In the debate about global trade imbalances, we often hear it said that because Americans produce nothing that China exports to the US, any move to restrict Chinese imports to the US would have no employment effect on Americans. A forced contraction in Chinese exports would simply result in an equivalent increase in the exports of some other country, let’s call it Mexico. Mexico would benefit from US trade action, but the US wouldn’t.
There are many reason for opposing trade war between the two countries – the two most important being, in my opinion, that trade war will result in slower global growth than a negotiated settlement, and that the importance of the US-China relationship involves a lot more than economic issues. A troubled relationship between the two spells potentially bad outcomes for issues such as the environment, global terrorism, and nuclear proliferation. But the argument that China trade has no impact on US employment is I think a very weak one.
In the first place, China doesn’t simply produce slippers, lighters and toys to sell to the US. Chinese growth is heavily capital intensive, and China produces many things that Americans produce or used to produce until quite recently – including automobiles, steel, chemicals, advanced metal products and, soon enough, aircraft. Remember also that China’s import substitution will have as big an impact on trade as export support.
Anyway it is hard for me to imagine that the explosion in US imports from China in the past decade could consist of nothing that Americans produced themselves but were already importing from other countries. If that were truly the case, wouldn’t China’s rising exports and trade surplus in the past decade be balanced wholly by declining exports and trade surpluses in other countries? US imports and the American trade deficit should have held fairly steady.
But even if I am wrong, and China and the US produce absolutely nothing in common, it is irrelevant. The claim that there can be no employment impact in the US of a contraction in Chinese trade could only be true if all trade settled only on a bilateral basis.
Globalization is not bilateral
There may have been a time, two or three hundred years ago, when trade settled mostly on a bilateral basis, but I would submit that by the late 19th Century, and certainly in the past few decades, trade never settles bilaterally. It must settle multilaterally. In that case it is pointless to talk about the overlap between US and Chinese production. Let me try to explain why.
Let us assume there are four countries in the world: China, the US, Mexico and Brazil. Let us also assume that China runs a large trade surplus with the US and that the two countries produce completely different sets of goods in which there is no overlap.
If the US takes actions to force up the value of the renminbi and so reduce Chinese exports to the US by $100, Americans would still need to buy those goods from someone else, albeit at higher prices, since according to our admittedly unrealistic assumptions they do not and cannot produce them on their own.
Rather than buy these products from China, Americans will buy them from Mexico. In that case nearly the full quantity of lost Chinese production would shift to Mexico (higher prices would reduce US demand somewhat). Chinese workers would get fired and Mexican workers get jobs.
So not a single unemployed American would benefit, and consumers would have to pay higher prices, right? Not quite. This isn’t the end of the story. If Mexico does not intervene in its currency, two things are going to happen in Mexico. First, the peso will strengthen as demand for pesos rises among American importers. I am assuming that the surge in exports causes no capital inflow into Mexico, but if it does, that would put even more upward pressure on the peso.
Of course a rising peso shifts income from Mexican exporters to Mexican households. It also reduces the profitability and demand for other Mexican exports and so causes Mexican exporters to reduce other production by some amount. Total Mexican production in that case rises by less than $100, and either American or Brazilian production increases to fill the gap.
Mexican imports rise
More importantly, unemployed Mexican workers will now get jobs and will earn income that they weren’t earning before. Real household income in Mexico will have risen by quite a bit.
Since it is a pretty safe bet that Mexican workers don’t save 100% of their additional income, especially if they were formerly unemployed, Mexican consumption must also rise. Notice, then, that total Mexican production rose by less than $100 and total Mexican consumption rose by some large amount, perhaps very close to $100. I am making the unreasonable assumption that there is no increase in Mexican investment associated with the increase in Mexican exports, but if there were any increase in investment, it would increase Mexico’s domestic demand even further without increasing Mexican production.
So Mexico’s trade surplus will not rise by anywhere near $100 dollars. It will rise by a lot less than that. Since the rising renminbi shifted Mexican exports upwards by $100, that must mean that Mexican imports also increased, and if that is the case they must have imported from somewhere – perhaps from the US or Brazil.
If the increase in Mexican imports was satisfied by increased US exports, then of course there is likely to be a positive impact on US employment. If they imported part of it from Brazil, then we have to go through the whole exercise for Brazil and come back to at least some additional US exports to Brazil. Mutatis mutandi a reduction in China’s trade surplus must result in a reduction in the US trade deficit and an increase in US employment as long as Brazil and Mexico don’t intervene in trade.
One obvious flaw in my argument is that I have left China out of the picture once I assumed a drop in its exports. But why couldn’t the full increase in Mexico’s imports come from a surge in Chinese exports to Mexico?
In fact it could, if China intervened to counter the impact of declining exports to the US, say by reducing interest rates or by increasing subsidies to manufactures in other ways. The rebalancing impact of an increase in the renminbi, or of an increase in US tariffs, would be offset by higher subsidies, paid for of course by the Chinese household sector. In that case China’s trade surplus could even rise.
This would create a worse problem both for China and the world, especially for poor Mexico, who will be dragged even deeper into the unsustainable US-China imbalances. It would mean that China still exported deficient demand into a world struggling with anemic demand growth while, at the same time, worsening its domestic imbalances, perhaps by increasing investment in a country where investment levels are already dangerously high. And it would mean that US unemployment remained where it was.
Trade is more complex than we assume
So what would I conclude from this little exercise? Three things.
First, the no-overlap argument – that the US cannot benefit from a reduction in the Chinese trade surplus because the US produces nothing that China sells – is silly. Not only does the US produce (or could produce) many things that China sells, but more importantly it doesn’t matter if it does. Trade does not have to settle bilaterally. In fact it almost never does.
