A lot has been said recently about the manner in which China manipulates it's currency, the Yuan. But China wants to hear none of it. In his annual press conference, Mr. Wen Jiabao, China's Prime Minister said that he was "a staunch supporter of free trade" and denied that the Yuan was undervalued. (The Economist, March 18, 2010)
Such denials are reflective of what the world is dealing with. An issue, which should have unified the world against China has, over time, become one which has divided it between Free Trade Proponents and "Protectionists". And amazingly, China is in the Free Market camp.
Ever since Paul Krugman proposed the controversial 25% levy on Chinese Imports into the US, eminent economists like Donald Boudreaux, Greg Mankiw and most recently, Stephen Roach have launched vicious attacks against him labeling him a protectionist who would not only stop world trade, but probably cause World War III.
But before we decide where virtue lies, lets examine the arguments.
Free Trade relies on free markets to be effective. By intervening in its currency market, China has demolished the very foundation of free trade. If Mr. Jiabao is a staunch supporter of free trade, as he professes, the Chinese government should let the currency float and allow a free market to determine its value. In other words, China needs to act like it supports free trade, not just say it. Also, the self appointed guardians of free trade need to examine the logic of supporting government intervention in the currency market while espousing free trade.
If the Yuan were to float, it would appreciate against the US Dollar and all other free float currencies because of the trade surplus that China enjoys. This appreciation would make manufacturers in other countries more competitive and reduce China's trade surplus. In other words, the markets would restore equilibrium and free trade would continue unhindered. This equilibrium is unattainable if China intervenes to decide the price of its currency.
China's currency intervention is the most blatant form of "market protectionism" that has existed and needs to be recognized as such. It benefits China at the cost of it's trading partners and leads to a transfer of wealth from the importing nation to China. But does China need a weak currency? Or does it just desire one.
With its trade surplus, China benefits tremendously from a weak currency. Since it exports more than it imports, a weak currency makes it richer by increasing the value of its exports more than it loses due to increased value of imports. The magnitude of the trade surplus implies that China doesn't need a weak Yuan to compete in the world, but its stance on the currency proves clearly that it desires one. What China gains from a weak Yuan is clearly understood, but in the absence of need, the only explanation for its obstinacy is Greed.
As one of the first proponents of "Competitive Devaluation", China used the currency market to gain a competitive advantage against its peers. Over time, with command policies supporting exports, China established itself in the major markets of the world and then proceeded to compete effectively with domestic manufacturers. The dis-inflationary impact of Chinese imports allowed the US and other importing nations to follow expansionist monetary policies, which created an impression of increasing wealth. However, asset bubbles, supported by a misguided de-regulation of market intermediaries, resulted in a disastrous crisis. A detailed discussion of this is available in an earlier note, China's Currency Policy, The Financial Crisis and the Future of Financial Reform.
But the financial crisis is not the only problem that China contributed to. By keeping the Yuan weak, China effectively ensured that every country competing with it would need to do the same with their currencies. India was, and continues to be, one of them. Except that in India's case, the trade balance is unfavorable and currency weakness actually costs India more on its imports than it's benefit to exports. In essence, currency manipulation by China enriches itself but impoverishes India.
For India, the impact of Chinese currency manipulation along with inherently faulty monetary policy has led to at least one economic crisis. If the Yuan were to appreciate vis-a-vis free currencies, it would result in an environment where most of the past wrongs can be corrected, at least prospectively. More details can be found in an earlier note, Inflation and the RBI. Whether the RBI will have the wisdom to take that opportunity is a question that can only be answered then.
China's greed has sucked wealth from its trading partners and its competitors. The financial crisis of 2008 has called many practices into question and presents an opportunity for the world to unite against China and ask it to play by the rules.
If it's free trade that it wants, it has to respond with free markets.
Although interesting I cannot agree with your post.
Let’s look at the undervalued rembibi for what it is: a tax on internal producers in China and a subsidy to export-oriented industries. So, by keeping a pegged currency, China is diverting resources from internal production to export. That’s all. It is not getting richer, rather poorer that it would be without the peg.
Now, exactly how can the peg produce buts not only in China but around the world? Without the peg, China would trade less, and thus the other countries would also trade less. Thus, China’s peg is also diverting resourced in other countries form internal production to export or outright assets sale.
In the first case, diverting capital form internal production to export, the peg is indeed furthering malinvestment, and pushes the world’s structure of production away form its utility-maximizing point. Yet it would be a long jump to go from this truth to the statement that China fueled the bust. For, empirically, the bust in the west hit (as always) financial institutions first, and then propagated. We would have expected, form a peg-induced bust, to see export industries crumbling first, and then other firms. But of course that didn’t happen.
