Because of US and European pressure Beijing may allow much faster appreciation of the renminbi than it likes over the next year, but this will almost certainly be accompanied with policies that reduce the adverse employment impact. In my opinion the most likely such policy involves credit. If Beijing expands cheap credit, however, it may exacerbate dangerous imbalances within the economy.
Before explaining, let me suggest why I think we are going to see much faster renminbi appreciation. Part of the reason has to do with what looks like good economic numbers. The real estate market seems to be recovering, manufacturing is doing well, and Chinese growth is strong. Here is what Saturday’s Xinhua had to say about the most recent PMI index:
The Purchasing Managers Index (PMI) of China’s manufacturing sector rose to 53.8 percent in September, up 2.1 percentage points from August, the China Federation of Logistics and Purchasing (CFLP) said Friday. The reading of the September index was the highest since May and marked the 19th consecutive month that the index was above the boom-bust line of 50 percent
Meanwhile on Sunday data released for non-manufacturing industries showed the same trend, especially (shudder) in the property sector. Here is Credit Suisse on the subject:
The non-manufacturing PMI was up 0.2pps (sa) in September, with the business expectation index rising 1.5pps to 67.3 (sa). The improvement was triggered by the rebound in property sales transactions in September, in our view, which raised the business activity and expectation indices for the real estate and construction sectors this month. Meanwhile, the retail trade indices fell, but remained elevated, in our view.
So far no big surprise. As I have said many times in the past two years, most recently in my May 12 entry, Beijing’s response to the global crisis seems to be a panicky process of stomping on the accelerator when things began to slow down, and then as the economy overheats, real estate development surges, and doubtful investment projects explode, stomping on the brakes.
There is little fine-tuning that they can do – we’re stuck with the choice between bad growth and no growth. I am pretty sure that one way or another we are going to clock in investment-driven GDP growth numbers of 8-10% well into 2012 – although, as Mahatma Gandhi famously complained, speed might be irrelevant if you are going in the wrong direction.
The South China Morning Post version of the story identifies one of the risks associated with the economic rebound.
Mainland manufacturing surged ahead faster than expected last month as domestic demand underpinned growth in the world’s second-biggest economy. The official Purchasing Managers’ Index rose to a four-month high of 53.8 last month, beating a Bloomberg forecast by economists of 52.5 and confirming the country’s economic resilience. Analysts warned, however, of rising inflation risks and a protectionist backlash from the mainland’s trading partners.
…Goldman Sachs said Beijing’s policy since July had been akin to having “one foot on the brake and the other foot on the accelerator”. The bank said the September PMI “suggests the foot on the accelerator has been heavier than expected, and the foot on the brake lighter than expected. Growth in the coming months will continue to be the result of the tug of war between the tightening and loosening measures in different areas of the economy, but the latter appears to be gaining the upper hand.”
Along with Goldman’s slightly different use of the brake/accelerator simile I favor, the article points out that rapid manufacturing growth will put upward pressure on the country’s trade surplus. Add to this what looks like buoyant economic conditions, at least on the surface, and I can only assume that it will increase foreign impatience with the impact of China’s deficient demand on foreign growth.
Currency wars
So the trade environment will continue to deteriorate and continue to take center stage. By now everyone is probably aware of the remarkable statement last week from Brazil’s finance minister. Here is the Financial Times version:
An “international currency war” has broken out, according to Guido Mantega, Brazil’s finance minister, as governments around the globe compete to lower their exchange rates to boost competitiveness.
Mr Mantega’s comments in São Paulo on Monday follow a series of recent interventions by central banks, in Japan, South Korea and Taiwan in an effort to make their currencies cheaper. China, an export powerhouse, has continued to suppress the value of the renminbi, in spite of pressure from the US to allow it to rise, while officials from countries ranging from Singapore to Colombia have issued warnings over the strength of their currencies.
“We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness,” Mr Mantega said. By publicly asserting the existence of a “currency war”, Mr Mantega has admitted what many policymakers have been saying in private: a rising number of countries see a weaker exchange rate as a way to lift their economies.
What is remarkable is not that Mr. Mantega has said something that we didn’t know, but rather that someone so senior has said what everyone has avoided saying for so long. The Europeans, too, have entered the fray more aggressively and are complaining about a rising euro. We are certainly in a global beggar-thy-neighbor process, in which the first round, just like in the 1930s, takes place as currency intervention, and the second round will take place as tariffs.
I have always argued that the only way to avoid a real deterioration in trade relations is for the major economies to come to a grand bargain and agree to adjust over an eight to ten year period, although I have also always been very pessimistic that this would happen, but it seems perhaps President Sarkozy is making a valiant attempt to do just that. From an article in Saturday’s Financial Times:
France and China have been in talks for the past year as part of an effort by Paris to heighten co-ordination of exchange rates to promote stability of the international monetary system in the wake of the financial crisis.
The talks and their content have been kept secret, in an attempt to draw China into a discussion on global currency co-ordination, a subject that Beijing has been reluctant to countenance in the past.
In an ambitious move reminiscent of the currency accords of the 1980s, President Nicolas Sarkozy hopes to open a debate on the subject when France takes over the presidency of the G20 group of leading nations in November, according to people familiar with the matter.
I wish him good luck but I very much doubt that anything useful will come of it. There are rumors going around about who will replace Larry Summers in the White House and even rumors about Tim Geithner being replaced at Treasury (you can read a little more about these rumors here). Both of them have been, I think, very reluctant to allow an escalation of the trade conflict, but in a world in which everyone is behaving childishly, this attempt at grown-up behavior looks increasingly out of step.
And as everyone by now knows, the US House of Representatives on Wednesday passed a bill to press China to let its currency rise faster. Although this bill does not bind President Obama in any way, and might not even survive a WTO challenge, it is nonetheless pretty clear that the world is tilting inexorably towards more trade conflict.
So the renminbi must rise
After all everyone is already doing it – cheating on trade, that is. The big surplus countries are dragging their feet on enacting the kinds of policies that will increase domestic demand and so reduce the drag on global growth caused by their deficient demand. The big deficit countries are either in collapse (Europe) or are warily eyeing the amount of their domestic demand that leaks abroad to create foreign jobs (the US). In a world of beggar-thy-neighbor policies and anemic global demand growth, countries that do not retaliate will almost certainly see rising unemployment.
So that is why I think pressure on the renminbi is inexorable. The way the numbers work, I see only three options. First, the US can allow its trade deficit to explode. Second, the world can organize a concerted attempt to deal with imbalances. Or third, each country can continue implementing policies aimed at acquiring a larger share of dwindling global demand.
The first two, I think, are unlikely, and so I suspect the renminbi issue will not go away. But excessive focus on currencies and tariffs is likely to make a bad situation worse, and this is what I really want to discuss today. Currencies matter to trade, and it is strange to see the gyrations among many economists who try to deny it.
Most notable, I think, is the complete reversal of official opinion in Japan. Twenty years ago when it was the undervalued yen that was at the center of trade disputes, Japanese officials were adamant that currency intervention has nothing to do with trade imbalances (the problem is “structural” everyone insisted). But after the PBoC started intervening against the yen a few months ago, suddenly Japanese officials have decided that in fact currency intervention matters a great deal to trade.
Perhaps to someone more cynical that I am the reversal in Japanese opinion is not so surprising. As Tokyo seems to have discovered, currencies do indeed matter. The level of the currency has a big impact on the relationship between domestic production and consumption, and of course the difference between the two is the savings rate, which determines the trade surplus (i.e. the excess of savings over investment).
For that reason I am always puzzled by people who say that devaluing the dollar will have no impact on the US trade deficit because the problem is low savings relative to investment. No, that is not the problem. That is simply one of the definitions of a current account deficit. But if the dollar devalues, and consumer prices rise, US consumption is likely to decline. In addition, to the extent that any of the stuff Americans used to import before the devaluation is now produced domestically (not all, but any), then US production must rise. Since savings is equal to production minus consumption, the US savings rate must automatically rise.
But just because the currency matters to trade, it does not mean that it is the only thing that matters, or even the most important thing that matters. Anything that affects the level of production, the level of consumption, or the level of investment, will automatically affect the trade balance.
This is why I worry that we are putting too much pressure on the renminbi. There are many ways for China to rebalance, and they all involve the same process of transferring income from producers to households. Raising the value of the renminbi, for example, increases the real value of household income in China by reducing the cost of imports.
It balances this by lowering the profitability of exporters. The net result is that if it is done carefully, the household income share of China’s GDP rises when the renminbi is revalued, and with it consumption rises too. Since China must export the difference between what it produces and what it consumes or invests, raising the value of the currency also reduces China’s trade surplus.
But what would happen if China were to raise the currency too quickly? In that case the profitability of the export sector would decline so quickly that exporters would be forced either into bankruptcy or into moving their facilities abroad to lower-wage countries. Either way, they would have to fire local workers
But firing workers reduces household income and household consumption. If it reduces household income faster than the revaluation increases real household income (by lowering import prices), the net result is a reduction in total household income and a reduction in household consumption.
Balancing and unbalancing
This is the problem China faces. It must raise the value of the renminbi as part of its rebalancing towards greater domestic consumption, but if it does so too quickly, the rebalancing will occur not as an increase in consumption relative to rising production, but rather as a drop in production relative to declining consumption.
This may seem like a confusing point, but it is worth understanding. China can rebalance with high unemployment as well as with low unemployment, and the difference has to do with the speed of the rebalancing. If China adjusts too quickly, consumption will actually decline, and production will decline even faster. In that case China rebalances (consumption rises as a share of GDP), but under conditions of rising unemployment.
That is why too much focus on the currency is dangerous. It is clear that the US and Europe have become very impatient with the slow adjustment process in China, made all the worse by a European crisis which is almost certain to cause the European trade surplus to surge. Every major economy in the world, including China, is implicitly expecting US consumption to drive employment growth, as Premier Wen more or less told President Obama last week, but with soaring unemployment the US is in no mood to divert its own demand abroad.
And so there is a good chance that the US will overreact, and will use the threat of tariffs to force the renminbi to appreciate much faster than China can absorb. Even Tim Geithner seems to think that we will see much faster appreciation. Here is what an article in Friday’s Financial Times said:
Tim Geithner, US Treasury secretary, said the renminbi was on track for significant appreciation against the dollar and there would be no “trade war” or “currency war” between the US and China.
So after years of dragging its feet, postponing a rebalancing, and forcing rising trade surpluses onto the rest of the world, China may have to adjust its currency policies so quickly that it risks a sharp contraction at home. So what will China do?
This, for me, is the most interesting and perhaps important question. Most probably Beijing will do the same thing Tokyo did after the Plaza Accords and Beijing did after the renminbi began appreciating in 2005. It will lower real interest rates and force credit expansion.
This of course will have the effect of unwinding the impact of the renminbi appreciation. As some Chinese manufacturers (in the tradable goods sector) lose competitiveness because of the rising renminbi, others (in the capital intensive sector) will regain it because of even lower financing costs. Jobs lost in one sector will be balanced with jobs gained in the other.
But there will be a hidden cost to this strategy – perhaps a huge one. The revaluing renminbi will shift income from exporters to households, as it should, but cheaper financing costs will shift income from households (who provide most of the country’s net savings) to the large companies that have access to bank credit. So China won’t really rebalance, because this requires a real and permanent increase in the household share of GDP. Instead what will happen is that it will reduce Chinese overdependence on exports and increase China’s even greater overdependence on investment.
This will not benefit China. It will fuel even more real estate, manufacturing and infrastructure overcapacity without having rebalanced consumption. Expect, for example, even more ships, steel, and chemicals in a world that really does not want any more.
So we are still pretty much stuck. China and other surplus countries like Germany and Japan need to understand that their policies are causing real damage in the US, and the US needs to understand that the surplus countries simply cannot adjust fast enough to suit the US, but neither side is very interested in understanding the other.
