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Bretton Woods Two and Trade Politics

by Brad Setser
May 27, 2005

The interest rate on the 10 year Treasury note is somewhere between 4.0-4.1% — and the US seems to be having no trouble financing its current account (or its budget) deficit right now. The risk of hard landing remains just that, a risk — right now the market hardly seems worried about the United States’ still growing external deficit.

Consequently, this is a reasonable time to step back and look back at some of the arguments that Nouriel and I laid out in February, when we put forward the case that growing external imbalances posed a growing risk to the US economy. We did not suggest that the hard landing was imminent — we thought the risks were far higher in 2006 than in 2005. In 2006, the US external deficit would be bigger, one-off factors like the corporate tax holiday would have played themselves out, and Asian central banks would hold even more reserves than they do now — calling into question their willingness to keep on adding to their holdings of dollars. But we did argue that the risks were more immediate than most thought.

Some of the arguments that we made in February look pretty good three and a half months later. Korea’s central bank governor has not mastered the art of communicating with the markets. But it is still pretty clear that Korea thinks it has all the reserves it needs and would rather not continue to add to its reserves. Japan is out of the market, but its past intervention seems to have left a legacy in the market — the willingness of private Japanese investors to buy US debt hinges in part on expectations that the Japanese authorities will keep the yen from appreciating too much, and thus prevent dollar depreciation from wiping out the positive “carry” generated by higher US interest rates. Change those expectations, and US rates might change to compensate Japanese investors for the greater exchange rate risk. Above all, the burden that China has to bear to support the system seems to be rising. We don’t know the pace of China’s reserve accumulation in April or May, but I would not be surprised if both numbers turn out to be very high — reserve accumulation of $30b, or even $40 b, in May is not out of the question. Annualized, that works out to $360 b (20% of GDP) or $480 b (25% of GDP) — a phenomenal sum.

This was a key component of our argument: the burden China has to bear to support the system would rise, until it exceeded even China’s threshhold for pain – though the pain in this case is rather abstract. The pain comes from the growing gap between the coast and the interior and resulting social tensions from China’s unbalanced growth, future financial losses and difficulties keeping surging reserves from leading to a surge in the money supply. Jonathan Anderson of UBS estimates that China’s money supply should grow by about $70b a year, any reserve growth in excess of $70 b needs to be sterilized. If China’s reserves grew by $40 b in May (this is a pure guess), and 75% of those reserve were invested in dollars that provides $30 b of financing to the US. The US needs about $65-70 b in monthly financing to cover its current account deficit, so China’s central bank ALONE would be supplying just under 1/2 the needed financing.

China says it does not want to give in to US pressure — though I would note it also did not move when the Bush Administration refrained from public pressure. But if China tries to “punish” the US for its public criticism by holding on to its peg, China, in effect, has to keep on financing the US at a low rate. Rather than kow-towing to US demands to change its currency, China will just keep writing large checks to buy low-yielding US securities …

However, I think Nouriel and I did miss a couple of things in our Bretton Woods Two paper.

1) US assets could become more attractive relative to European assets if European interest rates fell sharply, not just if US interest rates rose. On the short-end, US rates have risen while European rates have stayed constant. On the long-end, US rates certainly have not risen (hence, the conundrum), but European rates have fallen. Bunds now yield 3.3% — well below Treasuries.

2) China’s lending curbs could make it easier — at least for a while — for the PBoC to sterilize substantial reserve inflows by issuing sterilization bills that pay relatively little (perhaps less than China earns on its reserves). Chinese bank deposits are increasing rapidly, but the PBoC’s administrative controls have crimped the banks’ capacity to lend. The result: the banks use their spare cash to buy the PBoC’s sterilization bonds, and are willing to do so at a very lost cost. China has kept its deposit rate absurdly low to increase the profitability of the state banks, allowing the banks to write off some NPLs with ongoing profits (low deposit rates also helped keep lending rates low, and low lending rates and a growing economy make it pretty easy for firms to cover at least the interest on their loans, keeping NPLs low … ). But as the banks buy more and more PBoC bills that yield about what they pay on deposits, their profits will fall — relying on administrative controls to keep sterilization costs down has a price, even if that price is not immediately obvious. And as the pace of China’s reserve accumulation accelerates, that price will only grow.

However, our argument did not hinge entirely on the possibility that the world’s central banks would tire of financing the US, and slow the pace of their dollar reserve accumulation. The same imbalances that led to rapid central bank reserve accumulation were also generating growing strains on certain sectors of the US and European economies, strains that could easily be expected to give rise to protectionist pressure. That part of the argument certainly has been born out. There is a risk that the US will tire (at least politically) of Chinese imports before China tires of financing the US.

(Continues)This year, China is likely to import about $50 b — maybe less — of US goods, and $200b, maybe more, of US debt (assuming China’s reserves increase by $300b, and 2/3s of those reserves are invested in dollars). That is an unusual pattern of trade. I do not doubt for a second that many parts of the US benefit from this trade as well: the PBoC’s willingness to buy US debt — treasuries, agencies, mortgage backed securities, even corporate bonds — has helped the Fed support US consumption after the stock market bubble burst by generating a bit of real estate froth.

However, American who bought homes in San Diego (or all of California), Miami (and much of Florida), DC, New York, and elsewhere on the Eastern Seaboard generally don’t attribute the capital gain on their home to China’s willingness to finance the US, and thus to cover up the consequences of the US “savings” deficit. They certainly are not using their capital gains to write large checks to help out those losing jobs in the manufacturing sector. And remember, when a factory closes in a small town, the impact on town is profound: the small town usually is left with more houses than jobs, and that pushes down local real estate prices — leaving those who lost their job with a smaller financial cushion from their “home equity” as well. Maytag employs 1/5 of the population of Newton Ohio, so shifting the Maytag plant to China would have a profound impact on the local real estate market (See the C1 story in the Wall Street Journal).

I think this raises a set of very real issues — issues that go beyond the typical debate about trade liberalization. The underlying assumption behind most trade debates is that jobs lost in sectors that compete with imports will be offset in large part by new jobs in exporting sectors. The baseline assumption is that imports will be paid for by exports — and there will be a shift from one “tradable” sector to another.

That does not seem to be what is happening now — at least in the US. There is a shift out of sectors that compete with imports, particularly imports from China — socks, washing machines, auto parts, furniture (the less glamorous parts of the US economy centered in the Midwest and the South) — into the real estate sector, and other sectors sheltered from external competition. That is the consequence of balancing higher imports with more exports of “debt securities — IOUs” rather than “goods and services.”

As China’s global trade surplus rises, it is becoming clear that the US “savings deficit” (private as well as public) is matched by an equally large “consumption deficit” in China. As a result, the large US trade deficit is increasingly matched, now that China’s investment boom has cooled a bit, by a large Chinese trade surpluses (I am talking about both countries overall deficits and surpluses, not their bilateral deficit/ surplus). China’s is now big player in the world economy, despite still being a poor country: its goods exports (end 2004) were about 75% of US goods exports, and they are rising fast.

The emergence of large trade surpluses in one major part of the world economy — and extremely large, sustained trade deficits in another big part of the world economy — is, I suspect, a real challenge to the global trade regime. I “buy” John Gerald Ruggie’s “embedded liberalism” thesis. In the post-war period, trade liberalization was matched by a set of other policy changes that took some of the edge off creative destruction. Policies like social security and its equivalents in Europe, Europe’s public health care system, Japan’s system of lifetime employment and counter-cyclical macroeconomic policies to limit the business cycle.

One of the system’s unwritten norms, I would argue, was that the major players did not run current account deficits (or surpluses) or more than 5% of GDP. In the 1980s, the big battle between the US and Japan came when the US current account deficit was about 3% of GDP. Japan has run a sustained current account surplus for some time, but not a 5% of GDP surplus. Some resource exporters have run large current account surpluses, but not, I think, the world’s major manufacturing economies. With two major players the US and China now running deficits and surpluses on a scale that I suspect are unprecedented for major players in the world economy, it is no shock the global trading system is under a bit of strain.

You can argue that the traditional goods for goods trade left some potential gains from trade off the table, since it meant that savings short — or investment rich — countries were not generally running large external deficits, and importing large amounts of capital from abroad (though certainly no one anticipated that large gains from trade would come from the export of the savings of poor countries to rich countries). But the traditional goods for goods (or services for services) trade also simplified the external adjustment process — growing imports were matched by growing exports, and growing employment in the export sector.

The current pattern of trade implies a large shift of resources out of the US tradables goods sector now (see this Business Week article), as the US runs up its external debt at an accelerating rate. But then — probably within five and certainly within ten years — the trend will have to reverse itself: there will need to be a large shift out of real estate and back into tradable goods production. No country can run large trade deficits for long without running up its external debt levels to levels that are difficult to sustain: on current trends, barring unanticipated valuation gains on US assets, the US external debt to GDP ratio will be well above 40% of GDP by 2008 — a very high level relative to US exports.

My point: it is not surprising that the unprecedented US savings deficit and Chinese consumption deficit (and resulting US current account deficit that is now heading towards 7% of GDP and Chinese current account surplus that looks likely to exceed 7% of China’s 2005 GDP) is putting real strains on the trading system. Deficits and surpluses of this scale in major parts of the world economy challenge the norms of the post-war system — and challenge domestic political compromises that enabled post-war trade liberalization. Even if deficits and surpluses of this size are economically sustainable, they may not be politically sustainable.

UPDATE: interesting DeLong riff that key’s off Krugman’s column. It touches on some of the themes discussed here, but in a shorter and punchier way …


  • Posted by camille roy

    So the current free trade regimen really isn’t good for the american worker? Now you tell us.

    Will the last one out of the plant please turn out the lights.

  • Posted by anne

    What a fine essay, but your analysis becomes more worrying though you are tempering. Housing speculation may give us less time for stability that we in any way wish.

  • Posted by brad

    my concern arises from the internaction of the current trade regime, current exchange rate management in Asia, the US savings deficit and the poorly developed system in the US for transferring gains from trade (in this case concentrated in the real estate sector, strangely enough) to those losing out from trade.

    But remember, that if the US got rid of the trade deficit that implies that the US would need to stop importing savings from abroad. Do that cold turkey, a lot of things would have to change — a sharp rise in interest rates that reduced real estate prices and us domestic consumption would not be good for the US worker either.

  • Posted by anne

    While I walk about for a time looking for birds, I will be asking myself whether a slowing of the housing market is more of a danger than limited capital inflows. A slowing of the housing market will quickly slow the economy and likely lower long term interest rates. The difficulty may be with housing before slowing capital inflows. Darn.

  • Posted by Edward Hugh

    “I think Nouriel and I did miss a couple of things in our Bretton Woods Two paper.”

    I’m very happy to see this Brad, I mean no one has the answer here. This is a really new and interesting situation. I certainly don’t have things clear, and I think there is lots of room for thinking out loud, and exchanging ideas.


    “US assets could become more attractive relative to European assets if European interest rates fell sharply,”

    I’m also glad you are picking up on this. I think Europe forms part of this triangle, in a way in which perhaps Japan doesn’t, or at least not to the same extent.

    I don’t think eurozone interest rates will fall sharply, but I think they could come down a bit. Obviously there is a zero bound, we are at 2%, and the ECB is resisting fiercly any move.

    The benchmark 3 1/4 percent German bund fell to a record low of 3.269 percent during the week. What I think is that European rates will form an anchor, which will constrict monetary policy in the US. And the weak euro will give support to the dollar.

    “the poorly developed system in the US for transferring gains from trade (in this case concentrated in the real estate sector, strangely enough) to those losing out from trade.”

    Again this is the point. The housing froth and the political tensions. But I don’t see any easy answer to this one. Why do we need to assume as a theoretical a-priori that every problem has a solution? Or that problems and solutions are parcelled out in equal quantities in an initial ‘game open’ call.

    “The pain comes from the growing gap between the coast and the interior and resulting social tensions from China’s unbalanced growth”.

    Yes, but I’m not sure ‘social tensions’ are quite the same in China as they are in the US, actually there are few real signs of social protest in China. I don’t know if you formed an impression on your trip, but I have the feeling that many Chinese are happy, and are happy that there economy is growing so well, that China may become a superpower, even happy that the US talks so much about them.

    So the social tensions which break the ‘conveyor belt’ may be more in the US, but, when push comes to shove, they may not be so important either. As many people keep insisting, the US isn’t France.

    “into the real estate sector, and other sectors sheltered from external competition.”

    well, if this is the case, then certainly it is preoccupying, and here I wouldn’t especially be worried about China. Another missing player in the scheme of things is India. Now to counteract what Roach calls ‘global labour arbitrage’ in services, the US was supposed to be moving on to the new generation, high value activities. That is certainly what luminaries like Catherine Mann were telling us. If it isn’t noticeably happening, then this is preoccupying.

    At the moment I’m deliberately ducking the *big* question about how sustainable this is, and for how long, since I haven’t sorted out what I really think. What I do think is that the orders of magnitude here are large.

    The only real historic analogy I can think of is the situation of the UK when faced with the imminent arrival of the US. Now the US itself is faced with a much bigger rival. The US’s advantage was land, the Chinese one is labour, and remember, there is still India to think about.

    Very hard to see clearly here.

  • Posted by Paul Denlinger

    The Chinese economy is still export-driven, and to a large extent, it still depends on the US market to drive growth.