The latest financial crisis was “made in the USA” not at all in China, although should the rembibi be floated tomorrow there would be a shift in resources form export to internal production world-wide. Whether that would be considered a ‘crisis’ depends on how much undervalued is the rembibi right now. I myself do not thing that any country on earth could ever come close to undervaluing its currency so much as to induce anything more than a minor readjustment on the world economy. Yet the important thing to see here is that those who fearing a crisis should advocate the strengthening of the peg, not its abolition.
The second case, where other countries sell resources to finance increased imports, is similar in nature: when (if) the yuan will float, FDIs towards the US will increase (increase, not reverse), as the opportunity cost to foreigner of holding American assets will increase.
But something important must be clarified: the peg gin itself in not forcing the US to sell assets. When a peg-driven import surge happens, such surge would be financed though exports or asset sales. The difference will be set by time preferences. A low-time-preference people like the Japanese financed increased Chinese imports through exports to China, whereas a high-time-preference people like the yanks financed it though asset sales. So, even without the peg the US would be selling assets and be facing trade deficits right now, as its time preferences are far to high. What the peg does is only to highlight and intensify that sale.
And so for the important point: China is not causing trade deficits! It could not. It is merely causing more resources in the world to be devoted to trade instead of internal production (when the partners are low-time-preference countries) or making high-time-preference countries sell more assets. Its entirely up to the ‘receiving’ country to ‘decide’ whether it will have a deficit or not. Pining low growth or poverty to China’s peg would be madness.
The world is indeed poorer than it would be without the distorting peg, but rest assure that the Chinese surplus will not go away by floating the yuan, neither shall India’s deficit disappear. If these countries (my own included) wish to lower the artificial parts of their trade deficits, let them address their own budged deficits first (which shows one-to-one in international trade) and then ask that China float the yuan. If the west wants to avoid busts let it introduce monetary competition itself and than ask China to float the rembibi. The whole tirade is mercantilist, hypocritical, short-sighted demagoguery.
You make many interesting points, Merlin, but current models fail to capture the impact of the transfer of labor income. I agree that a large part of the crisis is made in the USA, but China's role cannot be wished away.
China's intervention in the currency market distorts the very free markets required for free trade.On the other hand, a slightly more contentious issue, would be the intervention of the US Government in the labor market. Minimum wage requirements prevent labor cost reductions needed to combat low cost producers elsewhere in the world even if unemployment in the US rises. Let me elaborate with an example...Lets assume that a product can be manufactured in both US and China for USD50 in raw material and 2 man-days of labor. If labor cost in China is USD 12.50/man-day and labor cost in the US is USD 25/man-day, the US manufactured product would cost USD 100 while the China manufactured product would cost USD 75. If US consumers buy the Chinese product, they gain USD 25 while US workers lose USD 50 in wages. The net loss to the US economy is USD 25. China gains USD 25 in wages.Assuming US consumers shift en-masse to Chinese goods, unemployment in the US would increase, which should ideally result in labor being available at a lower cost. When labor costs in the US reach USD 12.50/man-day, US production will become competitive again as the US manufactured product would cost USD 75 as well.But minimum wage requirements prevent this from happening, casting job losses in stone.
So while the US Government intervenes to 'protect' its workers, China benefits and draws production away from the US. China would have this benefit even if they did not manipulate their currency. Hence the term greed... By holding its currency at an artificially deflated value, they are in essence sucking in jobs from all over the world, not just high cost economies like the US.
What I would like to see is the US government stepping away from the labor market and china stepping away from the currency market. Let them both find their own level. I don't think government has any role to play in deciding either the cost of labor or the value of a currency.
Thanks for your response. Its always nice to get a discussion going. My blog is www.rajivshastri.com where i have some more notes and i would appreciate your comments on those as well.
best regards
Rajiv
I wrote a line by line critique of this article. Sadly it got erased.
Let me summarize what you are saying:
1. The greedy Chinese are purposely lowering the value of their currency. Thus, for every dollar or rupee that you bring into China, the greedy Chinese govt is giving TWICE AS MUCH as you should be getting. Thus, all Chinese goods cost HALF AS MUCH as they should.
2. This is very bad for the rest of the world. Those poor misguided souls living outside China are getting twice as much for their money as they should be getting.
3. In particular, India is having a very hard time with this. And here's why [from http://www.heritage.org/index/Country/India]
"India’s economic freedom score is 53.8, making its economy the 124th freest in the 2010 Index. Its score is 0.6 point lower than last year as a result of declines in freedom from corruption, business freedom, and monetary freedom. India is ranked 24th out of 41 countries in the Asia–Pacific region, and its overall score is below the world average.