An optimal solution will require real grown-up behavior on the part of the major economies, who must agree to resolve the trade imbalances carefully and with determination. Of course grown-up behavior is probably too much to ask from countries that have displayed so little of it to date. Instead trade relationships will simply continue to deteriorate.
——
For those who are as fascinated by these things as I am, I see that on October 3 German made the very last payment on its WWI reparations debt. German reparation payments were at the heart of the financial imbalances of the 1920s, and of course those imbalances led to the buoyant asset markets and trade imbalances of the 1920s, the collapse of European banks in 1930-31, and eventually the Great Depression.
Its one of history’s nasty little jokes that it waited for the advent of this crisis before it finally put that one permanently behind us.
On a related note I want to quote an interesting piece from Douglas Irwin’s “Did France Cause the Great depression?” The non-gated copy is here
A large body of economic research has linked the gold standard to the length and severity of the Great Depression of the 1930s. The gold standard’s fixed-exchange rate regime transmitted financial disturbances across countries and prevented the use of monetary policy to address the economic crisis. This conclusion is supported by two compelling observations: countries not on the gold standard managed to avoid the Great Depression almost entirely, while countries on the gold standard did not begin to recover until after they left it.
And the band played on…
Mr Pettis,
Do cheaper finance costs drive investment as readily as they do in the West? That is will Chinese be willing to take on debt simply due to low interest rates? It seems that it did not work in Japan in the early 90′s. Lower interest rates seemed to encourage capital, jobs abroad to “emerging markets” such as Malaysia and Thailand and North America.
Since we are on the topic of currencies, how do you feel the Euro moves will play out the rest of the year. Will continued dollar weakness begin to upset the Europeans particularly export heavy Germany? Or do you feel a dollar rebound is in order?
On gold and the Depression. One could argue that those countries that had fewer ties to global trade were least effected ie Soviet Union.
Another example, Japan was massively expanding industrial output at the time and invested heavily in war machines which they would later put to use.
Removing the gold standard in the 30′s in my view is not unlike currency devaluation today. If everyone had done it at the same time it would not have benefited any particular country. Instead it would have led to overcapacity near term inflation and medium-term deflation and High Unemployment. One should remember that by 1940 unemployment in the US was still above 10% and the US had spent all its surplus (I believe)
My thinking is that had WWII never happened the need for large scale infrastructure rebuilding in Europe and Japan would not have created the demand for labor in the post WWII era. Nor would there have been a demand for US manufactured goods and we would still have seen UE above 10% or higher throughout the 40′s in the US
Prof Pettis – thanks..question- Why werent obviously potential mercantilist issues addressed before WTO entry back with Clinton admin – instead of now – these issues arent particularly a historical surprise ? Was it extreme push by American corporations to make a DEAL at any price?
Professor Pettis,
This may be simplistic, but why is massive investment necessarily bad? Doesn’t China need a huge amount of infrastructure investment to raise living standards across the country? Does it HAVE to go to overbuilding of apartment complexes in Shanghai? Why not roads, bridges, water/sewer, housing (in areas that need it), rail lines, power stations, etc.
Should have added schools, and hospitals to the list.
Prof, Pettis, But how much room does China have for more investment? Its capacity in terms of empty apartments, steel capacity(40~50% of world production) and etc already seems to be at a maximum level.
How much more investment can they sustain? For example, for them to grow steel capacity for GDP growth, that would mean they would soon approach levels in excess of 60% of world production. I wonder if that is even feasible. Same goes for real estate. If China is currently building a 5×5 cubicle for every Chinese national, then will they build a 10×10 cubicle for every Chinese national?
I can not understand how the imbalances can be the fault of the exporting countries like Germany and China (I know you are not blaming only one side). It’s like blaming a factory owner who sells stuff cheaper (maybe even at a loss) than everyone else. Those doing charity work giving away things and services for free would be destroyers of the economy with this logic. If instead the US stopped borrowing huge amounts of money wouldn’t this break the money cycle behind the imbalance?
Not saying that the subsidies of the Chinese producers are a good thing, but this is not because it hurts Americans but because it hurts the Chinese.
“But firing workers reduces household income and household consumption. If it reduces household income faster than the revaluation increases real household income (by lowering import prices), the net result is a reduction in total household income and a reduction in household consumption.”
I don’t think this would happen. There might be a temporary increase in unemployment during the rebalancing, but these workers losing their jobs only held those jobs since they were subsidized by the household sector in the first place. The money would stay in the household sector instead of going to a producer and then partly back in the form of wages. The household could instead consume or invest this money directly, creating new jobs replacing whatever jobs were lost. Of course some individuals might be worse off, but on average Chinese consumers would be better off.
A well balanced piece. I share your frustration with those that claim that real currency rates have no effect, yet claim that China can not revalue. If it has no effect, why wouldn’t they do it to silence their critics? Their behavior implies their revealed beliefs are that it does have an effect.
But, of course, though it does have an effect it is no magic bullet. I would think some form of financial reform would have to be part of an effort to smooth the adjustment. You’ve mentioned asset sales before. Is it possible, or plausible to expand consumer credit access, so that real interest rate levels have less of a sectoral bias?
Dear Professor Pettis
I have a question which is (obliquely related). Surely when people talk about the need for rebalancing, they miss the point. Whether PRC or private capitalist is doing fixed asset investment doesn’t matter — it’s still investment. It helps rebalance the economy away from export dependency towards investment and consumption, with less saving, regardless of whether it’s state or private-sector?
Which isn’t good for the Chinese consumer clearly, but should be good for global trade?
thanks
Professor Pettis,
Why wouldn’t decreased interest rates and money-supply expansion to counteract the effects of a rising Renminbi be potentially disastrous for the Chinese economy?
Wouldn’t money-supply expansion and lower interest rates facilitate price-inflation, which, coupled with a rising Renminbi, would be disastrous to exporters and expose producers of domestically-produced goods to competition from abroad (obviously not from the likes of the US, but maybe from South-East Asian emerging economies)?
My apologies, a mistake slipped by.
Correction: Wouldn’t money-supply expansion and lower interest rates facilitate price-inflation, which, coupled with a rising Renminbi, would be disastrous to exporters and expose local producers of domestically-consumed goods to competition from abroad (obviously not from the likes of the US, but maybe from South-East Asian emerging economies)?
“In addition, to the extent that any of the stuff Americans used to import before the devaluation is now produced domestically (not all, but any), then US production must rise.”
This does not seem right. Total production is not fixed, even in the very short term.
If total U.S. production declines and U.S. consumption declines, U.S. net exports could go up or down.
I notice that Martin Wolf today wrote on the “currency wars.” Strauss Kahn is also speaking out.
Prof Pettis
Following on from Martin Wolf’s article, and his reference to the suggestion of Fred Bergstein that Capital Reciprocity should be a good solution, i was wondering if you had read that piece in the FT
http://www.ft.com/cms/s/0/070e525c-cf1d-11df-9be2-00144feab49a.html
And whether you think this solution would be slightly more preferable to the countervailing duties / trade measures. For some reason i seem to prefer it, since asking for reciprocity is at least in theory less likely to rattle people’s cages. And it has been hinted at by the Japanese (just before the Yen intervention earlier this month).
You can hear the drumbeats. In a period of roughly 24 hours, the FT publishes the following:
Martin Wolf
How to fight the currency wars with stubborn China
http://www.ft.com/cms/s/0/52b8a8e4-d0b0-11df-8667-00144feabdc0.html
John Plenders
Co-operation is victim in currency markets shoot-out
http://www.ft.com/cms/s/0/295e207a-d09a-11df-8667-00144feabdc0.html
Tadashi Nakamae
Japan is facing an uphill struggle to weaken yen
http://www.ft.com/cms/s/0/e262e3f0-d138-11df-8422-00144feabdc0.html
and Chris Giles with
Global economy: That elusive spark
http://www.ft.com/cms/s/0/4d6fd6be-d0b0-11df-8667-00144feabdc0.html
Even if the political class understood, they would not be able to communicate it to the average citizen in an intelligible manner, particularly given the extreme economic backdrop that exists today. Perhaps John Malone best caught the potential this past summer. In an interview he noted that owning a home with thousand of acres along the border with Canada meant he and his wife could walk across if and when necessary.
Michael,
Why not expect exporters, as an industry, to raise prices following a sudden reval?
Take the analogous case of domestic producers following a large deval. To the extent they go bankrupt, it is mostly because of their debt contracts, not because of the difficulty of adjusting prices. In other words, a domestic Brazilian electronics manufacturer has to replace inventory at higher cost following a reval. So what do they do? They both raise prices and divert goods to export markets, which is what produces an immediate burst of high domestic inflation. Presumably, were those producers in China, they would go bankrupt before raising prices?
I get that China has to compete with other low wage countries. But aren’t those countries also facing incipient inflation problems? How much share would they gain from Chinese firms over a period of a couple of years? How would they sterilize the wall of investment dollars heading their way without producing more domestic inflation?
Sorry — that should have read, “a Brazilian electronics manufacturer has to replace inventory at higher cost following a deval,” instead of “reval”.
Michael – great post as always. You’ve repeatedly stressed the balancing theme of ensuring that the currency appreciation is done delicately so that the rebalancing of the Chinese economy comes more in the form of increased consumption as opposed to in the form of decreased production.
Question – how hard would it be for the Chinese government help alleviate this by providing temporary unemployment benefits to people who lose their jobs (specifically, in this case, employees of exporters who lose their jobs as a result of the RMB appreciation/rebalancing)? Is this a naive suggestion? (I don’t know how easy it is to enact things like this China, or, regardless, if this would even help fix the issue)
Just curious! Thanks. It seems too simple an idea to work, so I must be missing something.
With China’s stop-go policy/experiments over the last decade as a real-time laboratory, do you think the PBoC has developed an empirical model of the economy, and they fear that there is no way that the can rebalance, as opposed to not wanting to rebalance. Or do you think that the state of government economic intelligence / econometric statistics in China is so poor that they have no clue?
I understand the predicament that China is in regarding adjustment. This may sound terrible, but, as someone who has been following US-China economic relations for a long time, and as someone who has a soft spot in his heart for China given the time I spent there, I have a real, real hard time sympathizing with them on this one.
The rest of the world was patient as China returned to the currency peg during the financial crisis, while we were all doing everything we had to do just to avoid utter disaster. But, when China returned to double-digit growth, and its primary export markets continued to stagnate, other countries began to remind China of the project of currency reform that began back in 2005. At that time, very few serious people were demanding an overly aggressive revaluation. The issue was reemerging, but patience was far from running out. China has had many, many opportunities over the last year to work quietly with its trading partners to reach an cooperative agreement and restart the adjustment in a rational way. But, it chose to be obstinate and utterly intractable, vocally refusing to even contemplate a scenario in which the interests of major trading partners would play a role in its decision making process. It alienated and castrated even those who were 100% willing to act as responsible adults and accept a gradual measure of reform, and it empowered those who would rather use the issue as a soapbox to win a midterm election. Surely, the situation we find ourselves in today was totally foreseeable, and has been primarily of China’s making.
Frankly, I still think that China’s trading parters, with the EU acting as a mediator of sorts and the IMF as a fact finder and arbiter, would welcome China to the negotiating table on this issue, and would be willing to compromise. I don’t think members of Congress actually want what’s happening now to move further in the wrong direction. Premier Wen’s recent statements, unfortunately, indicate that he’s willing to spout his cooperative charm on just about any issue except currency. If it’s not that the rest of the world is acting like ignoramuses for even suggesting that the RMB’s value plays a part in global imbalances, it’s that the rest of the world should accept the burden for the sake of saving China from the threat of social instability.
