Brad Setser

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Cross border flows, with a bit of macroeconomics

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Chart envy. China’s goods exports v. US goods exports

by Brad Setser
January 25, 2006

Every now and again, I run a across a chart that is so good that I really, really wish I had thought to do it myself.

James Pressler of Northern Trust's chart comparing Chinese goods exports v. US goods exports is one such chart.  Check it out.  It is on page 3, and is nicely paired with a graph showing China's reserve growth.   I cannot think of any simple chart that captures so many key trends in the global economy quite as well –

What does this chart tell us?

1.  Exports – trade really — have been a big source of China's recent economic dynamism the Chinese economy.   True, China both import and exports a lot, so if you disaggregate China's growth, net exports matters less than the surge in domestic investment.   But that doesn't change the fact that the investment required to expand China's exports (and imports) at this pace has been a big driver of overall growth.

2.  Dollar depreciation has been really, really good for China.  There are lots of reasons why Chinese exports took off in 2002.    The WTO.   The shift in electronics manufacturing to China.   And the weak RMB.   If look at disaggregated export growth data since 2002 the impact of the weak RMB shows up very cleanly.   Chinese exports to Europe have grown faster than Chinese exports to the US (in dollar terms).  Wanna guess why?

3. Don't look to the past to predict the future.  China has changed.  One example: Jonathan Anderson of UBS found that the electronics slump of 2001 had a far bigger impact on the rest of Asia than on China (Goldstein summarizes Anderson here).  True.  But that was before electronics production shifted to China.   A similar slump now will likely have a different impact.   China exports three times as much stuff as it did as recently as 2001.   China's exposure to the global economic cycle must be growing.

4.  China will soon top the US (and then Germany) as the largest goods exporter in the world.

5.  Chinese export growth almost certainly will slow significantly as some point in the relatively near future.  Don't know when.  Don't know why.  But the law of large numbers says it will happen.   If you export as much as the US, your exports just don't triple every five years!

6.  Dani Rodrik is right.   OK, the last statement is more debatable that the first five. But Dr. Rodrik does have an interesting paper showing that China's exports a basket of goods that are atypical for a poor, labor rich economy.   China's export basket (using 2002) was typical of a country with a fair higher per capita income.  Rodrik: 

"a major argument of this paper is that China is an outlier in terms of the overall sophistication of its exports: its export bundle is that of a country with an income-per-capita three times higher than China's."

Emphasis in original; hat tip: the eagle-eyed New Economist.

The sophistication of China's export basket has increased since 2002.   And, as Rodrik notes, China's export success is not simply a product of its ability to import more sophisticated components.  That is part of the story, but not the full story:

"China has steadily moved away from being simply an assembler of components.  Increasingly, production is integrated backwards and the supply chain is moving to where the assembly is undertaken."

In other words, don't count on China importing high-value added components forever. 

Rodrik argues that China's export mix has been atypical for some time, but I think Rodrik's argment is still consistent with Dr. Frankel's argument that China's market exchange rate is out of line with its purchasing power parity exchange (PPP) exchange rate.    Poor countries market exchange rate is usually well below their PPP exchange rate.  But even adjusting for the fact,  there is an unusually large gap between China's current market exchange rate and its PPP exchange rate.

It is also consistent – in some broad sense – with David Dollar's finding that China is unusual in another way.  Most relatively poor countries are not (small) net creditors to the rest of the world.  

Put differently, Rodrik finds that China exports a product mix of a far richer country.   Frankel finds that if China had a more typical gap between its market exchange rate and its PPP exchange rate it would be a far richer country.  And Dollar finds that as a result, China is a (small) net creditor when most comparably poor countries are not.

In other words, the RMB is undervalued.

I think Rodrik's conclusion supports another argument that I have made, namely that China's huge reserve growth is challenging one key embedded norm of the post world war II international economic system consensus.  Major players in the global trading system – and China is now one – historically have not spent 10% of their GDP a year intervening in the foreign exchange market to keep their exchange rate from appreciating.  Yet that is what China has done since 2003.   Either the norms of the system have to evolve to accommodate China, or China's behavior has to change to match the existing rules of the game.

One note: if any one has an excel chart with China's monthly export data going back to 1995, I will happily reproduce Pressler's graph.


  • Posted by malabar

    If US consumption declines as a result of a housing slowdown then if as GaveKal state that economic volatility has been outsourced by the west along with manufacturing, then China could face a severe economic slowdown as capital investment declines.