"India continues to move forward with market-oriented economic reforms and has achieved average growth of about 9 percent over the past five years. The economy has been driven by information technology and other business process sectors. Despite sluggish progress in reducing onerous non-tariff barriers, the trade regime has gradually become more open, with its average tariff rate decreasing.
"The state still plays a major role in over 200 public-sector enterprises. Public debt is 80 percent of GDP, leaving little fiscal room to react to the global downturn. India’s overly restrictive regulatory environment does not facilitate entrepreneurship or realization of the economy’s full potential. Corruption is pervasive, and the judicial system remains inefficient and clogged by a large backlog of cases. Labor freedom is especially weak, with rigid regulations a costly impediment to further economic growth and job creation."
All this makes it hard for India to make a decent product at a decent price. Clearly, it's all CHINA's fault.
4. China has to make sure its COMPETITORS can compete against it more effectively. If it doesn't, it is being a bad greedy boy. The fact that it's giving away stuff at half price to all takers makes them real cunning sly villians.
5. The biggest victims of China's greed is the United States. Those silly bastards have been buying Chinese stuff like there is no tommorow at half price. This is VERY BAD for the American consumer. He should be paying double what he does for everything.
In fact, those cheap prices are what caused the Great Recession the USA is suffering from as we speak. If only American consumers had paid double for everything, they would today all be rich.
I hope I have stated your position correctly, sir.
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
Extremely well thought out, Dave. Neither your sarcasm, nor your imagery is missed out at all.
However, if for a moment you could look at international trade not only from the consumers point of view but from the manufacturers as well, you would see how simplistic models of analysis fail.
My second post takes into account both points of view. If competition reduces the price of goods, that is a desirable outcome. But if it concentrates jobs in another nation, it isn't all that good for the importing nation. Part of the blame lies with the US Government's Labor Policies. If they were to allow labor to be freely priced, and that would mean abolishing minimum wage requirements and reducing social security payouts, they would probably be in a position to compete effectively at some point.
However, that doesn't justify China's intervention in the currency market to dictate the price of its currency. Nothing does. Any distortion of free markets needs to be removed for free trade to function effectively. And any distortion of the magnitude undertaken by China needs to removed for free tarde to function at all.
Yes, China supplies cheap goods to the rest of the world and consumers benefit because of it. But manufacturers suffer and the amount that a open economy like the US stands to lose is far more that its potential benefit. This is because what it gains is the price difference between the goods produced, but it loses the equivalent of the total labor cost required to produce them as production moves to another country taking wages with it. Low cost producers have a natural advantage due to the abundant supply of manpower and this advantage will only get eroded only over time as the cost of labor in these countries rises to that in the US, or the price of labor in the US falls. If this natural course is to be run, all impediments to free trade need to be removed.
Your comments, though well thought out, fail to take into account all aspects even though I have highlighted them clearly. By concentrating only on what consumers stand to gain or lose, you have let your biases show, and that Dave is not a critique. Its a confrontation. If thats what you wanted, you could have been kind enough to admit it.
I don't really know where your loyalties lie, but they are clearly not with free trade. Your support for China's intervention says it all.
As for your comments on India, I don't need to read what the international media says about it. I live here. Yes, we have our own legacy to sort out and I didn't at any point of time claim that China was standing in the way of India's growth. It can't. Because unlike China, India's economy is 85% domestic and it really doesn't need exports for growth. It needs exports for the foreign currency they provide to allow us to import. However, India's monetary policy has been irredeemably influenced by the exporters which has resulted in a weak currency environment and I know for a fact, having been an active and significant participant in the debt market here, that a large part of the stimulus for a weak currency has always come from China. When I speak about India, I speak from experience, not from what I have read in a magazine. If you are really interested in what I have to say about policy here, read my blog.
Thanks for your comment. I could have done without the sarcasm, though, but then thats just me.
Why just remove all the regulations that make it hard for manufacturers in India to compete? Remember, you're forgetting the nasty detail of the weight of such fixed costs. Eventually, such fixed costs crowd out any and all firms following profit motive. Thus, your entire thesis relies on everything being held constant rather than looking to alternative explanations and/or resolutions to the problem.
"The power of liberty going forward is in decentralization. Not in leaders, but in decentralized activism. In a market process." -- liberty student
Merlin, I hope you read this
ladyattis, I couldn't agree more.
