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Ut-oh …. exports are starting to fall fast

by Brad Setser
November 13, 2008

For the US trade deficit to fall (setting the effect of falling oil prices aside), exports have to grow faster than imports — or imports have to fall faster than exports.

If exports fall faster than imports, the deficit will stay large.

In September, the headline deficit fell because the petrol deficit fell. The petrol deficit has gone from $43 billion In July to $35.6b in August and $32.1b in September as the average price of imported oil fell from $125 a barrel to $108 a barrel. That alone generated a $10 billion improvement in the trade balance — and there is more good news to come. Especially if the US continues to import 5% less oil even after the prices come down.

But the non-petrol goods deficit is now moving in the wrong direction. It increased from $29.3b in June to $35.6b in August. Non-petrol exports fell by $9.9b over the last two months, while non-petrol imports fell by “only” $3.7 billion. The sharp fall in exports shows up clearly in a chart showing “real” non-petrol goods exports and imports. Real data tries to show what is happening if changes in price are taken out of the equation — it is meant to measure the actual quantity of stuff that is traded.

The fall in real goods exports has been steep enough to push the real non-petrol trade deficit back up.

And remember this is the September data. Since then the global outlook has deteriorated — and the dollar has strengthened substantially. That isn’t going to help US exports. The main reason why the US should support more emergency lending to the worlds’ emerging economies is pure self-interest: if their currencies continue to fall, the US isn’t going to be able to rely on exports to help it get out its own domestic troubles.

There is one small bit of hope. The monthly data jumps around a lot. Two months do not a trend make — though in this case, the falloff in exports is almost certainly directionally right. But the pace of the fall could reflect some month-to-month noise. Civil aircraft exports fell from $5.5b in August to $2.2b in September (Boeing strike?). So long as the Gulf and India and China don’t cancel their Boeing orders, civil aircraft exports shouldn’t fall by quite that much. Average monthly aircraft exports this year have been around $4b.

Two other things to watch:

One, will US exports to Latin America hold up. Y/y growth for the first three quarters of 2008 was 37% …

Two, what will happen to the US deficit with China. Y/y exports are up $17% while imports are only up 7%. But given the gap between what the US imports from China and what it exports to China, that works out to $16b in new imports and a little over $8b in new exports, so the bilateral deficit is still growing. However, if both import and export growth turn down, the fact that the US doesn’t sell much to China (absolutely) would start to work in the United States favor.

Or to put it differently, a fall in US demand hurts China more than a fall in Chinese demand hurts the US.

At least directly. Watch out for the rebound. Falling Chinese demand for Brazilian iron ore and soybeans could mean less Brazilian demand for US manufactured goods …

Thanks to Arpana Pandey for help on the graphs.

111 Comments

  • Posted by Howard Richman

    Brad,

    This is exactly what I have been predicting in my comments on your blog. For example on October 27, in response to your piece, “The Soaring Yen,” I wrote:

    “There is no reason to expect that the U.S. trade deficit will fall during the worldwide depression, given that Central Banks around the world will be buying dollars with their currencies and lend them to the United States so that they can steal market share from the United States in the diminishing global markets. This will cause American exports to fall sufficiently to prevent the movement toward trade balance that you expect.”

    By the way, I also predicted the worldwide depression and explained its cause both here on this blog on October 6 ( http://blogs.cfr.org/setser/2008/10/06/the-damage-spreads/ ) and in my own blog on October 7 ( http://tradeandtaxes.blogspot.com/2008/10/worldwide-depression-started-this-week.html ).

    In a commentary with my father and son, I also proposed a solution (Waren Buffett’s Import Certificates to balance trade) which would get the U.S. out of the worldwide depression ( http://www.enterstageright.com/archive/articles/1008/1008buffet.htm ).

    Import Certificates (ICs) would save Detroit, as well as the rest of the American manufacturing sector, without requiring government bailouts. American exporters would get ICs whenever they sold products abroad. Importers would have to buy ICs from American exporters in order to sell foreign products in the United States. Detroit vehicles would be profitable when sold abroad and would be profitable when sold in the United States.

    Howard Richman

  • Posted by fatbrick

    There are still lots of goods US can sell but won’t. One military plane like F22 is about millions of dollars. If you sell 10 of them, you will see instant falling deficit and there will be multiplier effects. How many goods are there on the exprot limitation lists of US government? My hunch is that if you open that end, the imbalance problems can be solved instantly.

    Remember, those high tech stuff can help China improve productivity, where higher productivity leads higher income then higher domestic consumption, at last higher demand for US goods and services…

  • Posted by gomad361

    dear fatbrick,

    How exactly do the F22′s help Chinese productivity? On second thought, I’m pretty sure I don’t want to know the answer to that one.

  • Posted by robert

    If we sell F22s to China they will have to employ thousands of engineers to take it apart and figure out how it works.

  • Posted by Twofish

    bsetser: the US isn’t going to be able to rely on exports to help it get out its own domestic troubles.

    I really don’t see how the US is going to be able to rely on exports at all to help it get out of its domestic problems regardless of what happens.

    I think focusing on the trade deficit is just looking at the wrong place.

  • Posted by DJC

    No one advocates that the US government permit the sale of F-22 Fighter or Nuclear weapons to China, but a broad range of civilian high-tech products remains out-of-bounds for export. The US is a high-labor cost nation and is simply uncompetitive producing textiles and shoes. Every Boeing 737 or 777 airliner requires the personal signature of the United States President to waive high-tech legal restrictions. It’s as if the United States is doing some sort of favor to the Chinese permitting the sales export of Boeing commercial aircraft. Most US and Chinese corporations aren’t willing to go through with the trouble obtaining the US President’s signature or even obtaining a background security check. Among the high-tech industrial products embargoed to China in recent years are satellites, supercomputers, semiconductor chips, transport helicopters, aerospace carbon fiber, semiconductor equipment, 3-axis machine tools, CAD Aircraft design software, etc. What does China SMIC or even Intel do when the company requires lithography equipment for a new Dalian semiconductor fab? The companies buy the stuff from Europe and Japan which don’t impose high-tech export restrictions. At least the CEO of the company doesn’t have to worry about going to prison. Every American Industrial company that loses billions of dollars in export sales due to national security restrictions should send an invoice to the Pentagon for reinbursement of financial losses. Paulson’s $700 billion TARP program, used as a political slush-fund for every conceivable corporate welfare program on the planet, should also be able to kick-in a few billion dollars. :-) LOL.

  • Posted by DJC

    French President Sarkozy Pushes for Abandonment of US Dollar hegemony as World Reserve Currency

    French President Nicolas Sarkozy said on Thursday ahead of the G20 meeting of world leaders:

    “I am leaving tomorrow for Washington to explain that the dollar cannot claim to be the only currency in the world…, that what was true in 1945 can no longer be true today”.

    There have been many previous indications that the dollar would not remain the world’s reserve currency for long. But this is a dramatic statement by a close American ally.

    http://georgewashington2.blogspot.com/2008/11/sarkozy-pushes-for-abandonment-of.html

  • Posted by Michael

    Brad,

    Two things which might have influenced the decline in exports:

    I have heard some anectodal reports about the difficulties to obtain letter of credits due to tightening lending standards of the banks. This might have made exporting in some cases more difficult than before.

    Some of the improvenment of the US export data over last year was coming from the high prices of grain at that time. This effect is coming back now.

  • Posted by bsetser

    i starting hearing about the letter of credit problem in oct — so i am not sure it explains september.

    and the “real” trade data looks at volumes not the dollar value of sales, so it wouldn’t be affected by falling grain prices. no doubt tho that will have a modest impact on the overall numbers.

  • Posted by ReformerRay

    Twofish -

    I agree that exports will not get the U.S. out of its economic problems. Trying to help other countries so that will be ABLE to buy U.S. exports does not result in more U.S. exports sold. We still have to compete.

    I disagree that one should not look to the trade deficit. The trade deficit is central. It is the reason manufacturing production in the U.S. is non-competitive. If manufacturing goods sold in the U.S. are produced overseas, the ability of U.S. manufacturing firms to compete is reduced.

    All the assumptions about international trade should be reexamined, beginning with the notion that protectionism is the only alternative to free trade.

    Just as good or bad regulation exists, good or bad restrictions on imports exist.

  • Posted by Thomas

    Brad,
    Isn’t demand for our exports (partially) a function of our demand for imports? Shouldn’t we thus expect the former to fall (with a lag) in line with the latter?

    Thomas

  • Posted by Thomas

    Fatbrick,
    If we could pull F22s from thin air, then you would be correct. As it stands, we must manufacture them. And to manufacture more of them means we must manufacture less of something else (that old scarcity thing). Thus, we would merely export F22s in place of something else. If not in place, then we would have had to have imported more capital goods, people and inputs to produce the extra output. In which case, extra exports offset by the imports their manufacture creates.

    No such thing as a free lunch. Cheers.

  • Posted by fatbrick

    Well F22 is just an example. There are all kinds of stuff: high speed chips, high end machines, etc…Talking about comparative advantage in the international trade…you cannot blame others for giving up your own advantages…

  • Posted by fatbrick

    Thomas,

    If US is in full employment right now, then what you said makes sense. As we can see, US has extra capacity: how many workers got layoff in the industries related to Boeing in the past few months? Can other places can provide the enough demand for your production ability, given their own problems? And you really cannot sell more to others since you just do not have a significant deficit to others…US already had enough F22 export to Middleast to offset the oil deficit.

  • Posted by lb

    DJC: “but a broad range of civilian high-tech products remains out-of-bounds for export.”
    if you want, there’s some auto companies for sale for cheap. lots of civilian high-tech patents there, many of which have never been utilized for mass production for reasons far beyond their feasibility factor.
    pick 1…you got your choice…

    p.s. you get me those bamboo textile patents, i get you competitively priced high-quality apparel made in the USA ready for export in time for the next presidential election.
    quid pro quo baby.

  • Posted by ReformerRay

    Thomas responds:
    Brad:

    Isn’t demand for our exports (partially) a function of our demand for imports?

    The large trade deficit proves that the two are not closely related.

  • Posted by Gregor

    The dollar.

    the Rate of Change has been too much. In 120 days, it’s destroyed exports.

    the last thing Americans need is increased purchasing power.

    We need a weak and stable dollar, probably about .7500 on the index.

    G

  • Posted by Twofish

    ReformerRay responds: If manufacturing goods sold in the U.S. are produced overseas, the ability of U.S. manufacturing firms to compete is reduced.

    Define US manufacturing firm. Is General Motors a US manufacturing firm? Is Toyota? Is Honda? Also if it generates American jobs, why should I care if the plant is owned by General Motors or Toyota?

    Also, very few manufactured goods are produced in one location any more. If you take a cell phone or car, it’s very difficult to say where it was produced.

    ReformerRay: All the assumptions about international trade should be reexamined, beginning with the notion that protectionism is the only alternative to free trade.

