The post-industrial economy?
Buried in a column on iconoclastic (and fashionista) tax policy expert Lee Shephard is this little gem:
"“The whole Midwest was engaged in metal-bashing of some sort back then[when she was growing up],” she said. “Now they make loans instead of cars.”
Michael Pettis would disagree. He thinks the stereotype of that the US economy produces "spread and correlation products" — i.e. debt — rather than real products needs to be revised. He approvingly cites CATO's claim that the value-added in the US manufacturing sector is the world's largest.
Peter Goodman of the Washington Post similarly emphasizes the size of the US manufacturing sector:
"The United States makes more manufactured goods today than at any time in history, as measured by the dollar value of production adjusted for inflation — three times as much as in the mid-1950s, the supposed heyday of American industry. Between 1977 and 2005, the value of American manufacturing swelled from $1.3 trillion to an all-time record $4.5 trillion, according to the Bureau of Economic Analysis.
With less than 5 percent of the world's population, the United States is responsible for almost one-fourth of global manufacturing, a share that has changed little in decades. The United States is the largest manufacturing economy by far. Japan, the only serious rival for that title, has been losing ground. China has been growing but represents only about one-tenth of world manufacturing."
I am a little more skeptical. The US manufacturing sector is bigger today than in the 1950s because the US economy is bigger today than it was then. And since the US has the world's largest economy by a factor of around 3 — and remains remains more than four times larger than China's economy (at market exchange rates) – the US should also have the world's biggest manufacturing sector. It certainly has the world's largest service sector, the world's largest retail market and the world's largest mortgage market.
But I still wouldn't claim the US manufacturing sector is in rude health — even if overall manufacturing output is rising and exports have picked up recently.
Exports are now growing faster than imports for the first time in a long-time. But the US still doesn't export nearly enough goods to pay for its large import bill for imported Asian goods and African, Latin and Middle Eastern oil. And it doesn't export enough services to pay for these imported goods either.
The BEA indicates that the US exported $270b worth of goods in the first quarter, while importing about $470b — for an overall deficit of around $200b (6% of US GDP). $70b of that deficit comes from energy and fuel, but $130b comes from manufactured goods (agriculture is in rough balance).
Some of that is offset by a $25b services surplus. But the service surplus could equally be applied against the roughly $25b transfers deficit. Roughly $15b of that deficit comes from remittances and private transfers, which could be thought of as the external price of importing the services of migrant labor. Net US exports of financial services — $10b — just covered the $6.5b bill for US remittances to Latin America, and fell far short of the United States $35b (quarterly, net) bill for imported automobiles … (data from the BEA)
The Eurozone, by contrast, exports enough goods to pay for its imports. It runs a surplus in both goods and services trade right now. Morgan Stanley reports that the EU — led by the Eurozone — now exports significantly more to both Asia and the oil exporting economies than it exports to the US (hat tip, Econocator). European — and particularly German — capital-goods producers have benefited far more than American capital goods producers from the investment boom in China and the oil exporting economies.
But with a strong euro and strong growth, the broader EU-25 ran a euro 45b goods deficit in q1, offset in part by a euro 15b services surplus for a modest overall deficit. In q4, the goods deficit was euro 25b and the services surplus was euro 20b — the swing into deficit is fairly recent.
The EU's combined economy is now larger than the US economy (in dollar terms), so the EU was treated as a single economic block rather than a confederation and if the EU's manufacturing value-added is equal to US manufacturing value-added as a share of GDP, it would have the world's biggest manufacturing sector in the world.
And my guess is that manufacturing value-added in the EU is larger, relative to EU's GDP, than manufacturing value-added in the US.
Let's go back to that trade deficit. The US runs a 6% goods trade deficit — with a deficit in both manufactured goods an in oil. The EU-25 — even if the q1 deficit is annualized — runs a goods deficit of only around 1.5% of its combined GDP. That suggests a bit more manufacturing value-added. Europe isn't exporting commodities to pay for its imports of Asian goods and Middle Eastern, Russian and North African oil.
I read in the NYTimes book review that the Democratic party hasn't adapted to the post-industrial economy. But unless the US can — over time — find a way to export enough post-industrial goods and services to pay for its "old economy" imports, I am not convinced that the United States post-industrial economy can be sustained in its current form.
True, selling ads linked to search to the entire world is a great business. But so is selling oil that can be pumped out of the ground for $5 for $70. Last I checked, Google's exports didn't cover the US oil import bill.
The (net) sale of debt securities certainly has been far more central to the United States ability to pay for its (net) imports of goods than the (net) sale of services. In the first quarter, the US exported $210b in long-term debt securities to the world v. $240b of goods. That suggests to me that manufacturing of debt for sale to central banks and others really has been a big part of the United States post-industrial economy. The US certainly exports far more debt than goods and services to China.
But just as selling debt to pay for industrial goods imports wasn't necessarily a viable long-term strategy for a pre-industrial economy, I am not sure it will prove to be a viable strategy for a post-industrial economy.
Brad, I wonder how much of the US trade deficit is down to the peculiarities of US tax policy and the relative weakness of the US labour movement.
The US profits data suggest that US companies are doing SOMETHING right, so if it’s not adding value, it must be something else. Could it perhaps be avoiding tax and saving on labour costs through the creation/emphasis on foreign subsdiaries.
If memory serves, somewhere between 30-40% of US imports reflect intrafirm trade, but the data is notoriously dificult to come by. Have you got any sense whether that percentage has changed? Equally interesting would be whether or not US subsidiaries’ expots to third party countries has been increasing substantially as well.
