last year, and one in the next town is still operating and recently hired back some of those laid off last year.
There’s business that makes art supplies about two miles from here. There was a silversmithing firm a few towns away that just closed last year. There’s a tiny flag manufacturer a couple towns over.
I mentioned this before, but when we remodeled our home we had to buy a dozen cast iron radiators. The first batch, in 2002, came from a foundry in Connecticut, one of the most expensive states in the U.S. A second batch, in 2005, came from China.
In the Mid-West and around the Great Lakes you’d find a much higher concentrations of factories, machine shops, foundries, making all sorts of things.
Here’s a map of the locations for that plastics manufacturer that has a plant near here:
http://www.berryplastics.com/catalog/content/corporate/locations
Granted, this is all anecdotal, but it’s also commonsensical.
And I think it does matter. We probably had a million excess people working in construction to support the housing bubble. Now we have a lot of unemployed people who lack a higher education. We need blue collar jobs.
[...] Here is the original post: Be careful of bilateral trade numbers [...]
The post is spot on. A couple more points:
1. There are many products still made in both the US and China. It is true that some industries have been virtually wiped out, while others remain but are in continued decline due to import price competition. Examples include furniture, auto parts, major appliances, chemicals, doors and windows, industrial products, foods, and tires (I know because I recently purchased US made tires). An exchange rate adjustment should at least reduce the rate of decline of these industries and in some cases lead to growth.
2. It is true that for many products a revaluation would shift the initial purchase transaction to a different low wage country. However, there is a key difference. If additional dollars are sent to China or one of the other persistent surplus countries, they simply pile them up in the form of US bonds or other financial assets. If on the other hand additional dollars are sent to one of the deficit or balanced trade countries they SPEND THE MONEY, generally on consumption, investment or debt repayment. Typically, some fraction of this additional spending will make its way back to the US.
3. Trade flows are unavoidably a zero sum game. If all the current persistant surplus countries reduce their surplus to zero then then net deficit of all the current deficit countries will necessarily total to zero.
The persistent surplus countries have been major beneficiaries of the free trade paradigm over the past several decades. However, thier abject refusal to spend the excess cash generated by thier exports is the greatest threat to free trade. It also creats a substantial threat to stability of the EU and perhaps even to world peace. Since they are not willing to stop it on their own, I think the deficit countries need to continue to increase the pressure until they get action (substantial reduction of the trade imbalances). Exerting pressure to revalue the RMB is one way to do this. Although a simpler approach would be to just tell the persistent suplus coutries to get their trade in balance or face continually increasing sanctions. Then let them decide how to accomplish it, e. g. currecy revaluation, reduced subsidies, reduced import constraints, and/or spend more of the import earnings internally on things the country needs.
[...] (This guest post previously appeared at the author’s blog) [...]
In the US, your observation falls under the category of nuance. The report serves up the cause and effect that politicians love. They can point to it, and say, “this is what happens.”
Accuracy has no pull whatsoever, especially, I’m sorry to say, with republicans. They need red meat.
In the end, I do think that cooler heads will prevail on all this, but that’s the optimist in me, and he’s been wrong quite a bit the last decade or so.
[...] (This guest post previously appeared at the author’s blog) [...]
America’s only talent these days is blaming people. We blame the Chinese for taking all our manufacturing jobs and selling us “cheap junk”, when it’s really the US companies that move those jobs there and made them use the cheaper material to cut cost even further. We blame the Indians for taking our IT jobs when it’s really the US companies that moved those jobs there. Ultimately jobs are moving to China and India not only because of cheaper labor and land, but because those people work harder and do not complaint. Not surprisingly, we are losing our technological edge to Asia because their students work harder in schools to study math and science, while ours are busy playing video games, watching sports, reality TV, social networking, making fun of geeks…yet we blame them for “stealing” our technology. The scientists and engineers behind much of our scientific innovations the last 20-30 years have been a steady stream of immigrants, but we blame them for overcrowding our country. America is on the way down, and until we stop blaming everybody else and start taking individual responsibility, there’s no stopping this sinking ship.
Professor, don’t take too serious about the USCBC report. I think this is probably an organization which represents the interests of US multinational companies in China, where they have invested a lot for their manufacturing facilities. For them, either RMB appreciation or punitive tariff in US on import from China, or whatsoever consequences of a rising Sino-US trade tensions would be a bad news. Again there would be many factors affecting their business strategies in China, but I think in the short term some of these US multinational companies might be another group of LOSERS in RMB appreciation.