    I dislike very simple labels on things. The way I think is more useful is to start with a specific problem “What should be done with General Motors?” or a specific goal “How do we keep unemployment from hitting 8% next year?” and then figure out what the specific policies are needed to deal with that. We can figure out the marketing labels then.

    It’s not clear to me how import restrictions are going to either turn General Motors into a great company or keep unemployment from hitting 8% next year.

  • Posted by RebelEconomist

    Ah, Howard Richman……checkout my alternative to Buffett’s import certificates scheme.

  • Posted by adiemuso

    cant seem to be able to get my post up…

    read on The Standard, the Chinese is looking at increasing their Gold Reserves and diversifying their asset allocation.

    “The Standard
    The mainland is seriously considering a plan to diversify more of its massive foreign-exchange reserves into gold, a person familiar with the situation told The Standard.
    Beijing is considering changing its asset allocations during the financial tsunami in order to build up gold reserves “in a big way,” the source said.
    China’s fears about the long-term viability of parking most of its reserves in US government bonds were triggered by Treasury Secretary Henry Paulson’s US$700 billion (HK$5.46 trillion) bailout plan, which may make the US budget deficit balloon to well over US$1 trillion this fiscal year.”

    “The United States holds 8,133.5 tonnes of gold reserves valued at US$188.23 billion. China holds gold reserves of just 600 tonnes, worth only US$13.89 billion.
    Beijing’s reserves could easily go up to 3,000 to 4,000 tonnes, Tanrich Futures senior vice president Colleen Chow Yin-shan said.”

    “Until now, the United States has had little choice but to issue massive amounts of debt to fund its deficits, and China has had little choice but to purchase it, as there are not many markets deep enough to absorb the mainland’s US$30 billion to US$40 billion in monthly capital inflows.
    Government officials involved in the management of China’s reserves are beginning to see gold as an attractive place to park some of these funds. They see it as a real, tangible asset that will not lose its value over time – in stark contrast to the greenback, which is becoming more disconnected from economic realities as more bills are printed.”

  • Posted by Rien Huizer

    I would like to see a little more detail and much more time. It is becoming more and more difficult to interpret trade data, as a result of globalization. Much is intercompany trade and may de influenced by tax consideration and so on. On top of that we have had enormous commodity price and currency movements, that can influence flows. And then, how much of the current imports and exports are highly price sensitive, have domestic substitutes and are subject to market share considerations (see the miraculous resiliency of Japanese exports in the 1980s). What is the role of the credit malfunction. What is happening to order books. What is happening to the moving of production to China, etc

  • Posted by Rien Huizer

    I should have added: musings of the incoming President when reading his daily fix of Brad’s

  • Posted by ReformerRay

    Twofish and I look at trade from a very different perspective.

    Toyota is not a U.S. manufacturing firm because the accounting scheme used by Toyota is controlled by the overseas owner. No one outside of Toyota knows how the profits produced by sales of Toyota cars produced in the U.S. are described and what that does for the tax situation of Toyota in the U.S.

    I see U.S. manufacturing firms as those whose interests are aligned with the U.S.

    International trade is the new battleground. Other nations are whipping the U.S. because our policy, our population and our leadership does not see it as a battle. Instead, we see trade through the eyes of Adam Smith, who viewed trade and trade policy as a way to extend the power of Great Britian throughout the world because of the manufacturing prowess of England. The nation that has the most effective manufacturing system in the world should support free trade. All other nations should oppose free trade.

  • Posted by ReformerRay

    More on Trade

    Jobs are important. Taxes are important. The Net International Investment Position of the U.S. is important.

    Getting trade right is a long term issue. We have endured 31 years of a goods trade deficit in the U.S. The problems we face today were caused or at least supported by the lack of import restrictions on goods coming into the U.S.

    General Motors has no right to survive, in my opinion, just because it was a powerful firm at one time. In my ideal world, U.S. trade policy would aim at equal trade – imports and exports equal – but competition should determine which firms producing products in the U.S. would succeed in selling overseas.

    U.S. policy would control imports because that is the only part of the exchange we can control. That would mean less international trade and less consumption of goods in the U.S. It would result in a balanced economy that does not depended upon the financial sector to produce profits.

  • Posted by ReformerRay

    One more point.

    Imports must be limited by some scheme that does not discriminate among products.

    Import certificates, as advocated by Warren Buffet has that merit.

    A better import restriction scheme would reduce, but not eliminate, imports coming from the 5 nations that are responsible for 60% of the U.S. trade deficit in 2005 and 2006. Tariffs would be applied to ALL products that are produced in those 5 countries. Making the shift to equal trade should be strung out over many months. The level of tariffs should increase at stated intervals and at stated amounts announced in advance.

    All imports from other nations would arrive duty free.

    Imports can be reduced gradually and carefully, if that is a national objective.

  • Posted by Howard Richman

    Reformer Ray,

    I agree with you wholeheartedly in your posting just above. Indeed, as you write: “In my ideal world, U.S. trade policy would aim at equal trade – imports and exports equal – but competition should determine which firms producing products in the U.S. would succeed in selling overseas.”

    You then go on to say something that is not completely true: “U.S. policy would control imports because that is the only part of the exchange we can control.”

    The only thing that is wrong with that statement is that Import Certificate (IC) plans to balance trade, as we discuss in our book Trading Away Our Future ( http://www.idealtaxes.com ) actually do increase US exports at the same time that they reduce U.S. imports.

    For example, Warren Buffett’s plan ( http://money.cnn.com/magazines/fortune/fortune_archive/2003/11/10/352872/index.htm ) distributes the ICs to exporters in proportion to the value of their exports. The exporters then sell them to importers, thus making exports more profitable.

    In our book, Trading Away Our Future we suggest an alternative IC plan to Buffett’s plan. Ours complies completely with WTO rules because it does not involve export subsidies. The Import Certificates are auctioned by the U.S. Treasury and targeted toward countries with whom the United States has a trade deficit. They tell the country that is targeted that if they want to export to the United States, they have to import from the United States.

    In both cases, Import Certificates increase exports while at the same time reducing imports.

    Howard Richman
    http://www.tradeandtaxes.blogspot.com

  • Posted by ReformerRay

    Rebel Economist has an alternative to Buffetts Import Certificates.

    “obvious solution to America’s problem of unwelcome persistent trade deficits with countries which restrict capital inflows is to simply limit the amount of dollar assets that their governments and their agents are allowed to own.”

    Cannot be done. China demands that the imports sent to the U.S. be paid for with dollars. The large trade deficit with China creates the capital reserves in China of dollars.

    Do not accept the notion that financial flows control the level of the trade deficit. Causation runs in the other direction. Who will deny that imports are paid for with dollars and that a trade deficit requires more dollars going overseas than sent back to the U.S. to pay for our exports?

  • Posted by Howard Richman

    Rebel Economist,

    I did check out your alternative to Buffett’s Import Certificates. I like it a lot. It has some problems, but I think those problems are addressable.

    Import Certificates, however, work much more quickly and much more assuredly. They could be used to instantly balance trade.

    Howard

  • Posted by anon

    “Cannot be done. China demands that the imports sent to the U.S. be paid for with dollars. The large trade deficit with China creates the capital reserves in China of dollars.

    Do not accept the notion that financial flows control the level of the trade deficit. Causation runs in the other direction. Who will deny that imports are paid for with dollars and that a trade deficit requires more dollars going overseas than sent back to the U.S. to pay for our exports?”

    Absolutely correct.

  • Posted by ReformerRay

    Howard Richman and I have the same objective – to reduce the U.S. trade deficit, but we have quite different ideas as to how to get there.

    Import certificates have several demerits.
    1. They do not discriminate among countries, as Buffett described them. Perhaps you can modify his scheme to do so but my scheme goes more directly to the reality that the U.S. does not wish to reduce imports from nations that trade equally with the U.S.
    2. Problems of administration and control. Smuggling must be resisted. Fake certificates must be excluded. Tariffs can be admininstered by the Customs Service without creating a new system. Tariffs also provide new money which can be used to deter smuggling.
    3. Tariffs make it much easier to go slow in restricting imports to give time for investors to relocate production facilities in advance of changes in tariffs.
    4. A schedule of tariff increases provides certainity. The cost of import certificates will vary over time and creates uncertainity as to the cost structure in the future. Very bad for planning location of future production facilities.

  • Posted by ReformerRay

    I forget things.

    5. Import certificates do not encourage new firms to sell overseas that do not now sell overseas. Import certificates provide additional revenue to existing firms, thereby putting new firms at a disadvantage. We want to encourage new firms to enter the overseas market.

  • Posted by Howard Richman

    Reformer Ray,

    You make many thoughtful points, but I think that each one has an answer. Let me try to address your concerns one by one:

    1. Import Certificates (ICs) could easily be targeted to specific countries. Exports to a specific country could permit the same amount of imports from the country.

    2. Smuggling can indeed be a problem, but that is true of tariffs. The ICs would be handled by the same people who would handle tariffs: the US Treasury and its Customs Service.

    3. ICs can be phased in. At first, an IC created by $1 of exports could allow $1.50 of imports, then later $1.40 of imports, and so on.

    4. Exporters and importers would handle the new uncertainty just as they already handle the uncertainty caused by variable exchange rates.

    5. New firms would enter the market. In fact, many foreign companies would locate new factories in the U.S. in order to take advantage of the ICs.

    The key difference between ICs and tariffs is that Import Certificates balance trade while Tariffs lead to Counter-Tariffs. There is no counter to Import Certificates.

    Howard

  • Posted by ReformerRay

    Tariffs do not lead to counter tariffs if the tariffs imposed by the U.S. are limited to nations that have an export surplus with the U.S.

    What rationale would China use to impose a counter tariff on the U.S.? That we are unfair in seeking equal trade? That we have no right to adopt equal trade as a goal?

    First, the goal of equal trade is articulated and defended as appropriate for all nations, not just the U.S.

    The U.S. would have the moral high ground in this discussion.

    As a practical matter, the last time I looked, China had exports to the U.S. something like 5 times as large as the imports they accept from the U.S. If both countries ceased trade, the U.S. would be much better off. We can more easily survive without exports to China than they can survive without exports to us.

    Finally, import certificates can be used by other nations, just like tariffs.

    Do not confuse tariffs applied to nations’ production with protectionism, which applies tariffs to specific products and does not discriminate among producing nations. Protectionism makes everybody mad, whereas tariffs by country makes 5 nations mad.

  • Posted by Howard Richman

    ReformerRay,

    Import Certificates cannot be fought with Import Certificates. The country with the trade deficit is always the winner.

    Example: Let’s take a situation where United States imposes Import Certificates on Chinese goods so that every $1 of exports to China allows $1 imports from China. Now, let’s say that China decides to respond by keeping out US imports. Every time they reduce their imports from us, they reduce their exports to us.

    Howard

  • Posted by Twofish

    ReformerRay: International trade is the new battleground. Other nations are whipping the U.S. because our policy, our population and our leadership does not see it as a battle.