The size of the HIA activity would appear to suggest that tax is a meaningful issue in determining corporate behaviour. As a US taxpayer who hasn’t resided in the US for more than a decade, I do wonder whether or not Uncle Sam shouldn’t extend his reach to majority owned foreign subsidaries of US corporations, and indeed whether or not a new regime won;t attempt to have him do so.
you mean that you think microsoft, pepsi, coke and pfizer shouldn’t be able to take advantage of ireland’s lovely weather (and low taxes). what are you, a modern day communists? Or a dastardly American short the S&P?
I am sure that tax avoidance has an impact on some specific sectors, notably drug manufacture … but i doubt it is the main driver. US “IP” intensive firms are migrating operations to China to take advantage of its favorable tax laws … but no doubt it is something that needs to be examined.
incidentally, what the US data really reveals is that foreign firms in the US are doing something really wrong. Getting lower returns on their operations than they would get investing in treasuries takes some work.
I wonder why they continue ….
(Or I would, if i didn’t suspect that they too preferred to show profits outside the US)
I should have added that the reach of US tax (I think) already covers majority owned foreign subs. The US taxes (in theory) worldwide income, unlike many countries. But taxes on income earned outside the us in low tax jurisdictions can be deferred until the funds are actually repatriated, which leads to the accumulation of offshore cash hoards.
I’m not sure that the U.S.’s trade deficit in goods is an indicator of the strength of its manufacturing industry. No matter how large U.S. manufacturing was, in total or percentage terms, we could still export debt in order to buy *even more* goods from abroad.
But I definitely agree that trade imbalances are a far more important issue for our economy at present than the size or growth of the manufacturing sector. Trade imbalances seem to be much more due to fiscal, monetary, and exchange-rate policies than to real productivity in U.S. manufacturing…right?
Daniel Ikensosn’s article, “Manufacturing thrives despite myth of decline”, states that 55% of US imports go to our industrial sector, and are made up of products and components needed for our domestic manufacturing. If this is accurate, a stronger Chinese currency, or tariffs on Chinese goods, could make US manufactured goods more expensive to produce and, thus, render our exports less competitive.
“”The whole Midwest was engaged in metal-bashing of some sort back then [when she was growing up],” she said. “Now they make loans instead of cars.”
- but remember that the cars in turn had earlier usurped the agricultural economic base . . .
here we have another useful metaphor : the food chain. the loan shufflers and short sellers prey upon the industrial manufacturing economy, who in turn prey upon the agricultural economy, which in turn has its basis in the natural world (soil, rain, sunshine, etc.)
even something as technological as the moon shot is nevertheless based upon astronauts getting fed - that is to say the soil, sun and rain of the midwestern wheatfields.
a couple of ecological rules apply -
1. the food pyramid gets narrower towards the top. there have to be far fewer large predators, than innocent herbivores. fewer innocent herbivores than blades of grass. fewer blades of grass than grains of soil.
2. in spite of the top predators’ impressive size and fierce demeanor - it is they who collapse first in hard winters. the little herbivores can just about manage to get on without them. the opposite is not the case.
Boeing’s “Dreamliner” has few major components built in Anerica. The wings are built in Japan and the undercarriage is built in France, etc. The only major component built in the US is the tail. My question is this: When a Dreamliner is sold to a domestic or foreign airline, is the full $300,000,000 credited to US manufacturing? And if so, where is the myth?
If this is true then why is everything I and others own stamped Not Made in the USA?
There must be some value added in the actual transfer of manufacturing abroad. Or maybe just some funny quantitative juggling brought to you by corporate run think tanks like Cato.
This was probably a work of fiction:
http://www.foreignpolicy.com/story/cms.php?story_id=3905
The trade defect could be the result of certain policies, most of which can be changed, as argued some 8 years ago by Dr. Robert E. Scott.
“The U.S. Trade Deficit: Are We Trading Away Our Future?” THIS TESTIMONY WAS GIVEN BEFORE THE COMMITTEE ON INTERNATIONAL RELATIONS SUBCOMMITTEE ON INTERNATIONAL ECONOMIC POLICY AND TRADE ON JULY 22,1999. http://www.epinet.org/content.cfm/webfeatures_viewpoints_tradetestimony
“55% of US imports go to our industrial sector, and are made up of products and components needed for our domestic manufacturing”
that’s true, but i don’t think it is all that relevant –
a) oil and energy are sometimes counted as industrial supplies (b/c of the way they are classified in the trade data) even though they are consumer goods
b) the north american auto industry is integrated between US/ Canada and Mexico which results in a lot of trade in both finished products and components
c) the Boeing example, which implies the net contribution of boeing’s (large) exports to the US trade balance is smaller than gross US aircraft exports b/c a boeing has a high imported content (conversely, an airbus tends to have a surprisingly large amount of us content, notably in its engines — airbus exports to asia/ middle east are a net positive for the US trade balance)
the key here isn’t that the US imports components — both to produce for the us market and to produce for export. the key here is that the US imports a lot more goods and services than it exports …
is that a sign of over-consumption — i.e. a healthy level of tradables production that has been overwhelmed by us demand? perhaps. but I think us manufacturing value-added (as a % of GDP) is well below that of the eurozone, and i think the EU-25. and i increasingly doubt service exports can offset goods imports — they haven’t grown in line with us commodity imports, and us service imports are increasing. so i did use trade as a proxy for something broader where i lacked data — good cross country data on manufacturing value added (and here i am really interested in tradables value added, i.e. something that captures tradable services) between the us and europe.
how about the neo-agricultural economy
Sept. 3 (Bloomberg) - “Wheat rose to a record in Paris as traders speculated that Russia, the world’s fourth-largest exporter of the grain, may curb shipments… The U.S. is the world’s biggest wheat exporter…” http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aWyiA3O0XhdA
Manufacturing Isn’t What The Government Measures: Numbers Are Inflated By Cost Reductions From Offshore Outsourcing
http://www.manufacturingnews.com/news/07/0416/art1.html
The federal government’s measure of productivity growth of the U.S. manufacturing sector during the past 15 years may be widely overstated due to outsourcing and the shift to offshore production of goods, according to a study from the Upjohn Institute for Employment Research. Productivity measures do not account for outsourcing and offshoring and are, therefore, “misleading,” writes Susan Houseman in a study entitled “Outsourcing, Offshoring and Productivity Measurement in U.S. Manufacturing.”
