Yesterday in a meeting I was asked by an investor why, even while I have been writing maniacally about the crucial importance of global cooperation, I was so consistently pessimistic about the possibility of the major economies arriving at a “grand bargain” that will minimize over the long term the cost of the current crisis. I think, in fact, that a nasty fight over trade is very probable and I worry that not only will trade conflict come as a huge shock to China’s economy, but also that Chinese actions and public statements are actually contributing more to that probability than all the buy-America, buy-Europe talk filling the air.
Let me pluck one reason from the headlines of today’s People‘s Daily, the official mouthpiece of the country’s ruling party. The article, titled “Buy American can’t save the US economy”, is based on interviews with a number of Chinese commentators. One question:
Why does the US, which has always advocated trade liberalization, put forward such a clause? Can the “Buy American” provision offer effective solutions to the US’ economic problems? What impacts will the implementation of this economic plan produce?
All the responses are the same. The US, according to this article, is playing dangerous games with global trade even while Chinese policymakers are trying to hold back the tide of protectionism. The response by Song Hong, Director of the Research Section of International Trade at the Chinese Academy of Social Sciences (CASS):
The US is a country that has a tradition of free trade. But the US Congress has tarnished its own reputation with narrow-minded and selfish acts that place US interests above global interests. During the 1930s, the Smoot-Hawley Tariff Act enacted by the US Congress greatly aggravated the global economic crisis. Today’s situation seems to repeat that historic tragedy.
It is really worrying that the stupid and destructive Smoot-Hawley Act, which was terrible not because it was passed by the US but because it was passed by the country with the largest export of overcapacity in the world at the time, is perceived by some as something that can only happen in the US, and not in China. On the contrary, US policies can be extremely unhelpful, of course, and it would come as no surprise to me that many of their policies turn out to be harmful to US and global interests, but the US cannot possibly engineer a repeat of Smoot-Hawley’s disastrous impact on global trade and the US economy. As the largest trade deficit country in the world anything that results in a contraction in net US demand is not only not bad, it is a necessary part of any adjustment.
The US cannot give us another Smoot-Hawley. In 2009 only China and Germany are really in a position to enact the current version of Smoot-Hawley – to engineer polices that expand their massive export of overcapacity or, what amounts to the same thing, their massive import of demand – and if you want to figure out who might be doing it, you need only to look at the direction of trade surpluses.
The response by Li Quan, Deputy Director of the Department of International Economy and Trade at Peking University, to the questions posed by the People’s Daily was:
The reason why the US emphasizes the protection of the steel industry is that its steel sector is a declining industry that does not have any international comparative advantage. At the same time the sector is of strategic importance to the US, as evidenced by the fact that Steel City Incorporated, based in Florida, has close relations with the US government. As a matter of fact, in 2002, following the September 11 attacks, the US openly raised the rate of import duties on iron and steel in order to protect its own steel sector. EU countries complained about US protectionism and submitted the case to relevant institutions of the WTO for judgment, eventually leading to the US’ defeat.
Although I agree with Professor Li about the value of the steel industry to the US, what depresses me about the prospects for trade war is that there doesn’t seem to be any recognition on his part that boosting steel production by any country is harmful to the global adjustment process. Apparently only American boosting of steel production is. I just don’t think this makes sense.
Very ironically the same issue of People’s Daily has another headline: “China announces stimulus plans for nonferrous metals, logistics.” The article starts:
China‘s State Council on Wednesday announced support plans for the country’s nonferrous metals and logistics sectors. Presided over by Premier Wen Jiabao, Cabinet members agreed to promote company restructuring and will offer subsidized loans to support technical innovations within the nonferrous metals sector. The export rebate rates of nonferrous products should be adjusted, said the Cabinet without elaborating.
That’s not all. Today’s Xinhua helpfully lists China’s stimulus package for ten different sectors announced between January 14 and today. These consist of machinery, textile industries, shipbuilding, autos, steel industries, electronics and information industry, light industry, petrochemical sector, nonferrous metals and logistics.
