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raymondusa (raymondusa)
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What is the real solution to America's trade deficit?

My take:

This is a pretty good article.  If you guys have never read Stephen Roach, this is one of his better articles.

The US Congress seems more determined than ever to tighten the noose on China.  The issue is trade policy – and the legislative response to America’s outsize bilateral trade deficit with China.  The way things look today, bipartisan support for such efforts is deep enough to assure veto-proof passage of tough trade sanctions on a broad array of Chinese products shipped to the US.  I continue to believe this could be a policy blunder of monumental proportions.  By going after China, the US Congress is playing with fire.

US-china trade policy: a flawed "remedy"
For starters, this legislative “remedy” is based on seriously flawed macroeconomic analysis.  China bashing doesn’t address the real problem that Capitol Hill believes is bearing down on American workers – a multilateral trade deficit that hit a record $836 billion in 2006.  Since the Chinese bilateral deficit of $232 billion amounted to the largest slice of the overall trade gap – 28% for all of 2006 and fully 34% in the final period of the year – Congress has concluded that China is the major culprit behind the trade-related squeeze on middle-class American workers.

That overlooks one key point: The United States runs trade deficits not because it is victimized by unfair competition from China or anyone else but because it suffers from a chronic shortfall of domestic saving.  That’s right, lacking in saving – as evidenced by a net national saving rate that plunged to a record low of 1% of national income over the 2004-06 period – the US has no choice other than to import surplus saving from abroad if it wants to keep growing.  That means running current account and trade deficits in order to attract the foreign capital.  China turns out to be the biggest piece in this equation not because it is unfairly undercutting American-made products but because its menu of products satisfies the tastes and preferences of a chronically saving-short US economy.  China bashers continually overlook the macro context of America’s bilateral trade deficits at great peril.

US-China trade policy: consequences of legislation
Consider the consequences if Congress gets its way and US trade with China is significantly curtailed: The immediate impact would be a tax on US multinationals like Wal-Mart, which sourced some $18 billion of goods from China in 2006.  That would either squeeze profit margins or, if passed through to retail prices, raise the cost of living for American consumers.  Over time, if the sanctions were onerous enough, the impact would be to redirect US trade away from China.  But here’s where the problem gets especially thorny: Unless America increases its domestic saving, sanctions on Chinese products will do nothing to alleviate the overall trade deficit.  The outcome would follow the “water balloon analogy” to a tee – squeezing the Chinese piece would simply reallocate the deficit elsewhere.  And most likely that would redirect saving-short America’s multilateral trade deficit away from low-cost Chinese producers toward higher-cost foreign sourcing.  Again, that would be the functional equivalent of a tax increase on American consumers.

Of course, by going after China the US Congress is also biting the hand that feeds it.  China is one of America’s most important external lenders.  To a large extent this is an outgrowth of the same currency policy that has US politicians so up in arms – a “managed peg” that has allowed the renminbi to increase by only about 7% versus the dollar since July 2005.  To keep the RMB in this range, China must recycle a disproportionate share of its massive build-up of foreign exchange reserves into dollar-denominated assets.  As of February 2007, China held $416 billion of US Treasuries – second only to Japan and up nearly $100 billion from the level a year earlier.

And there is good reason to believe that the Chinese hold another $300-400 billion in other dollar-based assets, such as agencies and corporate bonds.  By continuing to allocate at least 60% of its ongoing reserve accumulation into dollar-denominated assets, China remains an important source of demand for American securities – thereby helping to keep US interest rates lower than might otherwise be the case.  In effect, Chinese currency policy is subsidizing the interest rate underpinnings of America’s asset economy – long an important driver of the wealth effects that support the US consumer.

Congressional pressure on China could put its bid for dollar-denominated assets at risk for two reasons: On the one hand, if China accedes to US pressure and allows the RMB to appreciate a good deal more against the dollar, there would be less of a need to recycle such a massive amount of FX reserve accumulation into dollar-based assets.  Absent such buying, US interest rates could rise.  On the other hand, if Washington enacts onerous trade sanctions on China, there is a good chance that the Chinese government could retaliate and order its reserve managers to diversify incremental reserve accumulation out of dollars. In that case, the dollar could plunge and longer-term US real interest rates could rise sharply – a crisis-like scenario that could tip an already weakened US economy quickly into recession.  Either way, by imposing sanctions on one of its major foreign lenders, the Congress could be putting a saving-short US economy in a very precarious situation.