    Its possible that hot money outflows from China could ameliorate the need for currency intervention of 10% of GDP.

    If an issue is foreign flight, where could money flow to in the event of economic growth rate declines in both US & China leading to a slowdown worldwide?

  • Posted by bsetser

    Well, hot money flows have declined somewhat, at least v. q2 of 05 — and maybe v. q3 of 05. am doing some work on that now.

    but if Chinese investment collapses, there are two potential effects:

    1) China’s current account surplus would surge — pushing up China’s reserve accumulation.

    2) Inflows would presumably slow.

    I am not sure which effect dominates. If hot money inflows turned to hot money outflows, then reserve accumulation would fall. otherwise, it is a bit unclear.

    And if hot money flows reversed and inflows became outflows and if those outflows did not seek refuge in the US dollar, the US would be in world of trouble. China’s current account surplus would soar — which has implications for global equilibria. But its reserve accumulation would tank. That would cut into the United States’ ability to finance its overall current account defict.

    The potential source of salvation — a big fall in oil, which would help cut the US deficit (even as it increased the Chinese surplus). But suppose Saudi Arabia offset a demand shock with production cuts …

  • Posted by Movie Guy

    Good post, Brad.

    Nice references, particularly James Pressler’s Northern Trust charts on page 3.

    China is on the verge of becoming a major automobile producer. That industry should spur domestic and export demand growth at increasing levels for at least three years while the ramping up occurs. Similarly, the outbound U.S. auto parts supplier businesses will add to China’s export growth. Significant growth can be anticipated.

    There will be no passage or enforcement of higher import tariffs on Chinese goods by the U.S. Congress or Administration. Too many key U.S. corporations are onboard with the China export and China domestic supply models.

    China may cool by 2009 or 2010, but its unlikely to occur until then. The corporate players are at the card table. The casino shall remain open, even if discounts have to be offered to the players to keep them there. And China has the ability to scrub off another 15% from the corporate costs of maintaining production and/or increasing production in China’s factories.

    China has control of the Economic Superbowl.

  • Posted by Stormy

    Rodrik has it exactly right:

    “Foreign investors have played a key role in the industry’s evolution. They are the most productive of the producers, they are the source of technology, and they dominate exports.”

    In short, it is the West that is providing the cash and know-how and the brand names that have made China a leading exporter of goods that are considerably higher than it should be producing.

    (1) FDI in China has spurred its trade surplus—and our trade defict—to abnormal levels.
    (2) Because we and other developed nations are the source of the FDI, we are, in a very real sense, part of the balance of trade problem. In short, our own companies are exporting goods from China, because of cheap labor, low taxation, low environmental standards….

    “Won’t you come home, Bill Bailey? Won’t you come home?”
    “Nope, profits are great here.”
    And so they are.
    “Invest in the U.S.? Forget it. China is more profitable. Bigger returns.”

  • Posted by HZ

    Movie Guy,
    Good point re corporate interests. Actually it is a lot more than using China as export base: GM is the leading auto seller in China, Wal Mart does well in China as well, so do McD, P&G, GE, Boeing, or just name your favorite Fortune 500.
    Yes that is the point. Unlike Japan, China is not (so far) taking market shares in the US away from US companies. With union influence on the decline, I don’t see major protectionist move against China likely.

  • Posted by maxed out

    “The potential source of salvation — a big fall in oil” – Kuwait apparently just announced that it only has 1/2 the reserves it has claimed. That’s 5% gone from the global oil bank. How does a big increase in oil prices affect your calculations? Obviously, a bit less salvation

    I also wonder if fuel cost is a potentially significant factor in international trade. A doubling or tripling of oil would add something to the price of imported goods but I wonder how much.

  • Posted by Mr.Bill

    RE Kuwait, oil prices & input costs

    The drop in Kuwait reserves shortens the length of time the world can rely on hydrocarbons as a cheap source of energy. This obviously affects the cost to produce any basket of goods as well as transport them to market. However, the cost of energy to manufacture in any given locale may matter less than wages, non-wage costs (ex-energy) and environmental standards. In otherwords, high energy costs may make Chinese exports less competitive, but may not be sufficient to make US manufacturing more competitive due to high wage costs and tougher environmental standards depending on the mix of labour and capital in the basket of goods.

  • Posted by DF

    A question occured to me,
    Most stats track the US Federal deficit and debt as a % of GDP, and not as a % of spending.
    Very often one can hear that compared to the european or japanese levels, the US federal deficit and debt are not so big.