And I don't believe even for a moment that if the Yuan were to appreciate, India's manufacturers would become more competitive. Things would remain the same till such time policies here change. Also, I believe that in the event of the Yuan appreciating, the Indian Rupee would appreciate as well, which would benefit India on the whole, though our manufacturers would remain as competitive or uncompetitive.
Using the currency to promote export competitiveness is a ridiculous idea in a trade deficit nation. In fact, dictating or influencing the value of one's currency is wrong in any environment. But its only when it gets to a magnitude like China's that it really starts hurting others. Trade is as much about jobs as it is about consumption.
Rajiv Shastri: China's currency intervention is the most blatant form of "market protectionism" that has existed and needs to be recognized as such. It benefits China at the cost of it's trading partners and leads to a transfer of wealth from the importing nation to China.
China's currency intervention is the most blatant form of "market protectionism" that has existed and needs to be recognized as such. It benefits China at the cost of it's trading partners and leads to a transfer of wealth from the importing nation to China.
A weak yuan has actually benefited China's trade partners more than it has China. By undervaluing the yuan China has effectively made it cheaper for foreign entrepreneurs and consumers to import capital-goods and consumer-goods. Perhaps my point will be clearer through an example. Imagine an entrepreneur who needs to purchase Chinese steel to build a factory in California. Let's say that in the free market the exchange ratio between the dollar and the yuan is 1:4. What this really means is that an American buyer has to exchange 1 dollar worth of capital in exchange for what in China is represented as 4 yuan worth of capital. By artificially decreasing the value of the yuan, let's say to 1:8, the American entrepreneur now pays less for more. The winner is the American, and the loser is the Chinese seller who has not yet adjusted his goods to the rise in inflation. Furthermore, the Chinese consumer also loses because the ultimate result is an increase in the general price level.
There has always been a fixation on the volume of goods sold, without realizing that what really mattes is the amount of capital-goods being exchanged. China has been tricking its own entrepreneurs into selling more of their goods for less foreign goods, and that is definitely not beneficial to the Chinese economy.
Since it exports more than it imports, a weak currency makes it richer by increasing the value of its exports more than it loses due to increased value of imports.
I think that it's best to look at the Chinese case from the perspective of an individual Chinese entrepreneur. Does one really gain wealth by selling one's good at an undervalued price? Furthermore, does one really gain wealth when one must later buy the input capital-goods for a higher price? The Chinese have been selling goods at less than the cost of production, tricked only by the rise in the supply of yuan.
The dis-inflationary impact of Chinese imports allowed the US and other importing nations to follow expansionist monetary policies, which created an impression of increasing wealth. However, asset bubbles, supported by a misguided de-regulation of market intermediaries, resulted in a disastrous crisis. A detailed discussion of this is available in an earlier note, China's Currency Policy, The Financial Crisis and the Future of Financial Reform
While I agree that other countries also inflated their currencies to make their exports attractive, I do not agree that this was the main cause of credit expansion in the United States. The Federal Reserve's monetary policy was set to make investment more attractive by pushing down the costs of capital-goods, i.e. the rate of interest, not just to try to make American goods more profitable on foreign markets.
Now, given that other countries have followed China's example by inflating their currencies - i.e. Brazil, India, European Union, etc. - it means that there is a trend of global impoverishment, because currency inflation is not profitable.
Rajiv Shastri: But minimum wage requirements prevent this from happening, casting job losses in stone.
But minimum wage requirements prevent this from happening, casting job losses in stone.
While there it is undeniable that minimum wage laws do more harm than good, I don't think it really has been that important in deciding the outsourcing of labor to the third world. The fact of the matter is that the average income level in those countries is many times lower than it is in the United States, and even if minimum wage was to be abolished it does not follow that American workers would immediately accept a wage on par with that of China or India. The individual worker has what is called a "reservation wage" which is an absolute minimum wage he or she is willing to accept over a period of time. Generally, the longer the worker goes without employment the closer to his or her reservation wage the ultimate accepted wage will be. So, if a worker's reservation wage is at $8 it means that that same worker will not accept a wage lower. In this case, the "equilibrium" is at the point where wages offered reaches his reservation wage.
My point is that employment outsourcing is a natural byproduct of the extension of the division of labor. Some jobs are moving out because the employer can maintain a higher profit margin, but these jobs would be replaced by other jobs in the United States because there is always a need for employment. What disallows this from happening in the United States is not just minimum wage, but also other handicaps to investment which really retard economic growth and job creation. These include distortions of the market which lead to depressions, other labor laws which make hiring employees expensive, capital interventions such as taxes, et cetera.
What the free-market would allow for is not a retention of cheap jobs, but the extension of the division of labor.