Second, what matters is the totality of Chinese intervention. If a rising renminbi, or trade tariffs in the US, are met by countermeasures within China, there might very well be no net trade rebalancing and even more dangerous distortions within the Chinese economy.
That is why it is probably better to target trade surpluses rather than just the currency, or just interest rates, or just wages, or just taxes, or just direct subsidies, or just any of a dozen factors. It is encouraging, then, that US Treasury Secretary Tim Geithner seems to be more intent on arriving at a deal limiting current account surpluses rather than forcing a revaluation of the renminbi – although according to reports Germany is very much opposed to the idea.
Of course even targeting trade surpluses has its problems. If China reduces its trade surplus not by boosting domestic demand but rather by boosting investment in commodities (stockpiling commodities), it simply maintains its domestic imbalances while increasing its exposure to commodity prices and pulling commodity-exporting countries even deeper into the global imbalance. It also does little to rebalance globally because for the major commodity exporters the propensity to consume out of additional revenues is quite low. In that case the imbalance has simply been shifted elsewhere. I discuss this in a letter today to the Financial Times responding to Martin Wolf’s column on the subject.
The third conclusion is the all these things matter in the US too. Measures targeted just at China might or might not work, depending on the Chinese response, and the wrong Chinese response can make both countries worse off (much worse off in the case of China). If the US really wants to see its trade deficit decline, it should move aggressively to alter the balance between domestic production and consumption in a more permanent way – perhaps by raising consumption taxes, although this will work mainly by increasing US unemployment if China increases its intervention in the currency or in interest rates and credit.
Clearly the US needs to move aggressively to shift global demand in its favor because most countries are doing just that – that is what beggar-they-neighbor means, and in a beggar-thy-neighbor world whoever does not respond will bear most of the brunt of the pain. There is no point pretending that we are not in a world in which nearly every country is cheating on trade, and will continue cheating as long as it is able.
But the wrong aggressive moves can easily make things worse. I guess this means that the whole trade problem really will best be resolved by an intelligent multilateral agreement, with no cheating and no free-riding, that involves a set of determined and coordinated policies that bring the imbalances down gradually over the next several years.
But that is asking for a lot. My guess? Trade disputes will be resolved through more tariffs and currency interventions. No one out there, it seems, is willing to do more than wish the imbalances away. Actually to take the painful rebalancing steps is still not on anyone’s agenda.
—–
On a separate note, a lot of people have been asking me recently about the Shanghai stock market, perhaps in the mistaken belief that I can get it right again. In May, when the market was at 2688, I argued that Beijing was about to stomp again on the accelerator, and that the market would soon race up, not because medium-term prospects were good (I think they are not good at all) but simply because short-term investment-driven growth would be high, and with it liquidity. I have been repeating that story in my meetings with institutional investors pretty consistently.
Of course I should have waited five or six weeks, because the market lost another 12% before bottoming out, but bottom out it did, and as of today (Thursday) the market was at 3087, about 30% above its bottom and 15% above my too-early call. I see evidence of nervousness on the part of the monetary authorities, and they will probably try to rein in liquidity in the next days and weeks, but surging hot money inflows might more than counteract this attempt to tighten.
What does this mean for stock performance? The next few weeks could be a little bumpy, as the expansionists and the contractionists fight over policy, but overall I still think the stock market is likely to rise strongly until at least next summer, after which the market will start worrying about the impact of the leadership transition in early 2012. There will still be pressure to keep credit expanding, and QE2 will probably increase the surge in hot money inflows that we seemed to have experienced in the third quarter. Everything in China is rising to historical highs – jade, premium tea, special herbs, living Chinese artists, dead Chinese artists, Chinese stamps, calligraphy, antiques – and so why not stocks?
The big risk is either a very nasty inflation number, which I think is a reasonably low probability event, or a very nasty trade confrontation, which is more likely. The former would have a longer-lasting impact than the latter, so on the whole I think the market is more like to be strong.
But watch out if the new loan numbers are too high and growth seems immoderate (and growth rates seem to be picking up again). Beijing is going to stomp alternatively on the brakes and on the accelerator at least one or two more times before policymakers start to get serious about adjusting the economy (probably late 2011).
[...] This post was mentioned on Twitter by Stan Abrams, Conduit Journal. Conduit Journal said: Levitra Buy http://bit.ly/aEoHbg [...]
Mr Pettis
What is your view on commodity and worldwide stock markets? Will they rise in unison with China? Thanks
Mr Pettis
Please another question. Auto sales in recent months have fallen sharply in China. Is it possible that a lot of this money coming into China will be saved?
To RS:
Auto sales are not falling in China, they are growing at around 20% pace.
Which is a deceleration of growth not a contraction.
Excellent article as always.
You seem (in my estimation) pessimistic that China will take any serious actions to re-balance.
The only US action likely to be taken to re-balance seems to be currency debasement.
Other than causing inflation, a drop in consumption due to decreased income, and the destruction of the middle class in America, I don’t see currency debasement having much effect. Imports may decrease due to a decreasing standard of living but so far it is not increasing employment (at all) or exports (significantly).
The effects on consumers of artificially low interest rates in China you discuss are also present in the US.
Surprisingly, it seems that a communist state and a supposedly capitalistic state are both pursuing the same damaging policies toward their people. It isn’t about the label you put on the system, it is about putting your cronies above your citizens.
The elites of both nations are just as corrupt and just as determined to impoverish their nation’s people for their personal benefit. Which society will erupt in revolt first? Impossible to know but I fear it will happen in both countries.