    This will not last forever though. The Chinese government needs to get bad loans of the four state-owned bank’s loan portfolios, and put in place good management who have the tools and ability to manage risk decisions to make loans on the Chinese domestic market.

    Once this is done, then growth in the Chinese domestic market will take off, and China will much less dependent on trade with the US for growth. This is likely to cause a rise in US interest rates, as the US will have huge deficits.

    After 4-5 years, it is likely that the yuan will become a freely convertible currency, which will further reduce demand for US treasuries. Between the yen, euro and yuan, the US treasury will need to find some other ways to make the dollar attractive to foreign investors.

  • Posted by Edward Hugh

    Just a brief word on the Michael Mandel piece, there was a phenomenon in business cycle theory some years back called the Kuznets cycle. This idea was based on something Kuznets had identified in the data: that there was a 15 year cycle (approx) based on immigration waves (with lags) into the US. The cycle disappeared, since immigration virtually became none existent.

    However, since 1988 immigration is back, and so, I would conjecture is the Kuznets cycle. The cornerstone of the cycle was construction activity, so I think it is important to be very careful when analysing this boom to look at all the forces which may be driving it.

    “Residential investment has become a black hole, absorbing a staggering 5.8% of gross domestic product. That’s the highest level since the late 1940s and early ’50s, when an entire generation of returning soldiers was setting up families and expanding into newly built suburbs. This time, Americans are building second homes and enlarging current ones at a record pace”.

    What I am saying is that this need to go back precisely to the early 50’s to find these percentages, convinces me even more that immigration demographics is playing a part.

    For the rest, Mandel’s reasoning doesn’t convince me too much, however the absence of tech innovation as a major growth area may have something to do with the political environment which has been created by your current administration. When the Microsoft case got lost, it became obvious that there were a whole series of new economy issues which were going to get neglected, as steelmakers and textile entrepreneurs exerted their influence.

  • Posted by brad

    paul — you mean offer foreigners a positive real return, taking into account the real depreciation likely required to limit the expansion of the us current account deficit (which implies cutting the trade deficit) — that WOULD be a real change …

  • Posted by Edward Hugh

    Reading the paper that Dooley et al will present at the June NBER conference:

    it seems that their argument could be summed up by saying that the rapid mobilisation of labour that is taking place in China has associated externalities which are available to the government as social co-ordinator. Basically I think you could put these down to Arrow style ‘learning by doing’, and they suggest (well maybe they don’t but I might) that the loss of interest (and even capital loss) on all the US treasuries can be booked out against these benefits. For as long as this holds, it is unlikely the Chinese will stop buying.

    Now…………when China no longer needs this learning by doing element, since it has its own critical mass, then this argument ceases to hold, but……… China at that stage can have such a foothold in the entire global economy, and such an interest in maintaining it, that it wouldn’t want to see one of the other key components – in this case the US – fall apart. So it will seek an orderly resolution of the problem.

    At this stage the renminbi could comfortably form part of the system of reserve currencies, and we would have a kind of Bretton Woods 3. If they aren’t saying this, then maybe they should be.

    Of course, as you are suggesting, internal issues in the US may destabilise everything. In other words it isn’t the periphery, but the centre, which may not hold. This would be new.

  • Posted by w

    Brad, et al,

    I have come to the conclusion that anne is filtering out economics, which is what most of us should do. We all have unique perspectives on the clouds passing by and thus entertain each other with the art of language and debate, but this blog

  • Posted by w

    Brad, et al,

    I have come to the conclusion that anne is filtering out economics, which is what most of us should do. We all have unique perspectives on the clouds passing by and thus entertain each other with the art of language and debate, but this blog continues to be as pointless as old weather forecasts and newspapers that blow in the wind……….boring! In the meantime, Ill wait for Greenspan and a 2% rate increase.

  • Posted by w
  • Posted by Navin

    2% increase ? in one go ? that would be doom ?

    Anyway, I think Fed’s tricks worked well so far I guess. They increased the rates, then prices dropped a bit (CSFB report). oil price tanked, industry looks rosy now, this outlook brought some life to stock market and dollar also inched up a bit. So all looks to be cool now. (to naive eyes)

  • Posted by Paul Denlinger

    My feeling is that the Chinese securities markets (Shanghai and Shenzhen)tried to offer a short-term bump in the early 90s by getting Chinese state-owned enterprises (SOEs) to list. That has been a disaster, and those two markets continue to decline even now.
    The Chinese government has learned its lesson, and now knows that short-term growth cannot replace systemic changes in its own equities and banking systems.
    No doubt, it is not in anyone’s interest to pull the rug out from under the US dollar, even as the new economic order forms. However, we are heading to a new world order where there is not a single dominant reserve currency, but one which will be dominated by the euro and US dollar in the first tier, then the yen and yuan in the second tier. This would be followed later by the Indian rupee and Brazilian real.
    In short, there are more choices for currency traders. This means that governments will need to be more conservative in how they manage their international monetary policies.

  • Posted by glory

    Property Sales in China Cool Ahead of New Tax
    By James T. Areddy

    Real-estate brokers across China are seeing signs of a sales slowdown, in what could be the first indication of a break in prices during a decade-long property boom. The slowdown comes a week before China is set to impose a tax on certain property deals nationwide. The central government earlier this month began circulating orders for localities around China to levy a 5.5% tax on the value of residential property sold after June 1. Speculators will feel the heat of the latest measure most, as the tax applies only when an apartment is sold fewer than two years after it was purchased. The move reinstates a policy that was in place in many Chinese cities until 2003, according to details posted on the Construction Ministry’s Web site. It follows the application of a capital-gains tax in March in the country’s hottest market, Shanghai. Local officials say the Shanghai tax will be superceded by the national levy.

    The transaction tax is proving to be the most effective measure unveiled yet aimed at cooling China’s home market. It follows administrative limits on the sale of unfinished apartments, crimps on lending and higher mortgage rates. Brokers from Chongqing to Hangzhou say the market is frozen even before the tax goes into effect. “Before, the higher the house price was, the hotter the property market was. Now, the lower the price, the more people are waiting,” says Li Yuzhen, a broker at Jiahe Real Estate Co. in the eastern city of Hangzhou…

    Banks are another worry. Even though mortgages have been around only since 1998, the government is worried banks could be saddled with more bad loans if speculative bubbles burst. Property-related loans were the fastest-growing portion of new bank borrowing last year. More than half of existing loans are collateralized with real estate. “In the end, it’s all banks,” says Andy Xie, an economist at Morgan Stanley in Hong Kong who has long argued China’s property prices are overvalued. He figures that $338 billion in Chinese property loans were originated last year. The Shanghai property market, measured in value per square meter, has surged by 56% during the past two years, according to official numbers, making it a sign of domestic economic froth that might invite a revaluation of the yuan.

    btw, here are some other interesting articles on housing 😀

    Most players think a spike in long-term interest rates will be the bad guy, pushing 30-year mortgage rates out of the Garden of Eden and pricing would-be home-buyers out of the market. But what if long-term rates don’t rise?


  • Posted by glory

    re: “unprecedented US savings deficit and Chinese consumption deficit… putting real strains on the trading system”

    i’m not sure that there is yet! cuz if there were, then wouldn’t inflation and rates be rising? and they are not 😀 one may take issue that inflation is not measured correctly, or that it ignores asset (housing) inflation, but the bond market is paying no mind… i do not see BW2 dissolving until inflation and bond yields put ‘real strain’ on the global economy.

    also re: import competition and the human costs thereof

    i thought this article from the richmond fed really underscored how difficult (bordering on impractical) job retraining is…

    Global Gain, Local Pain
    : The Globalization of Manufacturing has Produced Cheaper Goods for Everyone, but the Trend has Cost Hundreds of Thousands of Jobs in the Fifth District – By Karl Rhodes

  • Posted by jm

    An amazing post by the other Brad as he and Krugman contemplate the unthinkable, unmentionable possibility that the Austrians may have been right. I added there a link to Murray Rothbard’s “America’s Great Depression”.

    There is also a wonderful and relevant piece by Paul Kasriel touching on the same issues over at the Northern Trust site.

  • Posted by anne

    No, no, every line of these posts is engaging. Think of what Edward Hugh is arguing; we are facing what Britain faced with the emerging of the United States. We are facing an emerging China and India. Where Britain was confronted by a land and capital rich competitor far larger than her, we are confronted by far larger labor rich competitors. Where though is the guide?

    This blog is continually exciting and will be more with events.

  • Posted by anne

    Edward Hugh:

    The only real historic analogy I can think of is the situation of the UK when faced with the imminent arrival of the US. Now the US itself is faced with a much bigger rival. The US’s advantage was land, the Chinese one is labour, and remember, there is still India to think about.

    Very hard to see clearly here.

  • Posted by glory

    like i think until migration catches up with trade and capital flows, currencies need not necessarily adjust – as mcculley has sed:

    …economists steeped in the textbook microeconomics doctrine of purchasing power parity, also known as the “law” of one global price, are constantly frustrated in forecasting currencies. In the textbook, global arbitrage is presumed to bring currencies into such an alignment that prices for goods and services denominated in various currencies are all roughly equal. In the real world, currencies deviate so far from presumed purchasing power parity values as to make a mockery of the concept. Why?

    There is no free market in passports.”

    even in the EU you see difficulty in italians say moving to spain (former-e.germans to austria notwithstanding :) like if gov’ts and ‘volk’ are unwilling to give up control of their borders, what would make them give up control of their currencies?


  • Posted by brad

    navin — oil at 50 is better than oil at 55, but hardly constitutes “tanking” in any real sense — fundamentally, oil exporters are still doing much, much better than they were a year ago, when many agonized over the impact of $35-40 a barrel oil …

    I also don’t think the fed is all that thrilled with the dollar’s rebound — or with the low price of the ten year. It implies a widening trade deficit, and for all my needling of the fed’s propensity to argue current account deficits don’t matter, the fed certainly hoped that a weak dollar would at least slow the deterioration in the US external position. Right now, there is no market pressure for external adjustment — and i think the fed was banking to a degree on an orderly ratcheting up in market pressure gradually reorienting the US economy away from domestic consumption/ real estate towards external production …

  • Posted by brad

    edward — i do think I underemphasized the euro. I am not one who thinks structural reform in Europe is key to global rebalancing — structural reform’s short-term impact is very ambiguous. it might reduce domestic demand because uncertain workers scale back on consumption (see Germany), and the postulated gains from investment and a reallocation of the labor force into more productive sector will take time to materialize. Plus, there are limits to the scale of any potential boom in europe, given its demographics and already high levels of consumption. That said, the fact that Europe is basically in external balance may have led me off — Europe and the US are in a beauty contest to attract the surplus cash of the world’s oil exporters, and right now, it seems the US is winning (or, to the extent oil exporters invest in europe, driving down european yields, European investors are investing in the US … so the net flow of capital remains balanced). Right now, the fact that Europe seems unattractive makes it easy for the US to attract enough surplus cash to finance its external deficits at current rates.

  • Posted by anne

    Alan Greenspan indeed argued the effect of the weak dollar would be to limit the trade deficit these coming months.

  • Posted by anne

    Brad Setser:

    Right now, there is no market pressure for external adjustment — and i think the fed was banking to a degree on an orderly ratcheting up in market pressure gradually reorienting the US economy away from domestic consumption/ real estate towards external production …

    Ah, I understand. I would thinking the easing pressure for external adjustment could be a welcome respite, but this explanation is far more reasonable since there must be adjustment.

  • Posted by brad

    I increasingly suspect the “move up the education ladder” advice may be incomplete. China and India are a shock to low end labor, but also potentially to high end labor, at least in certain segments. They may have an impact on the global market price for engineering, chemical of physcial training at a very advanced level, for example — since both have the capacity to offer a high quality technical education in scientific fields to a large enough group to change the global supply/ demand equation. Steve at Information processing has discussed the impact of the oversupply of physics and chemistry graduate students v. available academic jobs on real returns on that education v. other mathematically demanding fields (finance as applied by hedge funds). Warehousing of ph.d. scientists in post-doc positions, etc. Lower salaries than for law school professors in part b/c of the ability to recruit impressive scientific credentials/ talent to US universities from a global supply source (including Russia). The impact of all this on the US economy may be very positive, but it also probably has an impact of the relative returns of an advanced scientific education. I worry that the basic advice of educate, educate, educate — while broadly true — also oversimplifies a bit. even if the uS educates like mad, their may well be convergence between the returns on a ph.d. education in the states and in say india. Better than convergence between the returns on high school education and factory work globally, but still something of an adjustment …

  • Posted by jm

    But take heart, brad. When avian flu mutates and breaks out of Asia to become the next Black Death, it may have the same beneficial effect on the distribution of economic gains between capital and labor.

  • Posted by anne

    Brad Setser:

    “I worry that the basic advice of educate, educate, educate — while broadly true — also oversimplifies a bit. even if the uS educates like mad, their may well be convergence between the returns on a ph.d. education in the states and in say india.”

    I would hold the education education argument simplifies quite a lot, though I am always and ever for education.

  • Posted by anne

    A Crescent of Water Is Slowly Sinking Into the Desert

    DUNHUANG, China – At the bottom of the mountainous dunes once traversed by traders and pilgrims on the ancient Silk Road, Wang Qixiang stood with a camera draped around his neck. He was a modern-day pilgrim of sorts, a tourist.

    He and his wife had traveled by train more than 2,000 miles from eastern China to the forbidding emptiness of the Gobi Desert to glimpse at a famous pool of water known as Crescent Lake. They came because the lake has been rapidly shrinking into the desert sand, and they feared it might soon disappear.