By holding its currency at an artificially deflated value, they are in essence sucking in jobs from all over the world, not just high cost economies like the US.
I'm not sure how this follows. Could you fill me in with the logical steps you took to come to this conclusion? I.e. how does an undervalued yuan make labor cheaper? Undervaluing the yuan has only made factors of production more expensive, although given that an undervalued Yuan is basically a subsidization the negative effects of this policy are not seen until currency expansion either slows or stops.
I think most people on this forum would agree with this.
Rajiv Shastri: Extremely well thought out, Dave. Neither your sarcasm, nor your imagery is missed out at all. TY for the kind words and compliments. I am sure the rest of the post will continue in that complimentary vein. However, if for a moment you could look at international trade not only from the consumers point of view but from the manufacturers as well, you would see how simplistic models of analysis fail. Oh me oh my. Took only one sentence to change the tone and call me simplistic. OK lets look at a real world example. GM has been making expensive crappy cars. The Japanese made cheaper better ones. Let us be conservative and say the difference is $1,000 per car. SInce there are more cars than people in the US, we are talking about a potential savings of 300 billion dollars. But let's be conservative and say only 1% of them buy new cars. So it's 3 billion dollars that the consumer stands to gain by buying a Japenese car instead of a crappy GM car. On the other hand GM will have to close its doors. Surely it is worth paying an extra 3 billion dollars to GM to make sure they keep on making inferior cars at a higher price. How simplistic of me to ignore the entire US auto industry in my analysis. I don't know if they teach economics in India. But the basic idea is this: In free enterprise, it is the responsibility of every person to look after his own interests. If everyone tries that for just a few days, they will come upon a startling realization. He is not the only game in town. Other people are out there trying to sell exactly what he is selling. In the face of competition, he learns that his own interests are best served by PLEASING HIS CUSTOMERS. This is a lesson everyone learns very quickly in the free market. And it is the magic ingredient, this realization, that makes everyone work hard and do their best, to PLEASE THEIR CUSTOMERS. And when everyone is doing their best to please their customers, guess what? THE WHOLE ECONOMY FLOURISHES. Every last man woman and child is better off. A link for your amusement on this subject. Makes sense, doesn't it? Is it historically accurate? It sure is. Students of economics, for a few hundred years now, have come to realize that this vital idea "Get everyone wanting to please the customer" is what counts. It is the only thing that counts. How fortunate you are to have to a site that can teach you this. Because every last page here is ultimately about that concept. Now what is the best way to get everyone working hard at pleasing the customer? A lot of thought was put into this, and a lot of history was looked at, and guess what the brilliant minds came up with? Let anyone and everyone do whatever [nonviolent thing] they want. Everyone. Even the Chinese. That way, the manufacturers you so worry about have to stay alert. They have to PLEASE THE CUSTOMER more than the Chinese. And if they cannot do it, guess what? WHO NEEDS THEM? They are not good at their jobs. They are so bad, in fact, that in order to keep them in business every last man woman and child will have to pay double. As time has passed, clever people have tried clever ways, supported by clever arguments, to not have to work so hard. Because pleasing the customer is very hard work. many times, usually through getting the powers that be on their side, they have manged to avoid having to please the customer. And guess what? The economy turned into a shambles. Like, as you know from personal experience, India is today. My second post takes into account both points of view. An admission that your second post is fallacious. ONLY the consumer counts. ONLY. Everyone elses job is to please him. See above. And here is a more serious link on this subject, by the great Murray Rothbard: Protectionism and the Destruction of Prosperity If competition reduces the price of goods, that is a desirable outcome. But if it concentrates jobs in another nation, it isn't all that good for the importing nation. You mean: it isn't all that good for a tiny portion of the population, the incompetent manufacturers. But it is GREAT for everyone else. Part of the blame lies with the US Government's Labor Policies. If they were to allow labor to be freely priced, and that would mean abolishing minimum wage requirements and reducing social security payouts, they would probably be in a position to compete effectively at some point. I totally agree. However, that doesn't justify China's intervention in the currency market to dictate the price of its currency. Nothing does. Nothing needs to. They are not your slaves. They can do whatever they want. And see the above to find out why that is GOOD for you personally. Any distortion of free markets needs to be removed for free trade to function effectively. Exactly. I am glad we agree. And surely you realize free trade includes the right of ANYONE [including the evil greedy Chinese] to charge whatever he pleases for his money and his products. That is by definition free trade. And any distortion Are you God? Do you know in your infinite wisdom what the exchange rate "should be"? Of course not. So how do you know that what the Chinese decide to do with their own money is a distortion? of the magnitude undertaken by China needs to removed for free tarde to function at all. You understand by now that such a statement is straight from the bizzaro world. Forcing the Chinese to do