    My question-remark is this one :
    given that the US federal government spends around 20% of GDP while many european countries are at 30% or more, is not it clear that the the US federal deficit and debt should be at least one third less as a % of GDP ?

    Phrased other wise, if a european country need to adress a 3 % GDP deficit, it needs to raise taxes by 9%, for the same deficit in the USA the fed gvt needs to raise taxes by 15%.

    Phrased otherwise again, a european country runs a deficit of 9% on its revenues if it has a deficit of 3% of its GDP, while the US runs a deficit of 15%.

    It seems to me even though the rise in taxes will be of the same % of the GDP, it will be more costly in the USA? because more private actors will need to give up.

    Am I right or is this irrelevant ?

  • Posted by realist

    energy is the elephant in the room. where are the charts showing trade balances with russia and the opec countries? the chinese are well aware of the energy situation. they’re out buying interests in international oil and gas companies, and cutting deal with the saudis. they understand corelation between diminishing oil capacity and manufacturing.

    as far as the auto industry, while japanese auto makers will be bringing in bargain basement priced autos, like the toyota laris and honda fit, to combat anticipated cheap, chinese 2007 auto imports, u.s. auto companies are, once again, asleep at the wheel.

  • Posted by bsetser

    Realist. Most Russian oil/ gas goes to Europe. Most of the Middle East’s oil goes to Asia. Some goes to the US, sure but not a lot. The US imports a lot from Mexico/ Vennie and the West Coast of Africa. Look at the world from the point of view of a supertanker and you will see why. The US oil import bill is around $200b, about the same size as the US bilateral trade deficit with china. But the overall current account surplus of the major oil exporters clearly exceeds the current account surplus of China.

  • Posted by bsetser

    HZ — China may not be taking market share from US companies (yet), but every now and again it buys a US company (or part of one) — Lenovo. In broad terms, the alliance of US firms/ Chinese labor/ Chinese state (for infrastructure, favorable tax regime for FDI, etc) delivers an accurate picture. Gave Kal’s platform companies that don’t manufacture and all. But it does need to be qualified — most investment in China is financed by domestic savings/ domestic banks not FDI. FDI accounted for maybe 5% of investment last year. And lots of Chinese firms — as Rodrik notes — like to reverse engineer foreign technology for sale in the domestic market. Call it accelerated technological diffusion …

    I am not convinced that the US political system will stand by passively if (and it is still an if) the next round of investment by US auto firms is in China. UAW is not dead (yet). Ohio/ Michigan = very purple states.

    And in economic terms, it is hard to see where the productive capacity needed to grow US exports to offset existing US imports will come from if the US ends up importing even more (autos) …

  • Posted by Dave Chiang

    A small revaluation of the yuan, which we have recently seen, will actually make the trade picture worse, since many products now sold in the US are made in China and only China. A small US dollar increase in prices will make those goods more expensive for the US to import with no real alternative sources. Thus the value of imports by the US from China will increase, making the trade balance worse. The overwhelming fact is that China’s labor costs are much lower than those in the US. Thus even if the yuan is revalued, the impact would not be large enough to seal the gap between wages in the two countries. Moreover, China also imports raw materials from neighboring countries, assembles products and exports to the US. To meet the competitive challenge from China, the US needs to implement an Industrial policy to promote the development of “high value added” and “high technology” Industries to provide American workers with a high standard of living. Unfortunately, the Washington Consensus and Federal Reserve policy seems to promote excessive and non-productive Housing Bubble speculation that has excerbated the massive US trade deficit.

  • Posted by bsetser

    Dave — in the short-run you are right, which is why it is a bit baffling that China’s doesn’t take an obvious step to improve its terms of trade. but in the long-run, without a revaluation to reduce the wage gap between the US and China, there won’t be much of an economic incentive to source even high-value added activities (auto manufucturing is one, i think, aircraft manufacturing another) in the US. That is some sense is one of the points that I think can be inferred by Rodrik –China has a product/ skill mix that is atypical for a country with its wage levels.

  • Posted by Stormy

    The wage gap may be too large for revaluation to work, Brad. In addition to revaluation, China needs to institute better labor regulations, more equitable taxation between foreign and domestic firms, and better environmental standards. These, in combination with revaluation, will make the playing field a bit more even.