    “It is a miracle of the desert,” said Mr. Wang, 67….

  • Posted by anne

    Spread of AIDS in India Outpaces Scant Treatment Effort

    MUMBAI, India – On an ordinary Thursday morning at the city’s largest public hospital, an ordinary group of Indians sat around a table, exchanging advice on life and death.

    A middle-aged man in a button-down shirt said he had long ago stopped having sex with his wife. A wisp of a woman sat quietly in a black burqa, her large eyes screaming bafflement at what she was being told. A plump woman in a brown sari requested that nothing be mailed to her home, for fear that her family would discover her secret. They were all living with AIDS….

  • Posted by anne

    Amartya Sen is focusing on broader health care and fundamental education in India. These public benefit absences are still potential significant limits on Indian development.

  • Posted by brad

    re: strains in the trade system, i was focused more on import quotas and export taxes to claw back some of the effects of the end of the multi-fiber agreement, the movement of the tariffs on china bill in the senate and house, and similar steps. if exchange rate adjustment is blocked by massive intervention — and price changes in china are supressed by a combination of price controls and government supported overinvestment that leads to gluts of certain goods, so real appreciation doesn’t happen through the price channel, i suspect that there will be de facto restrictions placed on open trade.

    right now, china is have an inflationary impact on certain commodity prices (tho less than a year ago) and deflationary impact on the price of many finished goods … a bad combination for many, but a good combination for commodity producers.

  • Posted by Stormy

    Ruggie: I found particularly interesting his comments on the weakening position of governments to tax business. All too true. It follows that the nation state as an economic entity has been weakened. Furthermore, because it is weakened economically, it has increasing difficulty maintaining the social contract, not only because capital can now find cheaper labor elsewhere but also because the actual tax base is eroding.

    The nation state is fast becoming a relic, a “residual state.” Corporations are, in a sense, meta-states, “seamless” entities, engaging in intra-firm trade that is accountable to no country.

    I would suggest that the recent bubble, to some degree,—housing and property—are really a consequence of some of the elements of globalization that Ruggie enumerates. Part of that bubble, the part that is driving it, is a small portion of the “income” of the meta-state. In which case, that bubble may last longer than most expect.

  • Posted by anne

    May 27, 2005

    Paul Krugman Gets in Touch with His Inner Friedrich Hayek

    Not Hayek the post-WWII libertarian political philosopher, but Hayek the interwar business cycle theorist.

    Hayek’s theory of depressions was that they started when, for some reason, interest rates got too low–below fundamentals. If interest rates are low, asset prices are high–above their fundamentals. Because financial markets are sending false signals that capital–whether in the form of machines, business organizations, commercial buildings, or housing–is very valuable, the market shift resources into capital-producing sectors and adds to its capital stock….

  • Posted by anne

    Running Out of Bubbles

    Remember the stock market bubble? With everything that’s happened since 2000, it feels like ancient history. But a few pessimists, notably Stephen Roach of Morgan Stanley, argue that we have not yet paid the price for our past excesses.

    I’ve never fully accepted that view. But looking at the housing market, I’m starting to reconsider….

  • Posted by anne|292|…

    Eastern Meadowlark
    New York City-Central Park.

  • Posted by anne|9|…

    Male Hooded Merganser
    New York City–Central Park, Harlem Meer.

  • Posted by Stormy


    Low interest rates certainly do fuel the bubble–especially from those who wish to ride the sudden flux of cash that has come into their communities. In this respect, the bubble is dangerous. But when I canvass Cape people on the kinds of construction that is happening and the kinds of people that are buying the big stuff–we are talking very big cash players here, very big. Some of these homes are absolutely huge–and they will be used only two weeks a year.

    My point is that simply to point at interest rates or the deficit does not explain enough. People are missing one element of the fundamentals.

  • Posted by Stormy

    Part of my point is: This kind of bubble would have happened with or without higher interest rates. These people have real cash; they are not speculators. In some cases, it is cash on the line. No mortgage. Behind them, hoping to cash in, are the speculators. They are in danger–as are those within the widening reach of these communities. Ruggie has the key to the new economic realities.

  • Posted by jm


    And from whence has come all that cash? Perhaps from being closer than the rest of the populace to the Fed’s money-dropping helicopters? Hedge fund guys carry-trading short rates against long? Executives of businesses related to home construction? Mortgage brokers? Real estate agency owners?

  • Posted by DOR

    Paul Denlinger,

    I like what you write, but I also hope you recognize that China has no securities markets in Shanghai or Shenzhen. They are casinos, run on listing by geographic quota, insider trading and rampant ramping, nothing more. To compare them to securities markets is a grave insult.

  • Posted by Stormy

    Try the above surprise. Those making the really big money are below the CEO, for then their salaries will not become public knowledge; in this case, an investment banker.

    Anecdotally, Cape people are surprised at the size and extravagance of the new homes–and the Cape has long been the retreat of a great deal of wealth. And yes, investment bankers have been mentioned.

    My point is not to deny the role of interest rates and the deficit in the bubble, but to point to what has ignited it in those “frothy” areas.

    If interest rates and the deficit were alone the cause of the bubble, then it should be country-wide, but it is not. Why isn’t it? “Gold fever” hits those communities when suddenly big cash ups the value of property.

  • Posted by Edward Hugh


    “However, we are heading to a new world order where there is not a single dominant reserve currency…”

    I broadly agree with this, but am not so sure about how it will, or can, come about. In this sense we are back to Bretton Woods one. The basic problem is how you make the transition in an orderly fashion. There is danger of ‘only corner solutions’being available.

    I would be happier if I could accept that the euro would be able to form a significant part of the picture. I am still not convinced that EMU will hold. Certainly if – as seems likely – it is ‘no’ in France on Sunday, and in Holland on Wednesday – this will slow down the entry of more states. Then we have the problematic situation of the weaker economies: like Italy and Portugal, who may simply not be able to live with a strong currency: I mean look at Portugal’s CA deficit – is projected at 8.9% this year, and the govt deficit has just been estimated at 6.8% (of GDP in both vases).

    My feeling is that five to ten years from now we will have a ‘leaner’ version of the Eurozone: maybe France, Germany, Belgium, Luxembourg, the Netherlands, Austria.

    Although watch out, since in the Netherlands the euro is an issue in the vote. I think a majority there now wish they hadn’t joined. Really they would rather be like Sweden, or Denmark. And the Czech Republic – which is another economy with some similar characteristics – is definitely having second thoughts.

    Japan is a topic in iteself, which maybe we could save for another day. But the yuan, the rupee, the Brazilan real, who knows, maybe one day, certainly these are all countries with a tremendous future lying out there. And don’t forget Turkey, Turkey is doing extraordinarily well.

    The thing is we don’t have to know what ‘there’ will look like now. What we need to do is manage our current situation responsibly.

    I mean imagine if Keynes at the time of Bretton Woods one had had to grapple with this emergent China situation, and outsourcing via the internet.

    I don’t think it’s possible to grapple in this way with tomorrow’s problems today. In this sense I am sympathetic to Dooley et al, who argue that a ten to fifteen year window is an adequate one.

    Certainly you are right that China needs to get it’s banking system straight. That this isn’t going to be easy can be seen from this report in the FT today:

    “Bank lending accounted for nearly 99 per cent of all business financing in China in the first quarter of this year, the highest level for at least five years, according to a central Bank report.”

    Again I think it is important to bear in mind that there is a long running debate about equity vs bank finance. Germany and Japan have always been much more dependent on the latter, and there is evidence that such dependence may even be useful in an emerging market context.

    It is unlikely China will be like the UK and the US in this sense.

  • Posted by Edward Hugh

    “structural reform’s short-term impact is very ambiguous. it might reduce domestic demand because uncertain workers scale back on consumption”

    Yes Brad, I entirely agree.

    I put up this post on Afoe last August:

    “the fact that Europe seems unattractive makes it easy for the US to attract enough surplus cash to finance its external deficits at current rates.”

    Again yes, and this makes buying US instruments the default setting, which is why I think this will run for a bit: the other beauty queens are either ‘under the legal age’or too old (Japan) :).

    “I worry that the basic advice of educate, educate, educate — while broadly true — also oversimplifies a bit.”

    Agreed. Part of this is the point about the different characteristics of an industrial and a knowledge based economy. In the latter case I think the gap is easier for the developing countries (and even for some individuals in the LDCs) to close.

    Lets go back to why Germany and Japan were champions in the 80s. The role of acquired, non-explicit, knowledge in a high tech industrial plant is enormous. Technology transfer is a huge problem. Economic historian Greg Clark has a lovely article somewhere about why the Indian factory was so unproductive in the 19th century – using basically the same technology – when compared with the Manchester one.

    I think when you get into things like Computer Aided Design this gap closes a bit. As I think I have said before this is evident to me here in Spain, where the gap with the German industrial arm is huge, but Spain can compete quite nicely with Germany in architecture and biotechnology (eg).

    Really these things aren’t going to sort themselves out until we get the currency and wage adjustments which makes economic evolution more stable all round. And this will need time.

    One of the issues *is* a political one. You could read the cheap treasuries as a subsidy to the US to pay for the adjustment costs. So you need an administration with the ambition to use the money this way, and not in a tax windfall for the richest 1%.

    In the end, once *rebalancing* is over, everyone can be better off, since lots and lots of things (including our own wages) can be really cheap. The big difficulty faces those who have spent their time getting into debt, since if things get cheaper, debts, in real terms, get bigger.

    “Right now, china is have an inflationary impact on certain commodity prices (tho less than a year ago) and deflationary impact on the price of many finished goods … a bad combination for many, but a good combination for commodity producers.”

    This more or less sums things up, and then you have to think of where all that extra investment in China is going at the moment, and what will be the impact on finished goods prices two or three years from now.

    In fact the availability of cheap capital in China is having another distorting effect. I once saw a study which estimated that manufacturing employment in China itself was declining, as the rate of closure of SOB’s meant that more workers were arriving on the labour market than were being soaked up by the new industries.

    This would be a minor critique of Dooley et al, since they don’t seem to take account of the fact that the reserve army is much bigger than the China one: think of places like Philippines, Indonesia etc. Greenspan is surely right, a big hike in the renminbi would also provoke massive outsourcing from China, an outsourcing which would suddenly become much cheaper. Nothing in life is ever simple, and in economics it is even less so :).

  • Posted by Edward Hugh

    A bit of self correction here. Greenspan can of course *raise* rates as a deficit correcting measure, to ‘cool’ the housing situation, and rein in US domestic demand, if the hike was big enough this would probably more than offset the resulting dollar rise impact on the CA deficit. (You would probably know about this better than I would, how each 1% increase in rates might affect the two, other things being equal). However there is another constraint: Krugman, among others used to estimate that in order not to increase the output gap, for demographic and productivity reasons, the US economy needed to grow at 3%, otherwise you get growing output gap, and disinflation.

    In the end, however much you agree or disagree with him, you have to admire Bernanke as an economist playing central banker. The constraints are important, and you’re still afloat. If you reduce the Federal deficit, or increase rates too quickly, then you almost certainly will fall below that magic 3% growth threshold.

  • Posted by Joseph Wang

    About Chinese banks and stock markets….

    I think one can be too critical of the Chinese governments behavior concerning Shanghai and Shenzhen markets. Yes those markets are a mess, but starting stock markets from scratch is something that no one has done before, and the Chinese government made one really, really good decision and that was not to let the stock and bond markets grow too quickly. At this point, the Shanghai and Shenzhen markets are in the midst of a huge crash, but this hasn’t damaged the general economy.

    The best way of thinking about Chinese stock markets is that they are sort of like the lotteries that US-states use to fund education and social welfare programs. The Shanghai and Shenzhen markets were basically a state sponsored lottery to fund unemployment insurance and welfare benefits, and as such, it was socially useful. Someday, it might turn into something like a real stock market, but that’s going to take a decade or so of work. In the meantime, any Chinese company that really wants to raise capital avoids Shenzhen and Shanghai and does so in Hong Kong or NYC.

    Also bank lending. Chinese banks are not structured like Japanese or German ones. They are forbidden from owning stock or actively managing companies. The model for the Chinese financial system was the United States, because most of the key decisions were made after the Japanese economy crashed but before the dot-com bust.

  • Posted by Joseph Wang

    The US Glass-Stegall Act which separated investment and securities banking seems to have had major impact on Chinese thinking, and there is still a large barrier which ironically has been reduced in the United States.

    This is a good thing since it prevented it separated the mess in the securities industry from the mess in the banking industry letting the government deal with them separately. At this point, the securities industry in China is small enough so that shutting it down and starting from scratch is an option, and the Chinese government did do exactly that in 1995 with the futures industry.

  • Posted by Joseph Wang

    With regard to the cost of capital. The trouble is that capital is too cheap to established state-owned enterprises and too expensive for individuals, startups, and small businesses.

    As far as what the solution is to the loss of jobs in the United States. Education is the key. The trouble is that people often mistake “training” with “education.” The two are not the same and “training” is pretty useless.

  • Posted by Tom Marney

    Edward Hughes wrote,

    “In fact the availability of cheap capital in China is having another distorting effect. I once saw a study which estimated that manufacturing employment in China itself was declining, as the rate of closure of SOB’s meant that more workers were arriving on the labour market than were being soaked up by the new industries.”

    Brad has alluded to this, too.

