This is perhaps the direct result of naïve wishful thinking of US MNCs “globalization” in the 1980s, believing all third world country workers to be robotic slaves in cranking out products that were price uncompetitive to make in the US. In addition to up-rooting manufacturing jobs in US to greener pasture, all in accordance with the capitalism text book principle of “relentless pursuit of cheaper labor”.

Trade protectionism is not limited to the obvious imposition of import tariffs. There are subtle tricks such as stringent FDA requirements, safety requirements (mostly are over-kill nonsense excuses), human rights standard (not quite comprehensible by Chinese workers, who are more interested in having work and to earn honest wages),…etc. However, the worst form of protectionism comes from government invisible hands of Mercantilism, namely; currency exchange rate manipulation to make it artificial low, government subsidies to manufacturing exporters, i.e. low interest loan financing, lower energy/utility consumption rates, lower land cost, products made by foreign JV must be exported (isn’t that what MNCs globalization wanted in the first place?), Dickensian sweat shop working conditions as viewed by Americans. Not just China, almost every developing countries in Asia, including developed economies such as Singapore, Taiwan, Hong Kong, governments have manipulated their currencies, mostly pegged to US$, with the exemption of S$ pegged to a basket of currencies with a limited (manipulated) trading band. The point here is hardly anyone screams loud about all these tiger, wolf, hyena economies, but a fast emerging giant dragon, since it is the biggest sweat shop in the world with one fifth of humanity, big enough to inflict disruptive and destructive damage in trade imbalance.

Obviously, on surface, it is unfair to the American work force that job losses are mounting , as Krugman worked out on the back-of-envelope calculation, he estimated US would have lost 1.4 million jobs in the coming two years if the current Chinese mercantilism predatory behavior continues. He is beating the drum for a trade war ahead, but would it solve the problem? The answer is flatly NO. Firstly, China would never budge on any finger pointing demands (uniquely CCP culture, not Chinese’s), such as floating the RMB in open market, SOE subsidies and production cost transparency, JV laws restrict products must be exported, collective bargaining in the form of organized unions, any trivial (as PRC perceives) human right issues of US standards. Secondly China would retaliate selectively with import tariffs on America products (not that many except for Boeing planes, doubt that they would pick wheat!). At the end of the day, every one becomes loser in a trade war.

What if, hypothetically suggested, Krugman’s 1.4 million US job loss translates into equivalent US$ figure of Chinese exports, which China agrees to slash in the next 2 years. US is to compensate the Chinese worker jobs loss, say 2X1.4 million = 2.8 million for their low efficiency, as a result of export withdrawal. Then US would end up with hell of a deal for cost effectiveness on otherwise unemployment and welfare payouts to 1.4 million US workers, as well as saving jobs, since US worker earns 10 times more than a Chinese counterpart. Nice and clean on this back-of –the-envelope calculation. Unfortunately, it no longer works that way, because US workers had already lost the skill, urge, dedication, and incentive to make the real “stuff” that used to be, simple “stuff” such as cast iron cooking pan, pots, kitchen utensils commonly found on Wal-Mart shelves, and you don’t expect these 1.4 millions workers to turn out another Bill Gates either. Pick a recent example of oil and gas drill pipe and casings, China had practically cornered the entire world market for making oil well pipes with API standards, of course supported by all its mercantilism know-how. As long as the pipes meeting API standards, there is no difference if it is made in Japan or China, or USA. However, there is still a difference, a large quantity of the pipes is tagged as API certified, but they are fakes. The nominal API built-in safety factor is at least 1.6, Japanese pipes are made for 2.2, the fact that who needs safety factor more than 1? Anything beyond 1 is bonus for expectation of a very slim probability of failure. Even with the US tariff imposed, SOE factory made pipes (fake and real) could still make profit. Accusation of dumping therefore seems to be groundless.

So, what are we getting into? Trade frictions? This is pathetic situation that US and China are effectively bundled together by themselves for a bungee jump of fate. The original culprit is “globalization”. Since the reform instituted by “paramount leader” Deng Xiaoping 30 years ago, he had no idea what would this lead to because he just wanted “change”. China had no plan or ambition to corner the world on commerce and trade, as always claim, they had been just “feeling the way when crossing the river” since then. They have absolutely no innovative idea other than making fast buck, conspiracy, strategy, future plan for the country and its people, even until the present day. What the west facing today is not cold war devilish communist, but Dickensian exploiter mafia of fake communists. Real communists are friends, fake communists are foes!

Surely, the dual bungee jump is not going to be pretty!

I really enjoy reading your blog. One of the best I’ve seen in this area.

One suggestion though – in a future blog could you discuss the roles of the WTO, IMF, and other global organisations’ roles in the previous and the current global recession? I think that this is one of the biggest problems – international regulations versus national regulations.

Generally, the process of globalisation and free trade either advances or retreats. It rarely maintains the status quo. Global regulatory overhaul is needed to prevent regulatory arbitrage and enforce trade rules.

The current system, whereby some countries “play by the rules” and others try to work around them (least certainly the spirit of them) is flawed and will most certainly contribute to the next crisis.

How can such a big country as China which treats itself as a developing country, but which has such a huge influence on global trade continue to excuse itself?