Manufacturing companies are outsourcing functions and offshoring production because of the inducement of cheaper labor and lower costs. These cost savings are then recorded as productivity improvements in the multifactor productivity calculation.
Productivity improvements from offshoring “may largely measure cost savings, not improvements to output per hour worked by American labor,” she writes. “Productivity trends may be an indicator not of how productive American workers are compared to foreign workers, but rather of how cost uncompetitive they are vis-`-vis foreign labor. Although the productivity numbers may capture some net gains to the American economy from trade, there is no reason to believe that these gains will be broadly shared among workers. The very process of offshoring to cheap foreign labor places downward pressure on many domestic workers’ wages and simultaneously increases measured productivity through cost savings.”
Should Asia nations continue to finance America’s deficits
by Philip Bowring
03 September 2007
George Bush and Ben Bernanke set out to put out the fire by throwing gasoline on it
http://www.asiasentinel.com/index.php?option=com_content&task=view&id=675&Itemid=35
The US economy has avoided a much-needed recession through a level of self-indulgence and hubris that makes 1990s east Asia look positively puritanical. Cheap money drove up house prices and enabled existing homeowners to borrow against the value of their properties, thus sustaining consumer demand. But the suckers who paid for this indulgence were the foreign lenders underwriting the US current account deficit, now running at a stunning US$700 billion a year.
Every effort to sustain house prices through cheap money may in turn sustain consumer demand for a while - but it will also sustain or even add to the current account deficit. The last serious Fed governor, Paul Volcker, has warned often enough that current account deficit of 6 percent cannot be sustained for long, even by a country that thinks the international system allows it free rein to print money and assumes that Asia must save “excessively” to enable an aging America to save very little.
An aside, but an important one.
The “real” value of global production is best expressed as the PPP value; the real utilitarian value of output. The market exchange rate principally represents ignorance and speculation; not that there even is a market determined exchange rate to compare some countries (e.g. China) to the US. At PPP China’s industrial output (including construction) in 2006 was ~4,800b intl. dollars (.481 * 10.17tr.) while the US output was 2,600b intl. dollars (.204 * 13.13tr.). All that worrying about China’s overtaking the US is not too early, but too late.
This may have some shaking their heads, going on and on over the imperfections of PPP, but consider this; China’s production of steel will be around five times the quantity of the US this year. More of US output may be stainless or of some other advanced alloy, but the difference in real value per ton cannot be much higher than two, particularly since the construction steel China produces is so obviously useful in its rapacious urbanization. Yet the value of China’s steel output at “market” exchange rates is nowhere near 2 or 3 fold larger than the value of the US steel industry, as is reasonable. This one weak example is repeated in nearly every sector, and not just in China either.
The theorietical relationships of finance and intl. finance economics are conceptually imperfect because the substance they deal with is imaginary. Real value is not determined by price, only weakly and temporaneously reflected by it. The relationship of money to production is relatively indirect and loose, and as the financial system continues to rapidly expand the imaginary universe of “wealth” it inevitably creates, that linkage will grow looser still. Analysing US production comparatively requires close attention to more basic productive realities, not a perspective from this other world of paper (or electronic) wealth. The US is not loosing; it has lost, as it was destined to. The real story of the “Bretton Woods 2″ era is not the financial balance being performed by China and the US, but the dramatically shifting balance of actual production, which will favor China over the West (as a WHOLE) soon for the first time in 500 years. The particular patterns by which this fact registers itself in the alternate financial reality over the coming generation will be interesting, possibly even detrimental, but ultimately irrelevant. From the PPP perspective, here is what one sees; Asia is converging, rejoining the world, with its masses intact.
Great posy MJG!
Markets are pricing at marginal utility, though I guess what we would like to see in GDP figures is total utility produced.
China was the leading industrial and technological power up until about 1400 AD, they have actually had in the 11th century per capita iron and steel production and technology, urbanizatition levels comparable to 18th century England.
They have de-urbanized, de-industrialized and become a rigid society due to a shift to labor intensive rice production in the middle ages.
China is clearly producing more than the US, but they lack oil and gas, whose utilitarian value is probably the highest of all by far and as US oil consumption per capita is 16 times of that of China it tilts balance of power in the favour of US.
I think interesting things will happen if and when worldwide oil ditribution reorganize. Unfortunately it probably wont happen without a major war or series of wars.
More bubbles one the way until then.
or use a developed labour theory of value and forget about all forms of marginilist theory as these tend to make a price=value identity when in reality, price can vary substantially from value…
no, forget that as it requires relearning economics.
Macro Man, in re. intrafirm ‘trade’ and U.S. imports/exports, this might help:
U.S. Department of Commerce - Washington, D.C. 20230 FOR IMMEDIATE RELEASE 8:30 A.M. EDT THURSDAY, MAY 10, 2007
U.S. GOODS TRADE: Imports & Exports by Related Parties: 2006
The U.S. Census Bureau, U.S. Department of Commerce, announced today that in 2006, related party trade accounted for 40.9 percent ($1,182 billion) of total goods trade. “Related party trade” is trade by U.S. companies with their subsidiaries abroad as well as trade by U.S. subsidiaries of foreign companies with their parent companies. Related party trade accounted for 46.8 percent ($863 billion) of consumption imports and 30.8 percent ($319 billion) of total exports (Figure 1). These percentages are consistent with past U.S. figures. In 2006, U.S. related party trade increased by 11.6 percent ($123 billion) from the previous year while total trade increased by 12.3 percent ($317 billion) from 2005.
http://www.census.gov/foreign-trade/reference/guides/tradestatsinfo.html
“55% of US imports go to our industrial sector, and are made up of products and components needed for our domestic manufacturing.”