    I think you are stuck in the 1980′s and are just ignoring demographics and economics is changing the United States. As a Chinese-American, I simply cannot see China and the United States as “us” and “them” and there are a large number of Americans who have these sorts of mixed identities, and people with mixed identities found Obama very attractive because he is the ultimately embodiment of the “global American.” By contrast when Palin starts talking about “real Americans” then I get a distinct feeling that I’m not what she thinks of as a “real American.” The more McCain made an issue of Obama’s “foreignness” the more attractive he was. The reality of America is that if you talk about “real American jobs” going over to China, India and Mexico as if this was some kind of war, you aren’t going to get too many Chinese-American, Indian-American or Mexican-American votes, and it makes me feel good that now “we” are in the majority and can elect a President that reflects “our” views.

    It is simply impossible for me to view international trade as a battle ground between nations in which people and companies have to “choose sides” and like it or not, I think more and more Americans are in the same position I am. Part of the reason I voted for Obama is so that I could stop apologizing for who I am, and much of the reason I like working in multi-national corporations is that people just don’t care what “side” you are on, as long as you are on the side of making money.

    Also I think you are ignoring economic reality. It is not the situation that one company will make product in one country and send it over to another. Today, any sort of manufacturing depends on multi-national supply and logistic chains, and these chains are far too deep to uproot without very serious economic damage.

    Finally, I think you are ignoring political reality. People don’t care about long term trade policy. They care right now about short term, “am I going to have a job two months from now” and the spectre of job losses unites Wall Street investment bankers and Midwest auto workers. People don’t are what plans you have for five years from now, they want action *NOW*.

    On 1/20/2009, the clock starts ticking. Obama has maybe a year to turn the American economy around before you start hitting 2010 midterm elections. Anything that needs to get passed needs to get passed quickly, and that means that there is no time or energy for any sort of floor fight. If you think you can get Congressional votes for some form of import certificates very quickly, then there is something to discuss, but otherwise, this is just an academic discussion that is disconnected from reality. Getting something passed legislatively means going through district by district, person by person, trying to figure out what can get passed and what can’t, making deals and twisting arms, and utopian “all or nothing” schemes really don’t work very will in this process.

    ReformerRay: General Motors has no right to survive, in my opinion, just because it was a powerful firm at one time. In my ideal world, U.S. trade policy would aim at equal trade – imports and exports equal – but competition should determine which firms producing products in the U.S. would succeed in selling overseas.

    Ideal worlds are pointless for real world politics. Also, it’s not a matter of right. General Motors is bleeding money, and there are going to be a very crucial set of decisions in the next few months (or maybe even weeks) about what the government should do or shouldn’t do. Any action is going to have a lot of big ramifications and right now, the critical issues are what are the possible options, and what are the likely consequences of those options, and that means going over details.

    One thing that I like about politics and economics is that in order to get things done, you can’t think at too abstract a level. You have to go and get the details. To figure out what to do with General Motors, you have to pull up balance sheets, union contracts, marketing reports, case studies, and go line by line, number by number to see what you can do and what you can’t. With politics, it’s the same thing. You have to go through person by person and understand what they want, what they don’t want, and try to come up with something that gets them to do what you want them to do.

  • Posted by adiemuso

    Twofish, “One thing that I like about politics and economics is that in order to get things done, you can’t think at too abstract a level. You have to go and get the details.”

    i have to disagree. politics and economics thrive on abstract, radical, nonconventional thinking and ways.

    extraordinary times reuire extraordinary efforts.

    going line by line sounds too tedious.

  • Posted by Ben

    Long time lurker. Just had to say, TwoFish that was a great post. Summed up what I’ve always found unique and exciting about politics and economics. If you look at the ‘Great’ presidents, like FDR, TeddyR, Abe – they operate in just the way you describe, issue by issue, person by person, at a low level of abstraction. That would be in contrast to the Stalins, Maos, Mugabes, perhaps even Chavezes of the world who build radical rhetorical and ideological castles only to have them quickly come crashing down.

  • Posted by RebelEconomist

    Howard, thanks for your comments. If you let me know what the problems with Reserves Control are, I will endeavour to address them – I know more about foreign exchange reserves than about trade finance, so that is the idea that I would be best placed to develop. As someone who is generally in favour of free markets, what I like most about Reserves Control is that it specifically targets the intervention that is considered to be causing a problem.

    That said, I must reiterate that I see even this protectionist measure as second best. I urge (nay, beg) anyone thinking along protectionist lines to study the British experience of the 1960s and 70s. Protecting British industry simply allowed it to get away with producing junk and not reforming working practices, and largely finished off British-owned large-scale manufacturing.

    Reformer Ray, trade and financial flows are jointly determined – you can’t have one without the other. As you say, imports are paid for with dollars, and the dollar claims – a claim on a bank in most cases, but even a dollar bill is effectively a claim on the US state – immediately represent capital inflows. By the way, I doubt that the rest of the world would agree with your view that the US occupies the moral high ground in trade matters.

  • Posted by a

    “Much of the reason I like working in multi-national corporations is that people just don’t care what “side” you are on, as long as you are on the side of making money. ”

    Yes, well it’s the people on Wall Street who were only interested in making money who got us into our present doo-doo.

  • Posted by Howard Richman

    Twofish,

    The Chinese have it in their hands to solve the world’s economic problem. All they need to do is stop practicing mercantilism. In an article in the Canadian Financial Post, Jacqueline Thorpe writes:

    “Allowing the Chinese currency to appreciate would make imports into China cheaper, thereby fostering domestic consumption; a domestic market of one billion Chinese consumers is just the tonic the rest of the world could use right now.”

    Howard

  • Posted by satish

    korean won having fallen from 900 to 1400, global commodity prices falling, you should see more korean cars and products everywhere.
    gm will have to cease prodution anyway if dollar remains strong . let big 3 go bankrupt.

  • Posted by Howard Richman

    Twofish wrote:

    On 1/20/2009, the clock starts ticking. Obama has maybe a year to turn the American economy around before you start hitting 2010 midterm elections. Anything that needs to get passed needs to get passed quickly, and that means that there is no time or energy for any sort of floor fight. If you think you can get Congressional votes for some form of import certificates very quickly, then there is something to discuss, but otherwise, this is just an academic discussion that is disconnected from reality.”

    There are only two alternatives that would save the Obama presidency:

    1. A spontaneous change in China’s policy. But China is doing exactly the opposite right now. They have stopped the RMB’s appreciation vs. the dollar and they are increasing their export subsidies.

    2. Import Certificates to balance trade and immediately get the U.S. out of the recession while saving the U.S. manufacturing sector.

    Obama will have a Democratic Congress and a mandate for change. He could get Import Certificates passed easily, if he were to decide to do so. Unfortunately, his advisors are not even presenting him with that option.

    Howard

  • Posted by ReformerRay

    Twofish provides an excellent post. I want to say first that Chinese-Americans who have come to this county to work and make money have contributed greatly to the qualiity of life available for all citizens of the U.S. I am pleased that he is confident enough of a good reception to be willing to lay it out as he has done. One of my friends once said, years ago, that he did not fear the growth of China because our Chinese would beat the Asian Chinese.

    It is true that many people no longer think that national boundaries matter.

    National boundaries matter greatly to me. My grandchildren’s opportunities in life will be largely determined by the viability of the U.S. production system (this is where I agree with Adam Smith – the wealth of a nation depends ultimately upon the size and value of the goods and services produced by the domestic economy). They are not leaving this country.

    Twofish is correct when he says that this nation is interested only in the short run – what do we do next. That attitude, along with the view that the only thing important is to make money for oneself, is the reason we are in our present doo-do.

    I see no good answer to our immediate problems. House prices must continue to desend to that level that consumers can afford to pay the monthly payments.

    I have been criticizing free trade ideology for years, to no effect. I am not going to change my song just because the chickens are coming home to roost.

    Some day the current mistakes will cease to be made (after Bush leaves office). Obama will undoubtably make some mistakes of his own. His economic advisor believes in free trade. If Obama continues to trust him rather than Warren Buffett, he will continue to support free trade. Sooner or later, the voting public will realize that they must defend the long term viability of the domestic economy and will reverse the economists ideology.

    I have been addressing my remarks to economists because I believe them to be able to transend the short term perspective of the rest of the population. My comments will fall on deaf ears unless I can persuade some of them to go back and read the sections of the Wealth of Nations where Adam Smith tries to defend his assertion that unbalanced trade is not harmful to a nation. You will find that discussion unpersuasive. Free trade is alive and well among economists because they have not re-examined the foundations of their faith.

  • Posted by London Banker

    @ Brad

    I written a blogpost on the collapse of trade finance. This strikes me as the clearest example yet of the contagion of dollar illiquidity to the real economy globally.

    A lot of global trade is transacted and financed in dollars. With the Fed discouraging international dollar credit (especially by raising the interest rate on reserves to the Fed Funds rate), and the interbank markets wary, and commodity prices collapsing, trade finance has taken multiple direct hits. The Baltic Dry Index of shipping costs has fallen 93 percent this year.

    http://londonbanker.blogspot.com/2008/11/systemic-risk-contagion-and-trade.html

  • Posted by Howard Richman

    Reformer Ray writes:

    I have been addressing my remarks to economists… My comments will fall on deaf ears unless I can persuade some of them to go back and read the sections of the Wealth of Nations where Adam Smith tries to defend his assertion that unbalanced trade is not harmful to a nation. You will find that discussion unpersuasive. Free trade is alive and well among economists because they have not re-examined the foundations of their faith.

    I couldn’t agree more! When illustrating comparative advantage, economists always assume that trade is in balance. They assume that each country gives up a bundle of goods it can produce more efficiently for a bundle of goods the other country produces more efficiently. They never consider the possibilty that trade could be kept imbalanced on purpose by a mercantilist country.

    How long did it take economists during the Great Depression to discover that it was necessary to raise the Fed to maintain a growing money supply?

    How long will it take economists during this depression to discover that it is necessary for a country to insist on balanced trade?

  • Posted by ReformerRay

    I my math holds up, I would like to address three issues from previous posts.

    1. Causation – Causation flows only from trade to financial results. There is no causation flow from financial results to the size of the trade deficit (except indirectly via change in the value of the dollar – and that influence is minor in the long run – goods trade deficit has existed for 31 years through ups and downs of the value of the dollar)
    2. Ideals – Ideals guide policy. The free trade ideal has controlled U.S. trade policy ever since the U.S. found it advantageous to the U.S. in the period 1947 – 1976. When conditions changed and the U.S. was no longer the most efficient manufacturing producer in the world, the policy did not change, for many reasons, including the ideological fixation of economists. Equal trade as an ideal is much more appealing because it insures that all participants in trade will benefit from participation in trade and the larger the trade the more all participants benefit.
    3. Protectionism. Classical protectionism (restrictions on imports to protect favored domestic producers) does reduce competition and is undesirable for that and other reasons. As outlined above, it is possible to reduce imports by passing laws incresing tariffs on imports from a few countries. This action retains sufficient competition by accepting imports from all the other countries in the world – plus, tariffs do not eliminate imports from the selected countries. Germany retained a trade surplus with the U.S. during the periods when the Euro was increasing in value at a rapid rate.