I firmly adhere to the belief that the world exists in shades of gray, but I can’t help but see this as one of those rare issues where the absurdity has come almost entirely from one side of the debate. That absurdity, ultimately, breeds absurdity throughout.
Dr. Pettis
Throughout this and other articles, you make the assumption that China’s aim is economic. And that in the end it will act in a rational manner to maintain its own economic achievements.
Thus ideas as: “So we are still pretty much stuck. China and other surplus countries like Germany and Japan need to understand that their policies are causing real damage in the US, and the US needs to understand that the surplus countries simply cannot adjust fast enough to suit the US, but neither side is very interested in understanding the other.”
But what if China’s aim is actually to cause real damage in the US? I myself have no doubt that China would be willing to take a major economic hit in order to to deliver a worse blow to the US. Despite the Rolexes and Shanghai skyline, China is a Marxist-Leninist state. And behind that is the notion of the natural superiority of the Han state. Even now with us turning away we see the Han pushing out Tibetans and Uyghur.
Somehow you expect that China will act in the way Western states do. That their self – interest is similar to ours. This I think is patronizing.
Remember our great feeling of “unsportsmanlike behavior” felt when Japan was still negotiating is Washington while steaming toward Pearl Harbor. Or the truce talks in Korea. Or the twists and turns of Mao in dealing with the KMT. This is out of the “Art of War”
China will sit and talk and cut the RMB 1/2% etc while we hold off proper defense of our economy.
Very reluctantly I have come to believe that in Korea, Mac Arthur was correct and Truman wrong in wanting to bomb China north of the Yalu. Negotiating and Aggression both have their place. Without the latter, we depend on the good will of the Other in negotiations.
Sun Tzu would lick his chops at your suggestion
An internal rebalancing of consumption and production will always remain difficult in countries with an unbalanced representation of the population (or better social classes). A balanced representation leads to compromises where the interests of the social classes become acceptable to all, and consequently lead to a balanced economy.
Even in times of stress, as of today and for example after WW I, emancipation of the social classes become the very source of solutions, although usually after a domestic war of atttrition between the classes and their political parties.
China needs to find this kind of social balance first, but as we all know the powerful elite only allows changes when they benefit from these changes too.
In this context I can hardly imagine that China will be able to rebalance its economy slowly. After a period of progress accompanied by lagging emancipation, a shock or shocks are requested to create an environment where the ruling elite opens the door for democratic and balanced representation of all classes.
So does this mean that China like Japan, will face a lost decade or more, except their problems will be much bigger than Japan?
Prof Pettis, I am a little confused when you mentioned that “…But if the dollar devalues, and consumer prices rise, US consumption is likely to decline…” What’s the mechanism for this? If consumer prices rise, would consumer still spend the same amount of money albeit buying less stuffs? Thanks!
RS, the combination of cheaper financing costs, socialized credit risk, and an incentive structure that favors job creation today is likely to cause upward pressure on investment.
Brasil61, partly I would guess because they weren’t so well understood and partly because when unemployment is low people don’t worry too much about sources of long term distortion in the economy.
SteveK9, investment isn’t necessarily bad, but I think it is wrong to ask if investment in the abstract is bad or good. The only legitimate answer must be: it depends. When investment creates more value than it absorbs, however you define value, then it is good. When it creates less, it is bad. There is no doubt that there are better and worse uses of investment in China, but the real question is not what might they invest in but what they actually invest in, and I suspect that this is driven by lots of factors besides the purely economic.
Park, it sounds like you are suggesting that they are at or past economically viable levels if investment. In that case I pretty much agree with you.
Anton, the subsidies help American consumers at the expense of American workers, and help Chinese workers at the expense of Chinese consumers.
OGT, I think they will try to expand consumer credit. In principle this should be good for consumption, but if it happens prudently it will be too slow to matter, and if it happens quickly, it will result in a surge of NPLs that will have to be cleaned up anyway by households. The last time there was pressure to increase consumer lending was in the auto lending sector about five or six years ago. I believe half the loans went NPL.
MB, in a financially repressed system money expansion tends to lead to asset inflation rather than PPI or CPI inflation. I discuss this in my June 15 entry.
Noah, why would raising tariffs cause US production to decline? It never has before.
Houhui, Paul Krugman has a piece on the subject with which I agree. You can find it at: http://krugman.blogs.nytimes.com/2010/10/06/mysterious-renminbi-proposals/
Dean Jackson, yes, the trade-war-is-inevitable camp has lately become so big that I think it is time for me to move on to some other topic. I think I will spend more time trying to understand how China will react to renminbi pressure and what the consequences will be. This post is part of that process.
David, I am not sure I understand. If exporters raised prices after a reval, that would increase the adverse impact. My guess is that they will try to reduce prices.
CG, you have to follow the cash. The government could very well provide assistance to unemployed workers, but how would they pay for it? If they do so by borrowing or taxing, they are simply shifting the cost back onto the household sector so there is no net benefit.
JTutu, I think given factional differences and the diverse bodies of winners and losers in any rebalancing (as discussed in last week’s entry) there is a kind of political paralysis that prevents real action.
Aeolius, although I have no doubt that many in China see the US as an enemy and see any harm to the US as a benefit for China (by the way, we have similar people in the US), I very much doubt that Chinese policy is driven by a need to maximize damage to the US, especially since it would cause even more damage to China.
Shanghai Observer, yes, I think so, although I do not think it will be nearly as bad as Japan’s.
Steven T, a devaluation in the dollar would reduce the real income of UDS households. Part of that reduction might show up as lower savings but at least part will show up as lower consumption.
Michael,
What do you think about the general idea that GDP measures the wrong thing, so to a great extent we’ve been chasing the wrong goal? For example, GDP doesn’t count the damage to health caused by the cadmium, lead and arsenic that’s widespread in Chinese soil and is now finding its way in everything grown there, including tobacco. Chinese cigarettes have increased levels of heavy metals, according to a story in the WSJ today, because of China’s soil. Or GDP shows an increase when a mountain is blown open for mining. GDP’s potential problems go beyond the environment, natural resources and health, and apply to other things that are hard to measure, like leisure time, education, and dignity. Also, the big factors, natural resources and the environment, become more important in a world that’s increasingly constrained by environmental and natural resource limitations. In other words, a world that’s much more zero-sum than in the past, and in which everyone’s pursuit of the current version of GDP can’t help but lead to conflict. Sarkozy tried to start a debate about GDP. Is this one of the areas economists should spend more time on?
There are so many ways in which all parties have, and can, act to change outcomes. All of them are complex enough that they can be hidden or disguised in some sort. That is why I think the only real solution to the current imbalances lies not in the current proposals but by a much simpler one. Trade certificates, like those proposed by Warren Buffet.
Michael,
Maybe the your best post so far. You must be aiming at a policy, making audience, but I am afraid that the international collectivity of policymakers when they consider payoffs and probabilities (intuitively of course) will not be able to rise above their (perceived) individual self interest, whatever that may be, but no doubt with a strong element of lazy nationalism. So, one should consider the circumstances and consequences of China facing its customers (not quite of course, much of China’s expeorts are arranged by trade “traitors” like Walmart etc; even Japanese firms succumb to this dishonorable practice, but in politics one forgets those details) who will demand the sacrifice that is easiest to monitor, the exchange rate. How then the Chinese elite distributes the consquences of that will be interesting to watch. Maybe your piece will have them thinking for a while..Do not count them out yet, there is an element of mandatory benevolence.
Michael,
Could you elaborate on your answer to Park, re economically viable levels of investment? It seems your gas pedal/brake analogy depends on that peak-possible level investment being a long ways off, or at least, always under the control of the authorities.
Isn’t it possible it could collapse under its own weight, regardless of the what the authorities do?
As far as the trade imbalance is concerned, there is a straightforward way to correct it. Americans could just raise taxes and cut spending. And the Chinese, Japanese, Germans would just suffer the consequences, and can not complain.
Why don’t the Americans do it? Because it’s going to be very unpopular. So economists like Wolf and Pettis and Krugman have devised this ingeneous argument that China should raise the value of RMB, as a way to raise prices for average American consumers, so that Americans would spend less, while politicians could shun the blame and even play up the tough guy image and gain some votes along the way.
So the imbalance remains. Could it be rebalanced? The answer is unlikely. American consumers are beyond salvage, whether or not the RMB revalues. China, Japan, and East Asia have to brace themselves for a tough ride ahead. What they should think is not how to rebalance, but how to face the inevitable collapse of American demands.
HI
GDP is a terrible measure, and similar to Churchill’s statement about democracy, was it, but better than all the others. Real problems exist as to the provision of data, where much in GDP is extrapolated, much divergence as to what is reported, when it is reported, how often it is reported, and how important that particular segment or aspect, or price coupled to number of units, is to an economy, a people and a culture. In so far, as trying to report so many more arbitrary factors, even those of great value, if little ability to place such value in economic terms, it would become more so difficult, such as measures of happiness and similar. I very much enjoy working, would you count that fact and the fact that I derive an income from that, doubly so….anyway. As to measures of incorporating natural capital, and measures of natural capital, and somehow integrating such into a slightly altered GDP structure, that might have some benefit, if somehow one could then base the trade of goods upon such, measures, ie there being a trade, sales related benefit to the maintanance and ongoing replenishment of our natural capital. Yet, even where we emphasize the importance of trade, over-emphasize in the present era I might offer, where domestic production and consumption is the holy grail of any economy, under some principles of fairness, it might be difficult to find a way to find balance in such system, that would enable the forward development of the worlds people, even if it must happen under such premises, where few even in todays climate can see the necessity of coordinated action in todays climate under signifigantly less complex criteria than those necessary for ones in which natural capital was properly valued. These issues should, be considered, it will take several years for all parties simply to understand the benefits in cooperation, and even longer for such cooperation to be had at the present stage, signifigantly longer to get to a more mature level of discourse and cooperation, especially where much greater cooperation will be required to get through coming demographic, technological and similar challenges to maintanence of the system which does not lack for development opportunities across the globe.
“although I do not think it will be nearly as bad as Japan’s”
Please elaborate if you have time. I’d love to understand why you think it won’t be as bad. Appologies if you already addressed this, but I’ve been reading for a while and I can’t remember a post specifically on this topic. Thanks.
An excellent post.
I think China would be able to satisfy foreign pressures with a rate of yuan appreciation that would avoid severe internal disruption. I am more afraid that the pressures will not be enough to get them to take any effective action at all. So far, the only party that seems willing to engage in any effective measures to reduce the value of the U.S. dollar is the Fed (with QE2, which is apparently having an effect on the dollar just in anticipation of its implementation), and they cannot do so against countries that fail to “play by the rules.” The failure of the Administration or Congress to impose effective measures may be the result of lobbying efforts by U.S. companies that now produce in China and benefit from the low costs allowed by the currency peg.
This unfortunate combination concentrates the effects of the Fed’s actions on the countries who “play by the rules,” since the pegged currencies will fall in tandem with the dollar, and may result in noticeable harm to their economies.
Prof. Pettis.
I see what you mean (krugman means) about the hard to enforce measures, but at least reciprocity would incur further costs on the Chinese (since they would have to pay fees to the street names / 3rd party buyers) on top of their loss making interest rate activity?
Prof Pettis
Agree with much of what you have to say, particularly the mismatched expectations on the part of various countries. China has already dug in its heels if you take what Wen Jiabao says as being the national line: a mob of several hundred million is to be feared, perhaps more than any punitive tariffs or even trade war. Tit-for-tat means collateral damage and not sure if economies already weakened really want to risk that.
the German reparations point was ironic but even more ironic is the fact that the severity of those punitive reparations and the economic consequences was what fostered conditions that were conducive towards fascism and the nightmare that wrought on Europe and the rest of the world. Of course, Germany’s WWII “partner”, Japan, did not face the same problem. Not only did the US effectively help Japan settle war reparation problems (which is still a controversial issue for countries who suffered from Japanese wartime aggression) in fact it now seems the Japanese have retained the US as a backer for its territorial disputes that have remained unsettled for much of the last century. Makes you wonder what politics and self-interest does not muddy up?
one glaring mistake:
Makes you wonder what politics and self-interest do not muddy up?