    But is it really a Bad Thing for the Chinese? It’d do little good to move workers from obsolete SOB’s (cute acronym!) into labor-intensive sectors that’ll be increasingly at risk from foreign competion as China becomes more prosperous. Better to establish more capital-intensive ventures that’ll be around for a while.

    I wonder if the Chinese are doing what they’re doing on purpose, or if it really is nothing more than a market distortion.

  • Posted by Edward Hugh

    I remember the days when this type of story about GM in Shanghai used to be news:

    According to Andy Xie the really interesting moment will come when they develop a sophistocated auto components manufacturing network in China. I have the impression that this is something that Tatia in India have already done – please correct me (someone) if I am mistaken in this assumption.

  • Posted by brad

    I would doubt that Tata has a “sophisticated” auto components manufacturing network — a network, yes, but probably one geared toward serving Tata production for the (I think) still protected local market. But i really don’t know a thing about this —


    I don’t quite understand Xie. China is no doubt headed quickly toward the development of a sophisticated auto parts component manufacturing network. The economics of this are pretty clear — at the current exchange rate, why not do this? Remember chrysler intends to produce a small car in china for export to the world — and some chinese manufactures are moving into the export sector. Competitive global auto producers generally do not have a per capital income in the $1000-1500 range. that’s textile level, not car level. Yet Xie is dead set against any adjustment in the peg — it doesn’t add up to me.

    as I have often argued, it would be much better for chinese wages and prices to converge toward current world levels than for world prices (by world i mean the major industrial economies and their low wage labor intensive manufacturing zones like Mexico) to converge toward chinese wages and prices — and since it seems pretty clear than in ten years, the basket of goods produced in the china will mirror in many ways the basket of goods produced in the advanced industrial economies. not perfectly, but china won’t be an all textiles and toys and electronic assembly economy either.

  • Posted by brad

    Edward Hugh — I am not as convinced as you are that a change in the RMB would produce huge “outsourcing” to Indonesia, Vietnam, etc. Right now, the current RMB peg is at levels that make Chinese labor + chinese supply networks + dense transportation links competitive (so it seems) with Bangladesh — so factories seem to moving into China. To go from that to factories moving out of China might take a bit more than a 10% change in the RMB. I suspect there are real network externalities created by the density of the supply chain and knowledge base in parts of China. Moreover, if China wants to move into higher-value production (as it should) it will likely give up some existing industries — or have to reorient some factories away from producing for the world market toward producing for the domestic market. Chinese exports cannot keep growing at 30% plus in a world where even the US import market is only growing at 15% — and that 15% import growth is in no way sustainable. forecast out a few years and it just doesn’t work. I suspect that in many cases, if china raised the peg, its producers would be able to raise their prices — b/c almost all their competition is Chinese anyway …

    Greenspan seemed to be making a two pronged argument — first, China faces some competition at the low end, so slower chinese export growth to the uS might be offset by faster indonesian or vietnamese export growth — fair enough, one can debate the magnitudes, but no doubt somewhat true. and two, so long as the US savings rate is low, the US will import savings from someone, and run a large trade deficit. Also true enough — but as I have consistently argued, I don’t the US “savings” deficit is independent of the willingness of the world — and particularly China’s central bank — to finance that deficit. In a sense, that //s Bernanke, tho I disagree with his explanation for the current “savings” glut in asia (it ain’t just the 97 crisis and the buildup of precautionary reserve balances). Get rid of China’s reserve buildup, and the US has less access to cheap financing. Financing the savings deficit starts to cost more, and you get adjustment — so focusing only on the trade channel misses part of the adjustment story that would accompany a large rMB move, in my view.

  • Posted by brad

    Edward — good point.

    “One of the issues *is* a political one. You could read the cheap treasuries as a subsidy to the US to pay for the adjustment costs. So you need an administration with the ambition to use the money this way, and not in a tax windfall for the richest 1%.”

    The other problem is that the US is not using “Cheap” financing to develop new export sectors, but rather to finance real estate speculation and a defense buildup (along with the tax windfall). Moreover, structural fiscal deficits leave the government poorly positioned to help cushion the inevitably transition out of the real estate sector …

    I have convinced myself of one thing: if interest rates rise — really rise — many in the US will cry out for “protection” from rising rates, not just from import competition. adjusting back into tradables production may be harder than getting out of it.

  • Posted by anne

    Japanese Expert Urges Chinese Shift on Currency; Beijing Still Hesitant

    HONG KONG – China should let its currency appreciate ‘sooner rather than later,’ the president of the Asian Development Bank said Friday, even as the governor of China’s central bank and some senior Chinese government economists tried to damp speculation that any move would come soon….

  • Posted by Tom Marney

    FWIW, I have my doubts that increasing the US’s ability to export is all that feasible. For whatever reasons, the US isn’t Germany or Japan. However, it would probably be feasible to develop alternative energy sources as a means of reducing imports. Plus, in light of the current housing boom, it’d also be a good time to implement changes to land use and transportition policy so that auto travel in the US doesn’t increase two or three times as fast as population.

    While I’m at it, I’ll also wish that everyone who wants one should have a pony.

    Edward, my apologies for misspelling your surname. I should’ve finished my first cup of coffee before posting.

  • Posted by anne

    A gift to all women :)

    Fighting to Protect Her Gift to Japanese Women


    IN the back of a theater here, two gray-haired women perched on the edge of their seats, nodding their heads, clapping their hands silently. On the stage, Beate Sirota Gordon, a snowy-haired American grandmother, implored Japanese women to rise in defense of the Japanese Constitution’s equal rights clause, which was fundamental, she said, to their rights as women.

    She should know. At age 22, she wrote it.

    “Japanese women should keep fighting for their rights,” Beate-san, as she is known here, said in Japanese to applause from the sold-out crowd….

  • Posted by Edward


    Regarding TATA in India, yes do manufacture their own auto parts (or source it from other Indian Industries) and make cars.

    Then the big news came when UK car Giant MG ROVER
    wanted to source the cars from TATA and sell them as ROVER brand.

    Unfortunately TATA’s quality was not as good as the Japanese / Korean. Or the design, which primarily was for potty Indian roads(hard suspension, more ground clearence) didnot appeal to International audience I guess

    BUT.. speaking of the Indian auto ancillary manufacturing capabilities. They are excellent.
    (Eg:- , which supplies state-of-the-art radiator caps to GM and Merc)
    This industry is only crippled by BAD INFRASTRUCTRE IN INDIA which cripples its delivery capabilities. :-(

  • Posted by anne|25|…

    Yellow-billed Cuckoo
    New York City–Central Park–Wildflower Meadow.

  • Posted by anne

    Brad Setser:

    ‘I have convinced myself of one thing: if interest rates rise — really rise — many in the US will cry out for “protection” from rising rates, not just from import competition. adjusting back into tradables production may be harder than getting out of it.’

    Agreed. We will not easily adjust to tradables.

  • Posted by Navin

    Apologies Edward, It was me (navin) who posted on TATA motors etc. I inadvertantly gave ur name instead of mine :-)

  • Posted by Stormy

    Pooley says:

    “This [foreign capital access to Asian labor] gives the capitalist excess profits for some time period and provides the resources for the capitalist to utilize to keep home country import markets open. The trick is to set the real wage (real exchange rate) low enough and to adjust it gradually upward to the expected real wage in the rest of the world until the excess labor pool is exhausted, all at a minimum cost.” (Bolding mine)

    I would like to know how those resources are utilized “to keep home country import markets open.” Simple question. I can make the leap to a “frothy” housing bubble.

    Talk turkey here: How large are those excess profits? They are truly enormous. Look at the mark-ups. Instead of talking about a firm increasing its profits, let’s talk about what the profits truly are.

    What to do with these excess profits? Who gets them? How are they utilized? Some of them should be used to soften the blow to the importing country. Right now there is no way of doing that; instead we talk of exchange rate change, long-range rise in the cost of that cheap labor as it is absorbed into the system, or licensing fees, or re-tooling, or waiting till the consumer is truly spent and asset values must fall. Why is the growing disparity between rich and poor in developed nations off the table here?

    But as Pooley points out, sometimes it is often difficult to identify the home identity of multinational firms—and they have incredible lobbying power. It is they that are causing the incredible dislocations. The genie is out of the bottle, truly.

    There is one way of siphoning off some of the excess to mitigate the rising discontent: Tax the individuals who receives a large portion of those excesses. Watch them all become citizens of Bermuda and other off-shore tax havens.

  • Posted by anne

    What a superb thread. Quite a few fine teachers indeed :)

  • Posted by Edward Hugh

    “it would be much better for chinese wages and prices to converge toward current world levels than for world prices (by world i mean the major industrial economies and their low wage labor intensive manufacturing zones like Mexico) to converge toward chinese wages and prices”

    I agree, and I want to hasten to add I am not against lifting the peg in some way or another.

    “Yet Xie is dead set against any adjustment in the peg — it doesn’t add up to me.”
    Obviously what he is worried about, is that China isn’t stable. He has these pieces from time to time on how the Chinese like to gamble, and things like that. I think his worry is genuine.
    I mean in the end part of this is a glass half full, glass half empty argument. As Krugman pointed out in his piece on China, the arguments from the US admin on lifting the renminbi peg are that it is in China’s interest to do this. Maybe it is, but there are pro’s and con’s, and from China’s viewpoint you could discuss this endlessly.

    At the other end there is the US and global issue. From this point of view the situation badly needs fixing. I am sure you and Nouriel are right about the long term damage a deficit of this order of magnitude, and growing, can have. But this isn’t the Chinese problem, except that it is, because they need to sell in a global environment. But given the way the issue is being presented, I am just not very optimistic about any real movement anytime soon. That’s the problem.

  • Posted by anne

    Chief Sees Surge in G.E. Business in India

    BANGALORE, India – Jeffrey R. Immelt, chairman and chief executive of General Electric, said Friday that he expected G.E.’s revenue in India to leap to more than $5 billion by 2010 from $800 million now….

  • Posted by anne|25|…

    Female Hooded Warbler
    New York City–Central Park, The Oven.

    Now here is an outfit :)

  • Posted by Alexis

    Story, agree with your Ruggie and Pooley cites regarding massive new types of problems in dealing with international corporations…and the huge profits skimmed off.

    Also, agree with comment re U.S. is now going to have a heck of a time increasing any exports after being gutted out and must develop alternative energy resources technology.

    Moderate concerned Americans had best demand that major appliances and other key high value items are made here in U.S. or …

    If I was in charge, I’d declare a fiscal emergency and make all the univs tech institutes and deem all over programs self-supporting Academies, including all the sports programs.

    If not, I would not bet my money on turning the ship around. Thirty year con of the univs (& school systems) by the we really don’t know how to do anything bunch may have done too much to destroy.

    For sure, the party is over.
    Govt. employee to univ to school employees salaries, benefits, retirment theiving must be sliced, sliced, sliced.

    The white collars and govt. unions didn’t give a ____when manufacturing workers started getting hosed fifteen years ago.

  • Posted by brad

    Alexis — accusations of bias should not be thrown around lightly. China’s peg inspires the usual almost theological debate between fixers and floaters, along with more than a little angst on both sides of the pacific. Americans in certain parts of the country worry that if the peg doesn’t change, they will lose their job; Chinese workers (or perhaps given the demographics of the internet), investors who employ Chinese workers worrry that any change will undermine China’s spectacular growth and impressive achievements. There is room for disagreement.

    Joseph Wang —

    “And why the concern for factory workers and not for consumers who are going to see higher prices if the RMB is revalued?”

    Simple, from my point of view. Higher prices are a necessary part of a necessary adjustment — the US is running up its external debt at an unsustainable pace. Wait a few years, and the needed adjustment will be bigger and sharper. I don’t think it is is good idea for a country that exports 10% of GDP (and that level is not surging) to have an external debt ratio of 50% or so — yet that is where the US will be if a gradual adjustment starts NOW. Wait, and the US external debt to GDP ratio will either rise to a higher level (risky) or the adjustment path will be sharper.

    “And why is PBC buying dollars considered “market manipulation” and bad whereas the US running huge fiscal deficits is somehow alright?”

    If the PBoC doesn’t like the US deficit, it should not finance it — it is pretty hard to get political consensus behind deficit reduction when large deficits are being made consistent with a boom in the interest sensititive sectors of the economy b/c of large capital inflows from abroad.

    As far as the benefits to the Chinese consumer. The reason people are into fixed exchange rates is that floating rates have historically caused crises and economic instability in developing countries that have them.

    There are two issues here. One is fixed v. floating. The other is the level. Right now, because of china’s financial underdevelopment, the US is pushing only a revaluation, not a change from fixed v. floating. The shift toward pushing only to change the level of the peg, not to change the currency regime more generally, was long overdue — I accept that China is not ready to float. Indeed, by waiting so long, China has made it more difficult to float — since the immediate upward pressure in the fx market in a float would be very strong (Trade surplus + FDI = $150-200b at current exchange rates — that’s a big dollar inflow relative to current dollar demand from Chinese citizens, whether for private investment abroad — controlled — or imports)

    however, i also don’t quite know the basis of the “floating = crisis” statement. I obviously have priors on this — see chapter 2 of my book with roubini on emerging market crises. But those views are based on experience. Mexico before its 94-95 crisis had a peg. Same with Thailand before 97. Same with Russia in 98. Brazil in 98-99. Turkey in 00-01. Argentina in 00-01. Obviously, if you are forced off a peg because of large capital outflows, the currency will tank. But in most cases, the core problem was the peg in the first place, which encouraged the country to hold on to overvalued exchange rates (remember, most of these countries were running large current account deficits before their crises) for too long, and encouraged excessive foreign currency borrowing, since fx borrowing usually looked cheap relative to local currency debt so long as the peg held.

