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CiteI downplayed the most recent gathering of the great and good in Washington, arguing that those gathered in DC didn't really commit to the policy changes needed to avoid an another year of widening imbalances so much as reassure each other that they wouldn't make any real changes.
The market seems to have a different view. The dollar fell against most currencies after — take your pick — the G-7 released its communique/ the IMF unveiled its new focus on imbalances/ the FT headline writers decided that something really had changed over the weekend/ the IMF stated the obvious. The dollar would be down even more if Japan hadn't intervened verbally and if Korea hadn't intervened with cold hard cash (see the FT). And no doubt China continued to spend big bucks to avoid joining in the general trend – though China spends big bucks to keep its currency from appreciating against the dollar even when the dollar isn't depreciating against everyone else.
One interesting point: those who think the world should take steps to reduce imbalances generally have downplayed the impact of the IMF's new mandate, and the G-7's communiqué, while those who don't think the world should do much are disappointed that the G-7 and IMF are signalling that they are not totally happy with the world as it is.
Those skeptical that the G-7 communique — and the IMF's new process of multilateral surveillance - signal real change note:
- The US has made it clear it doesn't intend to address is structural revenue shortage, guaranteeing large deficits. Rather, the US Treasury Secretary argued – contrary to much evidence – that fiscal deficits have little to no impact on the current account deficit.
- The Chinese have made it clear that they don't intend to let their currency rise, even though a stronger currency and higher interest rates would be a natural way to help cool what looks to be an overheated economy. 30% investment growth and close to 30% export growth are hard to square with the image of a fragile Chinese economy that cannot manage even a modest change …
- The GCC isn't willing to change its dollar peg (GCC = Gulf Cooperative Council), even though its dollar peg makes even less sense than China's peg. Oil is way up this year, if you haven't noticed. But the purchasing power of the GCC currencies is down, since they all peg to the dollar. If anyone wants to explain why that makes economic sense, be my guest. The argument that countries that sell oil for dollars should peg to the dollar doesn't cut it. The dollar price of oil isn't constant.
- The yen is about as weak as it ever has been in real terms, yet Japan still tries to talk the yen down. Or at least keep it from rising. Incidentally, Korea is by far the most responsible of the big economies in north Asia. It has let the won appreciate in real as well as nominal terms. Korea now has a small current account deficit. It imports oil. And last I checked, Korea's economy was managing just fine.
As Jens Nystedt, Deutsche Bank's new G-10 currency strategists (full disclosure: I worked with Jens at the IMF), observed, the G-7 statement was a lot stronger than the IMFC statement. Yet, setting Japan aside, the countries of the world with big current account surpluses are not members of the G-7. The G-7 remains a lot better at telling others what to do than figuring out what its own members should do.
Yet those betting on an ever more imbalanced world – or perhaps betting on a financially stable world in the face of ongoing imbalances – seem a bit more worried. Not because they think imbalances are anything to worry about – Stephen Jen calls imbalances a natural byproduct of globalization. No matter that globalization started well before the US current account deficit started to get big in 1998, and well before Chinese export growth and investment metasized in 2002-2003. Rather they are worried that efforts to reduce imbalances will trip up the markets.
My sense is that there are some — not a lot, but some — nervous folks out there, folks who are starting wondering if they should take trades that assume an imbalanced world will be a stable world off. Even if betting that the US deficit could rise from 6% to 7% in the course of 2005 paid off big timel, it is risky to bet that nothing will happen that will prevent the US current account deficit – 7% of US GDP in q4 – from rising to 8% of US GDP in q4 2006. It is also risky to bet on continuity when the American electorate is unhappy.
Yet there should be little doubt that the US is on trajectory that will take the deficit toward 8% barring a major slowdown in demand for non-oil imports. Check out the March port data. Or forecast the oil balance with oil at $75. Or calculate the income balance as the interest rate on US external debt rises from 3.75% to 5%. And so on.
Plus, there is small chance that the IMF's new multilateral surveillance process could have an impact.
I would emphasize a small chance. Hu didn't let the RMB breach 8 in the face of pressure from the US president. And if China can tell the US no (in the face of the risk of being branded a manipulator), it can tell the IMF no as well. The same argument applies in reverse as well: if Bush can tell China no will the US ever adjust its fiscal policy (in face of the risk of less Chinese financing), Bush can tell the IMF no as well.