AimD
Interesting perspective, but if as you suggest that the American consumers are beyond salvage what does that portend for a global economy that has serious levels of over-development of capacity. Sure, more investment could be delivered but to what end, for what purpose, in reaching, for anticipation of what goal, and further the investment required would be repaid how, by whom, while benefiting whom. OK, so the trade relationships that are supported, enabled by the “so-called” profligate American consumer, not that I disagree somewhat to that term, but usually, and entirely to the implications of such, and end conclusions drawn as to who benefits and has detriments from such an interplay of relationships. Essentially, if the US consumer is devastated, then what is the purpose of further investment, where such need be economically viable and the creation of replacement consumers a long-term goal, not even a short term possibility where further investment, if not for the artificial creation of GDp, or to simply meet numerical targets which rationalize the success of your supposed model, then what is it for, and how can it be economically viable, or not lead to insolvency, if numerical targets fail to provide such a picture.
The most important statement of Michaels piece, is the need for maturity, or even less than a sub=par decade ahead. Frankly the issue is what is the goal of this system, as it has had much success in development, if people mistake an excess of baubles of trinkets, and who receives it for the very tangible benefits of employment, wealth creation, road building, infrastructure roll-out and similar that is enabled by the excess of trinkets. And if any of you are Lew Rockwell fans, still decrying the Washington consensus, you might be crying for other reasons,. and very soon. Further, all currencies are fiat and always will be so, unless you want to turn Indian women into the wealthiest demographic in the world as they control 13% of the Gold ever mined, where all governments in totality control only 20%. So what we need is a mature discussion, and understanding the implications and goals of this system, if some are jaded by downturns in their investment portfolios while others pine for a utopian solution. If the US consumer is retrenched, this will without a doubt negatively impact developing countries more than developed as it will take time to recreate such a driver to the global economy where commodity producers may be flush at present, they will be only in so far as their products are going into economically viable projects, where malinvestment will only prove the global economy lower. But anyway, what is our goal, I could posit positive implications in each, if we all are still married to bigger is better, more is preferable, it most likely is for global development. Is that the goal of the system, |I always perceived it as such, where most have had more parochial interest such as the size of their investment portfolios, or who is seemingly getting more for nothing while not understanding the implications of such a scenario. Only time will tell, it should be interesting. Under alternatives, per capita bio-capacity rather than cash is king, as cash is simply a medium, but a very useful one that can be employed to advance the development of the global people. Few seem to see that. There are no replacemnt fundamentals under Gold relative to utility for trade in a single, much less the global economy, derivative perspectives that run of such thesis need be reconsidered considerably, the seeming beneficiaries and losers that are often related to such are the primary perspectives that will be altered as the rubber meets the road under such a new condition being foisted upon the global peoples.
Judy, regarding your remark about commodity producers. The problem with looking at countries that are commodity rich, like Canada, Australia and Russia is that the influence of BoT is mismatched with the employment benefits. Such countries would be far better served by producing a billion in manufactured goods as opposed to oil/gas/mineral exports. The real benefit to the countries (citizens not companies) lies in the employment generated. Dutch disease is alive and well, to the point that being resource rich and having an open market, can be as much of a negative as a positive.
Prof Pettis, what do you think of Ralph Gomory’s suggestion………
By Ralph Gomory
——————————————————————————–
America’s massive trade deficit is destroying significant segments of American industry and eliminating badly needed jobs. This is happening because the United States is slow to recognize an unpleasant reality: It does not exist in a world of textbook free trade. China, America’s largest trading partner has chosen mercantilism and is using the full powers of its government to advance its industries in ways that destroy their American rivals.
The United States has turned a blind eye to this reality. If it continues to do so it will become a poor nation.
However, the United States can deal with its trade deficit. It can balance trade. There are two ways to do this, and there may be more. Tariffs are one. The second is less well known but has major advantages: balanced trade with balanced certificates. Both approaches meet two important criteria: that the actions the U.S. chooses should be under U.S. control and do not require the cooperation of a mercantilist partner; and that the actions should be effective — they should actually balance trade.
Tariffs have a long and checkered history reaching back through centuries. In the United States, no discussion of tariffs is complete without mentioning the Smoot-Hawley tariff of 1930. There are many who credit this tariff with making the Great Depression even greater. Then there was President Nixon’s 1971 across-the-board tariff imposed to compel Japan and other nations to appreciate their currencies. It is generally credited with doing so.
Tariffs meet the first criterion: They can be enacted, repealed or modified by the United States without the consent of its trading partners. Whether they are compatible with WTO Article XII, which permits extraordinary actions in the face of severe and continuing trade imbalances, is something that can be argued.
Tariffs have the advantage of being flexible. They can be applied to different countries or to different classes of goods. They can be set high or low. If they don’t initially seem to be producing the desired result, they can be set higher. As a result, they can meet the second criterion: They can get the job done. They can balance trade.
However, the effect of tariffs on the scale of trade is a major drawback. Tariffs tend to diminish trade, and therefore its benefits. There is also the unpleasant possibility that tariffs could trigger a trade war in which countries react to their trading partner’s tariffs with tariffs of their own. This is the effect that followed the U.S.’s imposition of the Smoot-Hawley tariff.
In an extreme case, one can imagine trade being balanced by tariffs, but balanced at some level far below the pre-tariff-war level. It is this potential for tariffs to limit or even eliminate trade that make tariffs so extremely unpopular among economists. And economists matter. They often directly formulate government economic policy. Economists do not want a world economy in which tariffs and counter-tariffs cut off the benefits of trade. They strongly believe and have taught it with pride to generations of students.
Tariffs are the “obvious” means to balance trade. But while economists stand against them — and label those who promote them as protectionists — it is equally true that economists have no other ideas on what to do to counter mercantilism. There is, however, a well-known economic concept worth considering to counter mercantilism.
In a remarkable article that appeared in Fortune magazine in 2003, Warren Buffett described the use of what he called import certificates that could be used to balance trade. University of Chicago Professor Robert Aliber has discussed a similar concept he calls “points.” These proposals have much in common with a well-known economic concept called cap and trade used to set limits on pollution.
With cap and trade, permits to pollute are either issued or auctioned to companies that emit pollutants. Companies must obtain enough permits to cover their emissions. If they can reduce their emissions they can sell their permits to others. Pollution cannot exceed the total of all the permit amounts issued. That is the cap.
When this same concept is applied to international trade it is called balancing trade with balanced certificates (BT/BC), an acronym that can also be used for “balancing trade with Buffet certificates.”
Here is an example. A company that exports $1-million worth of goods or services produced in the U.S. earns a certificate for that amount. These certificates are then traded on an open market. Any company that wants to import into the United States is then required to have certificates with total face value equal to the value of the proposed import.
This produces balanced trade very directly as the total value of imports is limited to the total value of certificates available, which is the total value of exports. The export total is the cap in limiting imports.
Many variations are possible. Like tariffs, the certificate system could be applied to specific nations or to specific classes of merchandise or in special situations or to all of these. The price of the certificates sold could go to the producers or in part to the government. The program could be introduced gradually by initially giving more than a dollar of imports for each dollar of exports, but decreasing that amount over time.
Unlike ordinary tariffs, the direct effect of BT/BC is not to lower or eliminate trade but to lower or eliminate the imbalance of trade. This is important. Imagine that the United States decides to balance trade with the set of countries with which it has persistently large trade imbalances. Such a group could be called China+. Here are some observations:
- When BT/BC is fully applied trade is balanced.
- The market price of the BT/BC certificates is an incentive to U.S. producers to export. This translates into jobs in this country.
- The market price of the BT/BC certificates makes the China+ group’s goods more expensive in the U.S.
- There is an incentive for the China+ nations to import U.S. goods, because that in turn will increase their own ability to export to the U.S.
- Should the China+ group respond with certificates of their own (a certificate war) they are simply moving the world toward balanced trade. Should they decide to respond with tariffs, they will be acting to reduce their own exports as well as those of the United States.
With a BT/BC plan, the China+ nations can avoid massive expenditures on certificates either by decreasing exports to the United States or increasing imports from the United States. The option of decreasing exports would allow the United States to re-grow its industries, while the option of increased imports from the U.S. would provide export-based jobs in the United States with no decrease in imports. In this case, the increase in U.S. exports would tend to drive down the price of certificates so that the real world might well come close to the world of textbook trade where trade is naturally balanced.
BT/BC is very much in line with the spirit of both the IMF and the WTO. The IMF states in Article I of its charter that one of its purposes is the balanced growth of international trade, while the WTO states in its preamble the aim of securing reciprocal and mutually advantageous trade.
Mercantilism is not going to go away. The United States must find a way to deal with its consequences despite the fact that powerful sectors of American society benefit from the present situation and therefore oppose change. If the United States is willing to face up to the reality of mercantilism it will find ways to arrest its downward slide.
The country must act before it is too late.
– Ralph Gomory is a Research Professor at NYU, President Emeritus of the Alfred P. Sloan Foundation and former IBM Senior Vice President of Science & Technology. This is the second of a two-part series, the first of which ran in the last issue of Manufacturing & Technology News.
Michael,
I concur with aimd. America can cut its budget deficit and indirectly also its trade imbalance by simply raising taxes or reducing its expenditure to balance its books. This obvious remedy is not adopted by choice and hence the deficit and imbalances remain.
The argument that this post is only about China and needs to be framed accordingly to maintain coherent discussion is convenient to argue that most of the economic pain has to be borne by China. It is hardly convincing to policy makers as it is incomplete and unilateral. Your post will be more effective if you explore rebalancing options by all partners in particular other rich players with large surpluses like Germany and Japan. My considered view is that as America is in a corner, it should take most of the economic pain which is self inflicted by choice. Five or six years ago China warned America that its policies were wrong.
Since then it has allowed the yuan to revalue upwards to date by about 23%, reduced its trade surplus by increasing its imports even going into negative during certain periods, took steps to boost domestic consumption by white good subsidies, rebates for electric cars, etc. The EU has benefited enormously to be the largest trading partner for China. America refuses to trade its so called high tech goods – a lose – lose situation. China do not want American consumer goods as it is not economically sustainable. It needs capital goods to further its target of sustainable growth. America needs to be cooperative rather than antagonistic. Recent chinese investments in high speed railways, alternative energy, hydroelectric power, electric cars, etc are prudent investment choices for the future.
The chinese animal spirit has always been to sacrifice and invest for the future for the sake of the family.
There is a recent article by George Soros in the Financial Times ‘China must fix the global currency crisis’ in which he observed that ‘China has already developed an elaborate mechanism for consensus building at home. Now it must go a step further and engage in consensus building internationally.’ The first sentence supports my view that the political structure is essentially democratic as decisions are made with consensus rather than executive as in the west. The interpretation of international rules has always be based upon western values and interests rather than universal interests and reflects on a narrow mind frame. Can there be rules and a stable economic environment when fiat currencies rule? Why not campaign for and adopt China’s SDR proposal. American importers should also pay for their purchases in yuan rather than dollars.
The big picture is that America’s way of life is not sustainable both economically and environmentally. For example Americans consume 4 times energy on a per capita energy basis though China total consumption is slightly more now than America. However if you factor in the factor that America GDP is 70% consumption while Chinese consumption is 36%, the effective per capita energy consumption is 4x(1-0.36)/(1-0.7)=8.5 times than of a chinese citizen.
Nearly every all arguments by western experts are dishonestly framed arguments based upon misinformation and selective presentation of facts.