  • Posted by Gcs

    as per usual at a well attended blog site
    the net new track gets laid slowly

    the daily progress :
    three lengths forward
    two lengths back

    and that’s on a good day

    so whats the net forward march here ????

    or our we repaving
    the road behind us
    for faster transport
    to the fronteer

    was a case of
    the latter i’d say

    nice smooth and straightening job here brad

  • Posted by Gcs

    dave c:
    “To meet the competitive challenge from China,
    the US needs to implement
    an Industrial policy
    to promote the development
    of “high value added”
    and “high technology” Industries
    to provide American workers
    with a high standard of living”


    high standard of wages

    which party of the two has this
    noble aim
    near the top
    of its “to really do” agenda ??

    obviously not the pubs

    but the donkey ???

    ask bobby reich about where your very sound suggest sits in the DLC’s pile of ” once back in power” plans

  • Posted by Guest

    China to ease foreign exchange accumulation: China is committed to slower foreign exchange reserve accumulation, Zhou Xiaochuan, the governor of the People’s Bank of China told the World Economic Forum, in rare comments about China’s exchange rate policy.

    Mr Zhou said that his country was committed to increasing domestic demand, rebalancing the economy gradually away from net exports, promoting consumption, particularly in rural areas, all of which would reduce the pressure on the country to keep increasing the rate of reserve accumulation at an annual rate of $200bn a year.

    Free Market Rattles Chinese
    Too Fast in China?
    China 2.0
    Three Horsemen and the Ghostbusters
    America’s health-care crisis: Desperate measures

  • Posted by FTX

    Re malabar’s point regarding US consumption declining as a result of a housing slowdown and its effect on China:

    The UK has been somewhat ahead of the US with its debt-driven consumption and housing boom. In 2005 the economy slowed sharply. The housing market stagnated, and consumer spending slowed abruptly.

    Furthermore, the UK pound fell against the dollar (and hence against the yuan) by roughly 10%.

    So how did trade go with China? Here’s the trade balance for the past few years (in million UK pounds):

    2001: -4040
    2002: -5200
    2003: -6390
    2004: -7988
    2005: -10000+ (estimated, deficit for 11 mths was -9256)

    In other words, I don’t think it’s a given that just because the housing market slows and consumer spending drops that the deficit with China will drop (or even stop increasing). Obviously the US is not the UK, but the two countries share many similarities in their consumer debt driven economic growth.

  • Posted by Movie Guy

    This Ship Has Sailed

    Allow me to roll up a few points.

    bsetser – responding to HZ – I am not convinced that the US political system will stand by passively if (and it is still an if) the next round of investment by US auto firms is in China. UAW is not dead (yet). Ohio/ Michigan = very purple states.

    And in economic terms, it is hard to see where the productive capacity needed to grow US exports to offset existing US imports will come from if the US ends up importing even more (autos) …

    bsetser – responding to Dave Chiang – in the long-run, without a revaluation to reduce the wage gap between the US and China, there won’t be much of an economic incentive to source even high-value added activities (auto manufacturing is one, i think, aircraft manufacturing another) in the US.

    StormyThe wage gap may be too large for revaluation to work, Brad. In addition to revaluation, China needs to institute better labor regulations, more equitable taxation between foreign and domestic firms, and better environmental standards. These, in combination with revaluation, will make the playing field a bit more even.

    Stormy is correct. The problem rests with WTO and its members. Had WTO, in conjunction with support from IMF (which has an active presence within WTO committees) and the UN (on environmental matters and labor standards) originally adopted global trade packages that called for fair trade based on universal labor standards, environmental standards, and taxation standards, as well as tariff reductions, then the global trading picture would be different. But that didn’t happen. It has not happened to this day. There is no single global trading oversight body or organization that addresses and enforces the complete trade package, and all factors that influence such trade.

    In the meantime, the percentage of imported finished durable goods manufactured for U.S. consumers and business interests has skyrocketed. There is no appreciable political support across the citizen voting spectrum to reverse the benefit of importing less expensive finished goods that fill the households and business offices in America. Yes, many people are sorry for the job losses, but they are hooked on less expensive goods. This is their drug of choice.

    The majority of American citizens, concentrated in major population centers, will support cheaper goods all day over American jobs, particularly jobs not lost in their immediate community areas. The major city dwellers are not overly concerned about the smaller communities and rural America. They don’t drive through it and see the damage; they fly over it. They ignore it, and many view it as part of a backward past of America. Life today is about services and little more in their way of thinking. Hell, most of them never made anything or cut the grass in their lives. And damn few can find the transmission dip stick in their autos, let alone tell you how the drivetrain actually works. The younger generations could care less whether such goods are manufactured on the Moon. The same situation is occurring with food products. Soccer moms want those food prices to come down. And, as a percentage, fewer of them belong to any commerce-based labor unions.