OK, no one says no directly. Bush talks (with no credibility) of reducing the fiscal deficit by 2009. China talks (with decreasing credibility) of its commitment to exchange rate flexibility. But no one does much either. And, as they saying goes, the IMF doesn't have an army. Its influence over countries that don't need its funds is limited, yet the policy changes the IMF (and others) think are needed are not limited. Morris Goldstein is right:
"Process is process. What is the IMF really prepared to say? What pressure is it prepared to put on countries that are not delivering? We don't know."
That said, in some ways it may be easier for China to move in a multilateral context than in a bilateral context – particularly if it can note that the multilateral process is putting pressure on the US as well, and take some pride in the fact that China is treated like the major player in the global economy it so obviously is. So I wouldn't entirely rule out the prospect that the IMF's multilateral surveillance – which presumably involves getting the key players in a room for a lecture – might prompt a some evolution in policy.
Or at least prompt some in the market to worry that there might be some changes, and thus decide to try to get out of the kind of bets that pay off only if imbalances continue to widen before the major countries of the world decide to do something …
Obviously this is in the wrong place, but . . .
Did anyone else notice that Korea’s real year-on-year GDP growth in the first quarter was the fastest in 18 years: 13.2% ?
35.7% of the increase was from construction (+23.8%), 21.9% from private consumption (+5.4%) and only 9.0% from net trade (+11.6%).
Year-ago matters (+2.7% GDP, negative construction), as does deflation, but . . . that much?
.
“Oil is way up this year, if you haven’t noticed. But the purchasing power of the GCC currencies is down, since they all peg to the dollar. If anyone wants to explain why that makes economic sense, be my guest.”
I’ll give it a shot. Perhaps the oil suppliers are concerned about the long term health of their oil business — the possibility of an oil price crash in the future. Perhaps the oil suppliers worry that if oil costs too much in dollar terms, then America is much more likely to quickly find alternatives to oil, and those alternatives would rapidly spread around the world, leaving the oil suppliers with lots of oil but little demand.
OPEC has obviously demonstrated the desire to have some control over the price of oil. Since OPEC is near maximum capacity now, there is not much OPEC control to keep prices down by increasing supply. If their currencies appreciate relative to the dollar, that would give OPEC even less control to keep prices from rising too much.
Or perhaps the oil suppliers are just conservative and do not want to change.
Motivations are difficult!
Is Tanigaki conducting a verbal intervention? Or is he trying to calm markets down?
As quoted in the FT:
“Sadakazu Tanigaki, the Japanese finance minister, repeated Tokyo’s mantra from previous episodes of yen strength that rapid currency moves are ‘undesirable’.
‘I cannot deny there has been some speculation in the wake of discussions at the G7 and I see some rough movements. We need to watch those market movements carefully,’ Mr Tanigaki added.”
When one looks at the texts of his remarks quoted in the Sankei Shimbun and Nihon Keizai Shimbun, his intentions seem somewhat more ambiguous:
“After the G7, the [yen's]movements have been rather rough. We need to pay attention and keep an eye on the situation in the markets.”
and
“The currency exchange level should reflect the economy’s fundamentals. [Currency] Movements resulting from sudden shifts or speculative trading which deviate from those fundamentals are not desirable.”
Now on the very same day, Kaoru Yosano, the Minister of State for Financial Services, when he was asked about the huge drop in the stock markets the day before due to panic about rising petroleum prices and a rising yen, said this:
“The Japanese economy is basically proceeding in a good direction. In the mid-term [at least]the price level of shares will reflect the fundamentals of Japan’s economy.”
“Level” “reflect” “fundamentals” “economy”…
Both ministers were being asked their opinions about sudden movements in the markets. The vocabulary of their responses was almost identical.
Yet no one suggested that Yosano was threatening Japanese government intervention in the stock markets.
References (in Japanese):
http://www.nikkei.co.jp/news/main/20060425AT3S2500925042006.html
http://www.business-i.jp/news/sou-page/news/200604260017a.nwc
i don’t want to take my eye off the ball here
the asian peg
built around the rmb
is the one hurting our local jobsters
but i agree the oil sheiks ought
to reval over nite
but that would spread the wealth so to speak
making all of arabia higher priced
while the sheiks oil profits smaller
the net to them personally ??
i agree with sw
the portable bucks are key
then again who’s saying
the exxons and shells
don’t prefer cheap local buys
if i had to bet
i’d say there is where the lever needs to be slipped
under the trans nat oilers
“pard get em to reval or ….”
who’s to say that
prez bush ???