If this is accurate, a stronger Chinese currency, or tariffs on Chinese goods, could make US manufactured goods more expensive to produce and, thus, render our exports less competitive.
So a declining dollar will leave us with both the disadvantage of increasing domestic inflation and the disadvantage of less competitive exports.
Seems like we may be overestimating the beneficial impact of an appreciating Yuan on the US economy….
“…Indian outsourcing companies may funnel some Seattle-area technology jobs to India, but with the affluence that creates in India, more and more Indians are flying. That has made India a huge buyer of Boeing aircraft and thus a creator of jobs in the Seattle area, where Boeing does much of its manufacturing…” http://www.nytimes.com/2007/09/04/business/worldbusiness/04outsource.html?_r=1&ref=business&oref=slogin
“…Figures for 2006 show outlays for foreign direct investment in the US to be approximately $175bn, the fourth-highest amount on record. The only three years that surpassed 2006 were 1998, 1999, and 2000, in the middle of the tech bubble. Thomson Financial services estimated that announced deals increased 36% last year. The largest buyers have been the Europeans, probably due to the strength of the euro and the British pound. Last year, almost 70% of FDI originated in Europe, while in the first quarter of 2007, 65% of the $23bn of FDI came from Europe… Preliminary data for the first quarter indicate that manufacturing received almost 70% of the total, with primary and fabricated metals, machinery, and computer and electronic products being the big beneficiaries…” http://www.ft.com/cms/s/0/49afc6f2-5a7e-11dc-9bcd-0000779fd2ac.html
“…China… is also the world’s largest milk importer… Some see the United States as another main source of milk supplies. International prices have now risen above the subsidized price of milk there, making it profitable for American dairies to export their milk. “There’s a real opportunity for the U.S. to export without government support or subsidies,”…” http://www.nytimes.com/2007/09/04/business/worldbusiness/04milk.html?ref=business
re: “Now they make loans instead of cars.”
how about replacing “loans” with education, technology, design, brands (more than just advertising), insurance, investment banking and accounting services - and putting a number on that?
if someone can clearly differentiate between ‘price’ and ‘value’…
“A report by the Tax Justice Network has accused the Big Four of ‘legitimising the use of offshore tax havens and for not taking a strong enough lead in international tax compliance… The… 150-page report says that major international accountancy brands all have offices across nearly all the major offshore tax havens… KPMG works in 41 of these, PwC appears to have a presence in 38, the same number as Ernst & Young, and Deloitte is present in 33 tax havens…”http://www.accountancyage.com/accountancyage/news/2184777/report-accuses-big-four
Stephen Roach had been bearish on US trade for years. He was one of the few voices of warning. Now that things look bearish, he seems to have disappeared. Has anyone heard from him lately, or is it possible that MS has muzzled him? MS bulls like Stephen Jen seem to be getting all the press.
I hope we’re not into a 1989 re-run. Back then 98.5% of MSM anylists were pushing dot.com stock buying. Today, they’re telling us that aside from this housing blip, the US economy is strong. This sounds a lot like, “Aside from that Mrs. Lincoln, how did you like the play?” If it wasn’t for the net, most of us would be suckerpunched. I can only hope that pension fund managers are reading this blog. Stephen Roach, where the hell are you?
Stephen Roach, where the hell are you?
There’s a video of Roach on bloomberg.com this morning.
Black swan, Stephen Roach is the CEO of Morgan Stanley Asia, and no longer chief economist. My sense is that the US economy bears comfortably outnumber the bulls, particularly among risk-takers (in London, at least.)
And it’s difficult for me at least to sense the crisis in US trade, given corporate profitability and the clear improvement in top line, ex petroleum, and real trade. The crisis, insofar as there is one, surely must be in the trade of financial assets of, shall we say, dubious merit.
Thanks for the heads up on the intra-firm data, Guest. Last time I looked as a few months agai, and the data was 3-4 years old….
Thanks for the tip on the Bloomberg/Roach video. Roach is still Roach.
Federal Reserve Blamed for Asset-Price Bubble Inaction
http://www.bloomberg.com/apps/news?pid=20601068&sid=aLsu9feQITDY&refer=economy
Sept. 4 (Bloomberg) — Federal Reserve officials, wrestling with a housing recession that jeopardizes U.S. growth, got an earful from critics at a weekend retreat arguing they should use regulation and interest rates to prevent asset-price bubbles.
Otmar Issing, former chief economist at the European Central Bank, and Stanley Fischer, head of the Bank of Israel, were among guests at the Fed’s summer symposium in Jackson Hole, Wyoming, to challenge the hands-off approach.
The criticism — one academic paper gave the Fed an `F’ for its handling of housing — may spur policy makers to strengthen regulation of lending practices that helped fuel the three-year mortgage boom that’s now unraveling.
Monetary Policy Faulted
By cutting rates to a four-decade low in 2003, the Fed inflated property values, Ed Leamer, head of an economic forecasting group at the University of California at Los Angeles, said at the conference. The ensuing housing slump, the worst since 1991, and the credit-market turmoil that followed, threaten to undo the six-year economic expansion.
Black swan rightly writes :
“Daniel Ikensosn’s article, “Manufacturing thrives despite myth of decline”, states that 55% of US imports go to our industrial sector, and are made up of products and components needed for our domestic manufacturing. If this is accurate, a stronger Chinese currency, or tariffs on Chinese goods, could make US manufactured goods more expensive to produce ”
And oil and energy are rightly industrial supplies when used by the manufacturing sector.