Matt, there are many reasons why you should be careful of reading too much into bilateral numbers. For example, trade numbers respond in the aggregate to changes in domestic demand and supply, and you can’t easily predict the changes nor which countries they will affect. So let’s say the US imposes punitive tariffs on Chinese-produced Good A, of which China sells $100 to the US. This won’t mean that the US will now produce $100 of Good A, and the US trade deficit and China’s trade surplus will both be reduced by $100. What actually will happen to their respective trade accounts will depend on the effect of the shift in trade in both countries on domestic interst rates, wages and the value of the currencies, and may show up as changes in imports and exports of completely different goods. It may also affect other countries. Maybe Mexico will now sell more of Good A to the US. This will affect Mexican interest rates and wages as well as the peso, and so will change trade between Mexico, China, the US, and other countries. In addition, much trade is routed through several countries before it reaches the end. A Chinese shoe manufacturer may sell shoes to Italy, which then brands it and sells it to the US. A reduction in US demand for Italian shoes, then, will end up reducing the Chinse trade surplus by far more than it reduces the Italian trade surplus, even though there was no US-China bilateral trade in this case.
Bob in MA and G stegen, I definitely agree. The idea that there is no overlap between what China produces and what the US produces is completely nonsensical. It is one of those claims that seems to have become true merely by virtue of its having been repeated so often, but if it were true it is hard to explain why US imports and the US trade deficit mushroomed in the past decade. Can it be that all the increase in US consumption has come about in the form of things the US never consumed before, and therefore never produced before? Or is it that the US has advanced technologically and socially so much in the past decade that things it was making a mere fie or ten years ago are completely beyond it today? Neither of these arguments is plausible.
DCH, if it were only one country foolishly blaming foreigners for its domestic problems, I would be a lot more optimistic about trade relations. But I am not sure the US has a monopoly on this kind of behavior, and I am not even sure that is behaving the most foolishly. Of course you would probably have to have some familiarity with other countries to know this.
AL, I recognize that the USCBC might be an interested party, but the claim is much more widely made than by the USCBC — so widely that it has become a kind of impediment to clear thinking.
DCH, You are right! I happen to read two books which were refered by my Chinese and Indian friends. Instead of blaming others I want to know how China and India become a big players.
‘Chinas creative Imperative’ – Thats the book by Kunal Sinha. As far as China goes, its not the cheap labor which made their products cheaper in abroad. Chinees changed their attitude and re-enginnered thier production methods to ‘CREATIVE production’ and that made the difference. They make things with passion. And they stared thier dream back in 1990s.
‘India 2020 A vision for the new millennium’ by Indias ex president Abdul Kalam. This book talks about how india started thier preparation back in 1990. And based on thier prediction back in 1996, they have achived everything. When this president asked one young girl whats your dream. She said I want to live in India as a developed country. That made tears in his eyes and he applogized her by not being given a developed counry for her to live. Instead of blaming corporates, politicians as a government employee he took it personally and stared working on the dream and look at where they are now. He is the man behinds Indian success.
I do not see any leaders and individuals in US who take things personal and put the country back on track. They should stop blaming others.
Professor Pettis:
Thank you for your illuminating post concerning multilateral balancing mechanisms.
Could you elucidate on what theory tells us concerning the burning question of the “full employment equilibrium” exchange rate of the US$ versus the Euro, Yen and RMB?
I think one can come up with plausible ball park numbers for the US$, Yen and Euro. But how can one estimate this for China’s “dual economy” with huge excess supplies of labour, a tightly controlled capital account and a largely quantity based financial system?
In sum, multilateral exchange rates capture all these distortions — and hence the ratio of the US$ (euro & Yen) vs. the RMB must reflect political (or quantity) rather than economic (price signal) parameters for some time. These political parameters may be hard to overcome as geopolitical power shifts to Asia as underscored by Mr. Robertsons’ insightful comments. regards James
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Almost any industrial product can be manufactured in China at 40-50% of the cost of producing it in the United States including trans-Pacific shipping. Chinese labor assembly costs are upwards of 1:50 the comparable US costs including benefits. But even skilled electrical engineers are 1:10 comparable US costs. Moreover, specialized industrial clusters provide “just in time” inventory control with numerous component suppliers. Around the Dongguan city in Guangdong province, except for high-end CPU chips, the local industry can provide the electronic parts for almost any electrical device. That is why US multinational corporations from Dell, IBM, Hewlett Packard, Cisco, Kodak, and Apple have mostly located their global industrial production around Shenzhen employing millions of workers. Port facilities and transportation infrastructure at Shenzhen and Hong Kong are state-of-the-art in terms of efficiency.