China: Embrace the Competition
by Axel Merk
http://www.safehaven.com/article-5041.htm
” Competition from China is going to intensify: we better stop whining and embrace it. Times have changed! A low skilled Chinese worker today may produce more consistent quality than a highly skilled Eastern European worker.
The Chinese approach is more scalable and – at the end of the day – may yield superior quality. Also note that a couple hundred thousand of highly qualified engineers are entering the workforce every year in China. Indeed, the Chinese are aware that they cannot compete on cost — investors concerned primarily about cost are moving on to cheaper places such as Vietnam. Instead, China is working feverishly — and successfully — to serve later stages in the value chain.
Ill guided policies have pushed the US economy towards consumption and debt rather than investments. The US is now in such a weak position that no policy maker dares to call for changes that foster savings and investments rather than consumption; such policies may induce a severe recession in the short term. Yet it is precisely the medicine the US needs if it wants to prevent the risk of ever increasing pressure on the dollar as the current account deficit escalates. ”
- Axel Merk
If China moves up the value chain — say into car manufacturing for exports — without allowing the RMB to adjust so that China’s RER better reflects those of other countries that have moved up the value chain, the political system of the world will, in my judgement, reject trade with China. The implied adjustment mechanism is that the world brings its wages (in nominal terms) down to Chinese levels to bring about a real adjustment. and that is not a pleasant process. I am all for China moving up the value-chain; that’s how folks get rich and become consumers (tho it would be nice if Chinese energy efficiency improved in the process, but we in the US can hardly talk). But I would like to see china’s real exchange rate appreciate as well. And right now, judging from Chinn’s graph (which puts China well below comparable countries, tho not outside the formal confidence level for a severe undervaluation) and Frankel’s work and the expanding current account surplus, China has a bit of work to do.
DOR — actually on topic; I was referring to those stats on Korea (tho i didn’t have the details handy) in the post. China take note: real appreciation isn’t always associated with an economic slump! US appreciated in the late 90s during its boom too …
To Brad,
The United States dollar is broadly overvalued against currencies of all major economic blocs in the world, not just the Chinese yuan. The Bush Administration’s ulterior motive for demanding a yuan revaluation is to prevent a massive US currency devaluation against the entire world that would simply destroy the dollar as a global reserve currency. But it is simply unacceptable for the Chinese to accept those economic terms since it would result in a ruinous outsourcing of industry to other lower cost nations especially India and Vietnam.
As Axel Merk states, if Americans do not want to adopt Asian wages in the West, they must compensate by providing incentives, rather than obstacles to invest. They have to think of ourselves as being a couple of steps ahead of the Chinese in the technology value chain; they must defend that position by constantly re-inventing ourselves. There are certain types of jobs that will not survive in America; there are also certain jobs that do not survive in China and have moved to Vietnam.
Regards,
“Oil is way up this year, if you haven’t noticed. But the purchasing power of the GCC currencies is down, since they all peg to the dollar. If anyone wants to explain why that makes economic sense, be my guest.”
Gcs has found the answer once again. It doesn’t make economic sense, but it makes social sense. The big boys on the Arab peninsula want to avoid spreading the wealth around. This is especially necessary if they want to keep control over their many immigrant laborers. (I dunno if things have changed, but 30 years ago in Jeddah, you couldn’t get a Saudi employee even to help move furniture – you had to go out in the street and find a Yemeni) The Saudis especially want to minimize contact of their laboring classes with Western culture, and keeping their income down is one way to do this.
Brad–The only thing the G7 communique did was to depreciate the dollar against the euro and the yen, which would exacerbate rather than mitigate the global imbalances, because the Chinese and oil producers’ currencies are virtually pegged to the depreciating dollar.
The new IMF surveilance process may not materially improve the power and quality of surveilance, since the IMF itself is in a grave financial difficulty, and its staff lacks direction.
Neither the G7 nor the IMF appear to have any power or determination to resolve the growing global imbalances. It is very unfortunate, but we may have to wait until the global imbalances start to explode (or implode?).
Dave Chiang — sorry, you are wrong.
The US dollar has depreciated from grossly overvalued v. the euro in 2001 to a value that is broadly in line with long-term equilibrium. I think it needs to go below the long-term equilibrium as part of the global adjustment, but the dollar is clearly less overvalued against some currencies than others.