    We have yet to see “financial crises” in emerging economies with undervalued pegs, but i worry that China may be the first — whether from overinvestment in the export sector and a resulting unbalanced economy ill equipted to survive a global downturn, or from the financial weakness created by the rapid money growth that accompanies rapid reserve growth in the absence of sterilization.

  • Posted by Joseph Wang

    Actually I very much doubt that the mix of Chinese industrial goods will match those in other parts of the world. The institutional and cultural barriers that keep Chinese companies from building automobiles and aerospace, for example is likely to keep China at a major disadvantage in these fields for more than 10-15 years. Basically automobiles and aerospace require hugely complex social groups and networks in a way that say consumer electionics do not, and it’s going to take more than a decade for China to get this level of industrial expertise.

  • Posted by gillies

    underlying all of the postings is an assumption of economic growth, as though economic growth were the foundation of our situation, rather than its final hoped for outcome. has anyone else seen those calculations which go roughly like this – ‘ if china were to eat the same diet that america eats now it would consume all of the food in the entire world’ etc. etc.

    britain may have politely yielded superpower status to america, but britain in her days of greatest economic power was an economy of coal, steam, railways, canals, clipper ships, textile mills.

    america was a superpower of the era of the ford car, aeroplanes, combine harvesters, skyscrapers, movies, grain, soyabeans, cattle ranches, shopping malls, aircraft carriers.

    even if china is next in line – she is not going to be a superpower of this same type. global oil and gas will be declining in total production at 2/3% per year as we go from plateau to decline. industrial civilisation built on fossil fuel extraction will be in decline in step with this.

    i am not predicting the future – except to say that the story might well be about something else.

    superpower status based simply upon overwhelming ability to outdo other nations in destruction might also cease to impress.

    suppose that history judges japan as the leading nation ? the first into property bubble, refusal to let bankruptcies take their course, contracting and ageing demographics, low spending, high saving, and persistent threat of outright deflation. suppose that is the future. superpowerless.

    the future availability of non renewable resources in the global economy, resources per capita, resources as measured against population – mean that future civilisation will need to be about something other than it is about at the moment.

    none of the posts about china seem to give this any thought.

  • Posted by Movie Guy


    You hug out Alexis in your May 28, 2005 05:02 PM post, leaving most to wonder what is going on.

    For you to delete Alexis’ fairly harmless and reasonably accurate (my opinion) 3:20 PM post and then to conduct a lecture is a bit disingenuous.

    Moreover, your post gives the impression that Alexis was challenging a poster in Asia or another part of the world. The fact is that the poster concerned, Joe Wang, is a legal resident of the State of Texas, resides in Austin, Texas, and was raised in Orlando, Florida according to his linked information.

    As emailed to me by a blog observer:

    Posted by: Alexis at May 28, 2005 03:20 PM

    “Jos.Wang, you are obviously biased beyond having any discussion with.”

    If you’re going to edit and delete posts, perhaps you should publish a disclaimer at the main web log page.

  • Posted by Movie Guy

    Let me correct what I said.

    Alexis’ post is still up on the previous thread.

    Why you addressed your remarks on this thread, I do not know.

    Apologize for the error, but not the observations about Wang’s geographic location.

  • Posted by Joseph Wang

    brad: Just a point of clarification, I do agree with you that Chinese export growth and the trade deficit are economically and politically unsustainable. It’s not quite clear to me how much you and I really disagree. It could be we are using different terms to describe the same thing, or there might be deeper disagreements.

    One thing about economics is that eventually someone has to pay the bill. The US government budget shortfall has to be paided by someone. However it is also a political fact that its possible to hide the payment so that people don’t notice it. One way of thinking about what is going on is that since the U.S. refuses to increase income tax to cover budget shortfalls, right now the question that is being debated is who and how to “tax” to cover the money.

    What is likely to happen is that there will either be an explicit or implicit tax on imports, which no one will notice. People notice when you take money out of their pockets, but they notice a lot less if the money that should be in their pockets isn’t there.

  • Posted by Guest

    “it would be much better for chinese wages and prices to converge toward current world levels than for world prices (by world i mean the major industrial economies and their low wage labor intensive manufacturing zones like Mexico) to converge toward chinese wages and prices”

    Great idea, but just how do you propose to get there??

    Some numbers I see here are not quite true- at least according to the Chinese
    1. ncomes have grown constantly for China’s urban and rural residents along with a rapid development of the national economy. In 2004, disposable incomes averaged 9,422 yuan for each member of the urban population, a year-on-year increase of 7.7% in real terms. Net incomes averaged 2,936 yuan per capita for the rural population. The figure represented a year-on-year increase of 6.8%.
    ( )
    BTW I would actually rather see medians then means for this kind of skewed distribution
    (Table 1 ) gives 2002 figures for income by province and a bibliography)
    2.China’s rural population has reached nearly 900 million, representing an astounding 70 per cent of the county’s total. With such a huge number of people living outside major economic centers, one of the Chinese government’s top priorities has become ensuring that rural residents live better lives. ( )

    Although there were some hi-fives when reports of labor shortages were published, China has a very high literacy rate. So acquiring the skills needed to hold a factory job seems within the grasp of most.

    So My question, Brad, by what mechanism do you envision Chinas 900 million rural population be brought up to world standards ?
    I do not know if you have spent much time in rural Asia. If you have not perhaps you will make a little time to see why China has better things to worry about then the balance of trade

    With the top ten hedge fund directors averaging 1/4 $ billion I cannot feel sorry if they crash. I would rather seem 1 billion chinese get a dollar bonus then Edward Lampert make a billion bucks

  • Posted by Guest

    I am not taking sides here, but the following post of Joseph Wang didnot sound well to me.

    “The people in the United States that are complaining the loudest are in industries that are on the verge of getting wiped out no matter what China does with the RMB. If a 10 to 20 percent rise in prices is the difference between life and death in an industry, you are already on thin ice already. ”

    Then what “kind of Ice” are chinese treading on when their WHOLE economy is pinning hopes on the PEG ?

    From Stephen Roach “Its export-led growth is dependent on the American consumer; at least a third of all Chinese exports go to the US. Moreover, China’s currency, the renminbi, has been pegged to the US dollar for over a decade.

    the US dollar will undoubtedly fall further, resulting in a depreciation of China’s pegged currency. For a super-competitive Chinese economy, that could fuel anti-China protectionist actions in the US and possibly in Europe as well. And US real interest rates will probably need to rise in order to compensate America’s foreign creditors for taking a currency risk. That could lead to heightened speculative capital inflows into China betting on an eventual currency revaluation — an infusion of external liquidity that might further destabilize its already precarious financial system.”

    Roach is very candid.. isn’t he ?

  • Posted by anne

    Hmmm :)

    Enter the Chinese Dragon, Now Bearing Minicars

    BEIJING – After a year in which dozens of Chinese corporations went global with their plans, the Chery Automobile Company has joined them with an ambitious gamble to become the first Chinese automaker to sell cars in the United States.

    The company announced this week that beginning in 2007 it would export 250,000 cars to the United States in partnership with Visionary Vehicles, an auto import and distribution company based in New York. Visionary Vehicles said the Chery cars would be 30 percent cheaper than comparable models sold in the United States and would offer a 10-year warranty.

    The plan’s scope, and the company’s own peculiarities, give the undertaking a faintly quixotic hue….

  • Posted by gillies

    to the female hooded warbler.

    your irish cousins cannot match you in your yellow spring outfit – but what they lack in variety they make up in numbers, noise and sheer persistence.

    this tower awakes to the ‘clack’ of quarrelling jackdaws. they leave heaps of twigs in the yard in unsuccessful attempts at building in holes in the walls. the swallows fly in at the top floor if the window is open. once they actually nested and we could not shut the window until september. at various times swifts, swallows, house martins, sparrows, bats, rats, and mice have shared or tried to share these walls. these and wrens live close at hand, the jackdaws and magpies are enterprising thieves. kestrels, herons, duck, swans, grey crows, are more likely to be seen at a distance. gulls pass, usually indicating bad weather.

    but mostly its the jackdaws. very handsome birds singly and close up. bloody nuisance in large numbers. the crow family dominate in ireland. i think it is to do with cattle. they turn over dried up dung pats and harvest bugs beetles and worms. they seem to have a highly developed social life. a lot of their noise and movement has no other interpretation.

  • Posted by Movie Guy

    I thought the blog’s subject matter was economics.

    Apparently not…

  • Posted by Movie Guy

    You could just email each other with this other stuff. Or take it to a blog that focuses on animals or birds.

  • Posted by anne

    Walk the streets of Saigon and you will find an endless stream of motor bikes and you will think they are all Hondas, but look closely. There are some Hondas and some Honkas. Honkas are from China, and Vietnamese rides do enjoy them. There appears rather little that can not be designed and produced in China as well as in America or Europe :) India soon too, I believe.

  • Posted by Movie Guy

    But in order for emailing to work, Anne would have to post a valid email address instead of the one she uses:

    It doesn’t work.

  • Posted by Navin

    Brad : The font seemed to have changed ? I think the old one is easier to read.

  • Posted by anne


    There is the Irish countryside and the lover of the Irish countryside, green beyond green and patches of wildflowers about. What a lovely passage :) Thank you so much.

  • Posted by Joseph Wang

    brad: I think that one can summarize the argument against messing with the peg as follows.

    1) It is impossible to break the peg without having defacto floating exchange rates. Once you revalue, its likely that the new value will not be in equilibrium for very long resulting in more revaluations, after which you have a floating currency in all but name.

    2) Breaking the peg exposes China to a possible currency crisis later. Essentially the worry is that by breaking the peg now you can end up with a situation in a few years where the RMB ends up overvalued, in which case you end up with an Argentine style crisis. One way this can happen is that right now China has capital controls. If those capital controls are relaxed, one would end up with money flowing overseas which would cause the value of the RMB to go down. I *think* this is Andy Xie’s argument.

    Curiously, I really personally haven’t made up my mind as to whether or not breaking the peg is a good thing or not. One thing that I’m trying to figure out here is that *assuming* that the United States refuses to reduce its fiscal deficit, what is likely to happen.

  • Posted by gillies

    joseph wang –

    yes, i go for the benefits of ‘creative conflict’.

    no blood gets spilled in cyberspace. short sharp soundbites are best. to encounter people with utterly different perspectives is a bonus. i live in ireland, read the asia times online, and sometimes post my conclusions here – which i picture as a tree full of birds in central park.

    and still the dollar rises.

    yes, a consensus formed around an unopposed view is the great danger. the guns of singapore facing out to sea . . .

  • Posted by Joseph Wang

    I don’t think that revaluation of the RMB by 10% is going to kill the Chinese economy.

    Roach’s argument is that the US dollar is likely to fall further and that the possibility of revaluation causes large amount of hot money to flow into the Chinese economy which makes cooling the economy harder.

    However, the counterargument is that breaking the peg will encourage speculative inflows “the next time” whereas keeping the peg will show people that trying to benefit from a revaluation that they may lose their shirts.

    Actually, if you *ask* me what I think China should do rather than assume it from my posts, personally right now I’d be in breaking the peg against the dollar and establishing a peg against the Euro. It won’t fix the current issues but will keep China from tying its currency to a sinking ship.

    The trouble with doing this is that its not clear to me that the currency markets will allow this to be a viable strategy. In fact, I’m a little concerned that with all of the talk about breaking the peg, there is one simple question that I haven’t seen answers.

    Suppose tomorrow morning, the PBC announces that it revalues by 10% or 15%. What happens? I’m not talking long term, but rather what happens that day or that week. How will the Dow react? What will the currency markets do? What happens to interest rates?

  • Posted by anne

    Dear Gillies,

    Jackdaws and crows and ravens are wonderfully adaptable birds. When you look at a crow closely, the crow looks back. I was walking about the Divinity School quad and I noticed a clump of black below a bush and walked there. There was a crow. I took off my jacket and picked up the crow and there was a call from a tree a few feet away. Another crow was on a low branch and cawed. Though I could feel no broken bone the crow in my jacket was obviously weak and I had to take it away. Quiet an awful feeling, for the crow in the tree cawed.

    I took the crow home and set it in a cage with a heat lamp and began to feed it berries through a large dropper. She ate and drank, but never once even tried to bite or claw me. Never. Again I found nothing wrong. The following morning the crow was stretching and completely alert. I fed her and this time I could feel real strength. Are they ever strong birds. So, I took her to the office and fed her and at the same time I had found her the day before I took her to the library and our bush. Since she seemed fine, I opened the cage and she just lifted away. Amazing, as she climbed in the sky another crow was suddenly there and the two circled and climbed and were gone towards the river. Oh my.

    Never did the crow try to strike at me for all the exams and feedings. There is a bird.

  • Posted by anne

    ”Would it be the quiet and the birds that’d interest you?” McKiernan asks, stony toward those who seek Ireland for its charm and ignore the hard bits.

    Ruttledge reflects to himself: ”No, it wouldn’t be. . . . They say we think the birds are singing when they are only crying this is mine out of their separate territories.”