Nor does the Congress appear to be all that sensitive to the internal pressures that trade sanctions might impose on China or the broader Asian economy.  Despite its rapid growth and increasingly important role as one of America’s major suppliers of goods and financial capital, China is still a very undeveloped economy.  That’s especially the case with respect to its financial system, dominated by four large banks that are only just starting to go public.  Banks and China’s other international borrowers need to be able to hedge their currency exposure – especially in the face of the large exchange-rate fluctuations that Washington lawmakers are seeking.  Lacking in well-developed capital markets, such hedging strategies are very difficult to implement in China.  A large RMB revaluation could, as a consequence, deal a lethal blow to China’s embryonic financial system

part 1

2007-5-11 01:09 PM

raymondusa (raymondusa)
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part 2

Moreover, there is the distinct possibility that Washington-led China bashing could inflict major collateral damage on the rest of Asia.  Contrary to popular folklore, China has not become the world’s factory.  Instead, it is functioning much more as the final destination of a huge pan-Asian supply chain – directly involving inputs and supplies from the region’s other major economies like Korea, Taiwan, and Japan.  China is, in fact, the largest export market for the first two of these externally-led economies and is rapidly closing in on the US as Japan’s largest export market.  Professor Lawrence Lau of Stanford and the Chinese University of Hong Kong has estimated that domestic PRC-based content accounts for only about 20% of the total value of Chinese exports to the US (see Lau’s 2003 paper, “Is China Playing by the Rules?” presented as testimony in September 2003 before the US Congressional Executive Commission).  More recent research by economists at the central bank of Finland underscores how shifts in the RMB would reverberate throughout a vertically integrated pan-Asian production platform (see Alicia Garcia-Herrero and Tuuli Koivu, “Can the Chinese trade surplus be reduced through exchange rate policy?” Bank of Finland, BOFIT discussion paper #6, 2007).  The US Congress is operating under the false presumption that trade sanctions would be a surgical strike on China.  That is unlikely to be the case.  Instead, there would undoubtedly be major cross-border spillovers that could quickly put pressure on the rest of a China-centric Asian supply chain.

There is a final misperception about the oft-feared Chinese exporter.  It turns out that China has become an important efficiency solution for many of the world’s multinational corporations.  China’s so-called foreign-invested enterprises – basically, Chinese subsidiaries of multinationals – have accounted for more than 60% of the explosive growth of overall Chinese exports over the past decade.  That raises serious questions about the real identity of the widely feared, all-powerful Chinese exporter.  It may be less of a case of the indigenous Chinese company and more an outgrowth of conscious decisions being taken by Western companies.  Who is the new China – is it them or us?

Unfortunately, the US Congress is seeing the China problem from a very narrow perspective.  At the root of Washington’s approach are understandable concerns about increasingly acute pressures bearing down on American middle-class workers.  But the link between this painful problem and China is based on flawed macro analysis – mistakenly focusing on the bilateral piece of a major multilateral imbalance of a saving-short US economy.  As is often the case, one error can beget another, and the real risk is that Washington-led China bashing could trigger a host of unintended consequences – not only taxing American consumers and US multinational corporations but also triggering currency and real interest rate pressures that could tip the US economy into recession.  But the biggest tragedy could come from a United States that squanders an historic chance to engage China as a strategic partner in an increasingly globalised world.  And if Washington pushes China away, I fear the rest of an increasingly China-centric Asia won’t be too far behind.

globalisation isn’t easy.  It puts pressure on developing and developed countries, alike.  As the world’s leading economic power, it falls to the United States to assume the special role as a steward of globalisation.  China bashing is tantamount to an abdication of that role.  globalisation may have an exceedingly tough time recovering

By Stephen Roach, global economist at Morgan Stanley, as first published on Morgan Stanley’s Global Economic Forum

2007-5-11 01:10 PM

mjackson321
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Thank raymondusa for such a good article,very helpful and enlightening .
anticipating more artcles from you

2007-5-11 01:28 PM

middlekingdo
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QUOTE:

Originally posted by raymondusa at 2007-5-11 13:10
Moreover, there is the distinct possibility that Washington-led China bashing could inflict major collateral damage on the rest of Asia. Contrary to popular folklore, China has not become the worl ...