You will agree that policies should not be made in isolation based only
economics only. The environment needs to be ‘safe’. America needs to demonstrate it is not an enemy of China by reducing its military expenditure, stop its hegemony and withdrawing from its 800 plus overseas military bases.
The conclusion is that America needs to downsize. That will be good for peace and the environment. It will not do so willingly but the market is forcing it to do so. China will do what it can to assist the world but it should bear only a small portion of the burden of adjustment. We should not reward America for its bad policies for they will then simply continue.
Please Mr Pettis can you go out on a limb and guess when major adjustment will take place?
Michael,
Question related to this topic:
Many exporters of goods made in China are foreign owned firms or operate under contracts let by firms whose principal business is to sell things in US and other OECD markets. They do their management accounting (mainly) in USD or another “home currency”. It would be likely that FX driven price increases would be transferred to truly domestic suppliers of inputs (labor, intermediates, rent etc). In many cases, contracts between foreigners and truly domestic firms may be denominated in USD.
Is there any data on the importance of this phenomenon, which might well blunt the impact of an FX shock on Chinese exports (by volume), at least in the short term. It would of course come out of the profits of the Chinese firms but that may be dealt with separately. Firms may well be able to get concessions from friendly SOE that provide inputs, or soft bank loans (that would assume connections and good conduct). Of course that would reduce GDP a bit, but maybe the process that leads to the PRC GDP number is capable of ignoring this.. There is a related matter and that is to what extent Chinese wages have downward flexibility. The remaining rural labor reserves (and soon to be redeployed construction and textile workers) point in the direction of abundant supply for years to come. That may be a gross simplification, with lots of market related rigidities actually in place. Also, there is the political aspect: can the Party afford declining standards of living?
Glen:
This is an interesting suggestion, and would have great impacts from moving toward balanced trade, to alter investment flows, employment opportunities and bringing some purpose back to the global trade system as originally envisioned which has been skewed of late by the sheer number of new participants coupled to the structural impediments that occurred do to the growth of stakeholder interests in furthering the model which is skewing the global growth potential, as I have argued essentially the system went from 1 to 5 participants too quickly. What I am concerned about is how perceptions of what is likely to occur has led to these issues; the development potential, trajectory, and similar by both the receiver country of great growth of late as well as those expectations of the international investor community. Expectations and timeframes as to the growth of the global middle class, while income inequality rises globally, functions within the global economy which trend potential for the realization of the global middle class downwards which mostly has to do with functions related to income inequality and the parochial interests of some players globally as to timeframes for development, likely beneficiaries and how projections fail to account for the reality of what is occurring, and how unvirtuos cycles, even those producing seemingly positive numbers are leading away from the long-term potentials which rationalize the giddy investments being proposed from the trends hypothesized. This proposal by Gomory-Buffet might be an impetus to get countries to more fully analyze their self-interest which may run counter to recent excesses even if recent excesses do proffer positive numbers. Even if one can accept the numbers as to growth in China, it must be realized that it is based upon vast stimulus and even greater levels of lending, the simultaneous strategy to develop multiple leaders across a wide variety of industries, can only lead to inefficiencies. Even the managed trade and development of Korea or Japan, united multiple companies with multiple internal strengthes togethor in tackling an industry simultaneously under a system with many fewer participants. To get this global system correct, and on a path toward universal development will require much more maturity, and useful timeframes. Demographic hurdles will have to be addressed, development under current constraints will not occur, universally, prior to meeting them and malinvestment and overcapacity only trend the global development potential downwards while skewing investment patterns do to investor expectations. One must remember, in this system, at present there are a plethora of development opportunities, while one can not destroy the segments of the global population that make such development possible, otherwise, again it is per capita bio-capacity where a new homeostasis will quickly be maintained. Further, despite the recent rises, decade or decade and a half long rise, in commodity prices, most developing and developed countries want to be more than simply commodity exporters, if powerful stakeholder groups within countries and regions do benefit from it. So this idea, if considered more fully might be a motivator for people to get serious about bringing the global development trajectory to a more sane path for the betterment of all global peoples, even if present expectations and life experiences do desire people to live in fast-forward.
HI, as CStevens responds, GDP is not a good measure but it is hard to come up with something better. In principle there is no reason why environmental deterioration, unwanted inventory buildup, and so on cannot be correctly deducted. They would be in most corporate accounting. I suspect the reason they aren’t has more to do with governance issues than with accounting issues. By the way, GDP measures total production. Why not a consumption measure? It would have problems too, but a different set.
Rien, thanks. Now that everyone is on the trade-war-is-coming war path I think I will spend more time trying to figure out how China will respond and what domestic impacts that will have.
Bob in MA, it is very hard to prove or disprove the argument that Chinese investment is being misallocated in the aggregate. As was the case in Japan in the 1980s, we will only know after the fact. I argue the case for circumstantial and historic reasons.
AIMD, there are many ways the US can reduce the trade deficit, and one of them is to raise consumption taxes. Basically anything that shifts resources from consumers to producers will force an adjustment in the savings rate and a change in the trade balance. Tariffs, consumption taxes, subsidies, currency manipulations, etc, are all ways of doing the same thing, and each has different sets of distributive impacts. The US wants to use one of the same primary mechanisms that China uses, currency manipulation, to achieve that adjustment. It may or may not be the most efficient way of forcing a trade adjustment, but I am not sure it is more moral or less moral than other ways of doing it. I am not sure what you mean by “American consumers are beyond salvage,” but I would argue that American consumers are adjusting. Chinese consumers cannot yet adjust because the mechanisms that keep their consumption low haven’t changed.
Matt L, I have discussed this before. Basically I would argue that the urbanization process (move a farmer to the city and his productivity automatically rises) and the education process in China will provide a floor to Chinese growth that is above the Japanese floor.
Houhui, not only is it almost impossible to enforce but it would require the US doing something that most Americans, including me, would not like the US to do. Complex restrictions on capital flows can be highly distortionary, and the US is so integrated into a system of international capital flows that restrictions, such as inflow taxes, could cause more problems than they solve. Still, any idea is worth considering.
Glenn, balanced-trade certificates are an old idea. For example the Germans used something every similar in the 1930s. In that case they created special export-related marks as currency for imports. This strikes me as likely to be very distortionary and very hard to implement. Also I see no need for the US to run a balanced account. Whenever the US runs a balanced account or a surplus the world economy seems to fall into crisis, and certainly without 30 years of excess US demand and trade deficits, there would be no Asian economic miracle. A world of rigidly balanced trade also means no inter-temporal shifts. For example, because the US and India are and will remain relatively young, while Europe, China, Russia and Japan are aging extremely quickly, it is reasonable for the latter countries to run surpluses now to compensate for deficits in the future. Balanced trade would prevent this from happening. What we need is not an elimination of imbalances but rather a mechanism that prevents excess imbalances.
WJL, with official unemployment in the US above 10%, and real unemployment much higher, and with countries like Spain suffering from unemployment of over 20%, while China is growing at close to 10% with upward wage pressure, I am not sure why you would argue that China is taking all the pain of the global adjustment. As for SDRs, I believe they are a great idea – for the US but certainly not for Asia. If the world used SDRs and not USDs as the dominant reserve currency, the US would never have been able to run such large deficits and Asian would never have been able to grow so quickly. I have written about this many, many times and don’t want to do so again, but ask yourself, if it was such a good idea for the PBoC to accumulate SDRs, why didn’t they? After all, the SDR is just an accounting unit. Anyone, even you and I, can accumulate our savings in the form of SDR equivalents. The PBoC did not accumulate SDR equivalents because doing so would have dramatically reduced China’s export growth.
RS, your question reminds me of an investor who once asked me when the tipping point would occur. The key point of the whole tipping-point metaphor is that the cascading event is completely unpredictable, even in theory. My Minskyite framework posits that as balance sheets get increasingly unstable, it takes smaller and smaller shocks to unravel them. Shocks are by definition unpredictable. By the way an adjustment is not an event that usually takes place at a point in time. Japan has been adjusting for twenty years. The US has been adjusting for the past two years. When will China adjust? It is already adjusting, just not very quickly.
Rien, you are probably right but I am always wary of putting too much importance on accounting, rather than economic, effects
SORRY, BUT FOR OBVIOUS REASONS I AM NOT APPROVING COMMENTS THAT HAVE TO DO WITH THIS YEAR’S NOBEL PEACE PRIZE. WHATEVER YOUR FEELINGS MAY BE ON THE SUBJECT, THEY ARE NOT ESPECIALLY RELEVANT TO THE TOPIC OF THIS BLOG.
Most of these comments are proposals that are beyond the ability of governments. What works for hundreds and thousands doesn’t work for millions. As the article says “So the renminbi must rise”. China can do it now or its trading partners will pick the time.
Hi Michael,
Informative post. I read an article (“Strong yuan means a more powerful China”) by Paul Kennedy (author of “The Rise And Fall Of The Great Powers”) about the potential replacement of the dollar as the world’s reserve currency, by the yuan rather than the euro. Kennedy appears to see this as a microcosm of the shift in power from the US to China, noting that the Dutch guilder was replaced by the French franc, the franc by the pound sterling, and the pound sterling by the USD, all of which he says corresponded to geopolitical shifts between those powers.
Perhaps such a question is beyond the scope of this discussion, but do you foresee the yuan ever occupying a place akin to that of the dollar? And although Kennedy associates reserve currency status with geopolitical primacy for the country that prints said currency, I know that you have argued before against the dollar’s status being an asset for the US.
Boltho, Andrea (1996): “Was Japanese growth export-led?”, Oxford Economic Papers, 48:415-32.
Ohkawa, K and Henry Rosovsky (1973): Japanese Economic Growth, Stanford University Press.
Alternative explanation for Japanese growth.
Judy, aren’t you confusing WW I and II? Germany had a heavy burden of post WWI reparations which may have contributed to a second European Civil War (the war in the Pacific was entirely different* and WW (or rather a single WW) is essentially an American narrative that travelled well) and after WWII the wise men reorganizing the world determined that there would be no reparations, because they only play to popular sentiment but are essentially counterproductive. Both Japan and Western Europe received widespread assistance from the US, while US military forces maintain a presence in those countries until this day, and with full public consent. Issues like reparations, comfort women, Nanjing etc are mainly useful as “traffic signals” and are of course a genuine issue for concerned or affected citizen groups.
* Russia participated (almost) exclusively in Europe, but had the bulk of the “WWII” casualties, etc. The Pacific War was between Japan and the US (with a minuscule but heroic Australian contribution) and mainly a contest between naval/marine and air forces after the other European “empires” had given up or accommodated (like France). Resistance to the Japanese occupation of the East Asian Mainland (the job of the Jap. Imp. Army) tended to be a Communist (and minority) affair (not that the Japanese were popular of course). Several effective Asian Leaders (like Park Chung Hee) actually served in the Japanese forces, LKY translated for them, etc. So the hostilities in the Pacific Basin can be divided into (1) a long Japanese campaign and occupation outside the US sphere of influence (started by the events in Manchuria) but with its roots far earlier in the occupation of Korea, the acquisition from China of Taiwan and a turn of the century contest with Russia over supremacy in NE Asia. And (2) the Pacific War between the US (initially associated with Anglo-Dutch forces and the japanese Imperial Navy (the main Allies/ JIA theatre was Burma, which was really a sideshow). JIA and JIN were culturally and politically very different animals and the origins of Japan’s conflict with the US and the role divisions within the Jap military may have played in causing this catastrophe are still not well enough known, but we all know how it ended, with a brutal demonstration of modern firepower that probably did a better job at discouraging future aggressive behaviour than any amount of reparations could have done.
I enjoyed this article very much.