A major factor, if not the factor, in how this will evolve is whether or not the US still has aspects of or is the hegemon. If the US is the hegemon that could also be very risky position for the world at first, as it seems China has convinced itself and the majority of the world’s pundits think otherwise. The common belief is that there is no hegemon and that China is in such an ascendency it may have already bypassed the US in terms of being the essential world power. Or variations on that theme.
Since the US is in the main a “free market”, where market forces will discern reality and flows will go where they will go, there will be little ability for the US to manage how we reach the outcome. So if the reality is not as most market expectations are currently pricing, great wrenching moves could materialize. The ability of China to manage outcome will not be available as China could not manage to what the CHinese public perceive as a lesser position.
And the US now has without a doubt the world’s most well trained and practiced hard power capability in history.
Another interesting, perhaps anecdotal thought that maybe gives some insight to the above is that the Iraq Governments 5.80 of 2018. In Jan 2009 they traded down to around 40 and they are now at 96, soaring almost 4 points in the last few weeks. 6.3% yield. Is this a sign of pax Americana?
I am becoming more and more convinced that while economics and finance will frame how the outcome moves, the outcome will be completely decided by whether or not the US is the hegemon. And that will be based on the one area no one wants to even acknowledge has a role: hard power.
RS,
Sales are declining from their previous highs. It is not so much an outright “contraction” (which would indicate that sales are absolutely lower than in the past) as it is a slow-down in growth rate. Still, it is a warning sign that much of the growth in China’s automobile market is the product of subsidization, rather than genuine development of consumption.
In any case, I am grateful to Professor Pettis for writing this article. To-date, doo many American pundits have lectured unemployed/disgruntled American workers about how their pain has nothing to do with global trade (and especially nothing to do with imbalances pertaining to China and its relationship with trade-deficit nations like the US), and is instead all self-inflicted. It just is not that simple.
If US successfully devaluate its currency via the rest of the world, it will clearly have a positive employment impact. But simply putting tariff on certain Chinese exports without changing the relative productivity of US labor, the net effect is unlikely to be positive.
QE2 reflects the effort of US central bank to inflate the dollar. Inflation in the emerging market will play a same effect as currency revaluation. “Made in China” will be ultimately more expensive either through currency revaluation or domestic inflation. I don’t believe the sterilization effort of Chinese central bank will work in the long run (Politicians will start to blame US conspiracy to ruin the Chinese economic stability).
Many US Congressmen who talk about currency issue actually want specific tariffs to help specific constituents in his/her district. Mid-term election play a big role to fuel the China bashing sentiment. The return of Republicans may help the US government back to moderate course.
Talking about multilateralism, what is at stake is WTO rules. There is unlikely to have a trade war without breaking the WTO rules. As a big power, US can certainly ignore the WTO multilateral institution and behaves unilaterally. But this will be counter productive if US want to persuade Chinese to respect the international commercial rule (ok, maybe Chinese nonetheless ignores the rules).
Michael,
Just one small point. While the idea of the US implementing a consumption tax like a VAT may be very sound, the odds of it passing Congress any time soon are nil. If that.
Thanks for another great post.
FYI,
Strange. Using Firefox as the browser, the embedded link to your FT letter leads to the FT paywall. Using IE, I can get right through. I cannot remotely explain why that should be, but that is what I just experienced. Explaining the whys and wherefors of how I made that particular discovery is more than you want to know.
Estimado Señor Pettis,
Congratulations on your blog. Could you give us your thoughts on what a country, such as Mexico (from where I write), can/should do to counter China’s unfair policy to subsidise its exports? Should we emulate China? or should seek to have NAFTA raise its trade barriers?
Thanks, Juan Carlos
Mr. Pettis,
I’d love to hear what you think about the variety of import certificate type plans that are being more actively discussed, both in terms of their effect on global trade imbalances and their feasibility given WTO and IMF agreements. One recent article from Ralph Gomory at NYU outlines the basic idea:
http://www.huffingtonpost.com/ralph-gomory/jobs-trade-and-mercantili_b_715954.html
Thanks.
Trade action may or may not bring back job to America but at least it will minimize job leakage to other countries. Clearly free trade is not working and all countries are playing a Prisoner’s Dilemma game, each trying hard to export their way to prosperity. Imposing tariff/quota, tax exemption and incentive system are definitely superior solutions than debasement of currency to regain competitiveness.
What US need more is restructuring its economy. US is a $15 trillion giant and surely it can’t be that difficult to create jobs for just ~150 million workers. Else, the future job prospect for 1.3 billion China and 1.1 billion India is pretty grim especially with current fast-paced productivity and efficiency gain.
Michael, could not agree more with this:
” I guess this means that the whole trade problem really will best be resolved by an intelligent multilateral agreement, with no cheating and no free-riding, that involves a set of determined and coordinated policies that bring the imbalances down gradually over the next several years.
But that is asking for a lot. My guess? Trade disputes will be resolved through more tariffs and currency interventions. No one out there, it seems, is willing to do more than wish the imbalances away. Actually to take the painful rebalancing steps is still not on anyone’s agenda.”
Just one little point, you mentioned Germany as against trade balance oriented coordination. Well of course they would be, but there is a little more than narrow self-interest here: they are simply the shanghai of Europe and at the EU level (or de EUR level), trade is pretty balanced, and with no currency manipulation, hidden subsidies, resource endowments, etc. The US has no business with internal EU affairs.. Or maybe they are trying to assist EU member governments that feel threatened by Germany’s ability to be productive and competitive?