Actually, this article comes of no surprise to me as I have read it before.

But Those Blustering Morons in Washington D.C. don't see it as a potentially lethal flashpoint of the US and China, rather as a Chance to get a few percentage points higher on the approval polls.

Well, it's what Democracy devolves to, so what can we do.

2007-5-11 01:36 PM

raymondusa (raymondusa)
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Politicians don’t usually have much business acumen, nor do they have a good understanding of economics. That’s why they go into politics so parasitical political supporters can feed them money, in exchange for favors so businessmen can make more money.

mjackson321:

I don't usually post many articles, as I prefer to write my own opinions. But when a good article comes along, and the author can say it better than me, then I post it.

Enjoy!

2007-5-11 01:50 PM

mjackson321
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we produce lots of products consumed by Americans at a very low price while U.S. government blames its trade deficit on China . how innocent we are ! and what an unfair judgement !
in fact , i think maybe the pressure from U.S. would help us put more attention on domestic consumption . we should develop our own market and let our people share our benefits .
how to enlarge our market ? that's the key point of the trade deficit issue . we can't ask other's government or congress for mercy .

[ Last edited by mjackson321 at 2007-5-11 02:14 PM ]

2007-5-11 02:12 PM

desperado123
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now Americans seems not only to be satisfied with the Chinese cheap products . a large number of hot money has been flowing into China from U.S. for the investment on the developing country's real stateand stock markets.i'm afraid our economy is on the risk under foreign capital's inspeculation.

2007-5-11 03:14 PM

voice_cd
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Chinese, US economies closely linked - Randt(U.S. ambassador to China)

The economies of the United States and China are so inextricably entwined that if something bad happens to China it is going to negatively affect the US.
"The way to address the trade deficit is for us to sell more to China rather than restricting Chinese sales to the US," the U.S. ambassdor emphasized.
Randt offered the following observation: "China is by far our fastest growing export market, with 32 percent growth rate last year. That's the real story."
the whole story for you on the following web site

http://www.chinadaily.com.cn/china/2007-05/11/content_870061.htm

Image Attachment: us001.jpg (2007-5-11 03:50 PM, 34.15 K)

2007-5-11 03:50 PM

markwu
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China can't buy anything from the US that China doesn't need in much the same way that the US as a sovereign country can't buy anything that it doesn't need.  China needs high-technology in order to raise her industries' productivity and value. If the US continues to restrain export of its high-technology to China, then the US should say what China is to do next. The US' line that China should revaluate her yuan has been argued before to be untenable and if taken too briskly would jeopardise the livelihood and wellbeing of her peoples, especially those in the rural and lower income areas. And if China were to impose export duty on her products to the US and Europe, the buyers in those countries would object since they have already invested much in their networks and employment of workers that import China's goods.

The US' flip-flop policy on trade with China is because the US cannot decouple its economics from its politics. It wants China's goods at cheap rates but forgets that means low-wages for China's workers as well as pressure on China's environment. At the same time, it wants China's market for its goods which remain high-priced, of only tolerable quality and not customized for Chinese preferences.  If China doesn't become rich, how can she buy more from the US?  If the US doesn't export really useful high-technology to China to help China scale the value-added curve faster, how can China become rich faster to import more US goods and help the US close itss trade deficit gap?  The faster the US sees this reality, the easier is the solution out for everyone.  The US should be more responsible in its assessment of the situation, given that China has already taken an exposed position in buying US treasury bonds and the like when their returns will be in a weakening US dollar that will return less and less value to China's treasury.  If not careful in this regard, I fear China will lose billions from this.