Nearly all of these products are in global oversupply, so the full focus must be on boosting consumption, right? Wrong. A quick run-down of the related article shows that some of the measures are certainly pro-consumption:
- provide subsidies for home appliances for rural buyers
- boost demand for petrochemical products
- lower the purchase tax on cars
- provide one-off allowances to farmers to upgrade their three-wheeled vehicles and low-speed trucks
- improve the credit system for car purchase loans
But too many of them are actually likely to decrease Chinese contribution to global consumption (i.e. increase its negative contribution) by acting more to boost production than consumption:
- promote company restructuring and offer subsidized loans to support technical innovations within the nonferrous metals sector
- adjust export rebate rates of nonferrous products
- lift processing trade restrictions on some labor-intensive, technology-intensive, energy-efficient, and environment-friendly products
- provide more credit access for firms in the petrochemical sector
- boost innovation in information technologies (whatever that means)
- increase financial input for the country’s electronics and information industry
- give tax rebates for electronics and information product exports
- encourage large auto companies, as well as major auto-part makers, to expand through mergers and acquisitions so as to optimize resources and improve their competitiveness on the international market (does this mean prevent bankruptcies?)
- increase credit support for ship builders
- suspend construction of new docks and the expansion of slipways (which doesn’t increase production but, I think, might slow investment-based consumption)
- increase export rebates for textile producers
- help auto manufacturers raise their share of the auto market in China from 34% to 40%
- create a special textile-industry fund for structural adjustment and technological upgrading
The problem, as I see it, is while an awful lot of experts here are busy explaining why the US must be careful about how quickly it reduces its contribution to global demand, which the US absolutely must do as part of its adjustment process, they seem to miss the point that China must increase its contribution to net demand, but it is actually reducing it. It may be confusing to many if I claim that subsidizing credit to steel producers or auto manufacturers is the 2009 equivalent of Smoot-Hawley – after all isn’t Smoot Hawley all about tariffs? – but the point is the reason Smoot-Hawley was such a disaster is because it involved an attempt by the largest trade surplus country in the world to increase its trade surplus in spite of collapsing world demand, and the 2009 equivalent must necessarily be Chinese or German moves that have the same effect.
And for my Chinese readers whose hackles are being raised by all this “criticism” of Chinese policy, please know that I am not pointing all this out in order to provide ammunition for trade warriors in the US and Europe. I am only pointing it out because there is a real and growing risk that while busily crying “Smoot-Hawley” at the US, China is going to blunder its way into the same terrible mistake the US made in 1930, and my conversations with US and European officials convince me that frustration levels are already too high. Needless to say it is not just readers of my blog who have noticed that China’s trade surplus has risen inexorably during the time this crisis has taken place, and even a very superficial reading of the world press suggests that this is causing rising anger. Trade conflict would be terrible for China, and I don’t see how it can end well for China if something doesn’t change soon.
It’s not that no one in China understands this. Nearly all of the non-government economists I speak to (ok, maybe not a representative sample) are worried by the direction events are taking and many of them are even more pessimistic than I am about the prospects for trade conflict. The WSJ blog translated a very interesting comment by the PBoC. According to their translation:
China has a problem of high savings and low consumption. For a long time our country’s economic growth has been mainly driven by investment and exports, and the ratio of final consumption [in gross domestic product] has been in a gradual declining trend. The share of investment [in GDP] has steadily risen from 36.6% in 1992 to 43.5% percent in 2008, while the share of consumption has dropped from 62.4% in 1992 to 48.6% in 2008, well below the world average. The high share of investment and exports and the low share of consumption are not conducive to the healthy and stable development of the economy.
The significant slowdown in global economic growth and the great downside risks for the future will directly affect China’s exports and investment in the tradable [goods] sector. Since external demand is inadequate, the driver for economic growth must come from increasing investment or consumption. Because the investment-led model of economic development increases the pressure on resources and environment, leads to a widening of the income gap and urban-rural inequality, and can easily lead to large fluctuations in economic growth as serious excess capacity emerges in some industries, it cannot be sustained for the long term. Therefore it is necessary to, in accordance with the requirements of the “scientific outlook on development,” speed up the transformation of our economic development model, and strengthen consumption as a driver of economic growth, in order to achieve a balanced growth pattern based consumption, investment and exports.