something is not free trade. Yes, China supplies cheap goods to the rest of the world and consumers benefit because of it. Which is the only thing that counts. But manufacturers suffer Because they are incompetent. Or because the US govt strangled them, as we said above. However. if a person is being choked to death, the cure is not to get another rope and choke him some more. It is to get rid of the original rope. The US economy is choking because of govt interference. The cure is NOT to starngle consumers some more by making them pay double for everything. At any rate, the companies that cannot compete with the Chinese will just have to close down. That is the price one pays for incompetence. Maybe they can study economics in their free time, and find out what has to be done to make the country flourish. Or maybe they will have to get menial jobs and find out how things are, and what it will mean to them if they have to pay doule for everything, like certain people want. and the amount that a open economy like the US stands to lose is far more that its potential benefit. Now there is an unsupported statement if I've ever seen one. Am I to take your word for this? 300 million people getting things for half price is not as important as a few thousand keeping their useless unproductive jobs? This is because what it gains is the price difference between the goods produced, but it loses the equivalent of the total labor cost required to produce them as production moves to another country taking wages with it. This is just double talk. In simple English, you saying that the loss is that some people wil lose their jobs, while the whole country gets everything cheaper. And those few who lose their jobs are not going to starve, fear not. They will find their niche. They will discover what they are good at, even if it is just flipping burgers, and be productive instead of being parasites that want the whole country to pay double for everything just so they can keep on doing things badly. Low cost producers have a natural advantage due to the abundant supply of manpower As recently as the 1980s, the USA made the best products on the planet, sold them the cheapest, AND PAID THE HIGHEST WAGES. How did this happen? Do you have a clue? and this advantage will only get eroded only over time as the cost of labor in these countries rises to that in the US, Why should this happen? Is it a law of nature, like gravity? Do you know the answer? or the price of labor in the US falls. What will make this happen? Why do prices of labor rise and fall? Why are they higher in one country than another? If this natural course What is so natural about it? Are you making up your own Science now? is to be run, all impediments to free trade need to be removed. And letting the Chinese charge what they feel like for their products and their money is the very first principle of free trade. Your comments, though well thought out, Awww, I'm blushing now. fail to take into account all aspects even though I have highlighted them clearly. Silly me. By concentrating only on what consumers stand to gain or lose, you have let your biases show, My biases being what exactly? Pro consumer, and damn the torpedoes? Absolutely! And although I can summarize your position in way that you will agree with my summary [indicating that I understand it], I suspect you cannot summarize mine, meaning you have no clue. and that Dave is not a critique. Its a confrontation. If thats what you wanted, you could have been kind enough to admit it. Not sure what this means. I don't really know where your loyalties lie, but they are clearly not with free trade. Oh yes they are. As I have explained very clearly, I hope. Your support for China's intervention says it all. Neither I nor any of my family since the dawn of recorded history have ever been closer than an ocean away from China. I care about them as much as I do for any generic human being, but no more. I do, however, care about me. And I don't want to pay double for everything, thank you very much,. As for your comments on India, I don't need to read what the international media says about it. I live here. Yes, we have our own legacy to sort out and I didn't at any point of time claim that China was standing in the way of India's growth. It can't. Because unlike China, India's economy is 85% domestic and it really doesn't need exports for growth. It needs exports for the foreign currency they provide to allow us to import. Everyone knows Indians are extremely clever creative people. In any capitalist country, they instantly flourish. Sort out your legacy and you wil find the Chinese running to you, begging for the stuff you will be making that they can't. That will let you trade with them. However, India's monetary policy has been irredeemably influenced by the exporters which has resulted in a weak currency environment and I know for a fact, having been an active and significant participant in the debt market here, that a large part of the stimulus for a weak currency has always come from China. India, like every country ideally, should not have a monetary policy. The govt should just stay out of the way and let people do what they please about money and exchange rates. As you yourself write in this paragraph, the govt is always trying to help one group at the expense of another, in India's case, exporters. I guess I have presented my case by now; you know what I have to say about China. When I speak about India, I speak from experience, not from what I have read in a magazine. If you are really interested in what I have to say about policy here, read my blog. I am VERY VERY interested in any FACTS AND INFORMATION you can bless us with about India or any other subject. But at this stage, knowing your initial assumptions, I am not so curious about your policy reccomendations. Thanks for your comment. I could have done without the sarcasm, though, but then thats just me. I'm into sarcasm. It educates [when I am right].