My question is not : if the dollar falls, what happens to US exports ? But rather :
IF the dollar falls, what happens to the value added ?
I bet it will be squeezed like hell.
So far the VA has been boosted by holding patents and manufacturing abroad. When the dollar starts to fall, I bet the VA will start to fall with it. And what will happen to productivity ?
Consider this the US economy is 4 times larger than the chinese one, at current exchange rates. Well how much bigger would it be if the RMB was 40% higher ?
Answer : pretty less. ANd americans are the most productive workers only becaues :
1 the dollar is overvalued
2 they work longer hours
On top of that, once the housing and credit crunch is self evident : how much value has been added by the construction and housing industry recently.
‘China Currency Appreciation Could Boost U.S. Agricultural Exports’ - http://www.ers.usda.gov/publications/WRS0703/
“…Any EU delay over the approval of gene-modified crops made by companies such as Monsanto Co. and declared safe by scientists risks prompting legal challenges from farm exporters such as the U.S., Canada and Argentina… In a case brought by these three countries, the WTO ruled last year that a 1998-2004 EU ban on new gene-altered foods was illegal…” http://www.bloomberg.com/apps/news?pid=20601082&sid=a_Wlyg1.BX_Q&refer=canada
25/02/2004 - “The biggest potential consumer market in the world has flung open the doors to GM foodstuffs. Approving a handful of biotech soybeans and corn from US biotech giant Monsanto, China’s permanent approval - the first ever issued by the country - breaks down a key trade barrier for US companies…” http://www.foodnavigator.com/news/ng.asp?id=50160-china-opens-gm
“China is the fourth largest producer of genetically modified crops in the world…” http://www.agbioforum.org/v7n12/v7n12a13-mccluskey.htm
“AIG subsidiary AIU Insurance Company has been granted approval by the China Insurance Regulatory Commission to establish a wholly owned subsidiary in China…” http://www.insurance-business-review.com/article_news.asp?guid=E5AA01C2-A1C9-4B56-A4E6-B1B4D4F5DD6A
ecoshift –
the US imports very few components from china for re-export, and an increasing share of components from china for US consumption. think chinese auto parts. they go into cars for us consumption, not into cars that the us exports.
the us relies to a degree on japan for say aircraft components, so a stronger yen hurts boeing (but not 1/2 as much as a stronger $), but the notion that a reval of the rmb would undermine the us export machine seems to me to be far fetched.
a reval would be contrast raise the price of some imported goods/ reduce the cost gains from shifting component production for sale to the us market to asia. that’s the point. it also likely would cut into us firms profit margins. those are valid points, much more so than concerns that a reval would damage us (and by us i mean made in us not made by us firms) exports.
if someone out there has an example of a us export sector that relies heavily on cheap chinese components, let me know … and by export sector, i mean something where components are shipped to the us for final assemble/ production and then rexported, not something like the ipod where a range of electronic components mostly from asia are merged with us software, design (tho the design came from a brit based in the us i think) and branding for sale to the world. that is a us export that depends on chinese inputs for its cost edge in third party markets (and for apple’s own us margins), but the export is 100% services
MJG — where did you get the data for industrial shares? Your number for us manufacturing value-added is a lot lower than goodman’s (which seemed high to me, but i didn’t delve into it)? and does both the us and chinese share data include construction?
incidentally, with something like steel you have a point — tis a tradable commodity. but that also tends to mean that it moves across borders and the domestic price is close to the int. price globally. a lot of manufacturing is things like local processed foods and consumption goods that match local tastes, and there you can have big differences. manufacturing value added in the us processed food sector is large i suspect and contributes meaningful to the us total, even if very little of that output realistically is tradable internationally.
“Deere & Co… will continue to benefit from a world-wide farm boom. The Moline, Ill., farm-machinery giant said net income rose 23% for the third quarter ended July 31 and raised its sales and profit forecast for the fiscal year, expecting that results will be boosted by price increases… and the decline of the U.S. dollar against world currencies, which helps to spur sales overseas…” http://online.wsj.com/article/SB118717685586898375.html?mod=googlenews_wsj
“Deere & Company (NYSE: DE) announced today that it has completed its acquisition of the Ningbo Benye Tractor & Automobile Manufacture Co. Ltd. business, located in Ningbo in southern China… Deere expects to leverage Benye’s product range and manufacturing capacity for sales in China and into other Asian, African, and Commonwealth of Independent States markets…” http://www.deere.com/en_US/newsroom/2007/releases/corporate/2007_0827release.html
bsetser: But just as selling debt to pay for industrial goods imports wasn’t necessarily a viable long-term strategy for a pre-industrial economy, I am not sure it will prove to be a viable strategy for a post-industrial economy.
In the long run we are all dead, and one of the problems I have with neo-classical economics is that because there is such a focus on equilibrium, it doesn’t can’t deal with the idea that something might
work even if it won’t last forever.
Gabor: They have de-urbanized, de-industrialized and become a rigid society due to a shift to labor intensive rice production in the middle ages.
I don’t think that China ever became a rigid or de-urbanized society, and most of the recent studies have argued that China was competitive with Europe up until about 1750.
As far as industrialization, it is interesting to note that China has caused a massive deindustrialization of the world. It turns out that it is cheaper to produce textiles using Chinese labor rather than British capital, and this I think has relevance to Chinese economic development in the 21st century as well as the 19th.