The PBoC is right, of course, but what I would add is that they need either to speed up the process very rapidly so as to head off rising trade frictions (very difficult at best), or they need to get together with the US and Europe and work out a viable long-term plan that will allow them to adjust at a reasonable pace while heading off trade conflict.
Meanwhile more of the wrong kind of news comes from Goldman Sachs, via an article in today’s Bloomberg:
China investors should be “defensively positioned” as a decline in the nation’s tax receipts signals a steeper slowdown in spending than retail sales figures show, according to Goldman Sachs Group Inc. “Tax data show much sharper deceleration in income and consumption in the past few months than suggested by official retail sales or income growth figures,” Goldman Sachs analysts Joshua Lu, Caroline Li and Fiona Lau wrote in a note today.
Value-added tax has “de-linked sharply” from retail sales figures, the analysts wrote. VAT rose 1 percent in the fourth quarter from a year earlier, while retail sales gained 21 percent, according to the note.
…Growth in China’s individual income-tax receipts “slowed down significantly” in the second half and shrank in December and January, the Goldman Sachs analysts wrote. This compares with nominal wage growth of 21 percent in the third quarter, the report said. “We think the government’s fiscal stimulus package announced so far may help create jobs, but may not necessarily help boost wages which, in our view, is the key driver of consumption growth,” the note said. “As such we are not hopeful that China’s consumption slowdown will bottom out soon.”
I am not smart enough to figure out whether or not Goldman’s methodology makes sense, but the furious drop in imports relative to exports makes me anyway doubt any evidence that Chinese consumption isn’t slowing sharply.
While I don’t disagree with your overall point, I would argue that the various trade imbalances are anyway already in the process of autocorrecting to a large extent:
- Japan has already moved to a deficit several months ago. That would have been unthinkable only a year or two ago.
- German exports have been plummeting over the last few months, and will fall further, whereas imports are largely holding up (contrary to China, Germany imports huge amounts of consumer products, and German consumption – while not exactly growing – is unlikely to plummet, whereas demand for its typical export products has collapsed is unlikely to recover substantially anytime soon), so there’s little doubt that the German surplus will shrink dramatically in the months to come.
- As for China, it is less of an importer, so the trade surplus will definitely remain. But there’s little doubt that Chinese exports will drop sharply in the immediate future, as much of the drop in imports is due to fewer components being imported from Japan/Taiwan/Korea/etc, which will automatically mean a sharp drop in exports with a delay of 1-3 months. Therefore, there is little doubt that China’s 2009 surplus will decline compared to 2008. Maybe it won’t go down to a huge extent, and maybe the drop will not be enough to satisfy the US and other deficit countries, but it will definitely start heading in the right direction.
As for China’s stimulus package, I would argue that many of the points you list are “standard practice” in most Western countries as well:
For example, every self-respecting politician promotes innovation, “technological upgrading” and any sort of forward-looking restructuring of ailing companies. Encouraging M&A in the overcrowded car industry as a means of creating a more efficiently run industry is not per se bad policy-making either. As for suspending the construction of new shipyards, I don’t quite see why this particular measure is supposed to increase China’s production capacity.
I’m not disagreeing with your basic point, but it seems to me that much of what they are proposing is not “harmful” per se, and just comes as part of a “normal” policy response package.
Pettis: The point is the reason Smoot-Hawley was such a disaster is because it involved an attempt by the largest trade surplus country in the world to increase its trade surplus in spite of collapsing world demand.
Interesting. Since I don’t think that this was the problem with Smoot-Hawley. The problem with Smoot-Hawley and trade barriers in general is that they decrease total economic output by removing productivity gains from comparative advantage.
So you want to do everything you can to increase economic output, not decrease it, and Smoot-Hawley is bad because it decreases economic output.
Pettis: China is going to blunder its way into the same terrible mistake the US made in 1930, and my conversations with US and European officials convince me that frustration levels are already too high.
And my conversations with non-officials in the United States suggest that the Chinese trade surplus is simply not causing much popular discontent. The number one worry is unemployment and it isn’t obvious to most people that Chinese trade or even massive trade deficits are producing unemployment. Does anyone think that trade barriers are going to save GM?