TY for the kind words and compliments. I am sure the rest of the post will continue in that complimentary vein.
Oh me oh my. Took only one sentence to change the tone and call me simplistic.
OK lets look at a real world example. GM has been making expensive crappy cars. The Japanese made cheaper better ones. Let us be conservative and say the difference is $1,000 per car. SInce there are more cars than people in the US, we are talking about a potential savings of 300 billion dollars. But let's be conservative and say only 1% of them buy new cars. So it's 3 billion dollars that the consumer stands to gain by buying a Japenese car instead of a crappy GM car.
On the other hand GM will have to close its doors. Surely it is worth paying an extra 3 billion dollars to GM to make sure they keep on making inferior cars at a higher price. How simplistic of me to ignore the entire US auto industry in my analysis.
I don't know if they teach economics in India. But the basic idea is this: In free enterprise, it is the responsibility of every person to look after his own interests. If everyone tries that for just a few days, they will come upon a startling realization. He is not the only game in town. Other people are out there trying to sell exactly what he is selling. In the face of competition, he learns that his own interests are best served by PLEASING HIS CUSTOMERS.
This is a lesson everyone learns very quickly in the free market. And it is the magic ingredient, this realization, that makes everyone work hard and do their best, to PLEASE THEIR CUSTOMERS. And when everyone is doing their best to please their customers, guess what? THE WHOLE ECONOMY FLOURISHES. Every last man woman and child is better off.
A link for your amusement on this subject.
Makes sense, doesn't it? Is it historically accurate? It sure is.
Students of economics, for a few hundred years now, have come to realize that this vital idea "Get everyone wanting to please the customer" is what counts. It is the only thing that counts. How fortunate you are to have to a site that can teach you this. Because every last page here is ultimately about that concept.
Now what is the best way to get everyone working hard at pleasing the customer? A lot of thought was put into this, and a lot of history was looked at, and guess what the brilliant minds came up with? Let anyone and everyone do whatever [nonviolent thing] they want. Everyone. Even the Chinese. That way, the manufacturers you so worry about have to stay alert. They have to PLEASE THE CUSTOMER more than the Chinese. And if they cannot do it, guess what? WHO NEEDS THEM? They are not good at their jobs. They are so bad, in fact, that in order to keep them in business every last man woman and child will have to pay double.
As time has passed, clever people have tried clever ways, supported by clever arguments, to not have to work so hard. Because pleasing the customer is very hard work. many times, usually through getting the powers that be on their side, they have manged to avoid having to please the customer. And guess what? The economy turned into a shambles. Like, as you know from personal experience, India is today.
My second post takes into account both points of view.
An admission that your second post is fallacious. ONLY the consumer counts. ONLY. Everyone elses job is to please him. See above.
And here is a more serious link on this subject, by the great Murray Rothbard:
Protectionism and the Destruction of Prosperity
If competition reduces the price of goods, that is a desirable outcome. But if it concentrates jobs in another nation, it isn't all that good for the importing nation.
You mean: it isn't all that good for a tiny portion of the population, the incompetent manufacturers. But it is GREAT for everyone else.
Part of the blame lies with the US Government's Labor Policies. If they were to allow labor to be freely priced, and that would mean abolishing minimum wage requirements and reducing social security payouts, they would probably be in a position to compete effectively at some point.
I totally agree.
However, that doesn't justify China's intervention in the currency market to dictate the price of its currency. Nothing does.
Nothing needs to. They are not your slaves. They can do whatever they want. And see the above to find out why that is GOOD for you personally.
Any distortion of free markets needs to be removed for free trade to function effectively.
Exactly. I am glad we agree. And surely you realize free trade includes the right of ANYONE [including the evil greedy Chinese] to charge whatever he pleases for his money and his products. That is by definition free trade.
And any distortion
Are you God? Do you know in your infinite wisdom what the exchange rate "should be"? Of course not. So how do you know that what the Chinese decide to do with their own money is a distortion?
of the magnitude undertaken by China needs to removed for free tarde to function at all.
You understand by now that such a statement is straight from the bizzaro world. Forcing the Chinese to do something is not free trade.
Yes, China supplies cheap goods to the rest of the world and consumers benefit because of it.
Which is the only thing that counts.
But manufacturers suffer
Because they are incompetent.
Or because the US govt strangled them, as we said above. However. if a person is being choked to death, the cure is not to get another rope and choke him some more. It is to get rid of the original rope. The US economy is choking because of govt interference. The cure is NOT to starngle consumers some more by making them pay double for everything.