    The transference of production and production factors to foreign locations has the backing of major economic employers in America. It is the bargaining tool by which labor unions will be held in check. “We will protect some workers, but not all.” The growth in the number of companies and corporations operating in China and elsewhere globally has now reached down into the smaller firms, which are also onboard with exploring foreign production locations (internal to the companies) or foreign importers (as subcontractors). The U.S. Chamber of Commerce statistics bear out this point. The losses of skills will continue until the rules are changed. And skill sets among high tech workers are not immune to foreign competition. The shift to offshore high tech production (goods and services) is moving forward unabated. The significant wage differentials, coupled with rising knowledge and skills abroad, insures that foreign high tech source competition will grow, not diminish. All of which is firmly supported by those American, Asian, and European corporations that establish foreign production operations, transferring not only the production, but also the skill sets, and, in a growing number of instances, research and development. Yes, research and development, the very body of knowledge that many analysts said would serve as America’s core strength while the U.S. economy transitions from durable and non-durable goods production to services.

    I agree with Brad Setser that “without a revaluation to reduce the wage gap between the US and China, there won’t be much of an economic incentive to source even high-value added activities (auto manufacturing is one, i think, aircraft manufacturing another) in the US.” But I add the caution that we are already shifting major chunks of such component and end item manufacturing offshore. The investment dollars, whether actually captured in FDI numbers, are significant. Corporations do not put forth offshore ventures without some reasonable assurances that their investments will be protected. This is the important point.

    There is no immediate solution or recourse under existing U.S. trade policy, WTO allowed trade practices and lack of global labor, taxation and environmental standards, and weak currency oversight by the U.S. Treasury and IMF. American corporations and companies engaged abroad are supportive of the weaknesses outlined. And they have reasonable assurance that those weaknesses will continue to exist.

    Yes, as Brad notes, “it is hard to see where the productive capacity needed to grow US exports to offset existing US imports will come from if the US ends up importing even more (autos)”. Someone should explain this point to Richard Fisher, CEO, Dallas Fed, and anyone else willing to listen. Cranking up new rules for improving investment flows in the U.S. will serve little purpose unless such a review includes examining U.S. trade policy and WTO membership obligations, or lack of such. I suggest lack.

    There is no Plan B.

    This ship has sailed. It is very expensive to call it back to port. The resistance will be great.

  • Posted by HZ

    You know that Lenovo is an exception. IBM’s PC business is unprofitable. IBM got a chunk of Lenovo itself in return. IBM also has more ambitious plans for expanding its business with the Chinese government. Lenovo had to jump through many hoops and suffer quite a bit of indignity. Right now Westinghouse is up for sale. Its main value is its presumed lead position in bidding to supply China nuclear reactors. Will Chinese be able to buy Westinghouse? No. Not that they couldn’t afford the $5B price tag. The reactor contracts in the next decade alone are projected to be around $30B. And I don’t need to explain why. Congress was up in arms when Pentagon sourced some berets for the army from China. Can you imagine Chinese companies getting American government contracts? The term of trade is very favorable to US companies. Will Congress spoil it for them?
    UAW’s main competition is from within the US, the non-union states. They can gain a lot more by organizing Toyota plants. But overall yes American labor in manufacturing is suffering from global wage pressure, with or without China, but more acutely with China. It points to the need to intermediate income distribution through non-manufacturing activities. Imagine a scenario without China but with much more advanced automation. Does it make sense to destroy the automation to save manufacturing jobs?

  • Posted by Movie Guy


    I admire what you are saying, but the big boy heavies are not listening.

    Perhaps you should call a press conference and outline in no uncertain terms the concerns that you have.

    This is the method that I employed with great success that to bring visibility to issues that were before state legislatures and the U.S. Congress.

    Form an economic coalition. Step up. And the press will run with it.

  • Posted by malabar

    Brad, I believe you are correct that China’s current account would increase if their capital investment growth stalls due to consumption declines in the west.

    If the peak oil folks are right and they make a very persuasive case then even if oil demand falls prices may not as production declines. The oil producers have a strong incentive to lengthen their productive life and in any case they might not be able to maintain current production rates.

    I am interested in your opinion of currency investment flows in the event of a serious global economic slowdown. Where are the relative advantages?