  • Posted by Twofish

    Richman: There are only two alternatives that would save the Obama presidency.

    There are always more than two alternatives. In politics you have to deal with people that will disagree with you, and you will never get exactly what you want.

    Richman: Obama will have a Democratic Congress and a mandate for change. He could get Import Certificates passed easily, if he were to decide to do so.

    Change means different things to different people, and I voted for Obama specifically because I believed that he would follow Clinton-Rubin policies on trade, and I’m not the only one that did this. If that’s not true, then he is going to have a lot of problems because lots of other people happen to agree with me, and without our support he isn’t going to be able to get anything done.

    If you look at who elected Obama, the coalition is very much pro-free trade. You have Wall Street investment bankers, Silicon valley programmers, Walmart workers, longshoremen, and teamsters. The groups that are not pro-free trade are going to be satisfied with targeted tariffs designed to specifically benefit their industries.

    If he starts restricting imports, then he loses most of his support and if the Republicans take advantage of this (which they will), they will make 2010 a repeat of 1994.

    Obama is not doing to be interested in import certificates because it probably is obvious to him that it is political suicide for him to support anything like that.

  • Posted by Twofish

    ReformerRay responds: Ideals guide policy.

    Self-interest guides policy. I’m going to fight *HARD* against any efforts to restrict imports and trade because my job depends on having unrestricted imports and trade, and I’m not the only one in that situation. The reality of the economy in 2008 is that more people have jobs that depend on unrestricted imports than would benefit if those imports were restricted.

    2008 is not 1983. Politicians aren’t able to tap into resentful and angry laid-off auto workers mad at Japanese imports. They are able to tap into resentful and angry laid-off investment bankers and real estate brokers, and how import restrictions are going to help a real estate broker find a new job in the next year is something that someone has to explain to me.

    You can turn ideals into self-interest, but that’s a process that takes years. Any new ideal or principle is not going to be ready for prime time before 2012 at the earliest. The ideals and ideas that Obama’s people are working with were developed by the Democratic Leadership Council in the late 1980′s and early-1990′s.

  • Posted by ReformerRay

    Twofish is an honest man. Of course, self interest plays a role in every one’s position. But the most effective policy analysts always say they are acting in the public interest. If you cannot defend your self interest by saying it is in the public interest, you are not going to get much support. The people that are hurting because of lack of import restrictions are much more numerous that those that benefit from it.

    Economists as a profession are supposed to be able to tell us what would benefit the U.S. economy in the long run and in the short run, recognizing that any change will discomfort some and encourage others.

  • Posted by ReformerRay

    Obama must get the votes of the majority in 2012. If the manufacturing sector is still in as much trouble in 2011 as it is today, he is not going to be reelected.

    Twofish is right about the pressure groups that elected Obama. The Economist decided he was a supporter of free trade because of this chief economic advisor’s history. Obama’s rhetoric during the Ohio primary was discounted. That is a mistake. He identifies with people who have been fired from jobs because the U.S. economoy is in trouble. He just hasn’t figured out what to do yet.

    I think he doesn’t understand international trade and he is afraid to go against the strong concensus provided by pro-free trade economists. I was hartened to read that he greatly admires Warren Buffett and he speaks with him frequently. The struggle for Obama’s soul as regards free trade is very much up in the air. If he takes Buffett’s advice over the academic economists, he will move in the direction of equal trade.

  • Posted by ReformerRay

    correction “The Economist magazine decided”

  • Posted by DJC

    Go for the Gold Beijing… :-)

    China PBoC plan to increase Gold Reserves
    Friday, November 14, 2008

    http://www.thestandard.com.hk/news_detail.asp?pp_cat=30&art_id=74335&sid=21457716&con_type=1

    The China PBoC is seriously considering a plan to diversify more of its massive foreign-exchange reserves into gold, a person familiar with the situation told The Standard.

    Beijing is considering changing its asset allocations during the financial tsunami in order to build up gold reserves “in a big way,” the source said.

  • Posted by ReformerRay

    For years I have been seeking a forum where the merits and demerits of equal trade versus free trade can be argued.

    This is not yet the ideal place for such a forum because only 3 people are now engaged.
    This website is not primarily interested in the subject I am interested in. However, I do appreciate the exchange that has taken place.

  • Posted by locococo

    See, equal the trade is all right in itslef, dandy and fine and what s wanted in fact.

    Settling the world away isn t.

    you have had warnings about that, right here.

    So I ve got this one for all: CA restrictions are next in the pipeline, go figure.

    (+ I m not happy about that, make no mistake here)

  • Posted by ReformerRay

    lococo says:
    So I ve got this one for all: CA restrictions are next in the pipeline, go figure.
    (+ I m not happy about that, make no mistake
    here).

    I Assume CA is imports (or is it current account?)

    Why not happy? As Twofish says, the details are important. If import restrictions are classical protectionism, the result will be very bad. If import restrictions take the form of import certificates, great uncertainity about consequences. If import restrictions take the form of tariffs ONLY on imports from China, Japan, Germany,Canda and Mexico, competition will remain for domestic producers. Investors will gradually learn where to relocte production facilities for maximum return. Their decisions will be more favorable to the growth of the domestic production if tariffs as imposed as suggested above.

  • Posted by ReformerRay

    “a claim on a bank in most cases, but even a dollar bill is effectively a claim on the US state – immediately represent capital inflows”

    Correct but incommplete. The capitial inflow is matched by an outflow of financial assets, such as bonds or equities, of equal value. These exchanges leaves the U.S. with less financial assets and more goods and services.

  • Posted by George

    There isn’t any “balance of trade deficit”.

    China sends the US stuff, the US sends China T-bonds.

    The problem is the guy who keeps printing more T-bonds/dollars…

  • Posted by Twofish

    ReformerRay says: But the most effective policy analysts always say they are acting in the public interest. If you cannot defend your self interest by saying it is in the public interest, you are not going to get much support.

    But all of that is marketing. My interests are the public interest. Your interests are special interests.

    Where you have master politicians are people like FDR, Nixon, Reagan, and Obama that realize that things have changed and can take advantage of this. Nixon won in 1968 by appealing to southern whites and midwestern blue collar workers.

    One reason that Obama did that ended being brilliant is that he had a campaign that spoke to groups of people that hadn’t been politically active in the past. High tech workers and people in financial services.

    ReformerRay: Obama’s rhetoric during the Ohio primary was discounted. That is a mistake. He identifies with people who have been fired from jobs because the U.S. economy is in trouble.

    He does and he got votes because auto workers, computer programmers, real estate brokers, chip designers, and investment bankers are all worried about their jobs. He carried not only Ohio, but New York, New Jersey and California.

    The reason, he isn’t going to support import restrictions is that no one has come up with any explanation on how an out of work computer programmer or investment banker or for that matter auto worker is going to benefit from those restrictions.

    What I think he is going to end up doing is to have massive Federal spending create demand. It’s going to be the same as the housing bubble only instead of massive borrowing from China to pay for real estate, you will have massive borrowing from China to pay for roads, bridges, university scholarships, high tech energy programs, etc. etc.

    So people like Brad who think that the global economy is unbalanced I think are going to be disappointed. I wouldn’t be surprised if you have trillion dollar deficits in the next two to three years.

    Just as Reagan made “big government” and “massive Federal bureaucracy” a dirty word, I think that Obama is going to make “big government” and “massive Federal bureaucracy” something people think is wonderful because it provides jobs and benefits for all of the out of work investment bankers and real estate agents.

    ReformerRay: I think he doesn’t understand international trade and he is afraid to go against the strong consensus provided by pro-free trade economists.

    No. He is afraid to go against people like me that voted for him in 2008, but will vote Republican if he starts restricting imports. I don’t see how restricting imports is going to either help the financial services industry or else create another industry that absorbs people from financial services. If China makes a huge amount of money, great!!!! That’s more jobs in investment banking.

    People have these stereotypes that don’t quite match reality. The stereotype is that financial services consists of a few hyper-rich people that you can bash without risk since there aren’t too many votes. The reality is that most people in financial services aren’t hyper-rich, and there are far, far more people employed on Wall Street than you first think.

    Obama realized this (and figured out that upper middle class investment bankers that are scared of losing their jobs are sources for massive campaign donations). McCain didn’t.

  • Posted by lark

    If Obama goes to import certificates or some other mechanism, whose primary intent and effect is to reduce our trade deficit with China, I think he will be pushed by events.

    There are strong signs that China will pursue currency depreciation and export subsidies.

    There is a possibility of major unemployment in the USA next year.

    If these come to pass, the political calculus will favor strong action.

    I think Obama is a reasonable man. I voted for him on that basis. I expect him to respond to reality as it is, to emergencies as they erupt. It’s not impossible at all, though not yet likely, that this will include aggressive measures to bring down the current account deficit with China.

    Pettis Can Smoot-Hawley return

    we are already seeing Smoot-Hawley, as JM points out, in undervalued currencies, which constrain global demand and encourage more production. With all the talk in China of currency depreciation as the obvious solution (fortunately the authorities don’t seem to be biting yet), I worry that at some point it will become politically irresistible, and then China and other exporting nations will engage in a mad scramble to undercut each other. Besides not solving the fundamental problem of declining US imports, these kinds of policies are demand-constricting and supply-expanding. By the way when you say that we won’t see Smoot-Haley unless the global economy collapses, I think you have the causation backwards. At any rate yesterday Premier Wen sounded like he thinks we are close.

    Also, I disagree with Twofish that American real estate brokers, programmers, etc, are big beneficiaries of current trade policies.

    I am in IT and the job market never recovered from the tech bubble, because of offshoring.

    Real estate brokers (and financial types) are faced with the problem that their industries expanded with the credit bubble, which is in the dustbin of history now. It cannot be reflated.

    What this means is that American jobs will be in crisis next year.

  • Posted by Howard Richman

    Reformer Ray wrote: “For years I have been seeking a forum where the merits and demerits of equal trade versus free trade can be argued.”

    We would welcome and probably publish any working papers you write on the subject at http://www.idealtaxes.com . Also, you are always welcome to comment at our blog: http://www.tradeandtaxes.blogspot.com

    Howard

  • Posted by DJC

    From Hank Paulson’s buddy from Goldman Sachs, the US Economy is headed for a depression and there is absolutely nothing that can be done about it. Special thanks for totally wrecking and destroying the US Economy goes to Harvard University MBA program, AIG executives, Goldman Sachs Paulson, Fannie Mae, Freddie Mac, Citicorp’s Robert Rubin, Lehman Brothers, Merril Lynch, Bear Sterns, and the entire Washington Consensus. All of the Wall Street banksters better soon fuel-up their corporate jets to the Swiss Alps.

    http://www.globalresearch.ca/index.php?context=va&aid=10941

    According to Reuters:

    “The economy faces a slump deeper than the Great Depression and a growing deficit threatens the credit of the United States itself, former Goldman Sachs chairman John Whitehead …

    “I think it would be worse than the depression,” Whitehead said. “We’re talking about reducing the credit of the United States of America, which is the backbone of the economic system. … I see nothing but large increases in the deficit, all of which are serving to decrease the credit standing of America. … I just want to get people thinking about this, and to realize this is a road to disaster. I’ve always been a positive person and optimistic, but I don’t see a solution here.”