One is also concerned about the influx of hot money into China's bourses. In one aspect, it may be good to prime investor interest in the stock markets. But as has happened before in many other parts of the world, it can exact a terrible price on the receiving nation and her own people.  The Asian crisis of '97 and some of the earlier bubbles happened because too much hot money rushed in from the US and Europe that ultimately inflated share prices beyond fundamentals. Naturally seeing opportunities, local native punters joined in the party and ploughed in their life savings. But we all know that in order to make money, the fund managers and foreign investors must recover their positions. That means sooner or later they need to sell. Because of the size of their capital infusion, the moment they withdraw from the markets collectively, the locals will find their holdings losing value far more than what they had paid for. It's like a wave moving away and creating a vacuum that sucks dry everyone who remains behind.  Locals get burned because they cannot know in advance of the big boys who can manipulate announcements and window-dress for the killing.  Stock market plays, after all, are about passing your future losses to the next guy when you sell out now. For all its attractive potential rewards. it's a capitalist invention with dire consequences. Caveat emptor, all.

2007-5-14 10:29 AM

myfriend
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What is the real solution to America's trade deficit?

... devalue the us dollar by 50%.

2007-5-14 12:54 PM

#10

correction
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The fault lies with the US continues to restrain export of its high-technology to China because of its suspicion that such high-technology be used in weapon applications for China.
However, without US export, China could always turn to many other countries for such high technology imports and so benefiting EU countries and widening US trade deficits.

[ Last edited by correction at 2007-5-14 02:53 PM ]

2007-5-14 02:48 PM

#11

raymondusa (raymondusa)
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markwu:

When the issue of trade comes up, usually the author is writing from the US point of view, and focused on what China should do.  But to truly fix this imbalance, here are some realistic ideas for starters.

China:

1) Increase domestic consumption, when USA has things that China wants to buy.  There is savings available to spend, but Chinese are not going to spend just because there is savings.  US multinational companies will need to do a much better job of understanding the needs and culture, and to deliver products and services to fill it.

2) China needs to further develop other markets, to reduce exports to USA. (Decoupling, which we are already seeing some evidence in terms of total exports to US versus total exports to the world)

US:

1) Stop deficit spending, on a government level, and on an individual and company level.

2) Increase and consistently save more money, which lowers consumption, thereby reducing demands on imports.  This is easier said than done, since USA is a gratification now society, and asking it to save more, and not consume as much, is difficult.

myfriend:

Devaluing doesn’t work.  Don’t forget!  USA is a debtor nation.  It has massive debts and it needs to continue attracting financing from around the world.  You will not attract foreign financing with a policy to devalue the currency.  Central bankers around the world are not that stupid.  That’s why you are seeing Central Bankers rebalancing away and investing in other stronger currencies.

Furthermore, if USA wants to continue as a world reserve currency that Central Bankers around the world prefer, that currency needs to maintain its value.  Our clueless politicians may want to devalue the dollar to attract more domestic votes, but it will not attract more financing from Central Bankers around the world.

correction:

That's a very practical point of view.  If USA doesn't want to sell high tech, others will, and they will also get greater access to China's domestic market.  The sooner US treats China as a strategic partner, and bring it closer as an allied, the better off it will be.  China is the fulcrum that balances the US and EU, since both can see China's domestic savings, and a huge market.  Some may argue that China's middle class consumers may be 100-300 million, depending on which stats you include.  Anyway you slice it, that's a huge market ( too huge to ignore).

[ Last edited by raymondusa at 2007-5-13 11:14 PM ]

2007-5-14 02:59 PM

#12

poodles
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The Future

Devaluing the US currency by 50% has already happened,

Its in the past. Its just that centeral banks have also devalued their currency right along with the US currency.

Note how every commodity has doubled in US dollars??  No, the US dollar has HALVED in value, so has all other currencies.

Do you believe the US stock market has gone UP a LOT this year....
Your Wrong.  Value the stock market in GOLD, COPPER, NICKEL, and you will see, the stock market has dropped quite a bit.

You must value things by comparing not their PAPER CURRENCY price, but VALUE a thing by how much of another THING it trades for.

In 1930, I could buy a very nice suit for 1 ounce of gold. (30 dollars)
Today, I can buy a very nice suit for 1 ounce of  gold (650 dollars)

Has the 'value' of the suit gone up?  NO, the 'value' of the dollars has gone DOWN.