Dear Prof,
The “commodity stockpiling” argument is weaker than it seems. Commodities “production rate” into the economy cannot vary by much, they are difficult and costly to store, and demand is inelastic. As a consequence, no “stockpile” that is significant compared to the size of imbalances can be built. They are a good vehicle for speculation and all-time-classic cornering though
Commodity producing assets are another story, and are of the appropriate size, but they are stubbornly unmovable and, as the recent case of Potash Corp demonstrated, not for sale. It is too bad, “Xin Fa’an” on commodity producing assets would be really a good idea.
As an aside, I would like to see the face of Tim Geithner at the G20 table when the representative of Saudi Arabia declares that surplus limiting measures are a good idea and that they will adjust their oil production accordingly…
Lemi
Is not a slowdown a contraction of growth? But yes I see what you are saying. There is still the problem of a global oversupply of auto production capacity and I think we are in for a hard fall especially in Luxury autos. Tata Nanos suzuki swifts and VW polos will be the place to be
[...] Will trade action restore US jobs?, Michael Pettis [...]
Michael:
Another good piece, highlighting the multilateral effect of the current imbalances, and, again, some popular, misconceptions on, really, global development, and the trajectory of all nations in this development process.
Misconception 1: US can’t produce, doesn’t and couldn’t, of course it could, does, and would.
Misconception 2: Charles: Face of Geithner; in that Asia and the EU receive 2/3 of Middle Eastern oil, and the US a small percentage, I would like to see the faces of the other 18 representatives to the G20.
Misconception 3: Global Development and the Global Economy are Zero-Sum Gains, as if countries are small store owners vying for limited demand in a small village. If designed well, demand could grow, would grow, and could be more widely dispersed, again, ultimately, under far more resource efficient modalities than at present. As the Global Economy has grown over the past several decades, almost as if by design, go figure.
Just three for now, but usually in the comments we have so many of these to wade through.
Rien: Ok, EU trade balances, are we talking 15, 27 or 35. In that so much of German trade is in machinery, it is understandable their desire to add further the development of capacity development globally. Thus leading to an eventual shakeout. Were only the Southern Core countries, who complete in lower end, but arguably higher quality low-end manufactures so positioned as Germany, methinks, where similarly to more widely across the globe, real estate development, in higher end housing had become to large a percentage of their domestic economies, in the previous era of very high global growth and capital flows.
Litz: Within WTO frameworks, the US could apply across the board, or selective tariffs as it desired, with an a decision by the government. The WTO is essentially, a part of international law, its negotiation form the basis of that law, legally, within its rights, it could, the US government, make a decision, to exercise its rights under previously negotiated treaty terms.
Who knows how likely with recent elections, especially with the confused notions of the Tea Party activists, even though a VAT might be antithetical, I wouldn’t be surprised if something similar were it to occur, as it could be framed within principles with support to that base, which is an attempt to create a similar base in the US domestic polity as had been created under the previous eras of anti-big government, and moral majority, movements previously, if the direct opposite of what those polities had hoped, even believe to have happened had occurred (not that they ever knew the difference).
But I wouldn’t be surprised if either policy choice were to occur, even as juxtaposed against traditional party positions, even if strong lobbies or interests were to lobby against such decisions, as in many ways, I believe there to be a searching for new meaning. Especially after what had occurred, domestically to the economy, not even to mention the aftermath, during the 2000 to 2008 period, even if in the short-term, their constituencies are ignorant as to the origins of the recent mess, over the longer term they will be not. So, a searching for relevance, coupled to the fluid base (diversity of Tea Party adherents) organized around such issues, may actually lead to policy goals and decisions, that may be antithetical to previously, believed to be, held positions.
Michael,
While I’m generally an admirer of your analyses, this is one of your more garbled posts. You wrote: “If the increase in Mexican imports was satisfied by increased US exports, then of course there is likely to be a positive impact on US employment.”
Well, it depends entirely what kind of industries we’re talking about!
The U.S. industries that actually export have *low* labor content such as our major agricultural industries which are highly automated, as in the grains. A rise in exports translates into planting and harvesting a few extra acres — using machinery. Likewise, in our *low* labor content tech industries, a rise in marginal demand will have limited effect on employment. Do you really think marginal demand in Intel chips or Google searches will much effect on employment? No, because again it’s highly automated.
And if you think high labor content jobs like garments or electronic assembly are coming back to the U.S., think again. None of the well-developed supply chain infrastructure can be easily moved or substituted.
A VAT is a consumption tax. If an entity wants to cut consumption then a VAT is a way to do it. Does China want the US to cut consumption? Does any of the US trading partners want the US to cut consumption? The US Federal Reserve is taking action to save itself and its primary dealers. Now is the time to decouple from the US economy. If China and the rest of the world want to. Other than that they will have to mobilize their representatives in DC to try and stop the FED.
Michael, Paul Otellini, President of Intel Corp, highlighted some ways in which non currency subsidise effect trade………
It costs Intel $1 billion more to build a factory in the United States than it does in China — and it is not because of cheap labor. Ninety percent of the difference comes from the Chinese government providing Intel with capital grants, equipment grants, tax holidays and incentives.
Otellini says that almost all of Intel’s primary competitors are in Asia and that they are provided with substantial leverage over American companies. “In the case of Samsung, which is a large competitor of ours, Korea basically [provides it with] zero taxes and free money,” says Otellini. “You have people that work in standards that would not be acceptable to American workers. They have a different level of productivity. It’s not something I aspire to, I just say that’s a difference. They can get more out per nickel, so you have to watch that.”
http://www.manufacturingnews.com/news/newss/intel102.html
I bring this up because I disagree with Paul’s proposed remedy, which is basically suggesting that the US subsidises Intel to the same degree. What I would like to know is how do we address this?