But is China really going to bow to external pressure to revalue its currency more quickly? The political logic would surely make trade frictions – even a trade war – less unattractive than increasing the risks of a Japanese style bubble at home. A trade war could be sold as somebody else’s fault; but more rapid currency appreciation would be seen domestically as a decision by China’s top leaders to appease their foreign critics – I don’t see it happening.
My own best guess is that we will revert to the slow but steady upwards movement as per 2005 onwards.
Prof Pettis.
Fair enough!
What was your take on the not so subtle digs from various sides during this weekend’s IMF festivities? Are you any more optimistic that any cooperation can take place, or that the IMF can be finally given some actual teeth?
PS, does D-22 have website? I have some friends who are into live music coming to town, was going to see what is on?
“American consumers are beyond salvage” means that they are too indebted to be the consumers of last resort anymore, a role they played for a long period of time, as US runs mind-boggling trade deficits. And no one forced US do it. What happened is that US abused her position as the de facto central bank for all the dollar pegged countries and the status of dollar as the reserve currency in global trade. Especially after the burst of hi-tech bubble, the Fed has tried to soothe the pain of the market correction by excessive credits, and the Bush administration has squandered away the Clinton budget surplus by fighting two wars and cutting taxes at the same time.
That’s how the huge distortion is introduced into world trade and finance. Everyone, including Americans, Chinese, Japanese and Germans, has to pay. American consumers have consumed their futures. European banks are enmeshed in the distortions originated in America. The Chinese economy has grown at a fantastic speed on the back of unsustainable Americans demands. And the Japanese has got a respite by piggybacking on China’s growth and using China as a surrogate for their exports. Now the party is over.
And the American solution is to call for the rest of the world to consume more. They should act as irresponsibly as the American consumers. The distortion in American economy should be corrected by further distortions in the rest of the world. And one wonders why such a proposal does not fly.
aimd:
America wants people to consume what they can make, because we can no longer consume more than we make. That is not irresponsible.
Aimd
I agree with some of what you say but for the fact that simple the US went on a monetary expansion binge post the hi-tech burst and twin towers. Rather, most around the world did just the same, which was really in response to multiple shocks even further back to the Asian currency crisis, including the Meixican PEso, Russian Ruble, etc…. (one could even few the Chinese devaluation as a shock, although system institutions have come to be blamed in peoples minds as causes rather than those who recommended the austerity that followed) Anyway, so without replacing a consumer you have essentially no growth, nor even rationale for infrastructure investment and similar which will quickly lead to losses on the great degree of overcapacity of development in the world as lower expectations of growth will acknowledge lower levels of investment and lay bare poor investments leading to problems for those who have experienced greater growth over the previous period due to expectations of future growth.
How had the US encouraged EU banks to lend trillions in Euro’s Swissies and other harder currencies to build industry and housing in Eastern Europe and elsewhere? Tens of trillions I believe.
Anyway, 2000-2008 was a global growth party and all have a hangover from it, different medicine is required in different parts of the global economy, but that medicine need to be taken. The US economy isn’t going anywhere down, and the will whether any storm, even prosper further in absence of the dollar. The dollar has had and probably will still have further utility for the global trading system. The sheer amount of global debt and assets denominated in it will take decades to unravel were it to need to do so (despite the fact I believe it to be good for the US economy and people were it to do so). Eventually, all will have to face the consequences of the recent downturn and do what is right for the global economy in total. This most likely means different forms of austerity in different ways for different countries relative to recent experience, if not as normally defined. A gradual shakeout, and at least a decade of sub-par growth while this occurs. Further, we need for our numbers, institutions, and legal reforms to be more in line with what is expected of important members of the global economic community. The engineering of GDP has gone on for too long, which has led to some irrational exuberance among companies, investors and the global people ion general as to timeframes for development. What is to remember is that there are a plethora of development opportunities, and I believe most understand this, if politicians, regardless as to where they reside will play the “we’ve got the special stuff that everyone wants” card and it’s not my fault it’s the foreigners. Income inequality globally need be addressed and the importance of domestic demand where trade is the heavy cream floating on the top of the milk can, too rich for you too drink everyday. If you need 300 million metric tons, it is better having 275 million tons of capacity and trading for 25, than having 400 million metrics tons, as such costs will eventually need be born by someone, and this across so many sectors of an economy. If the housing sector continues to bear such costs, can the purported explosion in middle class growth dynamics ever occur, or are we just concerned with entrenching the interests of elites.
aimd,
Maybe it was japanese and US owned factories “driving Chinese (export) growth”? Rather than Japan piggying-back. The jury is still out on this. All we have is statistics about goods coming in and going out. China is both a site (and one that is undergoing fast expansion of its production and productive capacity) and a state. The extent to which the state of China can claim responsibility for China’s export successes is as yet not widely known. Maybethey’re more a facilitator than an actor.
Having written my own proposal for restricting China’s purchases of US government bonds some two years before Daniel Gros, which was discussed on Brad Setser’s blog at the time, I am a little miffed to see Daniel’s post get all the attention, so if readers here would like to read my post, it is here: http://reservedplace.blogspot.com/2008/10/just-say-no.html
There is little point commenting on Krugman’s post on this subject, since I doubt whether he reads all the comments, especially after the first day or so, but he should understand that US treasuries are registered securities. It should be easy to trace where payments on interest and principal go in the first instance, and given the experience of the US authorities in controlling money laundering and the scale of China’s purchases, let alone their holdings, I think it would be practically impossible for China to significantly evade US “reserves control”, as I named it.
To anyone who reads my post, it will be apparent that I am relatively sympathetic to China’s position, and believe that a Chinese current account surplus of some size with the USA can benefit both countries, but I think there comes a time when a country (China) which uses the liberal markets of one country (the US, and maybe Japan too now) for its own economic management purposes while denying other countries the freedom to respond in kind if they wish (by buying renminbi bonds; not that I would expect the US to do so anyway) has to respect that country’s tolerance for that arrangement. Ideally though, such matters should be discussed and hopefully settled by technical experts from all countries involved, as far removed from political grandstanding and nationalism as possible.
Professor Pettis,
You wrote, “In a world of beggar-thy-neighbor policies and anemic global demand growth, countries that do not retaliate will almost certainly see rising unemployment.”
Is this really so? What if forcing currency revaluations don’t actually decrease unemployment? The oft-cited case is the yen revaluation upwards which didn’t save U.S. jobs. I contend that the relationship between employment and currency is a simplistic notion that isn’t borne out by reality.
What is more operative is where the intellectual capital or physical capital (i.e. commodities) is actually contributed to a given good. The jobs are more likely linked there — not to a currency rate, which is more and more the result of political manipulation as opposed to market forces.
In the recent IMF meeting, China accused the US of destabilising emerging economies by allowing ultra-loose monetary policy to flood the emerging world with money, which is in effect a US style currency intervention.
The global imbalance issue is indeed US vs. the emerging economies. Almost every emerging economy, irrespective of their exchange rate regime, is intervening its currency (I do not see difference between Japan and China, for instance). China stays in focus because of its size. China bashing is not all legitimate.
China should take more leadership in global governance on trade imbalance. A repeat of Plaza Accord is in its own interest. Being a free-rider on a large scale is indeed intolerable.
@Glen: comment on commodity producers
Don’t remember commenting on commodity producers. Are you sure you are responding to the right comment/commentator?
@Huizer
Nope, not confusing WWI and WWII. Part of the official speak on causes of WWII traces roots to the economic hardship caused in part by the reparation (punitive) demands placed on the “losers” from WWI such as Germany. Which ties in very well with the “explanation” that rationalised not placing punitive reparation demands on Germany, Japan and other Axis powers.
The viewing of WWII as separate theatres of war is complicated by the Tripartite Pact of 27 September 1940, that carved out theatres of influence and war that made it easier for a “divide and conquer” strategy to be pursued. Now, I am no historian or expert on WWII history however, I suggest that efforts to whitewash Japanese actions in WWII have long been controversial, to say that resistance to Japanese aggression and occupation was a minority and communist effort would be to both insult the memory of thousands of Asians (if not millions) who gave up their lives in the effort and to play the national amnesia game that Japan has played for so long.
The issue of reparation has always been deftly dodged by successive Japanese governments who point to peace treaties signed (under American mandate) regarding reparations, which is part of the reason why legal cases involving Japanese experimentations (on POWs and civilians) or “comfort women” have almost never resulted in judgements that involve reparation. By focussing on “collaborators” or people who were forced into working for the Japanese during their occupation (of various Asian countries, some as you rightly pointed out, took place long before WWII) is again to repeat Japanese “alternative” histories that state that Asian peoples truly believed and subscribed to the “Co-prosperity theory” that Japan used as ideological propaganda to justify their atrocities and aggression in WWII.
As you can tell, there are deep currents of unresolved discomfort whenever such issues are raised partly because when alternative histories are promoted and seek to whitewash history, there is the obligation on younger generations to ensure that the perspectives of history are not lost.
American silence on Japanese efforts to “revise” history and gloss over their atrocities is oddly jarring partly because they have condemned similar efforts by other nations. That American official stance in the recent disputed islands issue was to side with Japan is not only telling of American interests in the region but also of a longstanding tradition whereby America has turned from Allied leader in the Asia Pacific theatre of war to postwar ally of Japan. The “firepower” you referred to in your comment that ended the war possibly plays a huge role in this complicated relationship – however, in whatever light Japan may appear to the USA or even the West in general, to many in Asia, Japan has been less of a victim than an aggressor. It is something for the history books for sure, but as long as one party continues to suffer from national amnesia, the rest of the parties cannot forget and that is something the Japanese are going to have to contend with till they are ready to face the past in a way that approximates Germany’s own process of facing up to its role in WWII.
Oops forgot one point:
Which ties in very well with the “explanation” that rationalised not placing punitive reparation demands on Germany, Japan and other Axis powers after the conclusion of WWII.
I’m very curious what you thing of Quantitative Easing II. There is a good Federal Reserve analyst who says this is the end of Bretton Woods 2.
link:
http://economistsview.typepad.com/timduy/2010/10/the-final-end-of-bretton-woods-2.html
I have trouble imagining how this could play out. How would QE2 dislodge existing currency arrangements?
Thanks for your terrific blog.
Jiudy,
I did not want to stray too far from the “China” and my question about whether or not confusing WW I and WW II was a genuine one. Your response to my -admittedly somewhat provocative- remarks in fact illustrates the fact that Asians by and large have not yet reached the level of postmodern enlightenment regarding the phenomenon of war, that is that concepts like justice, cruelty etc are relative and that war is basically a tragic accident that is more likely the more public narratives about past wars and nationalistic (or etno-chauvinistic) rhetoric are combined by politicians, keeping irrational conflicts alive. I have no desire to apologioze for Japanese, or far that matter US, Chinese of Indian behaviour. That is why I called WW II a civil war (in hindsight of course) contributing to a higher level of integration. Despite pacts en alliances, these two wars were entirely different, except from the point of view of the US. ( Only their terminal phase -when the two prospective victors began to confront each other, became the two wars united beyond the Anglo-American presence in both theatres). During the Pacific War, Germany and Japan were not in a position to offer each other assistance in fact, Japan, by attacking the Pacific’s foremost naval power in a rather silly way (combined with Hitler’s irrationality) facilitated a greater US role in a conflict that could have led to an entirely different (and more favorable to Germany) equilibrium.
The reason that I am boring people with this is that one of my greatest concerns for China is that it is facing the point where the Nanjing issue is no longer an instrument of diplomacy (a traffic signal) with Japan, something that both parties understand but has no cost (maybe this requires clarification, maybe not), but may become something that acquires political meaning in the vacuum that constitutes current politics (as public drama) in China. That is the stuff politicians can start but not control and we have seen the devastating effects of nationalist and especially revanchist movements.
Of course (as I said before) there have been real atrocities and countless victims (but if one takes China’s history from 1850 through say 1970, the Japanese toll appears negligible compared to the home-made one.