At least within the United States, I think you are vastly underestimating the amount of public sentiment with respect to trade and China. Everyone is blaming Wall Street bankers and is worried about losing their job, no one I know cares about China or the trade surplus. If you can have a politician give a speech that says “Cut trade with China, and you’ll get a job” then things would be different, but no one in the US is giving this sort of speech.
Much of the reason is that the overall trade balance is widening, but the gap between China and US/Europe is decreasing. Another reason is that the US can hardly complain about China giving a bailout to its automakers and engaging in massive building of infrastructure since the US is doing exactly the same thing, and complain about the evils of government subsidies to industry is hardly something that is going to be popular in Michigan right now.
[...] Can Smoot-Hawley only happen in the U.S.? (Pettis) [...]
Hello Michael: Spot-on article, as always. One of the minor benefits of this recession might be to resolve some earlier disagreements. The Economist, for example, referred to the “myth” that the Chinese economy was driven by investment and exports (call this Plan A); the more influential Bretton Woods II argument that global imbalances were benign; exchange rates were really not important; China had “decoupled;” (add your favorite here)
The PBoC article you quote is a cogent, concise argument for shifting as quickly as possible to a consumption driven model of economic development (call this Plan B), an internal argument that has been going on since at least 2004 when the leadership announced they were doing precisely that. As you document this shift is still not happening . Team A must believe that they can continue a strategy which has worked very well, while buying off Team B; wait out this recession until the West recovers (perhaps even gaining market share) meanwhile blaming the whole thing on the Americans. Will this work? The PBoC doesn’t think so. The failure of Plan A will look something like Indonesia after the last Asian crisis.
[...] Can Smoot-Hawley only happen in the U.S.? (Pettis) [...]
There is an important point which blurs the line between economics and business, but needs to be raised.
Chinese economic policy is now about buying raw materials, mainly from Australia, South America and Africa. Where there is a major need for raw material in China, and there is a major supplier (for instance in Australia), the aim is to buy enough shares in the company so that the Chinese board members can keep the company from raising prices when sold to China. This is then imported by a Chinese SOE which has the sole right to import said raw material. Companies which do do have CN representation on their boards are less likely to get orders from China, and their prices will be higher, making them less competitive on international markets.
Over time, the companies which do not have a China connection will be driven out of the market, and can be snapped up at cheaper prices.
Since most of world growth and development and construction will continue to come from China, it puts Chinese foreign exchange to work in a smart way, and making China the market maker in key raw material markets.
The endgame here is China dumping cheap, superior product on the world.
The only questions are how much and for how long.
Last time around in the early 90′s the over capacity of state of the art manufacturing in Asia lasted into this boom. THe US did nothing but allow a lot of it’s manufacturing base to evaporate. One could not even purchase raw material in the US for the price paid for Asian finished goods delivered and this when fuel wasn’t dirt cheap.
Thomas, I think it is pretty safe to say that China’s trade surplus will come down – these levels are beyond what even I, who had been arguing for years that Chinese monetary policy had caught the country in a surplus-expanding trap, would ever have predicted. The question is whether they will come down enough to relieve China’s trading partners. In the first half of 2008 the monthly surplus was an already-high $17 billion. In the second half of 2008 it was $33 billion (January this year was $39 billion). If they halve the monthly surplus they will still be too high, and given their focus on diverting as much domestic demand to domestic producers (in spite of all the free trade rhetoric), there is some question about how quickly it will decline. As for the impact of suspending construction of shipyards, I explain right after the bullet point in that part of the blog entry that this doesn’t increase production in the short term but it reduces consumption, which is why it has a net demand-contracting effect.
Twofish, no. You’ve got it wrong. Every major country that has achieved high levels of productivity – the US, Germany, England, France, Japan, etc. – did so behind significant trade barriers. The US had the highest in the world in the second half of the 19th Century, in contrast, for example, to Colombia and Chile, who were the most “free-trading” of nations.
This of course in no way proves that trade barriers are good, but it does indicate that vague statements about the total impact of trade barriers on global comparative advantage are pretty irrelevant when you consider policymaking from the national point of view. More importantly, I have read very few historians who, like you, see Smoot-Hawley as a disaster primarily because of its long term impact on global productivity growth. It was a disaster for the US because of its short-term impact on US export industries, who were forced into a very difficult adjustment when international trade collapsed between 1930 and 1933. The statement “So you want to do everything you can to increase economic output, not decrease it, and Smoot-Hawley is bad because it decreases economic output” might make sense only in an alternative universe where national policymaking is aimed primarily at optimizing global output. As far as I can see, most policymakers today are more focused on their own constituencies.