My house in the last 3 years has TRIPLED in value, has it?  NO, the dollar has dropped in value and no longer buys what it did.

If you keep your savings in paper currency, you will lose everything you have.

M3 the measure of money supply in the US is no longer reported as of last year, hmmm, wonder why....perhaps because its rising at over a 10% rate ??

China must be very careful holding paper dollars, like a paper dragon, they only represent power...they are not power.

2007-5-14 06:48 PM

#13

markwu
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raymondusa wrote:

QUOTE:

US multinational companies will need to do a much better job of understanding the needs and culture, and to deliver products and services to fill it.

And some of them are already quietly doing it - but would US congress admit to that? Take Darlie toothpaste. It was once a HK concern under the Darkie name until bought over by Colgate-Palmolive, a US public-listed corporation. While Darlie is now made a household necessity all over the world, it's certainly because it has been priced low by dint of low Chinese worker wages, with royalty repatriated quietly back to the US.

US companies have a tendency of seeing the short-term to the exclusion of long-term customer service. If they persist in doing things like false advertising (see how big the hamburger is in the picture - only - in McDonald's, as a small example), then how can they expect people not to wake up one day and be annoyed?

There have been other horror stories of their scant regard for overseas customers. One country found remnants of a KFC meal in an imported US car; even their hightech Boeing company has been sued for manufacturing defect in one plane that crashed and killed.

Even if we walk away from extreme examples, there's still plenty to bone about. Take Walmart in China; those refrigerators in black remind one of looking into a coffin even if you're actually looking for a frozen fillet.  And its layout sucks so much customers will collide their trolleys in some areas of the shop; there's no happiness and ambience and brightness exuding from such an american icon that would make shopping at this american brand an exhilarating experience - and you know, they just don't care because they come and make a gestural opening, then fly back and wait for the cash registers to ring.

I can write heaps on this subject but i don't want to belabour the point - if they want China's market, they must respect the Chinese customer more than their own. If their products and services have cheaper substitutes delivered better, who in his/her right mind won't choose those rather than part hard-earned pay to indifferent suppliers?

And sometimes, they ask for it; take Croc, the colorado-based plastics slippers that's all the rage in other countries. They don't do any survey and lob in with something that costs a month's pay; comfort aside, it's ridiculous not to even ask what is the meaning of slippers to a society which has four seasons, and for many folks, only a pair of canvas shoes.

Let's take another point which has not been discussed here. I think this trade deficit thing omits one consideration - and that is the royalty which countries pay to the US for products which those countries then sell to China.  In other words, when Chinese customers buy a product from, say abe-land,  and nippon companies pay royalty on that product to the US company, don't you think that that royalty should be subtracted from the deficit for purpose of better measured discussion? After all, the discussion is about who has net in the end and if the US gains by that, then shouldn't it include that?

In a nutshell, Americans must readjust their expectations when dealing with an emerging market, and this is especially so with a socialist economy in transition. If they expect the moon, they may only end up looking at it in some star-lit pond.  They fly in, stay at Portman's in Shanghai or Hilton in some other city, drink some Starbucks, talk to some people and then fly out to write a report for the eyes of a bunch of wild-eyed but rapacious shareholders and directors, and expect to win the hearts and minds of a million customers overseas?

2007-5-14 06:57 PM

#14

raymondusa (raymondusa)
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2007-5-15 12:35 AM

#15

tradervic (Uncle Laowai)
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Globalization = Holy Grail

Ladies and Gentlemen,

   This talk of the "globalization" of the world reminds me of the hype that went into the "De Vinci Code" a couple of years back.  Globalization is just another "Holy Grail" that everyone strides for - but does not exist.

   For a truly global economy to work, then the elimination of national tariffs and/or government oversights have to occur.  Then again, why bother to have a nation state at that point then?  If someone wants to see a true "free market" - then take a trip to Somalia.  No government and all the free trade you want - but mind the security and health issues, they could be a killer.