The korean won for example has appreciated in real terms significantly against the dollar since its crisis. while the Japanese yen has now depreciated to a point where in real terms it is rather undervalued …
China and the GCC currencies are also more undervalued than other currencies. the GCC b/c their currencies haven’t appreciated in line with the growth in their export revenues (contrast to Canada, South Africa, even Brazil). And China because it depreciated relative to the euro and thus has depreciated in real terms globally, and it hasn’t appreciated against the dollar as one would expect given China’s rapid productivity growth. There is no particularly good economic reason why a country that is growing as fast as China and whose productivity is rising as fast as China has a currency that in real terms is worth less than it was worth five years ago. Chinese exports went from $20b a month to $80b a month — an indication of the increase in the productivity of China’s economy, among other things. but the real value of its currency and thus the real purchasing power of China’s citizens (assuming wages have been constant, which isn’t true — i should probably say the real purchasing power of each RMB of earnings) fell …
do you honestly think it makes sense for many oil exporter and China to have currencies that are worth less in real terms than five years ago, when their primary export (the GCC) is worth more or their productivity (China) is much higher?
HK — add in the Korean won, but otherwise, you are right.
To Brad,
The logic of revaluing the Chinese yuan, or any currency, as a means of balancing trade with the US is flawed. This is particularly true if prices are denominated in the currency of the consumer economy, as the US dollar is. It was ironic that US Treasury Secretary Lawrence Summers in the late 1990s repeatedly lectured Japan not to substitute sound balanced macro-economic policy with exchange rate or interest rate policies because the US did exactly that with the Plaza Accord in 1985 and with its strong dollar policy after the 1997 Asian financial crisis. Robert Mundell, 1999 Nobel laureate in economics, observed while attending a conference in Beijing in 2005 that never before in history has there been a case where international monetary authorities tried to pressure a country with a not-freely-convertible currency to appreciate its currency. He said China should not appreciate or devalue the yuan in the foreseeable future. “Appreciation or floating of the renminbi [RMB] would involve a major change in China’s international monetary policy and have important consequences for growth and stability in China and the stability of Asia,” Mundell said.
With the development of deregulated global financial market, the world financial architecture began to operate under the rules of US dollar hegemony. The growth in the US economy was concentrated mostly in the deregulated financial sector where the US was unquestionably the leader in innovation. The growing capital account surplus made the growing trade deficit benign as the balance of payments problem was transformed into a US debt bubble. The 1997 financial crisis in Asia sent local currencies plummeting, making their Asian goods drastically cheaper. Yet China was the only Asian nation that did not devalue its currency. By 1997, the US trade deficit hit $110 billion, and heading higher. But net capital inflow to the US after July 1997 reached over $100 billion at 7.2% of GDP. The 2004 $666 billion trade deficit was equal to $784 billion in 1997 dollars, more the seven folds what it was in 1997. Surely that geometric increase was more than a foreign exchange problem with China.
Neo-liberals argue that with a stronger currency, the global purchasing power of China’s currency would rise, raising its income in global terms and consumption share, and thus reducing its rate of domestic saving. Yet under current terms of international trade, a higher exchange rate translates directly into a significantly lower domestic wage scale for any economy heavily dependent on export, further reducing domestic consumption.
Regards,
“Ill guided policies have pushed the US economy towards consumption and debt rather than investments”
thus sprak Axel Merk
key point :
is this a call
for an american industrial policy
or just a belower dollar
plus
higher taxes /lower spending
to move the personal liberty nation
towards
a balanced fed budget
and less
pursuit of happiness
by importation
if its only scroogey
number two
then the pain will be
in my estimation for little gain
brad:
” the dollar is clearly less overvalued against some currencies than others”
yes indeed
again johnny one noting
its the oilers and export tigers of the south
that have badly
undervalued currencies
seems too often dollar forex talk
ie
the “you deval….
no you reval” debate
turns into
useless gabble
among the first world’s
major floated currencies
ie
north v north forex
when its
the south side of the planetary markey place
that operates
with chronic grossly undervalued currencies
to this old “money changer”
its obvious
like global climate change
was twenty years ago
or tobacco smoking and lung cancer
in 1955
as in those cases
even if its not
rigorously demonstrable
should we wait around for the day
senior chinn et al arrive
banging at the door
with definitive statistical “signifigance ” ???
evil thought
since all the g7 can do is adjust among themselves
all this lower dollar higher euro talk
means indeed lower asian forex too
so
is this yet another policy
assault
on euro wage workers ????
ie
blast away
at their real wage cut resistence
by further over valuation of the euro ?????