We will have to disagree about public sentiment on trade. My conversations with US and European policymakers and their advisers suggest either that they are very frustrated with trade issues or that they have all maliciously conspired to throw me off the scent.
Qingdao, yes, I think there is little intellectual disagreement within the country that China needs badly to shift its development model, but this is much easier said than done and always involves short term pain. That is probably why in the five years they have been discussing the shift nearly all the relevant indicators (trade surplus, share of consumption to GDP, savings rate, productivity growth, income growth) have moved in the wrong direction. The current crisis makes it all the more difficult to make the shift, which is why I think China should enter into an agreement with the US and Europe to enlist them in a fiscal and trade agreement to minimize the pain.
Paul, I am not terribly worried about that. The commodity market is pretty fungible, and commodity producers, with or without Chinese representation on their boards, will sell at market prices plus or minus some frictional costs. I do not think we need to worry too much about Chinese ownership of foreign assets.
I don’t buy the Goldman VAT-consumption divergence. If there was not an endemic problem with the sale of tax receipts by certain local/provincial offices of government and a bustling grey market for fapiao to cover up certain naughty non-consumption expenses, VAT data and the like might be meaningful. A crackdown on major fapiao centers skews the data.
(Keep getting an error message for some reason, so this is my last try)
Michael,
sorry, I wasn’t being clear about what I had wanted to say regarding the shipyard issue:
Trying to put myself into the shoes of a Chinese reader, my instinctive reaction to this point would be: “No matter what we do, those Americans will never be satisfied!”
I mean: What do you expect them to do? They have huge shipbuilding overcapacity, and practically nobody anywhere in the world will place orders for new standard commercial vessels for the next few years considering the current state of the shipping market. So suspending construction of yet more shipyards is so common-sense, it’s hardly worth mentioning it as a specific policy action point.
Yet you seem to be criticizing them for this.
Missing from the BoT insights are the attached employment benefits. To clarify, the labour content, or the positive effect on labour demand is not homogeneous to GDP. China’s imports consist of items with very low labour:dollar ratios. The reverse is also true. With unemployment quickly becoming the most urgent issue worldwide, China should be weary of a backlash on measures that, while they may improve its trade imbalance, do little to improve employment growth for the trading partner.
It’s warmful to see your responses to the reders,although I haven’t commented even a single word. I have already followed your entrys for about 2 years (in many different wabsites)and learnt a lot from your wisdom. I must tell the truth that among all the blogs I read(perhaps I read too little), only you–I mean it–responded carefully to your readers. I’m just proud of this, because I believe that I can learn more during the interaction if I also make comments. after all with my respects, I believe your words are becoming more and more important to me and to we folks in China.
I agree with your basic thesis that trade barriers are likely to come from most countries, and that they will come in forms different from the obvious. They will likely come in terms of nationalist government subsidies – in all countries. Government spending is almost always locally biased, and its becoming a bigger % of every economy.
I dispute the seeming assumption that governments can somehow form agreements to help economies rebalance. The most we can hope for is that they will simply refrain from making matters worse while economies naturally adjust from what has been a very unnatural situation (influenced by government in the first place).
Pettis: Every major country that has achieved high levels of productivity – the US, Germany, England, France, Japan, etc. – did so behind significant trade barriers.
But there are “minor countries” that have achieved high levels of productivity without significant trade barriers, and there are also countries that have tried trade barriers and destroyed their economies. What works for one country in one time period can be totally disastrous for another country in another time period, or even the same country in another time period.
The success of trade barriers led to import substitution theories of the 1950′s which proved to be broken in the 1960′s and 1970′s.
Pettis: This of course in no way proves that trade barriers are good, but it does indicate that vague statements about the total impact of trade barriers on global comparative advantage are pretty irrelevant when you consider policymaking from the national point of view.
I’m not talking about vague statements and abstract theories. I’m talking about looking at empirical facts to see if what is going on matches those vague statements and abstract theories. In the case of manufacturing in China, you do get vast increases in productivity and utility through comparative advantage and economies of scale. These increase then work their way into the political system.