Please write a blog with your thoughts and some suggestions on global institutional reform.

Regards,

Tony

New Straits Times (Malaysia) January 7, 2010 Thursday, local, p. 17, by Frank Ching

China cannot tango alone on global stage

ON Dec 30, the International Trade Commission, which arbitrates trade disputes between the United States and other countries, imposed tough new duties on Chinese steel piping imports. That is only one sign that a new period of friction, dominated by trade disputes, lies ahead in China’s relations with the United States and Europe. Since its inauguration, the Obama administration has bent over backwards to accommodate China, playing down Chinese human rights offences, refusing to brand China a currency manipulator, and toning down criticism of crackdowns in Tibet and Xinjiang. However, this policy of accommodation, designed to encourage China’s willingness to accept greater responsibility for global affairs, hasn’t had much success.

The Copenhagen United Nations conference showed that Beijing puts a much higher priority on its own economic development than on climate change. And Chinese actions, in Copenhagen and elsewhere, suggest that Beijing feels it no longer needs to pay as much heed to the US as before. European countries were particularly enraged by Chinese behaviour in Copenhagen. The British climate change secretary, Ed Miliband, publicly accused China and several other countries of trying to hijack the climate conference and “hold the world to ransom”.

China’s image has also been affected because it executed a British citizen widely believed to be mentally ill for drug smuggling, despite high-level appeals for clemency and calls for the examination of psychiatric evidence. These are signs that Western countries are losing patience with China. And at a time of global economic problems, there is growing annoyance with China’s policy of continuing exports-based growth. While Beijing is quick to criticise what it calls “protectionism” in other countries, it insists on the right to maintain the value of its currency at an artificially low level, giving itself a built-in trade advantage.

Premier Wen Jiabao said in a year-end interview with the official Xinhua news agency that China “will not yield to any pressure of any form forcing us to appreciate” the value of its currency.

Barak Obama during his presidential campaign, had accused China of manipulating its currency but did not do so after assuming office, evidently hoping to achieve progress with Beijing in other areas. However, the Obama administration may now be ready to take a tougher stance. Certainly, it is being encouraged to do so. In a New Year’s Day op-ed piece in the New York Times, Nobel Prize-winning economist Paul Krugman declared that China “follows a mercantilist policy” that is, “to put it bluntly, predatory”.

The Chinese currency, he pointed out, is pegged about 6.8 yuan to the dollar and, “at this exchange rate, Chinese manufacturing has a large cost advantage over its rivals, leading to huge trade surpluses”. “Chinese mercantilism is a growing problem,” Krugman wrote, adding: “The victims of that mercantilism have little to lose from a trade confrontation.” Krugman’s position strengthens the hands of those calling on policymakers in the United States and Europe to take action. It comes at a time when unions such as the United Steelworkers accuse China of protecting its own jobs by increasing exports, resulting in the layoffs of American workers. Similarly, Carolyn Bartholomew, chairman of the US-China Economic and Security Review Commission, a body that advises Congress, has castigated the for “refusing to acknowledge even that China is manipulating its currency”.

In effect, she said, the administration is “providing cover to the Chinese government and depriving itself of a tool to create desperately needed jobs here at home”. Relations with China are bound to be affected in other areas as well. The Obama administration has deferred any announcements on new arms sales to Taiwan. However, such an announcement is long overdue and China is bound to react strongly to it.

Moreover, President Obama, who previously refused to meet with the Dalai Lama for fear of jeopardising his Beijing trip, has now promised to meet the Tibetan leader, and any such meeting will anger Beijing.

It is true that Washington needs Chinese cooperation on global issues such as Iran, North Korea, the global economy and climate change.

While China is to be treated with respect, however, the US – and Europe as well – should not create the impression of dependency on Chinese favours.

China is an important country, but it needs the US and Europe at least as much as the West needs China.

They need external reasons, without that they just run the current scheme for years,until they reach same strict limit (probably the loss on the assets will be higher than the GDP growth?).
For me it mean possibly 3-5 years more strugling before we reach the next “crisis”.
Or possibly we will reach it earlier,if there will be same change in the flow of the international founds (trade protection?)
So interesting

‘(Pardon me for not offering much in the way of substantial economic and/or financial commentary.)”

Who needs economics and finance in this case? But your positive feedback system (China meeting external friction and (predictably) responding in such a way that friction increases, etc) does not have to get going of course. History is usually not about what was easy to predict taking place. Look at Australia’s (cricket) victory over Pakistan..

Apart from the fact that the Chinese have pretty smart people at the top, with lots of discretion and good intelligence. I guess many researchers pick a not implausible scenario and build a theory under it. In the case of a country that has become so big that its economic environment can no longer be treated as inert to what it does, but rather a complex set of strategically operating actors, one has to assume that the leadership is aware of that change in situation and changes its approach to strategy. Most likely, China will try to free ride the world trade system as far as it can (it does have a much more centralized system and is hence capable of coordinating its business actors far more than the “western” countries (with question marks for Korea and Japan). That means that the stress points that would set off the positive feedback mechanism will likely be avoided, unless something goes wrong. It is not hard to avoid on or two reefs, but it becomes much harder if reefs and currents cooperate intelligently..