  • Posted by Guest

    Quick thoughts –

    I note the persistant references to geographic areas, countries, and lack of consideration that many transnational firms are national by definition only. Which is to say that a level of analysis taking the not-national, the anational, into account is missing.

    When, for years, half or more of ‘Chinese exports’ have derived from the transnational sector, where are the profits, how are these shared, how great the unequal exchange and what affects on long run development in that nation? The higher technical composition of capital in these enterprises is also their ability to appropriate a technological rent, a rent which contributes to ‘superprofits’ even as it is a drag on that nation’s national industries. Not a dualism but a dialectic.
    To the extent that China’s actually domestic firms lag, this rent perpetuates.
    To the extent that these firms attain the higher composition of capital, they fail to supply sufficient new employment to mitigate the unemployment disaster in that nation.
    To the extent that the mass of unemployed continues to expand, and as ‘floating labor’ self-organizes through the process of internal migration, social tensions continue to rise as does the state’s use of coercion which further aggravates social tensions.

    China is in a ‘grow or die’ situation, yet since much of this growth is low profit, the Chinese state can only but remain on stage. IMO, this state recognizes the gravity of the dynamic it is caught within: the necessity to create employment at faster rates, so also continue large scale infrastructure projects, even though these tend to further increase overaccumulation and excess capacity, and with this the dreaded ‘hard landing’.

  • Posted by Dave Chiang

    The U.S. Economy is heading for the economic precipice in short order. Contrary to the Wall Street propaganda claims, the inverted bond market yield is among the best indicators of an approaching recession. The Greenspan Federal Reserve policy of lax and irresponsible regulation of lending practices coupled with rock bottom interest rates of 1%, has fueled a lethal housing bubble that will implode the US economy in the coming year. Instead of financing “real” productive capacity in high technology industry, the Wall Street banking cartel facilitated the stock market “dot-con” bubble and the credit bubble in mortgage finance. The only thing that could keep the US economy on life support a little longer is another round of interest rate reductions, but this time it could collapse the dollar with leveraged hedge funds currently financing 80% of the current account deficit.

  • Posted by DF

    the wage gap is not too large, remember that the productivity gap between a US and chinese worker is also very large.

  • Posted by Daryl

    Movie Guy,

    I am very sympathetic to your views. Tell me though, in practice how does the WTO enforce envrionmental and labor regulations in countries like China? It sounds like it might be difficult or impossible. Isn’t it effectively protectionism, no matter how you slice it?

  • Posted by bsetser

    Movie Guy — You mean this blog isn’t enough of a megaphone? I have had my chance to be heard; I am pretty sure the US government knows exactly what I think. They just don’t necessarily agree.

    Malabar — I tend to think that a broad basket of emerging currencies will tend to appreciate against the dollar over time. I also tend to think europe has some real strengths that would play out in some circumstances — not the least the fact that their energy intensity is less than that of the US and their current broad current account balance. Of the two, though, my personal view is that the greatest long-term appreciation will come from the emerging world. But I don’t want to be more specific than that — I am not in the investment advice business.

    Dave. Hedge funds don’t supply 80% of the financing for the US current account deficit. The folks who supply Hedge funds with leverage in the eurodollar market provide 80% of so of the financing. it is a small but important difference. The hedge funds are just the intermediaries (and i doubt the total is 80%)

  • Posted by HZ

    I will hazard two policy suggestions here:
    1) A gradual rise in general, across-the-board, non-country specific import tariff level. The proceeds, with first priority, go into scholarships for trainings in nursing, HVAC electricians or whatever skilled labor field where there is a current shortage in labor supply. The rest should be used to invest in long term R&D grants to small businesses and reduce the budget deficit, if there is any leftover. As the total import value is high, a small rise in the tariff percentage can provide significant fundings.
    2) Raise the gasoline tax on a graduated scale, say first 10 gallons at the pump see a smaller tax increase, afterwards see a big tax increase. Invest tax proceeds in raising energy efficiency and alternative energy sources.

  • Posted by Movie Guy

    DF – the wage gap is not too large, remember that the productivity gap between a US and chinese worker is also very large.

    China’s wages are roughly 1/20th to 1/25th of comparable industry U.S. wages. That’s a sizeable gap.

    What is the productivity gap? How are we measuring actual production efficiency improvements in China, other than observing declining end product pricing?

  • Posted by Movie Guy

    Daryl – Tell me though, in practice how does the WTO enforce envrionmental and labor regulations in countries like China? It sounds like it might be difficult or impossible. Isn’t it effectively protectionism, no matter how you slice it?