But if you disagree this brings out the question of if you don’t get comparative advantage then why *shouldn’t* we bring back Smoot-Hawley? If trade barriers are good, then what’s wrong with them? If the problem with Smoot-Hawley is short term disruption, then we need to slowly ease in tariffs.
Pettis: The statement “So you want to do everything you can to increase economic output, not decrease it, and Smoot-Hawley is bad because it decreases economic output” might make sense only in an alternative universe where national policy making is aimed primarily at optimizing global output. As far as I can see, most policymakers today are more focused on their own constituencies.
But my point is that over the last twenty years, the increase in global output has lead to politicians being dependency on their own constituencies. In the 1980′s, a Congressman from Michigan would be screaming for trade barriers. Today they wouldn’t because auto production in China creates white collar jobs in Detroit. Globalization since the 1980′s *did* create massive increases in global output which reconfigured local political institutions.
That’s why I don’t think that Smoot-Hawley is politically likely unless things get a lot, lot worse that they are. We aren’t living in the 1930′s.
Pettis: We will have to disagree about public sentiment on trade. My conversations with US and European policymakers and their advisers suggest either that they are very frustrated with trade issues or that they have all maliciously conspired to throw me off the scent.
Policy makers and their advisers can be very unrepresentative of the public mood, so much so that politicians love to bash “Washington bureacrats.”
Policy makers and advisers may be frustrated with trade issues, but this isn’t going to matter unless you have public interest/support in the issue. If policy makers and advisers want to change the nature of trade relations, then they need to give speeches to create public support for their agendas. If they can’t, then it won’t matter, and no one has given the speech. Policy makers can be extremely detached from public mood, and what keeps the link between policy and the public are the politicians, and I’ve been trying to keep track of politicians that are giving anti-trade speeches, and I haven’t found any.
I’ve seen lots of talking heads on CNN and the Sunday morning talk shows talking about greed and evil Wall Street banks, and how we much increase increase bank regulation and change the culture of Wall Street. I haven’t seen anyway say “we can increase jobs through trade barriers!!!!!” because that statement is just totally out of touch with the public mood “outside the beltway.” If a Senator from Alabama starts talking about trade barriers, then an auto worker at a Honda plant is going to start wondering what is going to happen to their job.
Twofish
“Policy makers and advisers may be frustrated with trade issues, but this isn’t going to matter unless you have public interest/support in the issue”
Well this would be true in a direct democracy, but being a representative democracy you can get a way with a lot of things, especially if it can be winged into a nationalistic argument. The American public debt issue can be used as political ammo for trade barrier policies.
I still wonder about the Chinese consumption issue. From reading your blog I guess, that you hint the source of a direct consumption increase to be coming from the local and central government or the SOE (as Twofish mentioned).
We talked about the aging of the Chinese population and the demographics within a 15 year period and it seems you agreed that, there will be heavy expenses on the way. Now a government commitment to health care, pensions and other more long term consumption are very hard to remove when first installed, this is something that could really break the trust Chinese have in their leadership. A commitment like that has to be planned with care and over time.
Now they could do the odd one time cash splash from time to time, but it would not really change anything in this situation as the world demand would still be low and short term commitment would not help much.
If China has to increase private consumption (as to help the world demand issue) then the taxing of foreign goods could be relaxed
(and in a way from what I hear in the Chinese news that´s the argument the government is pushing at the moment with tech shopping trips to Europe) but this is hard to sell, because of the nationalistic environment and the bad employment situation.
Anyway you spin it, this really needs some networking and compromises within the central government just might be the tuffest spot they been in yet. Hope their political majiang is good
something I came across in a FRank Whalen article from 1992.
Think it sums this situation up quite well.
Kuttner represents a uniquely post-modern, positive liberty strain in American intellectual thought which holds that market economies must inevitably evolve toward a managed, regulated formulation where commercial warfare among nations, not individuals or private concerns, is the most disaggregated form of “competition.” Under this dirigiste, top-down world view, America is pitted in a zero-sum struggle against Europe and Asia, losing rather than gaining benefits from free and open trade.