BTW, Paul Krugman calls the Roubini/Setser view (in which we trust) on the deficits the “Wile E. Coyote” analysis. Having read your work, though, I recognize that you do not rule out the possibility of a “soft landing”–given that imbalances are addressed jointly, perhaps in a manner similar to the suasion that happened over the weekend.
Krugman also quotes you on “dark antimatter.” I can’t remember which poster here came up with the term, but I am sure that it originated here. If you want to see what Krugman will say tomorrow, read this blog today!
Shoot–sorry folks, I didn’t make a good link above. This is the right one for the “Wile E. Coyote” analysis.
Following up on GCS and FR, I’ll throw out the following conjectures, and see whether y’all agree:
1) A concerted policy to prevent currency appreciation is always and everywhere a technique whose effect (and usually whose purpose) is to maintain or augment inequality of wealth, both among different classes of private individuals, and between a government and its residents. The primary asset held by the vast majority of people in any country is a local currency wage perpetuity. An appreciating currency in import-accepting economy represents a vast, widely distributed increase in worker wealth, of which phenomena like housing bubbles are mere shadows. When a government actively intervenes to stop a currency appreciation, it captures wealth, via seignorage gains, citizen-subsidized interest rates, and other means, that would otherwise be widely distributed. Beneficiaries in absolute terms are governments and those who control them. Beneficiaries in relative terms are capital owners, who have protectable assets besides wage perpetuities.
2) None of this says whether the prevention of currency appreciation is good or bad. In China’s case, one can make a strong argument that China’s wage earners are willingly making a worthwhile sacrifice for their nation, preserving their nation’s competitive edge as China’s breakneck development lifts all boats. I’m neither making this case nor arguing against it, just saying it’s plausible.
3) I think it’s hard to find other than cynical motivations for oil state pegs. Perhaps the goal is not direct expropriation, merely the maintenance and expansion of existing social inequalities. Financial arguments aside, to the degree Western commentators wish to argue that oil-state internal inequality and injustice are “root causes” of terrorism, Western countries should be pressuring petrostates to abandon their pegs. The fact that these pegs distort US capital markets is icing on the cake, but pretty yummy icing. (It’s worth emphasizing that, unlike China’s case, there is no “national interest” economic case for oil state pegs, unless stimulating US consumption or increasing internal wealth concentration counts as a national interest.)
4) With respect both to China and the oil states, the short term political effect of thwarting appreciation is to undergird existing power and wealth relations. It’s “pro-stability”. Medium-term, one might argue that the pegs contribute to internal tensions and contradictions that may undo some petrostates. In China, unrest tends to be local and related to concrete grievances, while concentration of (especially non-private) wealth and power goes mostly unchallenged. In China’s context, preventing appreciation is clearly “pro-stability”, short and medium term, and is a challenge to those who think economic development will force political reform.
The only good reason for maintaining a dollar peg for oil exporters like Saudi Arabia is that they don’t want to suffer the “Dutch Disease.”
However, a major revaluation of the yuan-renmimbi will also put more serious upward pressure on the dollar price of oil, no matter what the Sa’udi riyal is pegged to or which currency oil is officially priced in. This is part of the dark side of the appreciation that everybody in Washington is calling for, even as they collectively freak out about rising oil and gas prices.
Iasus — Do the Saudis have enough of a non-oil tradables sector for “dutch disease” to be a real concern? (Perhaps the disease was congenital, in their case, but they’re hoping the peg will be a miracle cure?)
GCS — yep, fx is more than just the euro/dollar and a few other g-10 pairs, even those are the liquid markets with lots of action. and in many ways the adjustment of a range of emerging currencies against both the euro and dollar is the key to global adjustment.
I see the Dutch disease argument for Russia, which has an industrial sector that isn’t based on petrochemicals. The Gulf countries don’t have a non-petrochemical industrial sector. So I don’t think they have much to worry about there. I agree with Steve Waldman.