[...] Pettis: Be careful of bilateral trade numbers – China Financial Markets [...]
DCH, your use of “we” when talking about the US nearly, but not quite, covers up the fact that you are receiving about 5 mao per comment…from the MSS or some other body.
Also, if costs are so low in China, how come Chinese exporter profit margins are so tiny even with an undervalued currency? You are mainly highlighting that China’s policy is doing more damage to other developing countries than to the US!!!
If China is not labelled a manipulator on the 15th of April, the issue is going to get a lot more multi-lateral during upcoming summits in May / June and July.
Prof Pettis,
1. Nick Lardy is a senior fellow from the Peterson Institute (Prof Pettis has mentioned him on this blog before). Nick Lardy has recently put together the following research on the sustainability of China’s recovery. In some important areas, it does differ signficantly from the views of Prof Pettis. Base on the numbers in the research paper, the view put forth is compelling. Perhaps Prof Pettis can offer some thoughts?
http://www.piie.com/publications/interstitial.cfm?ResearchID=1527
2. Mark Dow predicted China’s change from trade surplus to trade deficit in July 2009. He was writing for Brad Settser at the Council on Foreign Relations. Admittedly Mark’s prediction was for the end of 2009 while China first recorded trade deficit in March 2010. Regardless, if Mark’s analysis is correct, and I think he is, that would imply the world’s imblance is being corrected at a rapid pace. The world is changing and has already changed a lot. The trade data for last year or so is bearing this out. Just look at the rate of change of China’s trade balance with the world (and US trade data too). Last year, market forces has proved once again to be significantly faster and stronger than political forces.
I think a more precise question that should be ask is how fast, what is a reasonable rate of change, for China’s trade balance to adjust?
http://blogs.cfr.org/setser/2009/07/10/chinese-handcuffs-no-chinese-trade-deficit/
3. Lastly I would like to ask everyone the following:
What is the upside and the downside of the RMB to dollar peg issue?
Many have pointed out that revaluing the RMB peg will have a small impact in addressing the structural problems in the US. Am I correct Prof Pettis that you also agree with this? On the other hand, US is the world’s largest economy and China will surpass Japan to become #2 by the end of this year. A trade war between the US and China, when the world is just turning the corner, will sending the whole world down again. The downside is we, the whole world, will all loose.
Mr. Pettis:
Snark on: One reason the US no longer makes what China makes is because of its trade practices have driven the corresponding US manufacturers out of business or they have been forced to relocate to China. Snark off.
Seriously, I do agree with the thrust of the article though, the effects of an RMB appreciation will not be simple. OTOH, as Albert Edwards has predicted, the RMB could well be devalued; I do not think this is as crazy as it sounds, but I would like to hear your thoughts on his reasoning. Don’t know if the whole article is available on the web, but here is what I’ve seen:
http://www.zerohedge.com/article/albert-edwards-calls-next-black-swan-expect-yuan-devaluation-following-deep-2010-downturn
LuLu / Michael
I’ve always had this question:
When the interest generated from public debt flew into the pockets of US savers (who bought the T-Bonds), how were these money spent?
If we look at US’s P&L, how much of its wealth is spent on R&D?
DCH, your comparisons of US and Chinese labor costs is by definition true; if the renminbi were set at 1 to 14 instead of 1 to 7, you would saying that things can be manufactured in China for 20-25% of US rates, instead of 40-50%. We don’t know what the comparison would be in the absence of fixed exchange rates; float the renminbi and we can make real comparisons. We know that Chinese labor is grossly unpderpaid, we just don’t know by how much.
Silly things:
Thanks for your reference to Nicolas Lardy’s article on “excessive” criticisms of China’s 2009 stimulus package.
It is an excellent read and in line with the more upbeat assessments coming out of the IMF/OECD/World Bank.
But to be fair, these days who really knows how the world economy will adjust to the biggest imbalances in post-war history?
regards James
One way for a manufacturing company in China to benefit/profit from CNY appreciation is to carry excess inventory of imported materials/components. This will either benefit through less pressure to absorb the higher CNY rate in setting export prices (if importers can choose equivalent products from differently domiciled producers and refure to raise their USd price) or by raising end product prices (where a producer has pricing power) along with the CNY increase and pocket the difference.
In both cases producer expectations of a higher CNY/USD rate would shrink the trade surplus temporarily, reinforsing the effect of outright speculation on the basis of the same expectations.
So when the Chinese authorities publicly expect trade surplus effects, that may well reflect private knowledge of an exchange rate, applied to a perception of the relevant mechanisms as above.