Twofish,
Perhaps you should read;
“More than 50 House Democrats plan to send a letter to President Obama as early as today urging a revamping of U.S. trade policy, including overhaul of existing and pending trade pacts as well as the “broken U.S.-China trade ”
http://www.nationaljournal.com/congressdaily/cda_20090226_9824.php
I am happy to see that both yourself Mr. Pettis and several of the others who have submitted comments are stressing a) the need to create a global answer to our economic crisis and b) China’s vital role in any solution that may come about. It is also reassuring to see that all are clearly aware of the complexity and variation in the many issues that face China.
What I would like to add is that from Twofish’s comment about networking and compromises at the Central government level. Unfortunately there is to much faith given to the Central government’s ability to force through changes. This current economic crisis will lay bare the problems in the marriage between the Party and the State, specifically at the accountability and control form the central government down to the village level government within the party. Hopefully, the Communist Party will evolve and improve the nature of their control and advancement structure either before or during these other changes. I am worried that all these stimulus packages and other talk will have no matter if the Party does not make the necessary changes
BTW Michael,
Here is another picture of you….
http://www.theepochtimes.com/n2/content/view/12599/
I think Twofish has a good grasp of American sentiment, whether we’re speaking of Main Street, Wall Street, or Pennsylvania Ave. Note that Geithner’s comment (mis-speak?) characterizing China as a currency manipulator fell with a thud in the public consciousness; no rabble rouser rallied around the issue, and instead I’ve seen several editorials suggesting Geithner tread more carefully with his terminology.
I don’t think the American public believes cheap imports are the problem, right now. Rightly or not, average Americans aren’t coming to the conclusion that unemployment has doubled over the past 12 months because Walmart carries inexpensive Chinese products… China gets off the hook probably because the trade deficit has been huge for *years*, but the recent crisis is entirely new.
Now, informed analysts understand that global trade patterns are responsible for the low interest rates + soaring asset prices that contributed to the formation of the crisis… but informed analysts aren’t the ones who get to drive this debate, period.
Think back to the original version of TARP when it became hung up in the house. While there were some critical comments aimed towards Paulson from these same informed analysts/commentators, I think it’s fair to say the vast, vast majority of financial experts believed immediate action was needed to prevent systematic collapse. But the populist reaction amongst the man in the streets? Entirely the opposite direction, and so intensely so that the legislation was thrown off track for a week.
The financial industry is getting the lion’s share of blame for this crisis, period. If China implements new tariffs explicitly blocking American exports and *changing* the flow of global trade substantially, public sentiment might change… but if Chinese government policy only maintains the current trade imbalance, I really don’t see it ruffling feathers.
Mike, you’re a China expert, so whoever you spoke to on the Hill is naturally going to discuss things from a China-bent. It’s hardly a representative sample of where their priorities lie vis-a-vis other issues… I’m pretty certain issues like the stimulus package + budget which will now consume all political discussion for the next 6 months. You can get a better grasp of Washington’s public priorities by looking into what the committees are doing, and I certainly believe China + trade imbalance is low on the agenda right now.
By the way, Hillary’s visit to Beijing culminating in her “please continue to buy US treasury bonds” request was front-page news from coast to coast.
Beware of assumptions before test, it is given as certainty that Smoot Hawley tariff act was the catalyst of the depression, but a post mortem analysis is not conclusive.
It may have been a crisis booster but not the crisis factor. As of today the crisis is solvency, credit, past money supply in relation to GDP and prices in relation to income.
Glen M,
This is the text of the actual letter sent by the House Trade Working Group:
http://www.mbtmag.com/articleXml/LN932745691.html
One paragraph devoted to China. Similar real estate devoted to “renegotiating NAFTA”, another paragraph for Colombia FTA, Panama FTA, Korea FTA… two paragraphs for essentially dismantling Doha and rolling back WTO.
IMO, not really China-specific, but rather the general protectionist mission statement.
Trixy, a more serious problem with the Goldman VAT data may be, according to a bank economist who wrote me, that VAT is imposed not only on final products but also on every intermediate stage. In other words, it is not only affected by retail sales but also industrial sales (e.g. raw materials, equipment, etc.). As industrial sales have been very weak recently because of inventory destocking, VAT revenue growth were bound to be slower than retail sales growth.
