Saturday, October 15, 2011

Declaration of currency and trade war - new economic weapon of mutually assured destruction?

War or cooperation. Take your pick.

Nouriel Roubini of New York University and Richard McGregor of the Financial Times

http://www.charlierose.com/view/interview/11941

Hypocrites who blame China for American troubles need to address fundamental productivity and structural problems

This columnist succinctly sums up the fallacies behind US politicians who blame China for its economic woes. William Pesek's Commentary in Bloomberg : `Made in China’ Tag Makes Hypocrites of Us All


Let the truth be told. Many of us should be aware that the blame game masks quick-fixes to satisfy personal vested interests which could be disastrous to citizens led astray in the long run. I won't chastise some American workers who have no interest or do not have a good grasp of economics being misled by rightists. However, I was really surprised to have met a couple of highly educated Americans were chanting the same mantra. They were studying international economics no less. Hopefully, the course and some of us who are widely read would have tempered their radical thinking. So work out the pros and cons and calibrate our responses before more of Americans join the bandwagon of hypocrisy to blame those who have succeeded under the very framework, terms and rules of the game established by the advanced economies. 

Quote : 



Hypocrisy is the defining element in all the wrangling over China’s currency.
October 11, 2011


The debate seems deceptively simple: As China booms and America implodes, how much blame does Beijing’s undervalued currency get for chronic U.S. unemployment? China says none -- it’s a developing nation and needs to create the hundreds of millions of jobs to keep the peace and satisfy its citizens. A vocal chorus in Washington says China’s trade advantage hogs all the growth.

The trouble with these disparate views is that they are both partly correct. The yuan does hinder growth, as Federal Reserve Chairman Ben Bernanke points out. It’s “blocking what might be a more normal recovery process in the global economy,” he said last week. Meanwhile, the risks of social upheaval in China are rising. Subsidizing exports is an obvious way to avoid it.

The real question is: What can Americans do? Three things: Blame the Jon Huntsmans in their midst, focus on trade access and rediscover their entrepreneurial soul.
The doublespeak from Corporate America is breathtaking, and few personify it better than Huntsman, the Republican presidential candidate. As Huntsman pledges to create millions of American jobs and touts his business acumen as proof he’ll deliver, the namesake Huntsman Corp. (HUN), a chemical maker, downplays the central role that cheap Chinese labor played in building a fortune partly “Made in China.” After the U.S., China is Huntsman’s biggest market.
Naming and Shaming
Sure, Congress can slap tariffs on Chinese goods. More success may come from naming and shaming the politicians, business leaders and companies making piles of money by moving jobs to China and, out of the other side of their mouths, demanding lower taxes and denouncing President Barack Obama as an economic simpleton. The U.S. long championed the globalization model that it now blames for its woes.
Hypocrisy is also at play in how Bernanke and his Chinese counterparts are embroiled in a race to the bottom.
“It’s pretty evident that a weaker dollar is part of U.S. policy, so they are hardly in a position to throw the first stone,” says Simon Grose-Hodge, head of investment strategy for South Asia at LGT Group in Singapore. “Even though China overtly manages its currency, a stronger yuan isn’t going to bring back the jobs American companies willingly exported.”
Perhaps the real indignity for Washington is that, as it ponders a trade war with its biggest creditor, China is winning the currency war. Lawmakers facing re-election next year will find China a convenient scapegoat for bad economic data. For all its growth, China’s model isn’t benefiting the world as some had anticipated.
Market Access
Market access, not exchange rates, is the critical issue. If the yuan jumped 30 percent tomorrow, Germans would sell more cars, French more wine and cheese, Italians more shoes and handbags, Australians and Canadians more raw materials. The U.S. would sell China more soy, corn, cotton and apples. What kind of wealth does this trade create as companies move jobs to China?
Apple Inc. (AAPL) would love to sell more iPads and iPhones in China. But then, much of the content in these products is made by low-wage workers there who can’t afford the finished goods. And Americans would lose it if the cheap wares they gorge on suddenly shot higher in price. Corporate America will just shift jobs to India and Vietnam if costs in China go up.
Here, it’s worth noting a recent report from the San Francisco Federal Reserve Bank. Economists Galina Hale and Bart Hobijn argue that “Made in China” isn’t taking over U.S. consumption as much as believed. Of every dollar U.S. consumers spend on a Chinese-made product, about 55 cents pays for services in the U.S. Think about it, when you spend $90 for a pair of Nike sneakers, only a fraction of it flows to China and even less to workers there.
Valid Concerns
The real issue is U.S. companies creating jobs at home and gaining access to Chinese markets. It’s challenging for U.S. corporations to compete in China, bid for contracts and protect intellectual property. China lavishes advantages and subsidies on national champions and limits access of foreign financial firms. Corruption complicates business.
Valid concerns all around and none of them hinge on the dollar-yuan rate. If the U.S. could compete on even terms, there would be ample money to be made in China and jobs would be created back home. Sadly, Congress is more obsessed with exchange rates than trade talks that might actually boost job growth.
China’s ascent should spur and motivate the West. Earlier this year, Obama called China’s rise another “Sputnik moment,” recalling how the Soviet Union’s 1957 space launch unnerved America. The U.S. needs to relocate the entrepreneurial passion that made it the biggest economy and created some of the best companies.
The extraordinary reaction to the death of Apple’s Steve Jobs reminds us how America loves its innovators. China’s growing influence should be a call to arms to do what the U.S. has typically done best. Rather than being inspired to think big or forced to reconsider their unreflective policy stands, many U.S. lawmakers are pointing fingers eastward.
It’s hypocritical to blame China for what ails America’s economy. If you think currency rates alone are going to restore U.S. prosperity, think again.
(William Pesek is a Bloomberg View columnist. The opinions expressed are his own.)
To contact the writer of this article: William Pesek in Tokyo at wpesek@bloomberg.net