The Chinese economy is following in the footsteps of Korea and Japan. As those nations evolved into higher-value added manufacturing, labor intensive textile and toy production migrated to China; so too are today’s textile manufacturers migrating to Vietnam and Cambodia. The Pearl River Delta region is similarly becoming too expensive for low value added, labor intensive manufacturing. Railway and highway transportation bottlenecks into interior Chinese provinces of Guizhou or Gansu are prohibitively costly and more than offset any lower labor expenses. In today’s London FT, France’s Renault and Japan’s Nissan are investing $1.6 billion in an car assembly factory in Africa’s Morocco to built 400,000 vehicle annually. Multinational corporation capital is already shifting to even lower labor cost nations than China. The Chinese are still well behind Western nations in the engineering of advanced technologies. For instance, the Chinese are probably a couple of decades behind in development of a composite Boeing 787 aircraft.
Western grasshoppers and Chinese ants
http://www.atimes.com/atimes/Global_Economy/II05Dj01.html
Everyone is talking about collapse of the US home-price bubble and the danger of recession, but no one is talking about the suckers who financed the bubble, namely the savers of Asia.
Asia will do so no longer. If the United States wants Asian investors to continue to take risk on its shores, it will have to allow them to buy solid US companies, rather than the sort of debt derivatives that blew up this summer.
One exceptional fact accounts for the instability in financial markets during recent weeks: the Chinese and many other Asians save about half their income, while Americans save none of their income at all. Foreigners, mainly Asians, invest US$1 trillion a year in the United States, because their home economies cannot absorb so much investment. The trouble is that Asians have put their savings into the balance sheet of US consumers.
Outside the US, it seems incomprehensible that the average family would save nothing for retirement or against a rainy day. In other words, the typical American family expected the value of its house to keep appreciating at nearly 10% a year indefinitely, eventually turning into a retirement fund. US home prices appreciated by 86% between 1996 and 2006; Americans seemed to think that this would go on forever.
Delusional expectations about home prices justified a trillion dollars of loans to borrowers with poor credit or inadequate income (”subprime” loans), and that is the proximate cause of the bubble. World markets have swooned in response to what the media call a credit crunch - the reluctance of investors to accept the Frankenstein monsters of financial engineering.
If the rout on financial markets turns into economic distress, Western governments will have no one but themselves, and nothing but their own hypocrisy, to blame. After instructing China for years on the benefits of free markets, Washington, Brussels and other Western governments have imposed the strictest sort of mercantilist barriers upon the free movement of capital.
It seems obvious to ask why Asians should have bought exotic debt instruments, rather than buy brick, mortar and machinery in the United States and Europe. The answer is that the US and European governments will not allow them to do so. The specter haunting Western financial markets is not proletarian revolution, but the sovereign funds of China, Singapore, the Persian Gulf states and others, ready to invest hundreds of billions of dollars a year. But the West does not want to allow Asians to control major companies.
The real reason behind the Opium Wars was that the British had nothing of interest to sell to China and China had a lot of produce the British wanted. So the British sold opium with the barrels of guns behind it. In the current time, the real reason behind the US trade imbalance in favor of China is that the US sees everything China wants to buy as being of national security concern. Now, the US just wants to force China to up its currency exchange rate so that it can destroy China’s economy just as it did to Japan. Japan has not fully recovered from the recession due to the currency mess.
Wendy Cai
DC — to the best of my knowledge, Japan/ Korea never ran a 10% of GDP current account surplus, and especially not when investment = close to 50% of GDP, even during their peak growth period. yes there are similarities — the rapid shift from agriculture to industry, the move up the value added chain — but there are also some enormous differences.
Brad S. “if someone out there has an example of a us export sector that relies heavily on cheap chinese components, let me know”
A dumb question… what difference does it make?
My dim recollection of trade theory is that imports of whatever frees resources to produce something in which the domestic economy enjoys a comparative advantage. Whether or not whatevers are constituent parts of somethings isn’t relevant.
Brad,
The US continues to be a major weapons exporter to Korea and Japan, everything from AWACS radar aircraft, F-15 Fighters to Aegis Destroyers, which significantly reduces the US trade imbalance. Most of Japan’s and Korea’s military is significantly made in the USA. Due to U.S. support for Taiwan which really an internal Chinese issue, the United States prohibits military sales and restricts most dual-use civilian exports to China. High-tech industrial sales to the Chinese are highly resticted and prohibited by law (ie. super computers, radiation hardened semiconductors, semiconductor manufacturing equipment, communication satellites, etc). Besides some food products and recycling waste, there is simply very little that America’s Corporations can legally export to the Chinese in accordance to US government regulation.
09.03.07 - “Omnicom Group Inc (NYSE:OMC) said it has bought a controlling interest in China’s Consultech, a healthcare market consulting and marketing communications company…” http://www.forbes.com/markets/feeds/afx/2007/09/03/afx4077175.html
Don’t forget role of Bush’s policies in asset inflation
By Jerome Guillet
Sir, In his article “Why the Federal Reserve has to keep the party going” (August 22), Martin Wolf refused to acknowledge one obvious cause of the current financial crisis: the policies of the Bush administration, carried out with the open support of the Greenspan Fed.
These policies, through tax cuts aimed at the well-off, massive corporate pork made possible by a war of choice, and lax monetary and banking policies, had as their goal making the investment class richer - at the expense of everyone else who participates in the economy.
Stagnant wages, made possible by weakening of corporate regulation and increased access to the Chinese labour pool, were instrumental in making higher profits possible, and lax monetary conditions allowed bubbling financial asset values. Lower taxes made capture of that wealth easier for the rich, and share buybacks (instead of investment) have been among the preferred instruments to get it done. The debt bubble also had the great advantage of making it possible to hide from most Americans that they were not sharing in that wealth capture, by hooking consumers on a habit of corrosive easy debt that substituted for real income increases.
The fact that spending growth was underpinned by debt and not by income is an inevitable result of the neoliberal policies pursued and the main cause of the American deficits, as financed by the rest of the world. With US spending directed at manufacturing based in other countries, their complicity has been easy enough to procure.