Thomas, in China analysis is too often labeled either as an attack on China or support for China. I intend neither. It may or may not make sense for China to cut back on shipbuilding, but as far as I see it the net effect, whatever the policy intention, is to reduce net demand. As such it is likely to exacerbate the global balance. I may be wrong, but not because I lack sympathy for the plight of policymakers but only if the net impact on Chinese consumption is actually positive.
Glenn, at a recent lunch your point was made very forcefully, and by a bank analyst who has been extremely positive on Chinese policies. She claimed that most new spending is going into areas that are not labor intensive and so may exacerbate the trade surplus while having a minimum effect on employment. This is the kind of issue on which I have limited expertise, so I can’t agree or disagree beyond nodding my head wisely,
Thank you Xiaochen.
A West, as the Plaza Accords suggest, governments can indeed speed up or slow down adjustments. In fact the argument is easily made that the current imbalances are caused primarily by distortionary government policies.
Twofish, while I concede that a few countries – mostly city states such as Singapore and Hong Kong – were indeed able to rise to developed-country status with very open trading borders, I am not sure why, when I argue that no large economy has ever done so, this would not hold for China. Small countries reliant on servicing large economies have a very different set of institutions and abilities, and a policy that serves Singapore and Hong Kong while unavailable to the US or Japan is not likely to be of service to China. I’m sorry but I am not sure I understand most of the rest of the comment.
As for your arguing that there has not been a rise in trade friction, I am a little surprised. Not only has there been a significant increase in political noise, as far as I can see, but there has also been an increase in WTO cases and in actual tariffs and barriers imposed within Asia. More importantly, the historical evidence suggests that as unemployment rises, trade friction deepens, so to dismiss the possibility of an increase in trade tension seems pretty disingenuous to me. By the way today’s article in the Financial Times “Asean split on protection,” doesn’t make any sense to me if the risks of trade friction and trade protection were as negligible as you suggest.
Shawn, I share your skepticism.
Glenn, thanks for the picture. It sort of ruined my day.
CCT, you may be right, but I suspect that if the folks on the Hill care, it is because they believe their constituencies care. At any rate the protection talk cited by Glenn need not be overly China-specific for it nonetheless to have a full impact on China.
Michael,
Sort of an unrelated thought. I saw in the Journal today on p. A6 that the stimulus plan is partly targeted at getting the Chinese consumer to spend their savings. What are your thoughts on this? What indicators would you be looking at to see if this is actually happening?
I would argue that China has had their own Smoot-Hawley for years. Have a look it in action in the steel industry.
http://www.eurofer.org/index.php/eng/News-Publications/Press-Releases/Report-shows-Chinese-state-business-relations-provoke-severe-market-distortions-in-the-international-steel-market
It is important to assess the impact of each of the stimulus measures announced by the government. It is clear that restructuring and consolidation are required in many sectors of the economy and those related measures will have a significant impact on overcapacity and excessive production. The minor changes in rebates will have relatively small impact, particularly given demand has dropped precipitously. Overall, it certainly looks like the measures designed to reduce overcapacity and increase domestic demand far outweigh the measures designed to increase output and protect exports, which in turn, reflect the priorities of the government. Also important to recognize the political realities of having to address a variety of important constituencies in China. In the next few days we will very likely hear a lot more about measures to increase social spending designed to support people in need and encourage increases in personal consumption
So let me get this straight, decades ago, when the US was the world’s greatest producer of finished goods, it pushed for tariffs/trade barriers, even though it had a major hold on exports throughout the world. Now, China is that nation that is the world’s greatest producer of finished goods. China is funneling capital into more export production, no doubt, to sell cheaply priced goods to Americans who are already over-extended on credit, and are in debt amounting to somewhere in the trillions of dollars. Not only that, they have lost $8T in household wealth. 600-700,000 jobs losses per month, with a possible rise to 1M per month down the line.
So, why would China think Americans will buy? They will end up with massive inventory surpluses, more industrial slowdowns, and unemployment. Deflation will persist pushing the prices for unsold items way down.
Inventories may take years to be sold off. With debt-deflation, hard economic times are ahead with wealth disappearing for many.
http://eye-on-washington.blogspot.com