   In the grand scheme of things - trade can be loose, but never to the lazie-faire that most globalization suporters want.  There was, is, and will be backlash at a national level for national interests - which we are seeing today.  Most likely the U.S. and China are going to though a round of trade talks in the near future.

TraderVic

2007-5-15 03:47 AM

#16

tradervic (Uncle Laowai)
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And China's OTHER customer is?

QUOTE:

Originally posted by jetsam at 2007-5-14 16:04
As China has repeatedly said, she doesn't need trade with a fat man in her restaurant, eating everything in sight and paying with fraudulent dollars. The massive reserves China has shows she doesn ...

Jet,

Say "Amerika" stops buying Chinese goods - who is China's OTHER customer to take the surplus?

Truth, Mexico thought it had the cheapest labor market, welcoming all the American companies they could get. Then China showed up with their workforce, and those same American companies left Mexico, leaving the Mexicans running into America looking for jobs. It will be interesting to see what happens when the American companies start pulling out of more factories out China for Vietnam, Bangledesh, and other countries. It is like I told my cousins-in-law in China what happened to my cousins-in-law in Mexico and my immediate family in Detroit: Do not get too used to the jobs - they will not last forever.

TraderVic

2007-5-15 11:06 AM

#18

raymondusa (raymondusa)
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poodles:

It has devalued its currency, but as you pointed out, others have done the same, so in relative terms, that’s not truly the effect US wanted.  It’s not an effective strategy since it fails to get the desired outcome, which is tilting the trade numbers and economic numbers in USA’s favor.

You are correct.  They stopped printing the M3, because they are printing large amounts of money to pay the bills.  Bring on increased inflation (and I don’t mean the number the US government chooses to report).  I remember when it was possible for one parent to work and support the family.  Today, it’s more likely that it takes both parents working to support a family.  Why?  Inflation, as almost everything cost more in relative terms, compare to 40-50 years ago.  US can print more dollars, but with reduced purchasing power, it is more money to count, but it doesn’t buy more in relative terms.  Inflation is an indirect tax that hurt US consumers and ultimately hurt the US economy.

China is diversifying and rebalancing away from the dollar and into stronger currencies and other strategic reserves.  The reserve portfolio is not a great investment, but I believe some amount of dollar reserves are necessary, to create some security for China against Neocons and others in US who would like to bully China. Think of the reserves like an insurance policy.  It’s not supposes to be a great investment.  But it has given China leverage since US do need the foreign financing.

markwu:

The deficit is a reflection of what is happening on a country level.  But I agree with you that many multinational companies are making money and not experiencing a deficit for doing business in China.  I don’t feel there is a realistic way to factor in those revenues on a corporation level, and I’m sure US multinationals don’t want it factored it.  They want to continue this gravy train for as long as they can get away with it, and allow the government to whine about deficits. As long as they are not the targets, staying silent and quietly collecting the revenues is fine with them.

tradervic:

USA is not just in China for cheap labor.  Perhaps you are unaware that China has about 50% of GDP in savings, as many countries are looking to get a piece of that domestic consumption.  USA is in China because it needs China's financing for its massive debts, deficit, etc., and need China to buy its products.  China has already developed other markets in Europe, in Latin America, etc.  Just look at the exports to US, versus exports to the rest of the world.

Bottom line:  USA is a debtor nation, spending borrowed money to inflate its GDP (which is not truly internally generated growth).  Just for some perspective.  It spends more in paying interest to service its debts, than it pays to fund the entire US educational system.  When it comes to a global economy, US cannot compete because their policies have so far inflated the economy, rendering it non-competitive.  When it was more an insular economy, US could get away with complacency.  But when exposed to a global economy, its weaknesses (inflated wages, inflated cost of living, inflated real estate prices, etc.) are exposed.  That’s the problem with just printing money to pay bills, bringing on greater and greater inflation, and making it more and more difficult to compete in this global economy.

[ Last edited by raymondusa at 2007-5-14 08:07 PM ]

2007-5-15 11:40 AM

#19

greendragon
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Reply #10 myfriend's post

ha ha ha

simple solutions!

and "some rebalancing of the ekonomi"!

ha ha ha

Green Dragon
Game Master

2007-5-15 01:02 PM

#20

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