Rein, While Germany may performing with no currency manipulation, hidden subsidies, resource endowments, etc. but that does not mean they do not benefit from having a currency that is lower than it otherwise would be if not for being part of the EURO. Would Germany be the export machine it is if they still used the DM, I don’t think so. While trade may be balanced within the EU outside of it it is not. Germany competes with US producers, and gets to have others , PIIGS, do the devaluing for them.
In today’s headlines;
“China stages live-fire war games in South China Sea amid slow-burning territorial disputes”
Why is it that while there is no debate that a skilled and detailed discussion on trade and international economics will tell you which number in “red” the ball will land upon, if it known the ball will land in “red” space, that the most important call, to figure out whether or not it will fall “red” or “black” is ocmpletely ignored.
Is not being able to make that call between “red” or “black” totally a function of analysis on hard power?
Now, hard power does have much to do with domestic economics, for example the ability to afford such a spectacle that China is now doing in the S China Sea. But the international flows and economics that result will be a dependent upon whether the US Seventh Fleet decides to do a demonstration in the same locale. And then what the countries in the area conclude in the comparison. Furthermore, a very good case can be made that China can afford this spectacle because of US economic strength – their most important market still for the heavily reliant on exports economy.
No matter how much analysis is spent on how the end game will play out economically, it is how this hard power comparison (and hopefully it always remains just a comparison) is judged that will determine the major directions of currency levels, trade and those countries’ which are entwined with international trade, domestic markets.
Assuming the USA has the resources to sustain the Seventh Fleet and if the USA in the future the USA no longer has to concentrate on the security issues in Central Asia and the Near East, doesn’t that make it a foregone conclusion that the Yuan will go to, say, 2 and these large international imbalances in trade will cease and China will have a landing be it hard or soft? I think that is a certainty.
So, that makes one’s thoughts on whether or not progress if not conclusion is occurring in Iraq and then what that means for Afghanistan the starting point of any useful economic discussion on Chinese trade policy and currency.
Or, want to figure out what will happen to the Yuan – figure out what will happen in Helmand Province. This board is perhaps the best place in the world to get input on whether, if a revalue in the Yuan occurs, will be “2.01″ or “4.75″, but the major factors which will determine when and why the Yuan will revalue is completely ignored. One might say that is the USA has to leave the field in Afghanistan with failure and security for the USA against Islamism for the next two decades is not achieved, then there will be no devalue of the Yuan and the current levels will be maintained.
Dr. Pettis,
Re: “There is no point pretending that we are not in a world in which nearly every country is cheating on trade, and will continue cheating as long as it is able.”
I just wanted to salute your courage in calling a spade a spade here. When a person as soft-spoken & diplomatic as yourself, living in an authoritarian country such as China resorts to such direct wording, it speaks volumes.
My take-away from this is that China does not accept that it is in it’s best self-interest to balance it’s economy no or at any time in the foreseeable future.
Assuming the present state of affairs continue, where China continues to perpetuate the mercantilist approach by doing things like buying European debt, buying favor around the world with the excess cash, etc, how long can this continue? What are the potential outcomes?
If the US is not able to gain enough support to counter the strategy, direct trade barriers seem the only alternative. Am I understanding this correctly?
Can you talk about how you expect this to play out?
Many thanks for broadening my understanding of the situation. I look forward to learning more from you into the future.
csteven:
What I can not agree with Michael is the suggestion that macro economic distortion can be fixed with micro trade action. If US decide to apply selective tariffs(AD, CVD) on specific Chinese product, it may help some most uncompetitive US industries, but will do little to bring back jobs to a large scale. What US need is dollar strategic devaluation, not selective tariffs. Devaluation can change the factor price and relative productivity of US to attract investment. Tariff not. (Michael has clearly a good point that changing US-China exchange rate will have a global impact of factor allocation, which will benefit US.)
Existing WTO rules have certainly tided the hand of US government on trade action. Currency manipulation is not countervailable under WTO subsidy agreement, as it has no “specificity”. DOC and ITC have thus rejected the demand from Congress in the past. US need to negotiate new WTO rules. But how can you expect the consent of China in a multilateral institution. To break or not to break the WTO rule is for sure a big concern of Washington now. They care!
US has taken unilateral action via QE2. China can use its highly regulated banking system to resist inflation pressure albeit only in the short turn. Countries like Brazil are caught in the middle of the currency war.
I bet the overheating and inflation in China will bite first before US take any trade action. Growing demand on land due to industrial growth has led to large farmer displacement and many unrests. Inflation is creating dissatisfaction among urban population. There is a big political risk ahead.
On election result, in deed, protectionists failed…
http://www.chamberpost.com/2010/11/bashing-trade-fails-as-a-campaign-pitch-as-a-governing-strategy-it-does-even-worse.html
“Some candidates, mostly Democrats, tried to win votes by tapping into anxiety about trade with China, “offshoring,” and trade agreements. The anti-trade activists at Public Citizen recently contended that “[v]irtually every Democrat in a tough race has at least one paid television ad attacking offshoring, and many propose changes to the tax system to combat it.”
It didn’t work. Public Citizen identified 36 new “fair trade” House members in a report issued after the 2008 election…. The activist group argued that opposition to free trade agreements played an important role in their election.
And yet 20 of those 36 House members were defeated on November 2. Fourteen were re-elected (four of whom are Republicans), and two are locked in races that are too close to call as of 10:00am on November 3… Other outspoken opponents of trade agreements such as Phil Hare, Zack Space, and Joe Sestak lost.”
And free trader win…
http://www.cato-at-liberty.org/what-the-2010-election-will-mean-for-trade/
“Republicans Pat Toomey, Rob Portman, and Mark Kirk all won Senate seats in the industrial heartland yesterday (Pennsylvania, Ohio, and Illinois, respectively) and all three voted in favor of major trade agreements during their time in the U.S. House. None of them ran away from their records on trade.”