The imbalances are totally unsustainable and need to be corrected - in fact, they should have been several years ago. That correction will be painful enough; arguing for yet another round of the bubble merry-go-round, which can only lead to an even worse crisis later, is utterly irresponsible.
http://www.ft.com/cms/s/0/4b06a0b2-59b5-11dc-aef5-0000779fd2ac.html
estragon — true. but we don’t have a market where goods production is determined jsut by comparative advantage either. CB intevention (and the impact on XRs) plays a role. and to assess whether China’s policy of holding its xR down is helping us exports (globally), information about the extent chinese parts go into goods that the us produces for the world market is relevant. A RMB reval helps us goods v. chinese goods in the us and in the world market. it has no impact on us goods in europe. but it would have a marginally negative impact on us goods made with chines parts in say europe.
my general sense tho is that this effect is so small that it isn’t really worth spending much time worrying about.
plus, i suspect the main impact of a move in the rmb will come through various financial channels.
Dave Chiang
Thanks for bringing that up since, if we’re discussing the U.S. mfg. sector, the question arises whether production of means of destruction (quasi-private production capital used in the creation of a wide variety and large quantities of weapons) should or not be included. It’s been some time but my recollection is that this subsector is a fairly large portion of total domestic manufacturing and that, since its products are unproductive, stands in antithetical relation to the U.S. social formation’s REproduction of itself. Given its higher than avg. capital intensity and (over)specialization, it is a relatively ineffective jobs creator and, same time, can be seen as capital misallocation which, perhaps, is necessary in an effort to mitigate tendencies towards overaccumulation. A long winded way to say that some large part of domestic mfg. is and apparently must be devoted to waste.
Further, to speak of deindustrialization is to look at the relation between, at least, services on one hand and manufacturing on the other. More correctly would be an analysis of productive v. unproductive, in which case we would see that there’s been a large build in the latter relative to the former and that this impacts the avg rate of domestic profit.
As interest rates have fallen over the last 20 years, doesn’t an increasing trade deficit naturally follow?
Hypothetical: the US is exporting 100 units, and importing 100 units at time T1, for a trade deficit of zero, when interest rates are 10%. US interest payments on pre-existing external debt total 10 units.
Now, assume interest rates fall to 5%, and as the pre-existing external debt matures it is rolled over. Now, total interest payments are only 5 units.
What to do with that 5 units? If the total debt stock stayed constant, the US would be running a trade surplus of 5 units. The Fed could stockpile foreign reserves, but to what end? Barring coordinated actions by the Fed to increase reserve holdings, decision about what to do with the 5 unit “windfall” will rest with each individual. And each individual might decide that if money is cheaper, why not buy more of it - enough so that interest payments rise back to 10 units!
In such a scenario, external borrowing would double, fueling increasing imports by the same extent. This would necessitate a rise in the annual trade deficit, until the economy reached a new equilibrium, at which point the trade deficit would disappear once again. No harm?
An observation on Inter-Generational Equity:
Is this really a “burden on the children” like deficit critics usually describe? Well, certainly the children and grandchildren will have to repay twice as much debt as the current generation. But if interest rates have fallen for good, then the cost to service that debt won’t be any greater - so it’s not really a new burden. If it is the strength of the current economy (and its policies) that lowers interest rates, then that really is the work of the current generation, and as such the associated surge in borrowing could be seen as a reward for their hard work.
If interest rates have NOT fallen forever, but will in fact rise in the near future (5-10 years), then the surge in borrowing will need to be paid for by this generation (most of it, at least), so there’s not much intergenerational inequity.
It seems the only way intergenerational equity is negatively impacted is if the current generation runs up the bills and then torpedoes the economy sufficiently to leave debt service costs markedly higher for the follow-on generation - and does so in a way that the pain is somehow avoided by the current generation. But I have a hard time seeing how that would happen, given the relative rapidity with which financial causes and effects propagate through the economy. Any such economic torpedo would detonate long before the launching generation could get into an insulated retirement (or die).
“…the People’s Republic of China does not publish details of its arms exports, and last submitted data to the UN Register on Conventional Arms covering its exports in 1996…” http://www.publications.parliament.uk/pa/ld200607/ldhansrd/text/70220w0002.htm
From Fortune Magazine,
Fuzzy Bush math
You’re about to hear that the budget deficit is falling. Don’t believe it, warns Fortune’s Allan Sloan. The deficit is much, much bigger than you think.
“I have a nasty little secret for you, folks. If you use realistic numbers rather than what I call WAAP — Washington Accepted Accounting Principles — the real federal deficit for the current fiscal year is more than 2 1/2 times the stated deficit.
Why am I inflicting this information on you? Because there’s been so much joyous noise about the budget emanating from Washington, despite the subprime mess and market meltdowns (which don’t bode particularly well for future tax collections), that my natural contrarianism makes me feel like bombing the buzz machine.
In addition, so many investors (and speculators) are fleeing to the supposed safe haven of Treasury securities lately that it’s a good time to take a look at what’s really going on with the federal budget.”
http://money.cnn.com/2007/08/31/magazines/fortune/deficit_sloan.fortune/index.htm
Off-topic,
Russ Winter’s comment:
“Another low volume moral hazard gaming fume rally. Obviously every Berserker and his brother knows about 1484 S&P level, Fib retrancements, etc, so they are trying to goose it through synthetically a la “snakes in suits” and squeeze some more shorts. And all led by the same ol same ol global, inflationary suspects.
$31.5 billion in temporary repos expire on Wednesday and Thursday. Will the Fed roll them?