  • Posted by Mark

    “What I think he is going to end up doing is to have massive Federal spending create demand. It’s going to be the same as the housing bubble only instead of massive borrowing from China to pay for real estate, you will have massive borrowing from China to pay for roads, bridges, university scholarships, high tech energy programs, etc. etc. ”

    Why do you think any of this will create jobs or demand? The only way an ex-mortgage broker is going to consume again is if he/she gets a direct subsidy. No way they learn to weld.

  • Posted by ReformerRay

    Doomsayers:

    Where is your faith in the market? At some level, house prices will cease declining and the stock market will cease declining.

    Massive spending by the federal government will kick in at that point.

    What happens next is the big question. I say, if the world does not see some sign that the U.S. plans to endure more pain and raise taxes to reduce the fiscal deficit, the interest rate required to sell Treasury secturities will go from next to nothing to very large. Then the whole U.S. system will be heading towards collapse.

    Proper course of action is to raise taxes first as soon as Obama takes office. Second, pass laws involving massive U.S. government spending. Hopefully, months will be required to go from authorization to actual investment so that the decline will continue to near the bottom before the investment takes place.

    The other needed action is to tell the world that we are gradually going to reduce the U.S. trade deficit – not suddenly, but over a period of years, so that by the time the first term is over, the U.S. will have balanced trade with the rest of the world.

    These three actions will reassure the rest of the world that we are not going to withdraw suddenly from our obligations but that we are going to change trade so that the U.S. economy produces goods and services of equal value to our consumption. Our critics have been urging that we do that for years. It is clear that the U.S. absorbs too much of the world’s resources.

  • Posted by don

    My view – bilateral balanced trade is not a good idea. Would you hold Saudia Arabia to the balance? But currency mercantilism is not a good idea either and should be discouraged.
    There are pressures for a big disagreement brewing that may give way to really bad results.

  • Posted by satish

    2fish- I have no problem with imports if china write-off all debts of us dollar denominated.
    debt and interest payments on debt are the future demons. if china gives its product essentially for free then i have no problem

  • Posted by ReformerRay

    The reason, he isn’t going to support import restrictions is that no one has come up with any explanation on how an out of work computer programmer or investment banker or for that matter auto worker is going to benefit from those restrictions.

    Market forces, my boy, market forces. We will all be working in whatever jobs are available. They will not be the high paying jobs the financial sector has destroyed, despite the efforts of Paulson to retain the old order.

  • Posted by ReformerRay

    don responds:
    don dsys

    “My view – bilateral balanced trade is not a good idea. Would you hold Saudia Arabia to the balance?”

    NO. Oil is a separate problem.

    The five countries accounting for 60% of the U.S. trade deficit in 2005 did not include any oil producing countries. Our trade deficit is caused both by industrial and oil exporter but my scheme is going to deal only with industrial countries.

  • Posted by ReformerRay

    Howard – I would be happy to contribute to your blog, but we need to find some people to disagree with us.

    You and I are like two brothers quarreling about small things. We are agreed on the basics.

  • Posted by ReformerRay

    George responds:
    There isn’t any “balance of trade deficit”.
    China sends the US stuff, the US sends China T-bonds.
    The problem is the guy who keeps printing more T-bonds/dollars…
    November 14th, 2008 at 4:37 pm

    No T-bond or valuable dollars, no imports.

  • Posted by ReformerRay

    TWofish -

    The financial sector has been a big contributor to Democratic politics for a long time – at least since the time of Robert Rubin.

    The contributed out of hope for favorable treatment, pre- collapse. Perhaps they contributed in 2008 out of fear.

    The power of the financial sector is old hat. LBJ rode to power on the backs of oil wildcatters. New players will emerge. The tremendous number of small contributions Obama received from people like me shows that many of us are tired of a government purchased by campaign contributions.

    Obama has no reason to fear retailation from the financial sector. You guys are no longer riding high.

  • Posted by Howard Richman

    Good point, Don. You wrote:

    My view – bilateral balanced trade is not a good idea. Would you hold Saudia Arabia to the balance?

    Your point is quite good that bilateral balanced trade makes much more sense with China and India than with Saudi Arabia. On the other hand, even Saudi Arabia suppresses the consumption of its peons by pegging its currency to the dollar. You continued:

    But currency mercantilism is not a good idea either and should be discouraged.

    You may want to read Warren Buffett’s original article about his plan. It is not a bilateral plan. It would simply balance U.S. trade with the entire world by issuing marketable Import Certificates to exporters, each certificate permitting the same value of imports.

    Howard

  • Posted by satish

    howard-
    import certificates can be last option. protectionism can be last resort.

    easiest way out of the current crisis is to give all salaried workers given extra pay in terms of his salary. extra pay must be progressive with lowest salaried getting maximum extra pay and the highest th minimum.

    us govt can take debt to pay all employees.
    just like employer contribution we can have
    govt contribution.

    the current problem is too much consumer debt. govt can reduce debt burden from consumers and dump them on foreigners if they are so reluctant to work for common interests of the world.

    if china can pursue self interest then so can us.

  • Posted by Rien Huizer

    Why on earth would anyone believe import certificates were a useful tool for a policy aimed at reducing imports from one specific country? If Walmart et al plus the Japanese cannot get their stuff made cheaply (after whatever kind of tariff) into the US from China, they’ll manufacture somewhere else.

    The problem is that it has become very easy to endow cheap, relatively unskilled people with modern technology without very high switching costs. That is what is called globalization. In a world with container transporttion, information technology and smart governments in some LDCs (i.e. not emotional about being an underpaid servant to the rich), there is always some country that you can use to produce the merchandise that flows trough the US retail machine (where the real money is made) and if that country is not China it could be Ruritania. Is the US going to chase Walmart et al’s flight to low cost? A universal import tariff would b far more effective. Alas, it would also be illegal. And that whil the US has been a free trade champion for so many years.

    A politician wanting to curry favor with the lower classes (the elusive US blue collar worker) should be very careful. There may be a few hundred thousand able bodies factory workers left, but it would tale a while -even assuming a sufficiently high tariff- before shirts, Nintendos and PC keyboards were made in the US again. Cars, refigerators, furniture etc. might be still within the reach of the US resident factory worker (the Japanese and Germans build decent cars competitively) but then he should not expect Detroit style featherbedding (or: healthcare, pension etc).

    There is no solution for the US trade problems (assuming one knows what those problems are), but why not look out of the window: the current bout of austerity in the US is basically where economic activity should be, given budget constraints..

  • Posted by locococo

    tizone 4 ttnk:

    China, Japan and South Korea agreed to enhance economic cooperation and consider boosting bilateral currency swaps to protect against the global financial crisis, the countries’ finance ministers said. (bloom)

    This is the right way to go.

  • Posted by ReformerRay

    Rein Huzier – Thank you for your very constructive and realistic post.

    “If Wallmart cannot get its stuff from China, etc. it will go somewhere else”

    Very true.

    The U.S. must make sure that investors in new plants are aware that “somewhere else” must be a country that is willing and able to buy exports from the U.S.

    U.S. exports are the second largest in the world, the last time I looked at the data. I just hope our exports are not primarily war material.

    Germany is the largest exporter in the world. They are selling machine tools all over the world. That market, like all other markets, will be restrained because of the world wide recesssion-depression.

    U. S. competition is with Germany and Japan. We should imitate them, if necessary, to get some of the export market they are serving.

  • Posted by ReformerRay

    I cannot give up on the possibility that the U.S. can change trade policy in a way that will allow the U.S. to manufacture more products in the U.S.

    True, major changes in U.S. trade policy are required. First, resign from WTO on the grounds that we no longer support free trade. Our current trade policy is to seek equal trade for us and all our trading partners.

    Someone said the U.S. does not occupy the moral high ground in trade. I agree. But my comment was what would be the case if we changed to a policy in support of equal trade.

    Equal trade protects all trading partners. A developing country that has equal trade with the U.S. will find that trade will make a greater contribution to the economic growth of their country than it will to the economic growth of the U.S. because of the difference in size of the two economies.

    It also seem obvious to me that the U.S. will be forced to adopt some form of value added taxation because that form of taxation is of tremendous help to Germany in its push to become the largest exporter in the world.

  • Posted by ReformerRay

    The U.S. trade deficit is produced by a series of bilateral deficits with individual countries, with 5 countries contributing 60% of the trade deficit in 2005.

    The quick path to reduction in the trade deficit is to reduce the bilateral trade deficit with each of those 5 countries.

    That solution does not get the U.S. to equal trade. But it is the quickest way to move in the right direction. And it preserves competition, by accepting imports from all thje other nations in the world. It also serves notice that the U.S. is willing and able to take actions that will reduce each of our bilateral trade deficits. Other countries will see their future influenced by the U.S. new policy.

  • Posted by Howard Richman

    Rien Huizer asks a good question:

    Why on earth would anyone believe import certificates were a useful tool for a policy aimed at reducing imports from one specific country? If Walmart et al plus the Japanese cannot get their stuff made cheaply (after whatever kind of tariff) into the US from China, they’ll manufacture somewhere else.

    There are two very good reasons why targeted import certificates would be a useful tool:

    1. They would force the government of the targeted country to change its policies. For example, China currently charges 25% tariffs on foreign vehicles and mining machinery, has non-tariff import barriers, and violates WTO rules by charging 25% tariffs on foreign auto parts and by subsidizing exports.

    As a result, in 2007 we bought $321.5 billion worth of goods from China and she bought only $65.3 billion from us. This year’s trade deficit with China promises to be even higher, as you can see if you check out the chart at the top of my blog today ( http://www.tradeandtaxes.blogspot.com )

    Targeted import certificates would force China to change its policy of minimizing their imports from the United States. They would have to import more goods from the United States in order to be able to continue to export to the United States.

    2. Targeted import certificates that are auctioned by the U.S. Treasury (as opposed to certificates distributed to exporters) are specifically permitted by Article 12 of the Uruguay Round of the GATT agreement which specifically lets countries running a threatening overall trade deficit restrict imports from any country with whom they are running a trade deficit.

    Howard

  • Posted by ReformerRay

    locococo responds:
    tizone 4 ttnk:
    China, Japan and South Korea agreed to enhance economic cooperation and consider boosting bilateral currency swaps to protect against the global financial crisis, the countries’ finance ministers said. (bloom)
    This is the right way to go.
    November 15th, 2008 at 8:17 am

    I agree.

    Because so many other countries are trading with each other, this permits the U.S. to withdraw from their role of accepting so many imports.

  • Posted by ReformerRay

    Howard and I agree that the U.S. must take unilateral action to reduce the volume of imports into the U.S. and that this must be done in a way that preserves competition in the U.S., that does not discriminate either for or against any U.S. producer.