Tuesday, October 4, 2011

US moves to punish Chinese yuan will increase cost of living for average Americans and has not effect on job creation

Some US senators are bulldozing for the Currency Exchange Rate Oversight Act. This bill, however, has limited support among the House of Representatives and the White House who know better not to risk more hardships for ordinary Americans, antagonise a major trade partner, without achieving the said objective of effectively reducing the trade deficit and creating more jobs. 


Some economists said they understood the politics of the debate but questioned whether the bill would bring back American jobs or prod China to move faster on currency reform.

"We consume a lot. The Chinese save a lot. We're going to run a trade imbalance with them," said Derek Scissors of the Heritage Foundation.   


An editorial from the  Washington Post claims the bill is counter-productive and does more harm than good. It is mere political rhetorical to project a "symbolism" with limited practical impact.


"But would it really create hundreds of thousands of jobs in the United States, as the bill’s advocates suggest? The verdict from an April briefing paper from the Federal Reserve Bank of St. Louis is: “probably not to any meaningful degree.” Overall U.S. employment is indeed a function of the U.S. balance of trade. While it’s true that the United States has been running a trade deficit for decades and that its deficit with China is a growing share of it, ending the trade deficit with China would not necessarily cure the overall U.S. trade imbalance. That’s because other low-wage countries that do not artificially depress their currencies could easily take China’s place. The components of many “Chinese” goods are already made elsewhere, imported by China for assembly and then reexported to the United States. Only 20 to 30 percent of the value of Chinese goods in the United States would be affected by a stronger currency.



Why risk costly Chinese retaliation for the sake of a measure whose practical impact could be so easily nullified anyway?

If Congress really wants to help American workers, it will end the stalemate and move these growth-enhancing pacts to final passage. The world economy has enough problems without adding a US-China trade rift to the list," 



"According to a US Treasury Department report, China made its exchange rate flexible last June due to its high inflation rates. On an inflation-adjusted basis, the appreciation is rising at an annual rate of more than 10 percent."


Strong opposition to the Bill from American business interests backed by the  powerful US-China Business Council will be a major stumbling block. With their profits and long-term interests to protect, corporations will ensure that their lobbyists get the message across to the majority of representatives not to vote


Nobel prize winning economist  Paul Krugman's contention has softened somewhat despite continuing to join in the xenophobic chorus as a clever diversion tactic to focus attention on a foreign bogeyman instead of addressing urgent and vital economic reforms in the USA.


"Holding China accountable won’t solve our economic problems on its own, but it can contribute to a solution — and it’s an action that’s long overdue."



More attention should be paid on  promoting US niche businesses and cooperation with Chinese state enterprises for mutual benefits which Americans will get to enjoy. 

First things first.  Get the house in order before criticising and pressuring others when one has limited leverage and effective solutions.