US consumption could decline and its relative importance within GDP could remain the same or increase. There no historical correlation between consumption and consumption share. Rather than imposing a punitive tax on consumption in a world with weak demand the US government has many other weapons at its disposal.
Unfortunately the US government is paralyzed and its political class is relying on currency debasement and rampant money printing from Bernanke. As Rouseff just said “The last time there was a series of competitive devaluations.?.?.?it ended in world war two.” That was Brazil complaining about the U.S. – not China.
Well, anyway, pundits will try to reposition this argument, will revert to tired old frames, playing on ideological positioning which “makes sense” to those who review it without reviewing the underlying facts. In such matters, simply revert to the least common denominator, throw forth easily digestible, not quite sound-bites, but at least small bits, or groupings of words, of little utility in the debate around the larger issues.
Litz: the US, and others could do, exactly what you say they cannot, I am not saying that they should, but mechanisms exist to do such that, especially where commitments have not been met, and are only being exacerbated by present policy.
The other gentleman, if supply chains have moved, and are now centered in some place, they could easily move again, and most likely will at some point, the question is when, not if possible. If has, could do.
Regardless we should be concerned for the further creation of over-capacity in the development of productive capacity more broadly across the globe, wasting precious capital, time, and energy, at least slowing the development of the global peoples. What we need to consider is how institutions have contributed to the creation of a cooperative environment, whether in trade or for whatever they have been designed to serve and the impact on the global community of policies that undermine the impact of these institutions toward further fostering of a cooperative environment toward serving the development needs of the global people, if some in some quarters have a psychotic need for it to happen at the push of the button, within their lifetimes, as if then they could be psychologically and spiritually satisfied while not accounting for millenial long trends, or taking into consideration the longer sweep of history.
Where minds are so easily molded, due to repetition in the present era, as is shown even on this board, where information flies across the globe at the push of a button, where images can be flashed across a billion screens, where words and repetition of constructed belief constructs take the place of pictures, which supposedly speak a thousand words, it is easy to see the end of such a process.
More maturity will need begin to reign in this discussion, and even a reformulation of all positions held, by any who find themselves in a defined camp as to where they stand on these issues, or eventually, we will be finding ourselves in a very different scenario then that which we suspect.
Anyway, where agreements have been made, and those agreements remain unmet, where benefits are being, further, disproportionately siphoned off, even saved, especially where constructs are being built as this being a “good” thing in popular discourse, we find ourselves, without more maturity in this dialogue, across, within, and between societies of a bit of a turning point on these issues. This notion of savings, at the national level, call it mercantilism, call it smart policy, call it built from a set of policies that are essentially unfair and counter to the basic principles of the system, where the “goodness” of such, due to its seeming positive outcomes, a relatively large store of cash, even has currency, within populations who are being detrimentally affected by it, both developing and developed country alike.
I can’t help but suspect that something is brewing underneath the surface. Which is why, I suspect a return to the previous status quo, that existent before the 2000-2008 global growth anomaly,is what is most likely to occur. Despite this discussion being posited as a US-China, Developing-Developed world dichotomy, it really has more broad than this, and with deeper implications where views, from all strongly held positions, in any ideological camp as exists across the world, are gravely in need of re-evaluation. These ideological camps, are essentially to date, recycling tired old frames, with relevance to an era where such things may have had utility, in furthering some cause or another, or rationalizing apathy in other cases, these many issues need be considered more carefully. I once had a friend who said, oh, you know, you should read these books, really, the only truly original thing that I have ever read in my life. Really, in the present era, there is way to much recycling of previously held beliefs, even refashioning of those beliefs to hold currency in the present era. trying to say things, which will speak to something within people, something they can understand, while the world accelerates dramatically. Really, rather than think in Zero-Sum perspectives, even to be circumspect in such to gain advantage while maximising our own benefits, much of what current dialogues revolve around, we need be more forthcoming in the great, perhaps even, but not necessarily so, grave, issues, confronting our globe (global people, community, society, people, possibilities, environment, lifestyles, knowledge, culture, responsibilities, potential and similar).
Essentially, oh, I get it, whats the goal, as at present, some goals will lead to a bastardization of the global economy, and potential of the global people, in such instances, outcomes will be far different than presently considered. In any way, they will regardless.
>>“Some candidates, mostly Democrats, tried to win votes by tapping into anxiety about trade with China, “offshoring,” and trade agreements. The anti-trade activists at Public Citizen recently contended that “[v]irtually every Democrat in a tough race has at least one paid television ad attacking offshoring, and many propose changes to the tax system to combat it.” It didn’t work. <<
You can't conclude that the strategy didn't work or it wasn't good one. The article acknowledges that it was mostly people in tough positions who did this, and 20 out of 36 is close to half of 36. Maybe "it didn't work" in the sense that 36 out of 36 of the candidates in trouble didn't magically win by bringing up China, but you can't conclude that "it didn't work" in the sense that the ads weren't politically effective. The China issue is highly effective politically, which is why the ads spread like wildfire.
It is amusing though to see the misdirection skill of those whose job is to misdirect.
[...] Will trade action bring back American jobs? (Michael Pettis) [...]
Glen,
Your comment:
“Germany competes with US producers, and gets to have others , PIIGS, do the devaluing for them.”
Has some merit, but you should keep in mind that the EUR zone (for convenience sake’s Denmark and Sweden included) consists mainly of non-PIIGs. Of these, Greece and Portugal are simply too relatively underdeveloped (but then again, they are -combined- economically smaller than a German state like NRW) to be anything but highly specialized in the future, or leave the EUR and maybe become a free-rider like the UK.