    Both import certificates and tariffs on selected countries would fill that bill.

    He says tariffs open themselves to imitation, counter tariffs in a way that import certificates do not.

    I say that import certificates auctioned off by the U.S. Treasury introduce an unnecessary element of complexity and uncertainity. No one who hopes to export to the U.S. can be certain what an import certificate will cost in the future or whether one will be available at a cost that will permit selling in the U.S. at a profit.

    My scheme envisions a tariff at 10% initially with a stated schedule of increases at stated intervals. Five percentaage points will be added at 6 months intervals until a cap of 40% is reached.

    My scheme also includes protection against inflation. The Federal Reserve Board would be authorized to halt any scheduled increase in the tariff rate when it determines that another increase would push inflation in the U.S. beyond a reasonable level.

    International trade is today a complex interdependent system. The U.S. role in that system should be changed gradually rather than abruptly.

    I do not see trade policy as a solution to our current problems.

  • Posted by Twofish

    ReformerRay: New players will emerge. The tremendous number of small contributions Obama received from people like me shows that many of us are tired of a government purchased by campaign contributions.

    And the tremendous number of small contributions that Obama received from people like me shows that many of us are tired of the Bush incompetence and McCain Wall Street bashing. One of us is going to be very disappointed, and I think it is going to be you.

    And if you look at the numbers, Obama had large numbers of small contributions, but most of his money came from big contributions, and if you look at where the big checks came from. They came from Wall Street and Silicon Valley. The high tech axis was even more useful because it gave Obama a big technology edge. The Obama website was light years ahead of the McCain one.

    Silicon Valley and Wall Street are very closely connected. It’s Wall Street bankers that give Silicon Valley money, and Silicon Valley give Wall Street bankers technology. The Obama election is a watershed since Obama really is the candidate of this new power elite. The new “iron triangle of power” is Google/Goldman-Sachs/MIT.

    Again, don’t believe the propaganda, including the people you support, *especially* the people you support.

    It’s much harder to resist propaganda from people you like than people you hate. Spotting half-truths and lies from people you hate is easy. Spotting half-truths and lies from people you like is hard. It’s really hard because someone is lying to you, and *they* don’t know themselves that they are lying to you.

    One trick is to read what people you hate and who hate you have to say about you. Obama is not going to point out how the notion that small contributions drive his campaign misses some important facts, but McCain, Palin, and Fox News sure will.

    You can’t go “populist” because I’ve counted noses, and there are more people that have interests, beliefs, and situations that similar to me than you. Part of this is that I’ve seen how revolutions and political change works, and once people into power, then all of a sudden you realize that different people want different things.

    ReformerRay: Obama has no reason to fear retaliation from the financial sector. You guys are no longer riding high.

    Precisely, which means that there are huge numbers of angry investment bankers out there that want *CHANGE* (i.e. a reversal of Bush era policies and a return to Clinton-Rubin ones). Again, it’s a matter of counting noses and seeing who has the votes, and before I signed on to the Obama bandwagon, I made sure that the votes were there so that he wouldn’t do something that I found to be unacceptable, and Obama had to court Rubin Democrats otherwise he would have lost to Hillary or McCain.

    Obama is going to have to stab someone in the back. If he stabs the Rubin-ites in the back, then we all go and talk with the Republicans and turn him into a lame duck. If he stabs the Nader-ites in the back, then it’s not clear to me how the Nader-ites can do anything about it. If Obama tries to ram through import certificates through Congress, I can tell you which senators get called, what gets said, and how to kill that idea. Import certificates and trade restrictions are just not going to happen, next year. If Obama is suicidal enough to try, I can give you the names of 45 Senators that will vote no, and the people that work on Facebook are going to work on Republican websites for 2010 and on the Palin campaign for 2012.

    (Also, don’t underestimate Palin. She is raw, unskilled at the media, but she is *not* stupid. Because she was new, she didn’t know how to fight the character assassination tactics that are part of hardball politics, but I’ll bet she’ll learn by 2012. If Obama starts restricting trade, then expect to see Palin at Google headquarters or on Wall Street.)

    There is this stupid piece of political marketing in which everyone has to claim that they aren’t part of some special interest and are talking on behalf of the majority and the “public interest.” As with most pieces of political propaganda, the most dangerous things happen when you start believing your own lies. If you look at what happened with Lehman Brothers and Bear-Stearns, then really got into trouble when they started believing their own lies about what a great deal subprime mortgages were.

    In the case of Wall Street and big business, the environment is such that there are so many people that will tell you half-truths and outright lies, and that there are so many people that are *GOOD* at telling you half-truths and outright lies, that you end up trusting no one and spend a lot of your time looking at the facts and trying to make up your own mind, since the smiling politician or salesman that shakes hands with you may stab you in the back the second you turn around. And it was obvious to me (and it should have been obvious to you) that Obama had to stab someone in the back once he explained what *CHANGE* really meant.

    In the case of the anti-globalization crowd, so much the the marketing and propaganda involved a group of saintly people taking the public interests of the majority against the evil interests of small numbers of Wall Street fat cats, that no bothers to count numbers and voters to see if that is really the case, and it isn’t. Also seeing everything as good versus evil, neglects that politicians have to make choices. Obama is a great guy, but he has to stab someone in the back.

    And since I saw this coming ahead of time, it’s not going to be me. One part of this is that Rubin-ites got themselves in important positions in the Obama campaign, which means that they are going to be in major policy positions in the transition and the Obama administration.

    If you look at the names of people that Obama is selecting for his transition team, they are all pro-trade, pro-globalization, pro-Wall Street, pro-Silicon Valley people. I can’t see a single anti-trade, anti-globalization, anti-Wall Street person in that list, which means that things like import certificates aren’t even going to get to first base.

    Don’t believe that Obama is a good man led astray by bad advisors (or do believe it, it makes my job easier). Obama is a decent man, most people in politics actually are, but he has to do what any politician has to do.

    Sorry.

  • Posted by Twofish

    ReformerRay: Market forces, my boy, market forces. We will all be working in whatever jobs are available. They will not be the high paying jobs the financial sector has destroyed, despite the efforts of Paulson to retain the old order.

    I think they will be. If you look at auto factories, you see empty lots and factory workers not doing much of anything. Now go to your typical investment bank. People are *BUSY AS HELL*.

    All of this financial instability has doubled and tripled the amount of work that people have had do to. When the Dow goes up 500 points in one day and down 500 points the next day, this vastly increases the amount of work that needs to be done. Computers start breaking, traders have to deal with frantic clients that want to know where their order is going. All of the old risk models are dead and have to be replaced by new ones, etc. etc. etc. And the fact that twenty percent of the people in the office just got laid off, and everyone is worried about their own job, makes things even busier.

    There is no lack of work to do, and no lack of new jobs once the situation clears up. Also the surviving investment banks are making quite a bit of money. When the Dow goes up 500 points and down 500 points and up 500 points and down 500 points, someone is making money from brokerage fees. And if you know how to write a trading system that executes an order 200 milliseconds faster than the other guy, you are a very hot property even in this market.

    And then there are going to be a ton of new regulations. Do you realize how many highly paid lobbyists, lawyers and compliance officers you’ll need when people pass all of those regulations? Every time someone passes a new regulation, then all of the computer risk models are going to have to be rewritten. There is a huge industry out there of highly paid people that will audit computer code to certify that it is in compliance with Sabranes-Oxley. Once the SEC and Federal Reserve start passing regulations going into complex and excruatiating detail what models and trades are available, there is going to be a huge industry that will grow up around that.

    So lets look ahead one year. Do you really think that people are going to need more line auto workers in Ohio or more computer programmers and lawyers on Wall Street? How many more SUV’s do you think people need?

    Maybe people will need more engineers and designers to work on the General Motors hybrid vehicles and green cars, but if that is the case, why do the engineers care if the car is made in Detroit or in Mexico, and more than a chip maker cares if the plant is in Texas, Ireland, or Shenzhen?

    If you make the product cheaper, more people will buy it. If more people buy the product, that’s more jobs for engineers. If you are a computer programmer, you want people to buy Made in China hyper-cheap machines so that they can buy Made in America computer programs. If you are auto engineer, then if you can reduce the price of the car and pack in more features, this is *good* for you.

    Also all of this talk about import certificates misses current realities. I start my day with a staff meeting in which half the people are in NYC and the other half are in London, and I don’t know where most of the people are. I get calls needing technical support asking me to log into some machine somewhere in the world, and I have no idea whether they person I’m talking to or the machine I’m working on is in Jersey City, Glasgow, Houston, or Mumbai. I just log in with ssh and vnc. One time, I was trying to debug a problem and the mouse and keyboard seemed a little slow, and I assumed that there was some mouse problem. After three minutes I figured out that machine was slow because I was working on a machine was on the other side of the world, and every time I moved the mouse or typed a character, the pointer had to move across the Pacific Ocean and back.

    So you put up import certificates. Are you going to monitor every internet connection to make sure that no one downloads a program that was produced in Mumbai? Are you going to install a monitor on every chat room or e-mail conversation to figure out where the programmers are working?

    It’s a 1980′s solution to a 2008 workplace. It doesn’t make any sense.

    And I have to keep repeating the question, since no one has even tried to give me an answer. You are talking in front of a bunch of laid off computer programmers from Sun Microsystems, a bunch of laid off delivery people from DHL, a bunch of laid off investment bankers from Goldman-Sachs, and a bunch of auto-makers that are about to be laid-off from General Motors.

    How the hell are import restrictions supposed to help? How does even talking about the trade deficit supposed to fix things?

    How are is any sort of “America is in a battle for international trade against another countries” think going to work, especially since you see a lot of Indian and Chinese faces in those audiences?

    One thing that you have to realize is that if an Indian-American engineer or Chinese-American engineer doesn’t have to stay in the United States. If the US pulls out the welcome mat and goes nativist, then you will have thousands of very highly skilled people go on the next plane to a high technology park in Mumbai or Beijing.

    Presenting things as a “war for international power” is stupidly suicidal because if the United States forces people to choose sides in a war, then there is no particular reason that people with the high tech skills that the US needs are going go choose the United States, and if you to into any US graduate school or high tech company, you don’t see that many Caucasian faces.

    It’s 2008. Not 1983.

  • Posted by ReformerRay

    Twofish -

    I have admitted inability to correct the current economic meltdown. I don’t know how to reemploy people who were supporting the financial system that grew so large it exploded.

    My interests is in correcting the mistake made in 1985 when the large trade deficit at that point was corrected by an expedient – joint governmental interevention in the currency markets to insure that the value of the dollar would continue to decline after Sept. 1985. That did nothing for the fundamental problem – the willingness of the U.S. to continue to import goods without requiring our trading partners to import from us.

    The goods trade deficit has existed for 31 years. It is unhealthy for the U.S. economy. It needs to be corrected. I do not care how long it takes or what the odds are they anyone will listen to me. I have faith that reality will win in the end and the infatuation with free trade will disappear.