It was not very wise of the West to further provide ammunition to nationalism in China by awarding the Nobel Peace Prize (incidentally the first Nobel ever awarded to a PRC citizen and resident) to someone clearly violating the award criteria as the PRC sees them) while maybe the next cohort of leaders (the current ones have first hand memories of Zhao Z’s attempts to develop real politics in China) is probably even less inclined to understand the need for a more participatory form of government as China acquires a western-style middle class. That class could go in the direction of nationalism if the country is externally frustrated, living standards suffer (as they have in the OECD countries) and the spiritual vacuum created by Deng X and not filled by Jiang Z lacks acceptable narratives other than nationalism and jingoism. There is a parallel with Japan in the late 20s and early 30s where moderate, internationalist leaders of a country that had developed fast, built a middle class and had a lively experiment with capitalism and democracy (more of both than in the period from 1945 through 1970), lost face when the dominant powers of the era excluded it from their attempts to overcome the gobal economic problems of that time, turning Japan into the ultimate beggar in the industrialized world. That may well have contributed to the rise of a rabid expansive nationalism that allowed military leaders to hijack the Japanese people in a suicidal war.
Maybe the elders of the overseas Chinese community share these feelings, rather than anger over things that happened over 50 years ago.
Michael, I understand your concerns with trade certificates, but I think that they could still be a valuable tool. I do suggest that they should be proposed as a simple 1:1 relationship, for the reasons you mentioned. I suggest they should include energy, or maybe even commodities used for ones own consumption. More for finished goods and services. Such certificates, could be traded among all trading partners. So while if one country required itself to run a trade surplus, it could purchase the certificates from other countries that could have a trade deficit. While there are many technicalities that would have to be worked out, there is something appealing about having firmer controls on the balance. The status quo, with everyone targeting the the US a bottomless pit of demand, is unworkable.
Regarding you remark about the US trade balance needing to be flexible as a requisite to prevent the world economy from falling into crisis, I agree. The problem is that while it needs the ability to be flexible, it is all to easy to be encouraged to be in deficit, and all to difficult to be in surplus. Participants are not partners. The status quo seems to imply that the US can run a deficit, but denied the opportunity to run a surplus. That is certainly is a system designed to fail and not really flexible at all.
Mr. Pettis,
Let me understand.
The PBOC has lots of US$ they use to buy inputs for their industries, and US gonernment debt, and not much else. The US gov’t and other developed nations have announced austerity programs aimed at balancing their gov’t budgets. If this austerity is successful, this implies the developed nations will no longer need to issue as many new bonds. The FED has announced QE2 and will buy more US gov’t debt.
Is all this an attempt to force the PBOC to change their dollar peg?
Many of those US$ sloshing around the globe will end up in China, and could cause inflation and bubbles unless PBOC lowers their price for US$.
@Huizer
Thank you for your response. There are points that I agree with and some that I don’t.
Maybe we can clarify some points here:
>During the Pacific War, Germany and Japan were not in a position to offer each other assistance in fact, Japan, by attacking the Pacific’s foremost naval power in a rather silly way (combined with Hitler’s irrationality) facilitated a greater US role in a conflict that could have led to an entirely different (and more favorable to Germany) equilibrium.
The tripartite agreement shows the intent if not the reality of axis powers carving up spheres of influence whereby western axis powers allowed Japanese forces help and essentially a free pass through their territories/colonies in the East. If nothing else, that facilitated the speed of Japanese strategy and invasion in the region. Obviously in the progression of the war, different paths were taken however, the carving up of spheres of influence helped to divide allied attention who were more preoccupied defending and freeing their home countries and therefore could not have spared the necessary effort to defend their colonies in the East. That, by the way, has often been (for official speak) seen as part of the explanation for post-war bloom in nationalism and consequent fight for independence. In line with your reasoning, would you perhaps suggest that Asian countries who managed to free themselves from colonial masters postwar see the Japanese aggression and occupation as a positive contributing factor in their independence struggle?
>That is why I called WW II a civil war (in hindsight of course) contributing to a higher level of integration. …That is why I called WW II a civil war (in hindsight of course) contributing to a higher level of integration. ..illustrates the fact that Asians by and large have not yet reached the level of postmodern enlightenment regarding the phenomenon of war, that is that concepts like justice, cruelty etc are relative and that war is basically a tragic accident that is more likely the more public narratives about past wars and nationalistic (or etno-chauvinistic) rhetoric are combined by politicians, keeping irrational conflicts alive.
The postmodern enlightenment of which you speak of is a rationalisation of war as a philosophical concept which can take place with time and after the realities of the war are resolved. Arguably, you can do that in Europe because the perpetrators have faced up to their actions in war. There is no rationalising cruelty and war crimes despite there not being any objective measure for it, by that measure neither is there a real concept of ‘cold’ because for example 0 and -30 are both considered cold by differing sets of people (with different experiences and background). however, we all know that -30 is probably a lot colder (and more deadly) than 0 (degrees celsius) even if we were to argue that it’s all relative.
there is a real difference in the East simply because the detachment, that is required for things to be seen in a detached postmodern manner, is absent for a variety of reasons, one of which is the fact that perpetrators are still in a state of denial about it. How can you look at the facts of the matter coldly and rationally when there are people who insist that some events did not take place?
>Of course (as I said before) there have been real atrocities and countless victims (but if one takes China’s history from 1850 through say 1970, the Japanese toll appears negligible compared to the home-made one.
Well, seen against the background of history, any particular conflict’s casualties will seem minor compared to the total toll, does that then minimise or in any way diminish any particular conflict? If that is the case, would you prefer to put the casualty toll of Japanese aggression against 5000 years of Chinese history where the toll from numerous civil wars would dwarf those numbers even more dramatically. Comparing statistics does not negate the devastation that is wrought upon people by war. Neither should such comparisons justify any revisionist or alternative “explanations” that seek to whitewash the effects of war.
If comparisons are to be made: It is odd that loud protests are heard when revisionist histories and justifications are made regarding the treatment of Jews and minorities who were persecuted and suffer atrocities at the hands of the Nazis yet little more than murmurs when Asians, who have suffer at the hands of the Japanese, protest revisionist texts and efforts that whitewash the atrocities committed against them
>>Maybe the elders of the overseas Chinese community share these feelings, rather than anger over things that happened over 50 years ago.
Perhaps this would seem odd after all “heated discussion” over the subjects we have dealt with, Huizer, let me assure you that nationalism and “jingoism” is what I fear most because whilst rational beings would not choose the option of war, nationalism and “jingoism” is precisely what could tip the balance. There will always be those who choose to exploit these sentiments and an element that is most inflammatory is to have foreign powers/politicians dismiss sensitive points of conflict. What is left unresolved, what cannot be confronted squarely is what is left to fester. 50 years is a long time by human standards but it does not mark the expiry date for ill-feelings particularly suspicion and suspicion is further brewed when parties cannot face the past squarely.
An interesting side story to an article in the NYT was the remark that French pro-natal policies date back to WWI and WWII where perceived Prussian superiority in pro-creation and numbers tipped the scales initially in the favour of aggressors . It’s been more than 50 years and some things have left a legacy even in Europe where parties have apparently made their peace with the past. What would you expect in an Asia that has yet to banish the ghosts of the past?
I look forward to the day when Asia settles the past in a way that allows little room for inflammatory politics. When we can look at war and history in a more rational way. However, I fear for a world that looks at war in terms of statistics and dismisses conflicts and war on those grounds because that will be a world that provides the breeding grounds for dehumanised and dehumanising conflict.
prof pettis
apologies for the sidetracking. some things are better said than left unsaid? no pun intended.
the currency manipulation policy seems to be making its rounds, Japan, Thailand, perhaps even South America are increasingly pursuing the route whilst loudly condemning others, a case of can’t beat them join them?
starting to wonder if it’s not just an expandedseries of asset bubbles inflating and deflating and a series of minor ‘w’s?
Judy and Rien, i would remind you that any discussion of the Chinese number of war dead or the number of deaths after the Second World War is actually illegal in China in public! Luckily this blog is still blocked in China, or else you would both be in line for a slap on the wrist!
Judy,
We disagree but I think that you represent mainstream NE Asian sentiment. Probably the Indochinese and the Malays do not feel as strongly though.
Korean and Chinese (including part of the Overseas Chinese in SEAsia) populations seem to really nurture this bit of unfinished business and politicians exaggerate occasionally and exploit when opportune, while in Japan, as you correctly state, there has been no real recognition of what role their armed forces played and we should blame the US for neglecting this important task of education. Probably the cold war got in the way. At least there is not a lot of anger about losing the war left. My own worry is that with a stock of popular sentiments like these and rather empty domestic politics in most EAsian countries (democratic or otherwise), there is always the danger that populism and communautarianism morphs into militarism on the back of real or imagined wrongs from the past. I am not so convinced that Asian Values provide a good defense to that. And that brings us again to China, because that is where nationalism is coupled with a very deep political/emotional vacuum because the Party has been unable to find a replacement narrative for what helped Mao to win the civil war.
I would personally be very happy if the Japanese did everything to deny the nationalist rhetoric to the Chinese leadership (after all, it would cost very little, apologies, a few politicians losing face for the good of the nation and some money -of which there is too much in Japan anyway-) And if you follow the Japanese media a little, there has not been a lot of non-routine nationalist fervor (which could make this politically costly) after China not only violated Japanese sovereignty over the Shenkakus but, to add insult to injury, accommodated the Japanese “tributary mission” in the Daioyutai..So why not a little more Japanese generosity. It will not cost too many votes. Interestingly, the Japanese themselves have a mirror of the Chinese/Korean feelings in their sentiments over Hiroshima vs the USA. And then US diplomats have trouble attending the relevant ceremonies…
Why not assume that the Japanese will play this card when it suits them; for instance on the occasion of as yet unpredictable events in N-Korea. Pity they can play it only once.
Michael,
Apologies but thanks for letting this discussion through. Not quite on topic of course but maybe interesting for some.
Houhui,
Point taken!
The fact is that now China is actually undergoing a transition period whereby cost of living is low and with huge pool of human resource available basically they can churn out everything in the most effective ways. Give them a few years down the road, things will start to turn around. As the country becomes wealthier, the population will start to demand more and this will drive up consumption. Eventually it will reach an equilibrium like what we are seeing with developed countries.
Nonetheless, what we are seeing here is a very unbalanced effect due to the currency control that prevents real valuation of yuan.
Like footnotes in Gibbon’s Fall of Rome, the comments after your posting are almost as good as the main act.
An interesting aside, like Toto dragging open the curtain the true Wizard of Oz was hiding behind and exposing him, I was struck by how almost at the same time or immediately after the IMF meeting in DC focusing basically on China there was another forum of defense ministers of Asia in Hanoi being reported upon. The attitude and approach to China was almost a 180 form each other with all the aggression of the Sec of Treasury offset by the Sec of Defense Gates in regards to the official policy of the US towards China. Gates was clearly offering friendship and cooperation towards Minister Guangle.
In fact, in reviewing the decade of recent history between China and the US, I wonder if it is security issues which are writing this story – not economics. in February of 2001 China and the US were in near hostility and it culminated with the forcing of a US military plane to land in China after being rammed by a Chinese military jet (which subsequently crashed and the Chinese pilot died). There was obviously a full out “cold war” starting between China and the USA. Yet their was also no trade imbalance and no massive excess trade reserves of US dollars held by China.
Then 9/11.
Is the reason for Chinese growth is that an implicit but powerful deal was struck that if China caused no security concerns on the US Pacific front, they would be allowed to pursue any trade policy they wished with the US. That China would not share the same end game that Japan was forced to go through when they applied the same trade policy. Taht the US could not afford to contain China and also fight Iraq and be in Afghanistan.