Short term measures (even the eminent mr Schauble himself would probably agree) such as a stricter and more credible monitoring mechanism would assist in raising effective taxation in those countries (one of the major reasons for the current problems) but they will not turn Lisbon into a Rotterdam. The extraction rates in the southern part of Europe are lower than in the northern part while wages have tended to move up beyond the space afforded by rising productivity and a low cost legacy.
Than means (a) a current problem that can be cured ( higher effective taxation coupled with a smaller public sector, but at a very high cost to the local elites) and (b) a longer term problem (productivity requires investment of the “Northern” type and that is unlikely to come if logistics-adjusted wages there are much higher than in, say Poland) of rising unemployment and as a consequence, local politics. However, the experience in the Baltics shows that austerity policies can work (or rather adopted and implemented) if the elite supports them and labor (if it is a political force at all) is aware of the consequences of failure. In simple terms: the PIIGs (unfairly and grossly): the PIIG elites did not converge their fiscal lifestyles to the EUR mean, while the non-elites did converge to EU wages. With the austerity measures there will be immense pain and maybe that will still require some countries to leave the EU once suitable separation arrangements have been developed, while others about to enter may want to absorb the lesson and maybe delay, reconsider. However, (1) it is unlikely that the effects (given the relatively small size of the PIIGs) will be large and (2) equally unlikely that the EU core (Greater Germany (Ger, Au, Be, Ned, Lux, to a certain extent Scandinavia) plus France, Italy and Spain will abandon monetary union and further integration.Ireland has of course the added problem of being adjacent to a highly unbalanced economy like the UK with an independent currency. As said, for the PIGGs is it a matter of specializing or making local investment more attractive for “German” capital, and not only in holiday apartments. Meanwhile, the existing EUR debts of the PIIGs (even in mr Schauble’s proposal) will have to be serviced. New debt maybe not, but at a very high cost to the country. Not a bad arrangement and probably popular among a majority in the EU, but not at the governmental level. We will have to wait and see. At least the silly EU expansion along Anglo preferences will be paused, and political integration be put back on the agenda, despite the ascent of nostalgically populist movements. In certain respects, the PIIGGs’ problems are convenient.
As to the argument that Germany competes with the US: of course and so does Illinois with the EU. Maybe even US companies based in Germany compete with German firms based in the US…A large economy like the US (and even a Chinese province-sized like Germany) though not a union of the EU type, has an enormous diversity of positions on the development curve. Germany was considered a near-basket case only a decade ago. Illinois in the late 1970s .Mr Geithner knows how to produce harmless rhetoric where silence would be politically more embarrassing whilst nothing can be changed anyway. This one is a bit more creative than the old line.
Rien:
Much can be changed, and will, with issues along addressing dependency ratios and similar to others for addressing structural impediments. These things will, can and should be addressed. Why? Because, although it is true, much of what you say, from a theoretical, and even a practical point of view, it can be changed, the question is should it, will it, what might eventuate in such an event, how might the broader development trajectory of the global people be altered, what is the outcome of such an event, what are the factors underlying current imbalances, it is not predictable how countries and regions would react in such a case, and what is the eventual course if there is not more cooperation in these things, where you are applying market principles, in a system where non-market actors, whose policies under mine the values upon which the system has rested, and why there has been understanding and, even, accommodation. Anyway, such things will be addressed, the question is what it might leave in its wake. Really, an interesting evolution of things, if people retreat into perspectives, which might be theoretically correct, but are distorted, yet, alterable. An interesting evolution, yet perhaps not evolutionary in the sense of the word. Should be interesting to watch this development.
Rhetoric = art of using language to communicate effectively and persuasively
Redirect = to change the course or direction of something
If values are not shared for market economics, how might they not be accommodated….not that this is something that should occur, but rather all efforts should be made such that it doesn’t or likely events will manifest that are antithetic to the needs of the vast majority of the global people most in need, and desirous, of greater opportunity. Information + Promulgation + Increased Opportunities for Access to More Information + Realization as to How the Globe is being limited by current structures, well….matter of time, if a mass of p[ropaganda need be waded through first. Of course, your analysis, is quite perceptive, if based upon a practicality that assumes values not able to be mitigated by altering policy. Of course they can, and unfortunately for the vast majority of the global population will, unless the values upon are accepted as useful and nations work toward meeting commitments as had been agreed, where even others acknowledge the role they are playing in creating imbalances, and others acknowledge how desire for alteration might lead unto previously charted waters of much lessor benefit to the global people, even, if they work to maintain frames, built in a previous era, of little value than serving populist interest and constituency bases.
RS, for what it is worth I think asset markets will do well globally, especially in developing countries. I wouldn’t buy them for a long-term hold, however.
Litz, I try to address many of these points in my next entry, and I agree with most of your comments.
Bob, you are probably right, but the main point is to identify the kinds of policies that will shift savings and consumption domestically. At some point we will get rational about consumption taxes, either explicit or hidden.
Juan Carlos, I am always reluctant to get into what are ultimately political recommendations because I have little expertise there. My guess is that Mexico is going to be hurt in the coming trade disputes because it is going to be forced to accommodate distortionary polices, especially monetary policies, in the major trade-imbalance countries. I wouldn’t be surprised however if NAFTA trade barriers are increasingly popular in both Mexico and the US.
SS, import certificates are an old idea, and they have some merit, but I think there are less distorting ways to rebalance trade. I also suspect that they would be hard to implement. If we are going to go that route, it might be easier just to impose tariffs.