    Political realities also change over time. Obama will do what he has to do. The financial system will continue to shrink. Paulson’s efforts to support it in its current form will not succeed because the amount owed to each other is too large.

    I will keep saying to anyone who will listen the following: Japan, Germany and China have shown how countries advance in a global economy by using their government to advance the interests of the export sector. The U.S. must learn from their success and our failures. The part of the global economy that the U.S. can control is the conditions under which imports are accepted into the U.S. If leaving the WTO is the price of gaining control over imports, we must leave WTO.

  • Posted by ReformerRay

    Twofish –

    Your prediction of an exodus of highly trained techincal people is quite likely. People will go where they want to go. But the citizens of the U.S. must recognize that the stronger the U.S. economy, the more these people will want to stay in this country. To retain such people, you do not try to bribe them to stay. You create a country to which they are attracted to stay. That kind of country must be one that is competitive in the global economy.

    The U.S. has no choice but to gradually reduce the level of imports into the U.S. while insisting that the only manufacturing firms that stay in existence in the U.S. are those who can meet the competition – after the U.S. government rigs the system so that some firms in the U.S. will succeed. We cannot pick winners or lossers but we can provide the environment where more domestic firms are competitive in the global economy.

  • Posted by ReformerRay

    How the hell are import restrictions supposed to help? How does even talking about the trade deficit supposed to fix things?

    Import restrictions enable domestic manufacturers to grow strong by service the domestic market. That is the way Japan built it’s manufacturing sector. Restrictions along are not enough. The domestic firms must be hungry enough to work hard to provide valuable products. Competition is necessary to prod domestic firms. Thus, gradual reduction in imports from our most suceessful competitors will enable domestic manufacturers to learn to compete in a less difficult environment.

  • Posted by Rien Huizer

    Howard, Reformer, etc

    It seems that you believe that there are technical solutions for the US’s “import problem”. I doubt there are ways to curb imports (or boost exports) artificially through government intervention.Those measures will have as their main effect an investment in circumvention and fraud.
    That is, without making dramatic changes to the US political economy. If you look at Japan or Germany you have paradigms that cannot be copied anyway. Germany (and neigbors Austria, the Benelux and Scandinavia (ex Norway) are all BOP surplus countries and this “greater Germany” (it hurts my feelings too) has about the same population, standard of living, life expectancy and Gini’s as Japan. The combined PPP of Japan and greater Germany is a little smaller than the US (mainly due to a 20% smaller effective (few illegals) population. However, these countries require far fewer man hours to generate a much bigger industrial output and spend 30% less on healthcare, very much less on defence (agreed, different foreign policy aspirations, voluntary restraint re WMD (which would be much cheaper of course than all those conventional toys)) In addition, the Greater Germand have about 25% more leisure. I suspect that the US has large pockets of inefficiency, in its government, healthcare, legal system, financial system and distribution. In addition, US consumers may be more trained towards hedonism and short term thinking.

    Those are things that are very hard to change under any regime but especially when a country is governed by a duopoly democracy and when business is addicted to labor intensive production (resulting in continuous loss of manufacturing and tradables production in general plus a bias towards inefficient services at home using a large army of low cost unskilled and illegal workers) and virtual absence of consumer budget constraints.

    Fortunately, it seems that the market is exerting some discipline. Let’s hope that the fear of deflation and recession does not lead to further expansion of those inefficient areas.
    Long term, there may be some light at the end of the tunnel due to structural imbalances in Euroland (the non greater Germany part shares many of the US’s problems, but at a lower standard of living) and may sooner or later become a kind of Argentina. And there is of course demographics. Europe is running out of people who can work, aggravated by the need for an activity robots have yet to learn, care for the elderly (the flip side of that life expectancy). Not really a problem for market solutions..

  • Posted by NeoMalthus

    ..and very soon the USD must fall.

    We are moving into the real endgame a run on the USD.

  • Posted by Howard Richman

    Rien Huizer,

    You make many good points. You are especially correct when you wrote:

    It seems that you believe that there are technical solutions for the US’s “import problem”. I doubt there are ways to curb imports (or boost exports) artificially through government intervention.Those measures will have as their main effect an investment in circumvention and fraud.

    You are correct, one of the problems with any system that places barriers at borders, including Import Certificates (ICs), is that it will increase smuggling and other types of cirmumvention and fraud.

    However, you are incorrect when you argue that ICs would not solve the problems with the American manufacturing sector. They would immediately make American manufacturing profitable, both American exporters who would receive the ICs and American businesses that compete with imports because their competition would have to buy ICs.

    The result, of course, is that manufacturing investment in the United States would increase dramatically. The long-term problems of the United States are due to the consistent decline in investment, especially investment in our trade-competing sectors. ICs would solve our long-term problem.

    Also, during time of depressions, like the one we are entering, ICs solve the short-term problem. There is no excess of saving in the American economy should we balance trade, and thus keep out the net-inflow of foreign savings.

    Howard

  • Posted by Howard Richman

    Twofish asks:

    Also all of this talk about import certificates misses current realities….

    So you put up import certificates. Are you going to monitor every internet connection to make sure that no one downloads a program that was produced in Mumbai? Are you going to install a monitor on every chat room or e-mail conversation to figure out where the programmers are working?

    It’s a 1980’s solution to a 2008 workplace. It doesn’t make any sense.

    You are incorrect when you argue that trade in goods is a thing of the 1980s. Goods trade is actually increasing in the world today and is the cause of the United States trade deficits. Goods can be monitored at the borders in 2008 just as easily as they could be monitored at the borders in 1980.

    You are correct that it is not possible to monitor services at the border. Indeed, a decision could be made to exempt services from the Import Certificates program.

    However, just because services cannot be monitored at the border, does not mean that they cannot be monitored. At the end of the day there is billing. If that billing involves parties outside of the United States, then Import Certificates would apply.

    Howard

  • Posted by Howard Richman

    Twofish,

    I believe you are correct in your astute political prediction that Obama will enact token protectionism to please the most politically powerful constituencies. He won’t address the trade deficits whatsoever.

    As a result, it is predictable that the United States economy will participate in the depression, during which we will lose most of what remains of our manufacturing sector.

    Howard

  • Posted by Howard Richman

    Reformer Ray,

    You were correct when you wrote that we basically agree. I would definitely endorse the program that you suggest and you would probably endorse both of the ones I advocate:

    1. Warren Buffett’s Import Certificates distributed to exporters which would immediately balance trade.

    2. Import Certificates that are auctioned by the U.S. government and targeted to specific countries.

    You are correct when you point out that Import Certificates have two disadvantages when compared to tariffs: (1) higher administrative costs and (2) higher price uncertainty.

    However, the advantages of Import Certificates outweigh the disadvantages. Tariffs can be fought with counter-tariffs, currency manipulations, export subsidies, non-tariff barriers, and a host of other trade manipulations, while Import Certificates cannot be fought.

    As a result, Import Certificates, unlike tariffs, increase American exports at the same time that they reduce American imports.

    Howard

  • Posted by Doc at the Radar Station

    The export and import figures are fascinating, but what’s up with this story about empty shipping containers being hard to find in the Midwest?

    http://www.npr.org/templates/story/story.php?storyId=97001507
    A Strange Shortage Illustrates The Global Economy

    The North Dakota farmer, Bob Sinner, says he is suddenly getting more business than ever from overseas. But just as he was gearing up to sell more wheat and soybeans abroad, he discovered he couldn’t find enough shipping containers…

    This story seems to imply that our demand for imported consumer goods has dropped so drastically that not enough shipping containers are being freed up at our ports to use to export our goods.

    Then NPR published another story two days earlier about scrap metal exporters:
    http://www.npr.org/templates/story/story.php?storyId=96901087
    Drop In Chinese Demand Melts Scrap Metal Market

    “I’ve forward-sold around 15,000 tons of material, and only 3,000 tons went through,” Adel-Al-Essa says. “The rest were either canceled or asked for discounts — or asked for discounts and changed payment terms.”

    The other 12,000 tons, Adel-Al-Essa says, are either in port or heading back at huge losses to him.

    Couldn’t the shipping container shortage here in the US be a result of them being idled and full of scrap metal or in transit back?

    I could be totally misguided, but couldn’t all of this create distortions in the export/import numbers and the conclusion that our exports are falling faster than our imports is in doubt? We need a micro analysis of the breakdown of exports. If we’ve got willing buyers and we can’t export as much as we could, then the numbers would be understated.

  • Posted by ReformerRay

    Rein Huzier – Tis true that Germany and Japan are different from the U.S. in fundamental ways – and cultural assumptions change slowly.

    The first change required for the U.S. is to recognize that the trade deficit has contributed to the decline in production of goods in the U.S. and that the U.S. economy must recover the ability to produce goods. So long as we think the current system is viable, we will not see an economic expansion.

    If I may introduce a new note to this discussion, in an interview on 60 minutes tonight, Obama demonstrated his usual good sense except for one comment. He said that economists of all persuations, right and left, are agreed that massive governmental expenditures, unmatched by taxes, are advisable to prevent the current slowdown from getting worse.

    I do not doubt the accuracy of his comment. I just think the concensus is wrong. Ignoring looming problems created the current mess. The notion that the ability of the U.S. to increase debt without penalty for the next two years is very dangerous and unlikely to be true, in my opinion. I think demonstrating a determination to raise taxes to reduce the debt is just as important as spending the money to create more purchasing power. Absolutely no reason to delay for one month raising taxes on houshold income in excess of $250,000. Also, if governmental investment happens before house foreclosures level off and begin to decline, the money will disappear without jump starting the economy.

    Sorry to stray from the topic.

  • Posted by ReformerRay

    Howard -

    China, Japan and Germany will lose 56 billion exports to the U.S. if their exports to us are reduced by 10% (2007 data). The U.S. will lose 18 billion dollars of exports to those three countries if our exports to them are reduced by 10%. Trying to match U.S. tariffs is a losing proposition for countries that have a large trade surplus with the U.S.

  • Posted by ReformerRay

    Note – above calculations refer to goods only.

  • Posted by ReformerRay

    The fact that the U.S. consumes an excessive amount of the world’s resources is a valid reason for reducing U.S. imports. What argument can be used to object to import restrictions for those countries who are sending us more goods than we send to them?

  • Posted by ReformerRay

    The psychological consequence of less imports available to U.S. citizens is important.

    A few years ago I bought a diswasher made in Germany because Consumer Reports said it was quieter than U.S. made brands. If the German made brand had not been available to me, I would have purchased a brand made in the U.S. I still would have purchased the machine that was the quietest of those available to me. And I would have been perfectly happy with the U.S. made brand because I had gotten what I wanted – the quietest of brands available.

    If I had purchased the brand made in the U.S., GDP in the U.S. would have increased by $600. Instead, my action (buying the foreign made brand) increased German GDP by whatever share of the $600 I paid went to the manufacturer.

    Consumer choice is based on marginal differences that are very small. As a result of marginal differences to a consumer, large differences in GDP are createed.