I think they are concerned about a repeat of the 1990s, when low oil prices and rising populations meant rising spending presssures financed by debt and a bit of a spending squeeze. There certainly is a case for building up assets in good times to protect v. bad times. What I question is a policy that now relies almost entirely on asset buffers and doesn’t make any use of exchange rates. The Saudi riyal was almost certainly overvalued when oil was at $15 (meaning even with limited export earnings, saudis had incentives to shop abroad rather than at home), and it is almost certainly undervalued with oil at $70 plus. Letting the riyal move in line with oil (and letting the external purchasing power of the riyal move up and down as export revenues move up or down) is one way to manage oil price volatility — it just is one the Saudis have opted not to use at all. Which means all the volatility either comes from building up assets/ spending down assets (or building up debt/ paying down debt) or moving spending up and down in line with oil … my core thesis is that budgeting would be a lot easier if the riyal denominated salary for Saudi officials was a bit more stable, and what varied was its external purchasing power.
Matthew Higgins/ Thomas Klitgaard deserve credit for the term dark anti-matter. I need to send Dr. Krugman an email.
i might suggest we generalize this
no peg needed for national best interest
to any economy overwhelmingly
a raw commodity exporter
oil gold iron ore timber cotton coffee eggs bacon
fish gem stones ivory tusks
ie
products that are always globally marketable
at some price
good or bad
for such “platonic” archetypal
pure commodity export states
a forex that moves with the world price
or index of prices of its export commodities
makes total sense
now how real states
out there match up to this type
well i’m no longer the rude empiric i once was
but my guess on russia
vs the pur oilers of the gulf
there may be a national mission
to become the next canada x6
ie dreaming of making some world class industrial products too
stuff that climbs
higher up the va pole
(not just stinking
endless tree farms
ore holes
and oil patches )
peg drops might indeed lead to a dutch rub
that kept this dream dead on arrival
so drop the peg okay
but find some other form of protection
some effective
industrial incubation system
prolly it’ll need be
overtly imposed
by ….the state absolute or otherwise
“the political system of the world will, in my judgement, reject trade with China”.
Brad – surely you jest. Name me one time or one country at any time that has rejected trade with a trading partner because that partner moved up the food chain. Everybody loves a bargin. If a better car is sold cheaper from Chnina, EVERYBODY will buy it.
The only way out of this mess is direct action by the U. S. Congress to reduce U. S. exports.
Hans Redeker(BPS Paribas) is quoted in today’s Financial Times. He says the correlation between oil and dollar/euro is 93% since hurricane Katrina.
“do you honestly think it makes sense for many oil exporter and China to have currencies that are worth less in real terms than five years ago, when their primary export (the GCC) is worth more or their productivity (China) is much higher?” (From Brad)
“Make sense” in whose perspective? Not relative to trade surplus or trade deficit – yes, of course. But trade does not control currency value any more. If it did the value of the dollar would have declined much more than it has.
The Chinese have the power to control the level of their currency and they are using this power to gain more power.
More than rehetoric is needed to slow down the Chinese express.
ReformerRay
Again, the idea of China as one big economy is causing problems. What is likely to happen is that the coastal provinces will start to move up the value chain with higher incomes before the interior provinces do.
Also, at this point the system is so interlinked that I doubt it is politically practical for anyone to “reject trade” with China with anything short of a major war. Supply and logistic chains are so distributed that cutting off China would be like cutting off ones arm.
I should have been clearer — reject trade with china was a bit of an overstatement. I do think that auto assembly is different from electronics assembly, and major Chinese inroads into the US market would generate a political reaction v. auto trade (see Japan/ 80s) if china is still intervening to hold down the RMB. But, as always, I could be wrong. The politics, though are likely to be different, for obvious reasons.
That doesn’t contradict Dr. Wang’s point. the electronics supply chain is global. I don’t think, however, the average big 3 auto has a ton of Chinese made parts. At least not yet. So the “rejection” woudl come before the supply chain is fully globalized. If I am way off on this — and auto parts are now largely sourced from China — do tell.
A hypothetical Chinese auto industry likely to be very different than the 1980′s.
In the 1980′s you had labor and management both on the same side against Japanese car imports. If electronics is any guide, it’s likely that the Chinese auto imports to the United States will be structured in a way that non-Chinese auto makers will make a huge amount of money from this. The first Chinese exports to the United States are likely to have a well known US or Japanese brand name on it.
Also, it is very unlikely that this will happen any time in the next five years. It’s also likely that the first Chinese cars will be produced for local consumption or for export to markets like Brazil or Mexico.
The other thing is that there is likely to be surprisingly little resistance to Chinese auto imports from labor. The trend has been to “grandfather” current workers so that they don’t have a reduction in salary, and only cut salaries for new workers.