    By the Lake
    John McGahern

  • Posted by gillies

    movieguy –

    the birds give perspective, widen the focus. trees are even better. a beech that stood outside the window here fell in 2002, being 230 years old. saw the famine come and go, a couple of world wars, the great crash, outlived the british empire, saw booms, and busts, and panics of all kinds. its huge bulk still put out a few fresh leaves for two more springs after it fell. that’s all it did – put out fresh green leaves in spring and shed rusty coloured ones in autumn.

    the analysis of the chinese peg situation is red hot – don’t misunderstand me. my fear is that the intense academic focus on this particular topic may cause us to miss something. economic calculations need a context. it may be that some ‘conundrums’ in current markets are the result of computeer driven trading – because computers lack any awareness of context. computers never take the walk in central park , to clear the head and refresh the perspective.

  • Posted by Joseph Wang

    Something else to keep in mind…..

    In some ways the issue of whether to repeg the RMB or not is more or less irrelevant to me because I’m not in a position where my opinions really matter.

    What *is* relevant is what happens to the world economy in the next two years. I don’t have any control over whether the PBC repegs the RMB or not, but there are hundreds of financial decisions which I do have control over. Where to put my money? How concerned should I be that I might lose my job? Should I consider looking for work elsewhere? How much savings should I put in the bank? etc. etc. etc.

  • Posted by Movie Guy


    As long as Brad tolerates it, you, Anne and a few others can continue to clutter this excellent economic information blog with your off-subject stuff. The blog is read globally, and you guys are talking nonsense in the middle of meaningful discussions.

    If I want to know any more than I already know about birds, I will visit an animal or birds blog, explore the internet, read more books, or simply walk outside and watch the eagles and hawks and other wildlife in my area.

    If we had thirty other posters frequently talking about their personal passions, including hobbies, the blog would go to hell quickly.

    You guys are just thread wreckers. Nothing more… And some others are enablers of your efforts to stay off subject.

    I have stayed out of this until today. But it’s getting worse. It’s just abuse.

    Others have addressed it previously.

    It’s becoming a joke.

  • Posted by Guest

    You said:
    “Bank lending accounted for nearly 99 per cent of all business financing in China in the first quarter of this year, the highest level for at least five years, according to a central Bank report.”

    I would guess that should read something like 99% of all reported business financing..

    If pre-handover Hong Kong and present day New York Chinese are a good proxy for the mainland then most local business is in cash.
    In HK there were money bricks traded at banks. They were covered in tissue paper tied with a ribbon and a seal. Some were 100 $100 US bills and others 100 $ 1000 HK dollars. Half a dozen of these or more handled in a single transaction was not unusual.
    I have sat with Chinese at local resturants and seen a paper bag changing ands. Then the bag was opened and $10000 and more being counted quite openly-obviously a business transaction.

    My ear to the ground in Shanghai suggests that there flats where people will live tend to be paid for in cash. Mostly spec housing is done via bank loans. He suggests that there is a difference in price for the two types of payments.
    So all business statistics, excluding perhaps those of FDI firms are perhaps suspect.

    A number of years ago I read an article on the problems China might face in going toward a market economy. The author suggested that the potentionally most dangerous factions were the State Owned production units, and the PLA. Both were relatively well off and had something to loose in a transitioning economy.
    The obvious Chinese thing to do would be to buy them off.
    I suggest that for the SOBs the cycle of bank loans, loans becoming bad, govt subsidizing banks and new loans being made was a polite bribe or make-work if you will. So one should not use these loans in judging China banks. That is not to suggest that ere were not actual bad business loans due to bad judgement “connections” and graft.

    Confucius saw the family, the villager and the nation as a man’s pillars. Mao tried in vain to break this down. You can trust your family absolutely; and they can trust you in business. You can trust others in your village because of the shame that can be focused on the entire family of the offender. And the nation is as for all of us.
    But you own nothing to the next village.
    Connection is an extention of this. Simplified: If someone in my extended family is related to Brad then is as if Brad is sort of related to me and therefore owes me as a family member would.So I can trust Brad in business. In a way that is unclear to me, I then have some relation with Brads family, such that if Anne is married to Brads second cousin I can expect a familial- like
    treatment from her and feel safe to do business with her. If Anne is a bank officer and I explain the connection we have I can expect a different treatment then she would give a stranger ( or perhaps treatment she would give to someone whose connection is through a less influential “family-member” then Brad ).

  • Posted by aeolius

    This my post just above and also the one on Chinas income dispartity.
    Don’t know why I am coming out nameless

  • Posted by brad

    1) 10% reval. Next day — treasury market goes down/ rates go up. A trader would give you an estimate of how much. Unless every other asian economy starts intervening to keep their currencies from moving more than 10% — in which case, the treasuries might rally (in anticipation of a new wave of asian buying).

    2) Over time, I suspect a 10% reval won’t have a huge impact on the treasury market, b/c i don’t think it will end speculation on a further reval or reduce China’s reserve accumulation by all that much. It probably will just keep China’s reserve accumulation from hitting say $350 b this year, not cut it below last year’s level of $200 b … that matters, but it alone is not enough to cause a total treasury meltdown.

    3) china has a long way to go before its currency becomes overvalued — I would argue that China could safely run a $50 b current account deficit for some time financed by ongoing FDI flows given its current level of reserves. Xie’s cannot revalue now b/c China is on the verge of an unsustainable current account deficit strikes me as a bit far-fetched. I think the bigger risk for China is that without external demand, its domestic consumption shortfall will start to bite … along with the risk that China’s internal imbalances have grown to the point where any change might trigger problems — whether problems in on overbuilt export sector or the real estate sector.

  • Posted by Jennifer

    There was no possible reason to have been mean to Brad Setser and Anne and Gillies. I am surprised and dismayed. There was no need for symmetry in reply, for there was a person who simply chose to be mean.

  • Posted by anne

    I am saddened, and have no idea what the point of the bullying was, but I feel thoroughly bullied so the point has obviously been made properly.

  • Posted by anne

    When I chanced to politely comment on the politics of economics I was similarly bullied. Curious that such should be needed. Curious that I should care, but I evidently do, which is why the tactic is employed.

  • Posted by anne

    I will consider before returning.

  • Posted by anne

    Never was there a hint of a word that was less than polite to the person. Never.

  • Posted by anne

    Yes; I was hurt from the initial harsh word and sought to ignore the word so was hurt again. Sorry that Gillies was part of this, and I thank you deeply Gillies. The Irish posts are superb. There is economics in trees.

  • Posted by brad

    Anne. For what it is worth, I too don’t think it makes sense to discuss economics without taking in politics — and I fully expect some will criticize the concerns about distribution expressed in my forthcoming post.

    All. I suspect it generally is best if I am the one who tries to define the limits of what is and is not acceptable in the comment section — whether limits on comments that are longer than my blogs, or limits on off topic links. In the past, I have tried to email people before posting “rules of the game” type comments, but most emails listed here are (for obvious reasons) non-functional. So I generally have stopped doing that and used the comments section itself.

    Civility is important, particularly toward regular (hopefully still regular, though there is not shortage of competing active comments pages) contributors.

  • Posted by glory

    i kinda like the bird stuff. it offers… perspective 😀


  • Posted by Movie Guy


    “When I chanced to politely comment on the politics of economics I was similarly bullied. Curious that such should be needed. Curious that I should care, but I evidently do, which is why the tactic is employed.”

    Tactic? That’s simply not true. Nor was there any bullying. I simply disagree with your assertion. I responded with one post. I posted the trade posts and you pushed them off the table. A number of people have made the same observation to me directly.

    I waited until Brad kindly posted the second open thread to do the trade information. I didn’t load the first open thread, nor interfere with the multiple subjects on it. Both threads were fresh enough that they were available for posts.

    I have never messed with any of your posts. You know that, too. I have never said anything about the increasing number of bird and other off topic posts either…until today. It’s just gone too far in my opinion and that of some other people I know.

    You can play the innocent game, but it’s not washing. Others may be fooled. I am not.

    Brad was kind enough to ask that the bird posts be limited to one day a week. I hope that you abide by his kind suggestion.

    If you posted a valid email address, you would have received two emails from me. But, of course, you still don’t use a real email address.

    Let’s move on.

  • Posted by Joseph Wang

    Just a bit of history on the Chinese banking mess. The basic problem is that you can give a company money for a “business loan” or you can give a company money for “social welfare” to pay off the laid off workers so that they don’t starve or riot. The trouble that the banks ran into was that they were tasked with being both providers of business loans as well as tasked with responsibility as a social welfare agency. These two roles do not mix well. However, one can argue that this was the least bad solution to deal with unprofitable state-owned enterprises.

    In 1998, the government split the roles and the major commerical banks are supposed to approve only “business loans” leaving “social welfare payments” to local governments and policy banks. The big question is how many of the loans that the banks have lent since then will eventually go bad. Personally, I’m pretty optimistic.

    As far as guanxi goes, the conflict between personalistic and bureaucratic norms is not only an issue in China but elsewhere and there are dozens of ways of dealing with it.

    For the most part, guanxi actually insures payment. A lot of loans to start small enterprises comes from friends and family, and the threat of social ostracism is quite severe enough to get people to repay, and the guanxi networks also provide a means of accurately gauging someones credit-worthiness.

    Also, another major reform in the late-1990’s was to separate the PLA from its business enterprises. Basically officers were given a choice between staying in the PLA, or becoming a retired PLA officer working in a spun off enterprise. This actually worked quite well because no one lost out in the deal. If you were a PLA officer making huge amounts of money from a business, you just became a retired PLA officer making huge amounts of money from your business.

    This was important as it prevented China from having some of the nasty military-economic interactions you found in Indonesia, Pakistan, and Syria.

  • Posted by Movie Guy


    Apologize for misstating Orlando for Ocala. A nice city which I have visited a number of times.

    Serious questions follow…

  • Posted by Movie Guy

    Issue from the previous thread related to the trade poltics.

    Jospeh Wang stated:

    “As far as “fairness”, the accusation that Chinese trade policies are particularly unfair in comparison to the United States strikes me as patently absurd.”

    “One need only bring up American agricultural subsidies. As far as the “innumerable books” about doing business in China, for a Chinese to set up a factory in the United States isn’t a piece of cake either.”

    It would be interesting to see how many separate examples of unfair USA trade policies that you or anyone else can cite, or how many of China’s trade practice obstructions can be readily defended from the list below. See “U.S. Trade Estimate on Foreign Trade Barriers with China”.

    jm, as some may recall, was responding to DOR’s previous post: DOR writes, “…China has done far more to open its economy [than the US]…”.

    In similar respect, I am questioning the basis for the “patently absurd” statement in comparing the fairness of USA to China trade policies.

    I extent to you and ALL others the same opportunity previously extended to DOR at 11:35 PM, May 26, 2005 on this thread. You are more than welcome to review the following U.S. Government source information and challenge any of it.

    Perhaps you will find cause to challenge some of the contentions and data presented. It would be interesting to note your differences of opinion if such exist.

    To date, DOR has not taken the opportunity to challenge any U.S. Government source information regarding trade with China. But perhaps others, including you, will in light of your statement.

    I look forward to any factually based comparative analysis.

    Doing Business with China

    Background Note: China

    China – Country Information

    USA – Exporting to China

    USA – China Trade Policy & Agreements
    – Trade Policy Initiatives
    – Bilateral Trade Agreements
    – Multilateral Trade Agreements
    – WTO Accession

    U.S. Trade Estimate on Foreign Trade Barriers with China

    USA – China WTO Accession Deal: Agriculture

    USA’s China Business Information Center (BIC)

    China’s Law & Regulations
    – Customs, Tariffs & Import Procedures
    – Standards
    – Industrial Sector-Specific Regulations
    – Forms of Establishment & Contracts

    China Trade Regulations & Rules
    Customs, Tariff & Import Procedures
    January to November 2004 Regulations

    China – Current Trade Regulations and Rules
    Past thirty days

    U.S.-China Trade and Economic Ties

  • Posted by Guest

    There is no need to be harsh about others on this blog. Why this should happen makes no sense, and was not called for, and is not called for, but it still continues. Harsh comments were extended to several people, not a single person, for no possible reason. The persons who were harsly treated never made a single comment that would warrant any such harshness.

  • Posted by Jennifer

    That a comment is followed by another comment that does not directly address the initial comment is a matter of life on a thread. I have no idea how to address each comment, but I remember the comments and read on and at times add to a thread. To be angry because a comment is not added to immediately strikes me as rather foolish. To be rude is always wrong.

  • Posted by Jennifer

    There is no reason for anyone to post an email address for fear of spam. With all the filters, there is still spam. No one however should be criticized for such a matter. Again, there should have been an immediate apology. There was no fault in any comment other than the angry comments that appeared for absolutely no reason. The needless anger was addressed to several people, and in a public setting is especially meant to bully.

  • Posted by Guest

    Grow up.

  • Posted by Joseph Wang

    The trouble with “fairness” is that the definition of fairness is that what is good for me is fair, what is bad for me is unfair.

    Having said that, its not difficult to list instances where the United States has put in or tried to put in trade restrictions. Mostly agricultural subsidies, but also restrictions on steel and wood products. You might respond with, yes but I’ve given you a list of fifty trade restrictions but you’ve only responded with two or three. However, if you look at the list, most of them involve very narrow industry specific restrictions, that people are trying to get rid of or have already gotten rid of. A lot of the report consists of “in 1996, China had this nasty trade barrier which they agreed to remove because of WTO and they are removing or have removed them.” Something that would be fun is to go through the report and block out everything that isn’t currently relevant. I don’t think that there is much left other than intellectual property.