    It wouldn’t be easy. But it could be done.

    WTO Labor and Environmental Hotlines would help.

    If the WTO, by virtue of its members’ vote, is not, in the future, empowered to set enforceable minimum environmental and labor standards, then alternatives include programs under the United Nations and/or creation of a broader powered world trade governing body.

    One argument will be that the WTO doesn’t have the expertise nor staffing to provide oversight of environmental and labor standards (same for taxation, BTW). Fine. Either staff the expertise and fund the operations, or refer to other binding global accords and national level enforcement standards administered by other global organizations.

    Labor standards can be adopted by the WTO and all member nations. The WTO can establish and staff a WTO Labor Hotine that can receive email and telephone communications from complaintants. Moreover, the existing UN humane sufferance programs could be expanded to back up the WTO Labor Hotline. It’s not hard to address verification once standards have been established.

    Environmental pollution standards can be established by the WTO. Enforcement can be accomplished internally or by another global organization.

    The WTO can establish a WTO Environmental Hotline that could receive email and telephone communications from complaintants.

    If a given WTO member nation’s environmental standards are deemed to be too low, then offset trade penalities can be incorporated into existing and future WTO trade policies.

    The UN’s Kyoto environmental initiative provides the foundation for assessing some environmental performances and allowing for mitigation (pollution credits and debits). Kyoto most assuredly is not an adequate oversight environmental treaty, as it does not enforce comparable environmental standards on developing nations. This, of course, explains the projected massive growth of environmental pollution anticipated from China, as depicted in this report:

    The Impact of the Kyoto Protocol on U.S. Economic Growth and Projected Budget Surpluses
    March 25, 1999

    Note this shocking pollution chart from the report:

    Figure 8 – Global Carbon Emissions: Reference Case

    The absence of comparable environmental requirements on production shifted to developing countries virtually insures that the planet will be subjected to net increases in overall pollution based solely on existing production levels, let alone future goods production growth in developing countries. The net pollution load is not sustainable under such an approach. The chart above makes that very clear. By year 2100, the U.S. will represent less than 10% of the global carbon pollution problem. We’re going to kill the planet at a faster rate if the existing WTO trade agreements remain in effect. It’s insane.

    Penalties for communication interference or prevention: If a nation blocks emails communications and telephone calls from workers to the WTO and/or UN, then the WTO can impose exceedingly costly sanctions. The member nations’ WTO membership can be downgraded or terminated under such conditions.

    China should already be paying a severe costly penalty for internet censorship instead of receiving support from Microsoft, Google (news this week), and other providers. The WTO sits there and does nothing, and that’s a disgrace to the concept of “free world trade”. WTO’s silence endorses human slavery.

  • Posted by Movie Guy

    complainants, not complaintants.

    And penalties was misspelled.


  • Posted by Movie Guy

    bsetser – You mean this blog isn’t enough of a megaphone? I have had my chance to be heard; I am pretty sure the US government knows exactly what I think. They just don’t necessarily agree.

    We need 250 Brad Setser leaders making the case.

    We need a Concerned Coalition of Economists which routinely conducts press conferences. Educate the layman’s news media.

    On a personal level, you could do what Peter Morici is doing with his monthly op ed pieces. Finfacts loves him.

    Peter Morici: China’s big plans for capitalism
    Finfacts Ireland
    Jan 2, 2006

    Finfacts Index – Analysis/Comment – Peter Morici

    Notice that the bottom of each article has links which allow any reader to note other publications, selected op eds, and testimony that Peter has identified on his personal information and cirriculum vita page. Now, Peter doesn’t have a personal blog, but imagine the response it would receive if he did have one.

    University of Maryland – news record on Peter Morici

    Granted, you might not be able to crank out op eds and interview clips at the same rate, but you can increase your presence with Layman America. They’re the people who call Congressmen and write those letters of concern.

  • Posted by Movie Guy

    I see some more spelling errors, but…

    long day.