[...] into the actual debate, you can find informed views here, here, here, here, here, here, here, here, here, here, and [...]
Rein,
The only problem with resource hording as a means to protect form a CNY:USD re balancing is that only an absolute minimum of companies would be able to take advantage of it. Any meaningful acquisition would propel commodity prices higher and be self limiting.
[...] They validate Roach’s view that tariffs would just shift the US deficit to other producers. Pettis says:The failure to recognize that adjustments are more likely to occur via shifts in multilateral trade [...]
Hi Michael:
Nice article in the South China Morning Post yesterday. Your approach in pointing out winners and losers in an RMB appreciation scenario is a calm voice in a ridiculous torrent of bluster. Thanks.
Glen M
Of Course, but lots of people, in Tw and HK are paid to figure out how to do this inexpensively.
[...] They validate Roach’s view that tariffs would just shift the US deficit to other producers. Pettis says: The failure to recognize that adjustments are more likely to occur via shifts in multilateral [...]
Prof Pettis,
I’ve just noticed and read your recent correction regarding EPI’s bad economic for politics flim flam. I’d like to also share a constructive critisim about this blog.
Your blog discussed a lot about what needs to change. However, I do feel some times (not always) the analysis doesn’t cover enough the much more important issue of “rate of change”.
Consider the trade imbalance of China and the issue of the RMB peg. China’s trade imbalance has been correcting for a year. It now has a trade deficit. With the current de-leveraging environment, it is very doubtful that China will regain a sizable trade surplus anytime soon. Given the current trend, what if China’s trade deficit continues? Should the RMB devalue instead? Yet, I don’t recall much discussion about the rate of change to China’s trade balance. Furthermore, how much higher rate of change is *reasonable* compare to the rate of change already underway?
To demand the unreasonable or the impossible is to demand failure. It is very worrisome that many US politicians can’t be bothered with such nuances. US, China and the world will all loose in a trade war.
Prof Pettis, I agreed with you on the many imbalances in the world economy. I really enjoyed your blog. I think more analysis of the rate of change will give us a better understanding of what needs to be done.
Michael,
What do you think of Liu Wei’s comments “revaluing the currency now would damage attempts to stimulate the Chinese economy”. Li Daokui, comments are easy to dismiss (after all he teaches at Tsinghua
).
http://news.xinhuanet.com/english2010/business/2010-03/31/c_13231749.htm
Were you at that forum?
If ever there was a sentence to sum up the entire issue, this must be it…….
” the balance sheet of China’s central bank, the People’s Bank of China, looks very much like a fund long on the US dollar and shorting renminbi.”
James Richards, Omnis
A revaluation can only shift production to other low wage countries to the extent that those other countries already produce the products, or those countries can attract capital and knowledge to generate additional productive capacity (in the longer-run).
Given the scale of Chinese manufacturing, it is hard to imagine another country stepping up and providing the production in the scale required. Only unless there is available capacity elsewhere AND a large enough upward revaluation. I find that hard to imagine. More likely, short term consumption would decrease (which is an aggregate global demand problem) and then shift. There is greater risk of consumption patterns shifting, so I would not increase investment in another low wage country to increase productive capacity mirroring China’s output profile.
The rest of the world doesn’t have the focus on component assembly and the manufacturing/logistics infrastructure that China has built – they will still have an incredible productive advantage after a revaluation.
I also don’t see US workers cranking out $800 flat screens unless they are willing to make $2.50 an hour. What the US produces in the same categories tends to be boutique items (yes, higher value), but the large volume commodities are shifting more and more to China. China is producing US brand cookies (Oreo/Chips Ahoys) for export to Australia with state-of-the-art production facilities not even installed in the US. Yes, those export cookies could be produced in the US – but what kind of revaluation level would be needed to offset the other advantages?
Instead, the US needs to be producing what China needs and can’t provide enough of for themselves. I expect Archer Daniels Midland to be a big beneficiary of RMB revaluation. Note that US planting of soybeans is at a new record.
The gradual FX response is probably most likely – the relationship are too complex and the US/globe can’t risk a further sharp reduction in aggregate demand – but the offset increase in Chinese consumption will be a benefit – for US/global multinationals, not so much for US workers.
With regard to the trade deficit inversion – I think the fact that it took SO LONG to get there relative to the crisis time frame is more telling than the absolute amount. It will be interesting to see the rebound effects as the US economy is finally showing some signs of a pickup. My bet is that it goes back to surplus faster than we might anticipate.