Rien, my sense is that most US officials believe the trade imbalances within Europe (and I think they are as bad as those outside Europe) will have to be resolved within Europe and not with US prodding. But remember that if the deficit countries in Europe are forced by their financial crises to contract their deficits rapidly, suddenly Europe’s internal imbalances will become a massive external imbalance, in which case it seriously affects the rest of the world. That was the main point of my July 14 and May 19 pieces.
Diogenes, I think you miss the point. The businesses that will be affected by incremental changes in exports and imports are likely to have employment consequences, and anyway even if they don’t, the benefits will accrue to investors, suppliers, servicers, etc. and through them spread through the economy. An increase in production can only have no employment consequence if no business, including service businesses, employs workers.
Glen, you highlight one of the problems with these trade disputes. The system is so heavily gamed that there are tons of ways of cheating. That is why Geithner’s focus on trade imbalances, rather than on specific causes of trade imbalances, makes sense to me. Perhaps, alternatively, it makes sense to bring back Keynes’ bancor. I do plan to write about that sometime in the future.
Purple, I keep hearing the phrase “The last time there was a series of competitive devaluations, it ended in world war two,” but of course that is total nonsense. There have been many periods of competitive devaluation both before and after the 1930s that did not end in war. China’s huge devaluation in 1993 may have caused the Asian crisis of 1997, but it hardly led to war.
I think targeting the US deficits seem also reasonable especially for a country like US which clearly over consumes beyond its means for such a long time. Further, this is self discipline on the part of US. Of course, this will also makes agreement from China to also target its surplus politically easier, this way chances for rebalancing to work will be better.
Prof Pettis, I understand that China’s 12th 5-year plan is largely about restructuring economy and redistributing wealth. Do you see any chance the coming 5 year plan fix the current world imbalances?(or probably too late)
Thanks for the response.
Are the rising bond yields in the European PIIGS countries anything to be concerned about in the near term in your opinion? Do you think Germany will take any action to halt the rise in the value of the Euro?
PROFESSOR, YOU PROBABLY ALREADY SAW THIS BUT THERE IS A REALLY GOOD ARTICLE IN EUROMONEY:
http://www.euromoney.com/Article/2710802/CurrentIssue/80126/Pettis-worries-that-Chinas-stuck-in-a-groove.html?ID=80126&single=true
Prof, So, then should the US not simply raise tariffs? Maybe not to levels to dis-courage trade or imports alltogether- but simply the average tarrif level by 4-5%. That would reduce their fiscal deficit, it would help move some production into the US, create some jobs- in short help some rebalacing.
Why is the US shy of raising import tariffs? Maybe consumption will get hurt a little, it is a question of what sort of economy they want in the long run.
Michael, @ yr # 34: of course, could not resist siding with the Germans this time. Of course in another exchange of comments the PIIGGs- Greater Germany relationship is discussed. The Germans have a point when they challenge the PIGGs gvts for poor socioeconomic and fiscal policymaking: if they had not allowed wages to rise so fast (above productivity growth) and continued to let their better off residents (I know quite a few) get away with contributing very little to the tax fund. Not only for attractive PIGGs citizens, but also for snowbirds from Greater Germany..Viva Espana. Anyway, this has nothing to do with China, where official academics appear to be cutting off mr Geithner by the knees (Fan Gang:
http://www.project-syndicate.org/commentary/fan20/English
One of the most civilized declarations of economic war I’ve read so far. Not much room for change in China apparently, so the foreigners should simply accept that it will take a long time. That of course means, under current arrangements..And maybe the problem is current arrangements. So all in all, fine if Mr Geithner wants to focus on trade balances while he has no leverage (domestically or internationally) anyway. But no need to soften the criticism of China my implicating Germany as well. Either one mentions Greater Germany (a term many of my countrymen, deeply resent) or one mentions an internal EU problem that should not have arisen, but happens to be there and may cause further complications. However, that does not relieve China of the obligation to speed up what Dr Fan so proudly announces..
Michael, I think you misjudge how efficient American businesses are at reducing labor’s correlation with revenue volume. As a CEO, I can tell you one of the goals is always margin enhancement — which generally means automation, outsourcing, etc. to reduce labor content. You wrote, “incremental changes in exports and imports are likely to have employment consequences, and anyway even if they don’t, the benefits will accrue to investors, suppliers, servicers, etc. and through them spread through the economy.”
Indeed it may help investors but they won’t employ more people. Indeed it may help suppliers and servicers, but they won’t generally employ more people — especially if it’s a small increment. But I can tell you where it might create more jobs: In labor intensive parts of the supply chain, i.e. in emerging economies. This is where any U.S. macroeconomic tinkering simply leaks its benefits to the rest of the world.
In the discussion of global trade imbalances, far too little attention is paid to the fact the overconsumption in things like wars, military budgets, over investments in non productive projects…etc…all these non sustainable overconsumptions to me are the greatest contributors to trade imbalances today. Shouldn’t all these overconsumption be fixed at the origins or sources instead of at the impacted ends?
[...] Posted on November 8, 2010 by perwagnernielsen| Leave a comment Michael Pettis has another superb blog post on this [...]
View by Andy Xie
http://www.cibmagazine.com.cn/Columnists/Andy_Xie.asp?id=1442&to_hell_through_qe.html
Not sure about the answers:
Is trade deficit equal debt?
Would the trade deficit come to zero, if every country has flexible exchange rate regime?
Is the currency value the most concern for US business and employment decision?
[...] have written in the past, in fact Mexico’s trade surplus wouldn’t change much, and it certainly wouldn’t [...]
You should be gratified. My wife hinted that she would make me a soprano if I did not refrain from checking out your web pages.
Sweet story to consider.