    Reducing imports will increase GDP. That is the argument for using governmental power to reduce imports – the marginal gain to consumers is not worth the large loss to GDP.

  • Posted by Sinomania!

    Brad, some observations that might explain a small amount of the recent export decline: Chinese importers want no more scrap metal or recycled paper. The market for paper is now $0 per ton and there is anectodatal reports of containers shipped in the last 3 months or less sitting at the port of Ningbo without clearing. The scrap metal export collapse is impacting prices and exports around the world.

    Regarding China’s Boeing orders, now that Chinese airlines are asking Beijing for a bailout and grounding planes (10% of China Eastern fleet, for example) and the new push for domestic jet production such as the ARJ21 passenger plane that GE is buying, cancelling Boeing planes may be a possibility in the medium term.

    There are four years left in the China Trade Relations Act that allow Congress to unilaterally control Chinese imports using the product specific safeguard mechanism. What do you think the danger is that a Democratic Party controlled Congress and Executive would try to stem Chinese imports? I’d say it was high.

  • Posted by ReformerRay

    sinomania -

    I have been arguing for a law to be passed by Congress that would stem imports from 5 countries, including China, but PLEASE – no law which singles out only China for restriction. Other nations are doing their best to increase their trade surplus with U.S. and the most successful ones, including China, should be restrained. Last time I looked, 70% of the U.S. goods trade deficit would still exist, even if China is removed from the picture.

    We must act enhandedly, on the basis of a general rule that applies to all countries similarly situation.

    China is too powerful and too prickly to be treated as the only problem. China is doing what other countries are doing.

  • Posted by Twofish

    ReformerRay: . That did nothing for the fundamental problem – the willingness of the U.S. to continue to import goods without requiring our trading partners to import from us.

    It’s not clear to most people today that this is the fundamental problem or a problem at all. If you ask a chip designer in Silicon Valley or an investment banker on Wall Street, if their lives would get better or worse if you moved manufacturing back to the United States, the answer is that it would clearly get worse.

    You might get all populist and rail against the small minority of people that are destroying standards of living for the majority, but the numbers work against you. General Motors employs 270,000. Citigroup employs 300,000. Chrysler employs 80,000. AIG employs 116,000. There are about 250,000 people employed in the auto industry. There are about 220,000 people employed by investment banks.

    And then there is Walmart that employs 2.1 million people.

    ReformerRay: The financial system will continue to shrink. Paulson’s efforts to support it in its current form will not succeed because the amount owed to each other is too large.

    Barring an economic collapse this is unlikely. People imagine investment banks to be this small tiny group of bankers in smoke filled rooms. However, Goldman-Sachs employs 32,000 people. Morgan-Stanley employs 56,000 people, and Lehman Brothers had 25,000 people.

    These numbers are likely to grow because of technology. In 1950, you went to a bank and talked to a teller and got a stack of money. Today you have ATM’s and then internet banking at the consumer level, and a whole bunch of computers and networks that manage money at the corporate level. That’s not going to go away as technology improves and the world gets more complex.

    Technology changes banking in some subtle ways. In 1950, you couldn’t open a branch on every street corner because you needed big vaults and armed guards to keep the bank from being robbed. Today, you can keep minimal amounts of cash in a bank and deliver it as needed, and this means that you can open up a bank at every street corner. Once you open a branch at every street corner, then you end up hiring lots of tellers and programmers.

    If you have google go down for five minutes, that is an annoyance. If you have a banks computers go down for thirty seconds, that is a full scale global disaster, and a typical mega-bank employs more programmers than Microsoft to make sure that this does not happen.

    This creates a lot of highly paid jobs that frankly are more fun than working on an assembly line.

  • Posted by ReformerRay

    Twofish – Thanks for keeping open the lines of communication. I am going to go look up some data before I respond to you. I’ll be back.

  • Posted by Twofish

    Sinomania: What do you think the danger is that a Democratic Party controlled Congress and Executive would try to stem Chinese imports? I’d say it was high.

    I think so too, but part of the negotiations involved give and take so that China ended up with the US able to protect critical industries in the US without hurting China industry that much and vice versa.

    There is no doubt that the US will try to use every clause and anti-dumping provision that they can to reduce Chinese imports, but people thought about that when these agreements were negotiated. I really don’t see how any governmental restrictions will make that much more of a difference than a general slowdown in consumer spending.

    Industry tariffs are useful because the allow political exchanges that prevent the system from fundamentally breaking. China voluntarily restricts exports of textiles, in exchange the US reduces pressure on China to open up wheat markets.

    You use industry specific tariffs to appease certain groups so that the stop supporting any anti-trade measures beyond their specific industry. Once textile workers in North Carolina get what they want, the are no longer interested in things like import certificates, and are in fact can be opposed to them because any effort to renegotiate trade agreements means that the agreements that already exist can get torn up.

  • Posted by ReformerRay

    Manufacturing employment in August, 2008 was 13.4 million while Financial Activities employed 8.2 million (Bur of Labor Statistics)

    Gross Output (raw sales) was 4.9 billion for maanufacturing in 2006 but the Value Added by manufacturing was only 1.6 billion (cost of inputs subtracted)

    Gross Output for Finance and Insurance was 1.9 billion and Value Added was 1.1 billion.

    Conclusion. Manufacturing is much more important than the finance and Insurance business for two reasons: More dollar sales and the large amount of inputs needed to produce manufacturing product. Manufacturing is the hope of the future for the U.S.

  • Posted by ReformerRay

    The aboove numbers can be supplemented by looking at the contribution each industry makes to Corporate Profits in the U.S.

    Manufacturing contributed over 45% of corporate profits before 1980, but only 19% in 2006. Finance filled the gap. As manufacturing declined, Finance grew. From aroune 5% of corporate profits in 1980 to 26% in 2006.

    The problem we are having today is that the finance system is no longer contributing to corporate profits as it was in 2006.

  • Posted by ReformerRay

    Industry specific tariffs will be outlawed when the U.S. adopts my scheme. Twofish’s discussion above provides part of the reason. The are irrational – depend upon political influence. Exactly want Adam Smith wanted to abolish by insisting on Free Trade. Free trade was his way of eliminating tariffs on specific goods or industries. A much better way has been developed and described above.

  • Posted by Sinomania!

    Twofish, ReformerRay – thanks for your responses. I agree on a product specific basis restraints on China trade won’t jeopardize the whole apple cart. The potential is there to damage emerging businesses expected in the next investment cycle. I’m thinking specifically of two areas: solar and wind power. The infamous financial rescue package includes tax rebate credits for solar and wind installed by individual households, a niche market now but with giant potential. For an installed wind turbine a family can deduct $4,000 starting next year. The price of the wind turbine alone has retarded the growth of this business for years (along with zoning restrictions). But I know I can import wind turbines from China that qualify California and New York state certifications for far less than $4K leaving money left over for a installation, DC convertor, battery bank, etc. Chinese production of solar and wind products is expected to ramp up significantly next year and into 2010 bring costs (and prices) down further. However, Congress is mulling new certification provisions for these products and domestic manufacturers (I won’t name names here) are lobbying for a type of “buy America” provision. That would hurt both the consumer and the development of new businesses around household solar and wind as fewer people are going to install them unless the prices for solar cells and turbines fall enough to break the psychological expense barrier. I don’t see that happening without Chinese imports so both sides could lose. Buy America is already costing the Federal government and local cities a fortune for rolling stock. It costs close to a million dollars for one new articulated “bus rapid transit” bus that could be imported from China (with greater fuel efficiency and more comfort) for less. That is just one example of the types of restraints that I fear a Democratic Congress and Obama Presidency will employ in the short term.

  • Posted by ReformerRay

    Sinomania has an excellent post, providing a specific example of the folly of classic Protectionism. Here I am ain agreement with mainstream international trade economists. Product specific restrictions on imports are undesirable.

    But restrictions on imports that are general, apply to all imports, do not create the same problems.

    If these restrictions are applied only to 5 countries, China, Japan, Germany, Canada and Mexico, the U.S. trade deficit could be reduced and finally brought under control.

    The only way the large trade deficit will be reduced is by import restrictions of some kind and the scheme I proposed in above posts is the most reasonable.

  • Posted by ReformerRay

    Thanks for Sinomania’ contribution. The only thing missing in these exchanges is the opinions of other people.

  • Posted by RebelEconomist

    Reformer Ray, Sinomania,

    You know my opinion already. Having witnessed the failure of trade barriers to save the British-owned car industry, I am generally against trade barriers, but since China’s exchange rate policy involves its own restriction (ie a closed capital account), China could hardly complain if the US imposed retaliatory restrictions (reserves control).

    I suspect you have seen off Twofish with your facts on the relative importance of manufacturing and finance though!

  • Posted by thomas

    The USA is a high wage Nation?

    According to the Mercer Report we are ranked 2oth in Pay to our workers and that does not include other benefits that many “Social” countries give their people such as Universal healthcare, Free Tuition, Free Vocational/Technical training, 50 days a year off including holidays,extensive welfare safety nets ,etc.

    The Mercer Survey was from 2006 and indicated that the workers pay was figured with inflation in mind in each country and after-tax income.

    Switzerland and Germany had the highest wages in the world.

    Norway, Germany,Switzerland,Spain,Denmark,Sweden,Findland,Japan,Canada,Ireland,Australia,Hong Kong were amoung the countries with higher wages and benefits.

    The US life expectency is ranked 48th and falling in the world. US Citizens rank 70th in Healthy living or living without health problems when ranked against the rest of the world.

    Parts of the US have third world standards when one looks at the following.

    -Life Expectency and health standards
    -Debt levels on Federal, state, consumers, US corporations,trade deficits,etc which total over 60 Trillion and climbing rapidly!
    -Affordability of College Tuition, we are now losing big-time because of College Expenses.
    -Vocational/Technical Training System such as in Germany which produces a high wage and high skill workforce is very weak in the USA.
    -The US Infrastructure is falling apart including Roads, Bridges, Dams, Water Systems,Ports,Power supply,etc.
    -US healthcare system is substandard
    -Us poverty rates are high and in cetain regions of the country the approach third world standards.
    IN the richest parts of the country the average life expectency is 90 while in the poorer regions the average life expectency is around 50 and falling!
    -Alot to do with the Rich/Poor Gap
    -Lack of US manufacturing and now trade deficits even in High Tech products.
    -Decreasing Farmland and Trade deficits in Farm Products.
    -lack of oil and oil deficits
    -lack of renewable energy plan to replace oil and other fossil fuels.
    -9 times per capita person population compared to other western nations and also the highest Correctional Population in the world approaching 8 million)Parole, Prison,House arrest,probation,etc)
    -A primary Education systen which is substandard and ranks near the bottom of the industrial world.
    -World biggest debtor nation with countries like Germany and Japan buying up our assets making us into a colony of sorts.
    -lack of safety nets for population including welfare, training, compensation insurance, unemployment insurance,healthcare,college and technical training,etc which are all weak or non-existing.

    Much to do if America is to survive without breaking up into different countries!

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