Fed let $2 billion expire today, took no MBS, and only accepted some Treasuries at 5.20% stop out. That’s 73 bps above the 3 month T-bill auction result, so what’s the message? Wile E Coyote?
The commercials don’t appear to be buying all this, biggest short on the Eurodollar in a long, long time.”
Brad
You are absolutely right to be skeptical of the claims of the health of manufacturing. The government figures for the growth of manufacturing output are significantly overstated because they undercount the importance of offshoring. Take a look at my story from a couple of months ago…
http://www.businessweek.com/magazine/content/07_25/b4039001.htm
Hi Twofish,
China did indeed de-urbanized, because urbanization levels went down from 20% in the Song era to 6% in the Manchu era.
According to P. Bairoch net capital accumulation was about -1% in China in the early modern ages.
I think China was a rigid society as the chiefly agricultural elite prohibited exploration and invention (just like in Japan). Just think of how the early 15th century chinese explorations were banned, and how relatively developed musket technology was suppressed in the 17th century.
Dr. Mandel — I feel guilty about not remembering to link to your cover story now! thanks for the comment. i found your discussion of the accounting of the impact of Chinese imports on the furniture industry most illuminating.
If you go to the UN website, you can get a spreadsheet with GDP figures, broken down by category, for all the countries in the world since 1970:
http://unstats.un.org/unsd/snaama/dnllist.asp
Using the spreadsheet based on prices in current U.S. dollars, in 1970 the U.S. manufacturing was 32.84% of the world total. In 2006, U.S. manufacturing was 20.53% of the world total.
If the dollar is currently overvalued versus the rest of the world, the U.S. manufacturing share in reality would be even lower of course.
In 2006 China was 2nd at 13.04% of the world total. If China’s currency should be worth 50% more than it is now, China’s manufacturing sector would be about the same size as the one in the U.S.
Brad Setser,
You wrote “And since the US has the world’s largest economy by a factor of around”.
I substantially disagree. The CIA world factbook gives an estimated 2006 GDP for China of $10.17 trillion. The comparable number for the United States is $13.21 trillion. Given China’s growth rate, China will be number one in roughly 3 years.
The vast scale of China’s economy compared to the US is evident in many dimensions. China is, by far, the largest producer and consumer of basic goods, including coal (2.5X the United States), steel (3-4X the United States), cement (10X the United States), aluminum, copper, nickel, etc. China will become the largest trading nation on earth (measured by exports) either this year or next. Apparently, China became the largest producer of greenhouse gases in 2006.
One very broad statistic is electricity production. China produced around 2,834.4 Terawatt hours in 2006 (BP Review of World Energy). That’s almost exactly 2/3rds of US production. A quick check of the trendlines shows that China will pass the US in power production around 2010-2011.
Note that these datapoints exclude Hong Kong and Tawain.
Looking at all of the numbers, what makes more sense? China’s GDP at 33% of the US level or 77%?
Thank you
Peter Schaeffer
“If China’s currency should be worth 50% more…” - isn’t china’s argument that an appreciation of this scale would be sufficient to collapse its’ economy? if not, why not let the RMB appreciate?
“(measured by exports)” - if we are in a bubble economy, much rests on adjusted production, energy (various sources) and shipping costs and how the markets, real value of and demand for much of this stuff may fare in a correction - and, presumably, ongoing adjustments to any number of distortions (tax breaks, subsidies). so simply looking at a huge lump of ‘old economy’ exports (i.e. tangible stuff that can be measured by tonnage etc.) at current xr’s and world prices can be massively misleading.
does it not matter that much of china’s production is, if i understand, driven by its massive dependency on exports facilitated by tnc branch plants that can relocate and retrofit anywhere in the world? what’s the world strength of chinese brands should the tnc’s pull out?
“…”The private sector has traditionally got money to grow from themselves or their family, because they find it hard to get credit from the banks. It’s a huge opportunity for private-equity firms that can bring in that needed money and also provide value,” the Journal reported, citing Wayne Tsou, head of Carlyle’s growth-capital team in Asia, as saying…” http://www.marketwatch.com/news/story/story.aspx?guid=%7BA79DB320%2DDE63%2D41F3%2D9B9B%2D154D25DD7674%7D&siteid=rss
MJG,
Great post. However, you have made a few mistakes. Your calculation of China’s PPP GDP used $10.17 trillion as a starting point. However, that is already a PPP adjusted value. See the CIA World Factbook for the original data. At market exchange rates China’s GDP is $2.518 trillion. Using your adjustment factor of .481, that gives a GDP for China of $1.21 trillion. This is actually considerably too low compared to the United States.
Earlier I posted the CIA PPP GDP statistics for both China and the United States. China is around 77% of the US which makes overall sense comparing the two countries.
Your reference to the steel industry is interesting. I haven’t seen recent steel production numbers for China, but I will take it as a given that China is producing 5 times as much as the United States. I would also assume that the product mix is close enough to assume parity in value per ton.
Specialty steel (stainless and other) is too small to make much of a difference in either country. See “http://findarticles.com/p/articles/mi_m3MKT/is_7-4_113/ai_n12414392″ (http://findarticles.com/p/articles/mi_m3MKT/is_7-4_113/ai_n12414392) for some specialty steel import and consumption numbers.
Beyond that the technology of modern steel production is quite well standardized. The combination of blast furnaces, basic oxygen, and continuous casting produces an equally high quality product everywhere in the world.
However, in one respect the US steel industry does (probably) yield a greater value added per ton. The US produces most of its own coking coal and iron ore. China imports a greater fraction of its raw materials (I believe). This would tend to yield more incremental value per ton in the US versus China.
It may be true that China’s industrial production is unsustainable with a floating RMB, but what would an end to Chinese intervention do to US long-term interest rates, and hence the real estate and financial industries in the US? There has been a lot of business in the US based on false conjectures.