  • Posted by Phil

    Two points. Firstly, if we are talking about wages and employment standards, the employees who are doing best in China are those in the export industries we are talking about. They are far, far better off than those working for state companies or farmers. So if you want to start a campaign to ensure better wages etc., you had better plan on doing it without the workers’ backing because they are pretty happy to be there.
    Secondly, and I’ve made this point before on this blog back when I was more actively watching it, I think we need to take a step back in all this debate about China and the US and indeed, the West and the rest.
    A problem that is just as important to our future as global trade and investment flows (or even more important) is the inequity between the rich and poor. We are rich and they are poor and with every passing day, as communications and the Internet spread to the farthest corners of the world, the poor are getting more and more exposed to the unbelievable riches of the West.
    There are two solutions to this problem: send them money and food when they starve and look the other way when some sneak across our borders (but no more than we need to pick our fruit and wash our cars); or let them play the game the same way we play it, by making things to sell us.
    The first solution is the way we have historically related to Africa and the second is the way we have been relating to Asia. The first solution has been proven useless. The second solution works — much of Asia has gone from relative poverty to relative wealth in less than 50 years.
    China and India (and Indonesia if it ever gets its act together) are much, much larger than the countries like Japan and South Korea that we have already let into the game so their entry will not be painless. For every 10 steps forward they take, we may have to take one or two back. But over time, as their billions become consumers, there is no reason why we can’t all be better off. This is not a zero-sum game.
    If we close the gates to them now, tell them that we are sorry but they can play the game but only as long as we always win, we will have those billions still watching us and our wealthly lives with no hope of joining in themselves.
    And what do you think their response will be then?

  • Posted by Movie Guy

    I understand your points, Phil.

    But I do recommend that everyone take a look at this chart from a previous post:

    Figure 8 – Global Carbon Emissions: Reference Case

    Our environmental course is not sustainable.

  • Posted by Guest

    It is somewhat misleading to look at only the CO2 emission
    of a given country. For example, China emits a lot of carbon
    dioxid, while making goods for the rest of the world. I think
    that the amount of pollution produced while the goods exported
    e.g. to the US are made, should be counted as part of the US

  • Posted by Movie Guy


    Ah, now your really trying to screw us. You’re implying that all of China’s manufacturing pollution for export goods become the responsibility of the goods importing nations.

    Uh, huh. Well, that puts it back at square one of what I stated. WTO must adopt global environmental standards for all member nations (members of WTO). Period.

    It’s wrong that production shifting from a nation with reasonably good environmental standards to a heavier polluter nation should be served with an obligation for Kyoto style debits payable to China because China doesn’t have comparable environmental standards (yet).

    If WTO had global environmental standards, we wouldn’t be discussing this as a principal problem.

    What a mess.

    BTW, I didn’t only look at CO2 emissions. I only used one chart as an example. There is other emissions data which can be reviewed.

    The CO2 chart made the point regarding the shift in emissions which will occur not only because production relocated, but rather because WTO rules support moving that production without penalty to a less environmentally restrictive location.

    I am sure that someone at Davos is studying your idea as we speak. We’re screwed…

  • Posted by Guest

    Better, that pollution be the responsibility of the _companies_, private and public, which generate it. But, in a profit maximizing system of national and anational competitors, it’s a sad joke to expect ‘corporate responsibility’ – equally a joke to believe that countries competing to lure transnational capital are willing to give up provision of indirect subsidies such as lax or nonexistant pollution control laws.

    Green GDP measures trying to account for ‘externalities’ can induce the state to intervene, or provide rational for intervention, but the bind is ultimately solved, at least mitigated, by social pressures.

  • Posted by Movie Guy


    It is obvious that developed nations losing production to developing nations could, in fact, apply an imported goods per unit fee on those products which were manufactured using less stringent pollution requirements. If the product doesn’t have a Green label, then it’s wholesale and retail costs includes the fee.

    I wouldn’t have a problem with such pollution fees. Perhaps this would change the nature of the “protectionist” argument and anti-global growth fear we hear from some analysts to an argument FOR responsible global citizen.

    What I would object to, though, would be the return of such fee monies back to the developing nations and corporate interests generating such pollution in the first place. No deal. Either meet the import nations environmental standards for production facilities and power generation, or pay the fee.

    Similar fees could be applied to products manufactured by companies abroad not abiding by decent worker standards. That could be Multi-colored label.

    You may have solved this portion of the global problem. Call Davos. Well, they might be less than receptive… Nah, call and write 150 Members of Congress who might support such legislation. Then hold a press conference to hold their feet to the fire. Might be successful. Seriously.

  • Posted by Nick Ng

    Losers deleted my post. China sucks

    [Editor’s note: your opinion does not exactly provide the basis for much a real dialogue; I am pretty tolerant of most opinions, but not high school chants]

  • Posted by Nick Ng

    Yes, I am in highschool, and I am Chinese, but that doesn’t mean I have to like China. They work for too little money and there are too damn many of them. Thank you for not deleting my previous message.