Good piece on Chinese industry.
jw
bingo
80′s
japanese trans nat invasion
now if it comes
gm and ford plus the japanese and euros
will source from their china plants
the japan then china now parallel
brakes down very big time
since its now also “our”not just “their
trans nats profiting by the trans pacific co prosperity sphere
nice class analysis mighty joe
Dividends is a much more tricky problem for SOE’s. The trouble is that you can go too far in the other direction, and most SOE’s in the world do so, what is the point in a corporation making a profit if the state takes everything?
The other issue is that if the state wants its share of corporate profits to fund education and social services, it can do so via taxes.
joe the problem of retained unventilated earnings
is real where agent principle interests diverge
even trans nats need
the threat of an intervention
if the capital as reflected in stock values
is under performing
if you want to pinch the guys into action
better a level playing field
say some gizmoed up
asset tax
then a dividend that takes more
from those who are earning the most
on their assets
something like an asset tax
puts a fair reeper
to all firms in proportion
to capital use
debt or equity
so much for what i tell
middle econ con cadre
over there anyway
it retains the self financing bias
without reinforcing it
big proviso
soe must be in a functionally competitive
set of market environments
if not
things get very second best very fast
and most markets fail so often
they look worse then second best
at any rate
dividends are not a real world answer
and
as u say
as a revenue source
for unrelated
state expenditures
dividends from soe s
are bad medicine
there’s a ton of reasons
taxes
and borrowing make sense
and
soe dividends don’t
and a tax on soe
earnings is as bad
its just dividends by force
and we’re back to a penalty
on higher performance
Did anyone else miss the point that any auto exports from China are going to be branded Toyota, Mitsubishi, Honda, Daihatsu, VW and GM?
Oh, and Tianjin and First, but not for a decade or so.
At the risk of sounding like a broken record, let me repeat myself once again:
Exports from China are 57% by foreign-invested firms.
.
DOR — I am tempted to say “so what”; what is good for GM or Delphi may not be good for GM’s US work force. The auto trade battle with China won’t be a repeat of the 80s. The firms may sit it out, but organized labor is still something of a force. Not what it was, but not entirely irrelevant. US firms may not ally with US workers … but I am not sure that the firm/ consumer alliance will win either.
As importantly, for global adjustment, in 2008, just as in 1988, Toyota and Honda and a host of others need to be building transplants in the US, not in China. Remember, the US doesn’t come close to paying for its current imports, let alone a signficant increase in its auto imports. Unless you are gonna tell me cheap Chinese assembled cars are gonna substitute for expensive Japanese and German (but not American) assembled cars, directionally, this amounts to another drain on the trade/ transfers balance. and last I checked, a 7% of GDP balance in the trade and transfers account wan’t consistent with a sustainable long-term debt profile.
i don’t honestly see how auto assembly (and auto parts production) can be outsourced to asia and the global balance of payments can still add up. cars ain’t cheap. And the US isn’t exporting a ton of services — if auto imports are rising fast, what set of exports will rise even faster to offset those imports and cut into the existing trade and transfers deficit …
I may lack imagination, but i just don’t see it.
Remember, an increase in US auto production by Japanese firms that replaced Japanese imports played a signficant role in the adjustment process at the end of the 80s. that was how, at a micro level, the macro (yen appreciation) had an impact. What changes this time around? Directionally, something now done offshore needs to come onshore, or some US export needs to really boom (other than Boeing).
True, cars ain’t cheap, and particularly cars made in the OECD. We have to accept, however, that cars made in China will be cheaper that cars imported into the US from OECD factories.
Will that lower cost be enough to reduce the overall bill for auto imports? Maybe (not). Will it help hold down any price increases from OECD factories? You bet.
Question from a long-time expat: do America consumers know / care if their Accord is made in the US or Japan?
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Question from a long-time expat: do America consumers know / care if their Accord is made in the US or Japan?
Hello DOR,
The answer is no.
However Japan is not manufacturing here to make us feel good. They were driven to US manufacturing in the eighties by a stronger yen and weaker dollar. Today Toyota is investing at an amazing rate in North America. Again, they are preparing for the next dollar slide that they know is in the cards.
Now, not only are they protecting themselves in the US market, they are protecting the home market from cheaper US automakers that may want to export to Japan. Instead they can export their own brands if that occurred.