If this has validity, it means the deal is still on and it is not G 20 or the US Dept of the Treasury or Congress or any of those constituents – it will have no economic drivers – but as soon as the war in Afghanistan and Iraq ceases (win or lose), the renminbi will immediately soar to 2, say, and China will plunge to a terrible economic outcome and their trade surplus disappear. The irony is that upon that point the USA will have a even more serious security concern.
Is watching what is going on in Pakistan and Helmand Province more important, if not the determinant, for figuring out what will happen to the renminbi and when? Not the IMF or Geithner nor anything in Washington DC.
Watch Gates not Geithner to get a sense of timing. “Sturm and Drang” ; not Keynes.
Michael, in reference to your article today in the FT. I believe China is setting the agenda. Somehow it managed to convince everybody that a 20% appreciation in, say, 12 months, would bring chaos to its export industry. But we see the vast majority of countries suffering currency volatility of such order without any major disruption. Add also the fast productivity growth in the chinese industry, perhaps close to 5-7% per year, and it is really difficult to sustain the chinese argument. I really don’t understand western experts failing to acknowledge that yes, China should revalue at least 20% relatively quickly. Further careful consideration of profit margins in the chinese export sector is therefore warranted before conclusions that China would face problems with currency flexibility
Prof Pettis
Agreeing with Huizer, thanks for the generously allowing the sidetracking, will endeavour to keep things on the straight after this
@Huizer
>Asian Values provide a good defense to that.
Sorry, no idea what Asian values you are referencing. Pretty sure there are no references to values in my comment?
As for the point that Japan can easily play the “apology/face up to the past card”, am a little sceptical. Partly because postwar Japanese politics, whilst seemingly influenced by America (pacifist constitution and all), has been dominated by figures who have either a link to the war effort or are descendants of those who were linked to the war effort. Granted that many of those with a direct link to the war effort are in their twilight years or have passed on, that aspect has made it difficult for Japanese politicians to come right out and face the past. Of course, the same could well be said of the “alleged” links between yakuza (Japanese underground) and Japanese politics but that’s a story best left for tea time natter.
As for your assertion that there has been little Japanese nationalist fervour against the recent incident, well, it has been noted that Japanese nationalism has experienced a revival in recent years, notably amongst the middle-aged. As for senkakus or diaoyutai, well, you’ve really exposed your stance on the issue?Considering they are territory disputed by several countries, exactly whose sovereignty is being encroached upon really depends on whose perspective you are adopting?
however or whenever they choose to play the card, let’s hope they do it well so that opportunists are prevented from fishing in troubled waters (no pun intended). Amazing that NKorea hasn’t taken advantage of this to the disadvantage of Japan.
@Houhui
The blog is blocked in China? Remember accessing it without much difficulty the last time.
Thanks for the heads up. Actually never discussed this with Mainland Chinese friends and certainly not with Japanese friends, not quite a topic for social conversation, one would imagine. Guess that’s another addition to the long list of what not to discuss in public. A dumb question, what about news reports and documentaries?
Back to the topic at hand:
Found the Japanese finance minister’s reaction yesterday a little wry: criticising SKorea and China regarding the currency manipulation issue and defending Japan’s own “adjustments”. One wonders just how long before BOJ really steps in the market in a more obvious manner. After all, reporting season is well underway and cannot imagine Japanese exporters are having an easy time.
And an NYT report made it very obvious how Mid-America (in both senses) is suffering and how that suffering is not abating for Americans, so we wait with bated breath for that obvious swing this coming election.
Yes this blog is blocked in China. VPN to the rescue! Many believe that war dead / Mao era dead discussions are illegal because the latter outnumber the former, or at least would do if properly counted. AS you have been saying, there is very little post-modernism in international relations in Asia (Japan being the most qualified candidate – not easy when surrounded with “previous era” states, which i think explains Japan’s constant inability to break fully away into the liberal-internationalist camp, despite being one of the top UN funders relative to GDP, having no offensive military, and still -for the time being – no nuclear weapons programme). A good book to read on the subject is “The Return of History and the End of Dreams” by Robert Kagan. (it is also a short book!)
Back to finance
http://www.reuters.com/article/idUSTOE69D01420101014
local government bad debt estimates increase slightly.
Judy and Rien:
These topics are interesting to anlyze as to how they play on the national dialogue, interestingly, often these are stressed simply so they play on the national dialogue, ie….it is a Least Common Denominator by which a population can coalesce around an issue, that is arguably of importance insofar as there are not more pressing issues of concern. Rather, such an issue is able to replace more pressing issues of concern. While important these very issues, although interesting in how they come to define a nations conscience, a nations worldview, insofar as that can be a collectively held perspective, are really less important than those factors impacting a country at the present. Important to understand their influence, certainly detrimental to confronting current issues at play in a society, but certainly useful in solidyfing support, or coagulating deeper contemplation, of the very real social, economic, and political issues at play, and necessitating action in a society. Certainly not polite to discuss in polite company, nor really of any utility in the present day, but perhaps useful in understanding the evolution of relations between peoples and countries, perhaps even the evolution of the mindset of stakeholders groups within countries, although often held or maintained because of they have in coalescing large groups of people to useful belief constructs, and positions held, by those who seek to promulgate one perspective or another. This is natural. Further, it is useful for people to call attention to that fact, so that we can get down to the real issues at play, today, rather than live in the near or distant past while not misunderstanding the utility of studying history for the evolution of relationships between different actors in society, rather than allowing history as an excuse for turning a blinds eye to the present.
These issues as to islands, as borders throughout history have moved throughout history. Claims and counterclaims exist. Where there are valid claims, as we can not say they correct claim to be 20, 50, 100, or 500 years ago is to jointly develop resources, as has been done elsewhere, ie the Middle East, where there are resources and border disputes. Simply, to get on with it, rather than enable its use to bind populations from the larger issues at play in the present day such as stagnating economies or vastly increasing income inequalities, entrenching stakeholder interests, and perversion of the global development via economics and trade, which has and can have great utility for the earths peoples if other such issues, as to those that I have mentioned which bind, do sidetrack most of globes peoples as tend to follow issues of little substance, in the present day, but with great emotional appeal.
Thought this might be interesting given what our NE Asian neighbours are doing. Of course, Singapore’s the tiniest player in the region. http://www.nytimes.com/reuters/2010/10/14/business/business-us-singapore-economy-policy.html?hp
As far as adjustments go, we are getting there, s-l-o-wly.
The funnier part was where they said “The Singapore dollar hit a record high after the news, which overshadowed data showing the export-reliant economy contracted at a record pace in the third quarter.”
as was said in 2008/2009: a series of bubbles and ‘w’s
http://www.nytimes.com/2010/10/14/opinion/14thu2.html?ref=opinion
Rien Huizer: I am not so convinced that Asian Values provide a good defense to that.
I can’t speak to the rest of Asia, but it seems to me that the principal Chinese value (which propelled China towards becoming the biggest non-European land empire in Asia; 3x the size of Asia’s #2, India, which was an empire built by Britain) is encapsulated by a Chinese saying that translates loosely to “conqueror=king; conquered=bandit”. History may or may not have ended in Europe. It is definitely on the march in Asia.
…last kick at the can. It always amazes me how in hindsight it always becomes clear and obvious that geo-political issues, usually issues of sovereign security, are the drivers of all large cycle pricing of assets, debt and currencies. Yet always it is the tactitcal issues of economics that folks look to to try to gain prescience. Almost always market pundits and economists are like drunks looking for their keys under the street light of economic science rather than where they know they lost them in the dark alley far away from the clairty of light. I can not find one major long cycle economic development in history that did not have this characteristic.
Why the immediate fascination with economic variables when the obvious issue which will determine all is that the USA is at war? Well, it is always this way.
Consideration should be directed to Helmand Province, the complexity of Pakistan’s ISI, and the US midterm election’s impact on the Obama war plan and so on – not the trade surpluses or Japanese fiscal policy – if they wish to gain prescience.
The issue of territorial claims on barren islands (oil reserves or not) or Japanese fiscal policy or Chinese real estate markets, these are only the tactical digestion of the main story: national strife and the playing out of sovereign “hard power”.
And despite the obvious massive increase in the Chinese military capability and the rather shabby showing in Iraq by the Americans – and other issues of the immediate waxing and waning of US military developments: in terms of “hard power” there is really only one power and that the hegemon is still intact and likely will be so for this century.
It seems that the basic current argument as to why the world has changed from a hegemonic world to a uni-polar world (and a uni-polar world is required for the majority, if not all, current currency and trade analysis to be useful) during the last decade has been based on an error in analysis: that the Chinese ascendency is strategic in nature. It isnt. Chinese “ascendency” is a secondary variable, a tactical outcome of US strategy as the US enters the 10th year of a global war.
What shoud amaze is not that China has ascended, but that desptie the massive economic impact that ascendency has had on the US domestic economy – the home market crash, the banking crisis and the stock market crash – that the US can sustain and “afford” allowing China to maintain a mercantalistic trade posture. That is indicative of a breathtaking level of power established. The Chinese mercantalism which has roared into being, for the first time in history that I can find, without a “hard power” backing. This mercantalism is not China’s choice, but is simply China responding to a deliberate US strategic policy to maintain stability and security on their Pacific front. The US is such a massive power that mercantalism that would be ample reason for war in almost all times past is now cheerfully allowed to occur as it allows the US to concentrate on larger issues.
As soon as this Islamism war concludes, the US “hard power” hegemon will re-assert itself with the now even greater “hard power” capability sharpened through war becoming the backing for the re-establishment of the US economic and cultural hegemon. Or rather it will become obvious that the over all hegemonic role of the US in all areas – cultural, economic and geo-political never really ended.
It amuses me that the (now mostly “ex”) neo-cons thought the “end of history” would be bucolic, and not a series of very nasty death agonies for the order that was being replaced by the hegemon. That this increased strife is proof that “the end of history” did occur and not that the thesis is wrong.
When Chinese war fleets hold elaborate games off of the Farrolon Islands, near the San Francisco Golden Gate Bridge, and when China becomes the key attendee for conferences on key ‘law of the sea” issues that are held in Vancouver – when those events occur will be signs that the US hegemon and the “end of history” is over. I do not think that is going to occur for another century, if not well after that, if not ever. I think Eliot is right that now the end of “the end of history will “end[s]/Not with a bang but with a whimper.” That it wil be self imposed by the US upon itself.
In the end, the significant international economic and strategic developments are always a tale of “hard power” and usually that is played out in wars which are either a proxy war or one of the first order.
And it is in that area, war, that one will find the ability to gain prescience to figuring out when the renminbi will rise. But rally it will one day, without a doubt and when the US wishes it ot do so, when the US can afford that move in context of their geo-political strategy.
Of course what makes this all a “through a glass darkly” is that the reality above is understood by a very small number of the American leadership and even a smaller, if not one, of the Chinese leadership. And that, as Japan showed us in 1941, this error is the main cause of true world war. This makes for the riddle that American exceptionalism as the mainstay of American international foreign policy is actually in the end the most considerate and humane and pacific strategy for the world. Leaving American exceptionalism as the stated policy to appease China as the US fights a protracted war, this curent policy being deployed for tactical reasons, may in the end be the only truly significant error in the current US foreign policy. It looks like China is making a grave error that this US side car tactical outcome is actually a major strategic development by China.
Judy, Houhui, Zhang Fei,
Thank you for your comments. We have been going on too long! These issues are hard and it is -as it appears- difficult to express complex opinions in this format. Two little things: (1) do underestimate how much the average Japanese knows about his own history, and not only the official version, there is plenty of access to information. (2) “Asian Values” are of course just a reference to the term used by certain politicians to justify distinctive approaches to government that deemphasize liberal democracy as a desirable regime. I used it ironaically. But, Zhang Feng, your “values” are apparently different, but very interesting..
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