    However, I think that the discussion about “fairness” is a little pointless. For example, suppose Chinese imports are putting a textile worker out of work. The trouble with talking about fairness is that it assumes that if China were fair that we could save that job, which isn’t true.

    That textile worker is out of work *regardless of whether the Chinese government is acting fairly or not*. China could have perfectly open markets and do everything “fairly” and that textile worker is still out of work.

    Now it could be that Chinese market actions will create a new computer programming job or not, but it is not going to matter to that textile worker, who is going to be out of work no matter what China does. After all, if you block textile imports from China because China is being unfair, that job is just going to end up in Bangledesh.

    At this point it might surprise people who ask me about my views rather than assume them, that I’m not a free trade zealot. Part of the problem is that people talk so much about the long run benefits of free markets (which do exist), that they lose sight of the real short term problems. For example, the basic fact is that a system of free trade is going to eliminate low-skill, labor intensive manufacturing in the United States. Now economic theory suggests that new jobs will be created, but you are still sunk if those new jobs are in say investment banking and require a Ph.D. that you don’t have.

    I wouldn’t be strongly opposed to protectionist measures to stop social disruptions from the market. For example, I’d actually prefer the US deal with the import deficit through targetted protective tariffs than with revaluation of the RMB since the evils of tariffs are well known whereas (just from this discussion) I don’t think anyone really knows what the impact of revaluation of the RMB is.

  • Posted by Joseph Wang


    I think we can summarize our disagreements as follows

    1) I’m not convinced that “revalue once then fix” is a viable policy. Part of the problem is that I don’t think that the US fiscal deficit is going to correct itself any time before 2010.

    2) I’m more convinced by Xie’s arguments than you are. One issue is that is neglected is that China has very strong controls on capital outflows, and without those controls, it is possible that you’d have enough capital movement to the US to put the RMB more or less where it is now since the Chinese financial system is sort of a mess and because interest rates for depositors in China are I think less than real interest rates in the US.

    The trouble is that over time, as the economy liberalizes, it is likely that the government will find it increasingly difficult to control capital outflow just like it is finding it difficult now to control capital inflow. If it is the case that the value of the RMB now is where it would be in the absence of capital controls, then you are setting things up for a currency crisis.

    (Then again maybe not. Someone really should write a paper that estimates the volume of capital outflow and the value of the RMB in the absence of capital controls.)

  • Posted by Joseph Wang

    Something else that you can do that explains why I think that accusations that the Chinese government is “neo-merchantilist” are absurd is to go through the reports, and do a side-by-side comparison of what Chinese trade restrictions were in 1995 and what they are now, and its pretty obvious that there has been some massive trade liberalizations.

    One other thing is that the report doesn’t mention “unfairness” that works toward exporters. For example, foreign companies generally have lower taxes and can get a lot of tax breaks that local companies can’t. Also, my personal experience has been that the Chinese bureaucracy is quite a bit nicer to foreigners or people with foreign connections than to locals. (Which makes sense if you remember that in China money talks and votes don’t.)

    China is not Japan. China has seen how Japan has messed up its own economy, and has taken quite a few lessons from that. One other thing to keep in mind is that the trigger for the imbalance in trade has nothing to do with Chinese government policy but rather US fiscal policy.

  • Posted by Movie Guy

    Joseph Wang, May 29, 2005 11:32 AM

    Good response.

    In most case of unfair trade, the appeals to WTO for ruling decisions appear to be working. I believe that system of checks and balances is holding up reasonably well. If the U.S. violates WTO policy, it loses on decision. Same for many other nations.

    China is reasonably masterful at crafting some delay mechanisms within the framework of what it agree to do under WTO accession, but China is moving forward on active participation. And the U.S. is complaining, on occasion, about some of the regulatory obstacles. But I expect it will balance out over the next five to ten years.

    As you said previously, many nations are trying to protect their agricultural industries. I concur. I also agree with your point about textile employment. And, yes, should export production be lost in China, it will flow to another developing nation. It’s not coming to the USA, unless driven by advances in automation which will not provide significant labor employment.

    Your point about job displacements and what jobs are and are not available thereafter raises another issue which I wish was being discussed more actively. The merits and perhaps deficiencies of the comparative-advantage theory of economics. But I will save that for a separate post.

  • Posted by Movie Guy

    “One other thing to keep in mind is that the trigger for the imbalance in trade has nothing to do with Chinese government policy but rather US fiscal policy.”

    I would add U.S. trade policy to the consideration. More later…

  • Posted by gillies

    what seemed to others harsh comment totally failed to ruffle my feathers. it was like water off a duck’s back. but i will of course take directions from the moderator and originator of the blog. yes it is a fine blog and the off topic stuff is for the birds . . .

    meanwhile, day after day, we simple foreigners have to sit and watch, without any credible explanation, the greatest and most powerful nation on earth, the sole remining superpower, live out of a chinese pawnshop while the hedge funds and even the torture camps are hidden offshore, and karl rove scripts stand up routines for laura bush, to try to gather a little popularity because her policy-challenged spouse is not able to.

    you guys think birds are a joke ? well you have pawned the industries of god’s own country to a ramshackle chinese pawnshop and you have no decent or convincing explanation why you have done it. well i think that is a joke.

    and that is on topic.

  • Posted by gillies

    anne you are not going to believe this but a robin flew into the room just as i was clicking on ‘post.’

  • Posted by brad

    gillies — quite on topic, and i would be disappointed if “bird blogging” does not start on say monday, or on friday. I may even do some “hawk” (as in jayhawk) blogging once basketball season starts again; a j-hawk is a most magnificent bird …

  • Posted by anne

    Gillies, Gillies, that solves the problem. Robins solve lots of problems, as do your metaphors. I like robins :) I do like robins and you. There is considerable cause for worry.

  • Posted by anne

    Thank you, Brad. I am settled, having sulked enough :) Thank you.

  • Posted by brad

    joseph wang — well argued on textiles. Tis true that certain segments of the textile industry can only survive in the US with protectionism, no matter what exchange rate adjustment occurs. And textile workers are not going to be retrained as hedge fund managers, and $1 b plus compensated hedge fund managers are not exactly jumping up and down to help out those on the losing side of the current trade/ interest rates equation.

    that said, i disagree with you on tariffs v. XRate moves. remember, the RMB has not been stable against say the euro, and i don’t see why moves v. the $ would have a dramatically different impact on china than moves v. the euro. Transitioning to a more realistic exchange rate level is a big challege tho, and one getting bigger every day.

    I also think the “lift the outflows and Chinese money will flee the banks” argument is a bit overstated. Right now Chinese savers are overwieght chinese bank deposits (the dominant financial asset in china by far) and underweight global assets, but foreign savers are massively underwieght chinese assets as well — Foreign portfolio money can invest indirectly in china via us and european firms with operations there, but direct holdings of chinese portfolio debt and equity are very small. So i think there would be two way flows. Moreover, at the current exchange rate, with $120-150 b estimated 2005 current account surplus and $50-60 b in estimated FDI inflows, Chinese savers could shift 10% of GDP out of the country ($180b) and Chinese reserves likely would still go up — this is why i think Jen’s argument that China has only 1/2 the reserves it “really” needs is a bit over the top … no country needs reserves = 80% of GDP.

    to be, the harder argument to deal with a version of the mckinnon conflicted virtue argument that jon anderson has put forward, but i’ll save that for another time.

  • Posted by anne

    Precisely what I do not understand. Likely even more than in 1999 or 2000, there is everywhere discussion of a housing bubble, and I would add a bubble in real estate or REITs, but everywhere there is buying and a growing wish to speculate. What a curious psychology. Since the importance to middle class America of the housing market is beyond the stock market, the danger is more and the damage could be worse. Then too, the Federal Reserve may have less ability to limit the damage of turn down in housing.

  • Posted by anne

    The China Scapegoat


    The most important diplomatic relationship in the world is between the U.S. and China. It’s souring and could get much worse.

    Alas, the U.S. is mostly to blame for this. And the biggest culprit of all is the demagoguery of some Democrats in Congress.

    There are plenty of legitimate reasons to be angry with China’s leaders, but its trade success and exchange rate policy are not among them….

  • Posted by Movie Guy

    gillies at May 28, 2005 05:23 PM

    “the future availability of non renewable resources in the global economy, resources per capita, resources as measured against population – mean that future civilisation will need to be about something other than it is about at the moment.

    none of the posts about china seem to give this any thought.”

    This was addressed on a broader scale on the previous thread. In at least three posts. Many more, if one includes the discussions and articles under some of the embedded links. And a few weeks ago, in a broader discussion of your points.

    Yes, the current pace of resource consumption is not sustainable.

    As an example from the previous thread:

    “The rise in U.S. corn exports to Mexico has provided a stimulus to some of the most environmentally destructive agricultural practices in America. Corn is very chemical-intensive, both in fertilizers and pesticides. With exports up, corn production has extended to some of the drier states, requiring irrigation at unsustainable levels.”

    “Under the United States Trade Act of 2002, the U.S. is now required to conduct an assessment of the environmental impacts of proposed trade agreements. The U.S. has conducted draft assessments of the proposed FTAs with Chile and Singapore, and is planning to do assessments for the FTAA and the new round of global trade negotiations.”

    “Assessments in Argentina, Ecuador, Brazil, and Chile–among other countries–in sectors such as agriculture, forestry, mining, and fisheries have identified problems that could have been avoided and also unexpected opportunities that could have been seized.”

    “A forthcoming WWF assessment for Brazil will show that the trade-led expansion of soybean production has led to more chemical-intensive agricultural practices in ecologically sensitive areas.”

    And so on…

    A couple of good books identified in two of the links:

    Priceless: Exposing the Misuses of Economics in Environmental Policy

    Environment and Trade:
    A Handbook

  • Posted by Movie Guy

    gillies at May 29, 2005 02:20 PM

    “meanwhile, day after day, we simple foreigners have to sit and watch, without any credible explanation, the greatest and most powerful nation on earth, the sole remining superpower, live out of a chinese pawnshop while the hedge funds and even the torture camps are hidden offshore, and karl rove scripts stand up routines for laura bush, to try to gather a little popularity because her policy-challenged spouse is not able to.”

    “you guys think birds are a joke ? well you have pawned the industries of god’s own country to a ramshackle chinese pawnshop and you have no decent or convincing explanation why you have done it. well i think that is a joke.”

    No decent or convincing explanation? Really?

    Well, it all goes back to what some are now calling a bird-brained idea (as applies to current international trade) which was conceived by some in the 1800s. The first of whom was Robert Torrens in 1815 (born in Ireland), followed by David Ricardo in 1817 (born in England) an English Utilitarian, and expounded upon by John Stuart Mill (born in England), an English Utilitarian, in 1848 ( this book was revised 7 times by Mills through 1886).

    It’s called theory of comparative advantage. It serves as the foundation of now outdated U.S. trade policy and a large portion of WTO trade policy. As well as for some UN development models.

    This outdated British economic theory is at the core of the present and growing U.S. economic imbalance problems.

    That’s the simplest explanation. More later.

    But do note this Harvard economist’s brief explanation: Outsourcing Common Sense (see page 4)

  • Posted by gillies

    i accept the correction.

    so we are getting the dustbowl as well as the crash ?

    both dust bowl and crash mean the same thing. high risks were taken with capital, to achieve maximum short term yield. it is a cycle in human psychology to do with the processes whereby immediate and novel experience becomes folk memory. its cyclical.

    kondratieff laughs . . .

  • Posted by Movie Guy

    Likely. But the U.S. will drain the ancient western U.S. aqquifers first. Arizona, as an example.

  • Posted by Movie Guy

    The Krontratieff long wave cycle theory is interesting. Plenty of conflicting opinions on the stretching of it, but some explanations, too.

  • Posted by brad

    Anne — i disagree with kristof, and am preparing something explaining why.

    and yep, MG, we in the US have never compensated those losing out from trade, and the losers exist. Ricardo’s one factor model is a real simplification. If we are in a Hecksher-Ohlin world where trade helps capital at the expense of labor in capital rich countries, there needs to be some bargain (political one) that compensates labor (tho Hecksher-Ohlin doesn’t quite fit a world where the integration of Chinese labor seems to have generated a glut of workers and a glut of capital at same time — driving down returns on both capital and labor, while driving up asset values).

    However, the current pattern of trade also generates winners. For example, the real estate bubble could not have developed without trade in financial assets that lets the US export debt and import savings to make up for our savings deficit.

    Finally, a gentle reminder to keep comments shortish.

  • Posted by Movie Guy


    The idea that comparative advantage theory will insure that U.S. trade agreements will result in a net benefit or gain to the American economy and citizens is ill-conceived. Yes, the corporations will benefit significantly, but the majority of the U.S. citizens will be left with lower standards of living. Without correction, lower standards of living will be all but insured.

    The issues of transportation, logistics, and telecommunications efficiencies of international trade have not been adequately factored into the equations of net benefit to American citizens. These considerations replace the fixed resource substitution premises of comparative advantage theory. Time and distance no longer exist as major trade barriers or major costs. Back office work can be performed anywhere in the world. The same story for manufacturing, research, and other service industries. The USA will be left with few marketable and tradable global advantages for its 300 million population to concentrate on, other than direct community level required work applications.

    Our trade policies are wrapped around the wrong theory. Or the theory isn’t being applied properly in the drafting of the trade agreements and U.S. corporate outsourcing regulations.

    Comparative Advantage and International Trade – simple explanation

    Shaking Up Trade Theory, BusinessWeek, December 6, 2004

    Harvard Economist Stephen A. Marglin; or here

    “The practical men and women who are responsible for trade policy today are equally the slaves of outmoded dogma. The first step to a better trade policy is to clear our minds of the cobwebs of comparative advantage, the refuge of those who find it easier to justify the havoc wrought by outsourcing than to re-examine received ideas. We need trade and we need trade policy. We don’t need free-market mantras.”

  • Posted by Joseph Wang

    Actually, my view is that comparative advantage theory is correct and that *on the average*, people are better off with free trade. The trouble is that what happens “on the average” doesn’t feel so good if you happen to be to be badly hit. What’s happening right now isn’t that the law of comparative advantage isn’t breaking down. It’s working perfectly. The trouble is that a lot of people with high paying comfortable white-collar jobs have suddenly realized that comparative advantage can work against them too.

  • Posted by Movie Guy

    Economist Stephen Marglin doesn’t agree. Nor do I. Nor do some other economists who are starting to question what is developing, including those cited in the BusinessWeek article.

    The point is simple. A party shouldn’t enter into a trade arrangement based on the theory or variant of comparative advantage if the trade arrangement isn’t expected live up to the expectations outlined under CA thinking. That would nullify the foundation for undertaking the trade exchange.

    If a party continues to repeat the CA trading exercise over and over, and continues to loose all the marbles, the other kid walks home with the full bag. It is not a win-win theory at this point. Hence, comparative advantage theory in whatever current form gets pushed out of the window.

    The comparative advantage theory isn’t working perfectly at all. The massive jumps in the efficiencies of transportation, logistics, and telecommunications changed the rules of the game.

    American standards of living will decline. The U.S. tax base will decline unless taxes are raised over and over. U.S. comparable economic strength will decline. U.S. purchasing power will ultimately decline.

    Comparative advantage theory is addressed at the tribe level, the nation. Yes or no with regards to entering into FTAs or other types of trade agreements.

    The USA needs a new economic model for determining trade agreements participation and outsourcing parameters.

  • Posted by Movie Guy

    loose = lose

  • Posted by Joseph Wang

    1) It seems obvious to me that both the United States and China have benefited greatly from free trade over the last 20 years. For how the United States has benefited, go to your local Walmart.

    There are a host of alternative theories of trade that say comparative advantage is wrong, but they’ve tended to be massive disasters economically.

    2) Massive jumps in efficiency, technology have not changed the theory. It means that some things that the United States had a comparative advantage in are no longer advantages, which can be locally disruptive, but that doesn’t invalidate the underlying theory. Comparative advantage doesn’t mention *which jobs and skills* will be advantageous for a nation to produce.

    3) And furthermore. Suppose I’m wrong and they are right. It’s far from obvious what the proper policy is. You can prevent the loss of textile manufacturing jobs by establishing tariffs, but short of shutting down the internet its far from clear what you can do to prevent a company hiring computer programmers or call center workers in other nations. As long as India opens its markets, service jobs are going to flow to India regardless of whether the US opens or closes its markets. If you start putting lots of regulations on businesses on what suppliers they use and where they do business, the companies will pull out of the United States completely (which is ironically what was killing the Indian economy before 1990.)

    This is the problem with talking about “fairness.” The problems (particularly with service job loss) don’t go away even if the US closes its markets. India and China could say (as China has done with its agricultural market) fine, we don’t care if you open your markets, we’ll open ours.

    Also, it seems to me that people are missing the really, really big picture. I do not believe that it will be possible for the world to survive into the 22nd century divided into haves and have nots. India and China are well on their way to having European/American standards of living in the late 21st century. The parts of the world that aren’t are the ones where you have suicide bombers and very, very scary ideologies. Basically, I’m of the opinion that if in ten to fifteen years, we don’t see “Made in Iraq” labels in Walmart, then there is a good likelihood that Bin-Laden is going to win.

    Anyway, I’m not a terribly ideological. I am interested in hearing these economist explain what the United States should do differently. However, if the policies they come up start sounding like the once that once killed the Chinese, Indian, Brazilian, Japanese economies, I’m not going to be very positive about them. Google for “dependency theory” and “import substitution.”

  • Posted by rdb

    The Alfred Deakin Innovation Lectures 2005: Lecture Three, Designing a Future or Tempting Fate
    Sunday 22 May 2005

    … Jonathan West from the Life Sciences Project at Harvard University …

    The key to China’s growth is not cheap, unskilled labour, it is cheap skilled labour. That makes a world of difference. China currently graduates 500,000 engineers every year, and it’s increasing the number of engineers that it graduates. An engineer that would be paid $150,000 a year in the United States earns $120 to $150 a month. A month. And in the factories I visited, the plant managers, most of them American, or many of them American, told me that they thought the Chinese engineers were better, more productive and as smart and much harder-working than the American engineers.

    What this means is that China has a cost-structural advantage that is so great it is difficult to think of any product that can be made and transported that China won’t have a structural competitive advantage in. So what we’re seeing is not just that China is emerging as a great new market, but it’s emerging as a great new competitor in a wide range of products that are taking us by surprise.

    The Australian garlic industry is facing disaster, because garlic grown in China is coming into Australia at one-tenth of the cost that our garlic growers can produce the product.

    China now has more area under grapevine than Australia, and I’ve been enjoying drinking Chinese wine while I travel in China. There’s a brand called Great Wall. The first time I drank it, I was quite hesitant, but I like when I visit countries to sample the local product, and I was astounded at how good it was. How did they develop a wine industry so fast that was so good? The answer’s very simple: they came to Australia and they hired Australian wine and viticulture consultants who flew up to China and showed them how to make the trellises, expose the grapes to the sun, pick them, keep the oxygen out of the mix, and they learned it in about five years, and they’re still ramping up production.

  • Posted by Navin

    Movie Guy,

    I read the HArdvard Economist’s article in programmers Guild. He is primarily arguing the comparative advantage IT.

    I guess India has an “absolute” advantage in IT to US ? Why are we still talkig abt “comparative” advantage ? ( IT)

  • Posted by Joseph Wang

    I think someone dropped a zero somewhere.

    Here is a list of salaries in Shanghai.

    I don’t see how you can hire an engineer for US$100-US$150 a month.

    China is putting out massive numbers of new engineers, and salaries for basic engineers is much lower. But what you have big difficulty in China in finding people with decades of experience or people with the management skills that you need to run a technical project. They exist, but you have to pay through the nose for them.

    Also, Chinese engineers tend to do exactly what they are told and not to bother management with questions or concerns. Managers like that…… until half way through a project, things completely fall apart because of an issue that was obvious to everyone on the shop floor but which no one mentioned.

    The other thing about outsourcing is that some jobs just can’t be outsourced easily. For example, plumbers, janitors, most system administration tasks.

  • Posted by brad

    One problem with jobs that cannot be outsourced — plumbers, janitors, system administration tasks — is that they also don’t generate goods (or services in this case) that can be exported. Call me old fashioned, but at the end of the day, a country generally has to “pay” for its imports — call em outsourced goods and services — with exports. And right now the only thing the US seems really good at exporting is IOUs. This is what sort of annoys me about the outsourcing debate. it turns into an is trade good or bad debate. That seems stale — tis good for some but bad for others, but tends to be good overall.

    But if a technological change (cheap communication) or a policy change (China’s integration into the world economy, along with India’s) increases US imports but not US exports at the current exchange rate, that tells me something — namely the US economy will (eventually) have to adjust, and in ways that are potentially difficult and in ways that at least it seems to me we in the US are unprepared for. The timing of the adjustment is uncertain — it depends on our ability to keep on exporting IOUs. Some think we could run up our external debt to Australian levels (70% of GDP, more or less), others say that we are pushing it at 50% of GDP (more or less where we will be in 2012 if we start to adjust gradually now). But the need for adjustment eventually is fairly certain.

    On current trends, the US net external debt position (the sum of all the IOUs we exported to pay for imports) is very high — 60% plus — by 2010. Australian net external debt, without Australia’s export base. the underlying deterioration over the past couple of years was masked by valuation gains on the $/ euro .. but those have run their course, or so it seems.

  • Posted by Navin


    If 3000$ is the salary per month for a Chinese junior level IT guy then China has no future in IT. :-) I am sure the salaries given in the PDF are Wrong because you can jolly well get folks in US for the same salary. (3000$ p.m for a guy straight out of college)

    In India per month IT salary for a junior guy(0-2 years) is 700$ (30,000 rupees maximum)

    One thing I have noticed with the salaries in the surveys and websites is that.. they are grossly wrong. If you want to know the real salary its better to ask a Chinese IT guy who is acutally doing the work and not to look at the surveys.

  • Posted by Movie Guy


    Your point about absolute advantage is well taken. We are really talking about absolute advantage in some cases. In IT, unskilled labor, and some other fields of skilled labor. I was moving in that direction by challenging the underlying U.S. trade agreement assumptions of comparative advantage.

    Here’s why I initially focused on it:

    According to this economic theory publication, “the main source of support for free trade lies in the positive production and consumption efficiency effects. In every model of trade there is an improvement in aggregate production and consumption efficiency when an economy moves from autarky to free trade. This is equivalent to saying that there is an increase in national welfare. This result was demonstrated in the Ricardian model, the Immobile Factor model, the Specific Factor model, the Heckscher-Ohlin model, the Demand Difference model, the simple Economies of Scale model, and the monopolistic competition model. Each of these models shows that a country is likely to have greater national output and superior choices available in consumption as a result of free trade.”

    Oh, really?

    “When countries such as China can perform tasks in which the U.S. previously had a clear edge, “comparative advantage cannot be counted on to create…net gains greater than the net losses,” Samuelson asserts in his new paper.” See Shaking Up Trade Theory.

    So much for the unbridled reliance on the application of comparative advantage economic theory in U.S. bilateral and multilateral trade agreements.

  • Posted by Movie Guy


    The purpose of employing comparative advantage and absolute advantage economic theories in the preliminary supporting analysis of specific trade elements in proposed U.S. trade agreements is to offer reasonable assurance that the resulting bilateral or multilateral agreements will result in new opportunities and improved standards of living of U.S. citizens. New opportunities and improved standards of living represent the U.S. policy basis for bilateral and multilateral trade agreement participation.

    Whenever it becomes apparent that bilateral and multilateral agreements repeated fail to satisfy trade projections based on economic assumptions as employed in the development of such trade agreements and based on other economic performance data and factors in the U.S. economy, appropriate timely adjustments and proposals by Congressional oversight committee and the Office of the U.S. Trade Representative (USTR) should be required by law. This type of measured performance review should become a matter of routine exploration much in the manner that the WTO periodically reviews and reports on U.S. global trade participation. It appears that the present USTR testimony presentations to the U.S. Congress are inadequate.

    Verify the results.

  • Posted by Movie Guy


    The purpose of employing comparative advantage and absolute advantage economic theories in the preliminary supporting analysis of specific trade elements in proposed U.S. trade agreements is to offer reasonable assurance that the resulting bilateral or multilateral agreements will result in new opportunities and improved standards of living of U.S. citizens. New opportunities and improved standards of living represent the U.S. policy basis for bilateral and multilateral trade agreement participation.

    Whenever it becomes apparent that bilateral and multilateral agreements repeatedly fail to satisfy trade projections based on economic assumptions as employed in the development of such trade agreements and based on other economic performance data and factors in the U.S. economy, appropriate timely adjustments and proposals by Congressional oversight committee and the Office of the U.S. Trade Representative (USTR) should be required by law. This type of measured performance review should become a matter of routine exploration much in the manner that the WTO periodically reviews and reports on U.S. global trade participation. It appears that the present USTR testimony presentations to the U.S. Congress are inadequate.

    Verify the results.

    (Corrected version)

  • Posted by Movie Guy

    I previously stated that the USA will be left with few marketable and tradable global advantages for its 300 million population to concentrate on without changes in U.S. trade policy and outsourcing regulations, other than direct community level required work applications. I also stated that the corporations will benefit significantly, but the majority of the U.S. citizens will be left with lower standards of living.

    While the consumer benefit of cheaper imported goods and services is obvious, the U.S. employment and wage/salary pictures must be weighed similarly as does the ratio and financial measurement of U.S. exports to U.S. imports in trade and current account analysis.

    “There’s little doubt that globalization is likely to continue to cut into the country’s 14.5 million factory hands. Add in 57 million white-collar workers suddenly facing global competition, too, and more than half the U.S. workforce of 130 million could feel the impact.”

    “Already, some 14 million white-collar jobs involve work that can be shipped electronically and thus in theory could be moved offshore, according to a study by economists Ashok D. Bardhan and Cynthia A. Kroll at the University of California at Berkeley’s Haas School of Business.”

    “Forrester analyst John C. McCarthy identified 242 service jobs as likely to be affected among the 500-plus major occupations tracked by the Bureau of Labor Statistics (BLS).”

    “But even if the incomes of more U.S. workers fall, won’t the rest of American consumers benefit from the lower-priced goods and services globalization brings? Not necessarily, some economists now believe.”

    “If blue- and white-collar employees alike are thrown into the global labor pool, a majority of workers could end up losing more than they gain in lower prices. Then the benefits of increased trade would go primarily to employers.”

    Shaking Up Trade Theory

  • Posted by Movie Guy


    I agree with your observations.