At any rate, the companies that cannot compete with the Chinese will just have to close down. That is the price one pays for incompetence. Maybe they can study economics in their free time, and find out what has to be done to make the country flourish. Or maybe they will have to get menial jobs and find out how things are, and what it will mean to them if they have to pay doule for everything, like certain people want.
and the amount that a open economy like the US stands to lose is far more that its potential benefit.
Now there is an unsupported statement if I've ever seen one. Am I to take your word for this? 300 million people getting things for half price is not as important as a few thousand keeping their useless unproductive jobs?
This is because what it gains is the price difference between the goods produced, but it loses the equivalent of the total labor cost required to produce them as production moves to another country taking wages with it.
This is just double talk. In simple English, you saying that the loss is that some people wil lose their jobs, while the whole country gets everything cheaper. And those few who lose their jobs are not going to starve, fear not. They will find their niche. They will discover what they are good at, even if it is just flipping burgers, and be productive instead of being parasites that want the whole country to pay double for everything just so they can keep on doing things badly.
Low cost producers have a natural advantage due to the abundant supply of manpower
As recently as the 1980s, the USA made the best products on the planet, sold them the cheapest, AND PAID THE HIGHEST WAGES. How did this happen? Do you have a clue?
and this advantage will only get eroded only over time as the cost of labor in these countries rises to that in the US,
Why should this happen? Is it a law of nature, like gravity? Do you know the answer?
or the price of labor in the US falls.
What will make this happen? Why do prices of labor rise and fall? Why are they higher in one country than another?
If this natural course
What is so natural about it? Are you making up your own Science now?
is to be run, all impediments to free trade need to be removed.
And letting the Chinese charge what they feel like for their products and their money is the very first principle of free trade.
Your comments, though well thought out,
Awww, I'm blushing now.
fail to take into account all aspects even though I have highlighted them clearly.
Silly me.
By concentrating only on what consumers stand to gain or lose, you have let your biases show,
My biases being what exactly? Pro consumer, and damn the torpedoes? Absolutely! And although I can summarize your position in way that you will agree with my summary [indicating that I understand it], I suspect you cannot summarize mine, meaning you have no clue.
and that Dave is not a critique. Its a confrontation. If thats what you wanted, you could have been kind enough to admit it.
Not sure what this means.
I don't really know where your loyalties lie, but they are clearly not with free trade.
Oh yes they are. As I have explained very clearly, I hope.
Your support for China's intervention says it all.
Neither I nor any of my family since the dawn of recorded history have ever been closer than an ocean away from China. I care about them as much as I do for any generic human being, but no more. I do, however, care about me. And I don't want to pay double for everything, thank you very much,.
As for your comments on India, I don't need to read what the international media says about it. I live here. Yes, we have our own legacy to sort out and I didn't at any point of time claim that China was standing in the way of India's growth. It can't. Because unlike China, India's economy is 85% domestic and it really doesn't need exports for growth. It needs exports for the foreign currency they provide to allow us to import.
Everyone knows Indians are extremely clever creative people. In any capitalist country, they instantly flourish. Sort out your legacy and you wil find the Chinese running to you, begging for the stuff you will be making that they can't. That will let you trade with them.
However, India's monetary policy has been irredeemably influenced by the exporters which has resulted in a weak currency environment and I know for a fact, having been an active and significant participant in the debt market here, that a large part of the stimulus for a weak currency has always come from China.
India, like every country ideally, should not have a monetary policy. The govt should just stay out of the way and let people do what they please about money and exchange rates. As you yourself write in this paragraph, the govt is always trying to help one group at the expense of another, in India's case, exporters.
I guess I have presented my case by now; you know what I have to say about China.
When I speak about India, I speak from experience, not from what I have read in a magazine. If you are really interested in what I have to say about policy here, read my blog.
I am VERY VERY interested in any FACTS AND INFORMATION you can bless us with about India or any other subject. But at this stage, knowing your initial assumptions, I am not so curious about your policy reccomendations.
I'm into sarcasm. It educates [when I am right].
Rajiv, you didn't listen to my point that India needs to reduce its regulations not demand international scale bullying over currencies.
Jonathan,
Lets just look at the US and China for the moment. As a result of an artificially weaker Yuan, consumers in the US gain while manufacturers and workers in the US lose. What the consumer gains is the price difference in US made and Chinese made goods. What the manufacturers and workers lose is the value addition in producing the goods from raw material. This value addition now goes to China because the goods are produced there. So for the US economy as a whole, its not all gain and there is a distinct possibility that wages lost may outstrip the benefit.
Now looking at China, due to a trade surplus, China gains more than it loses due to a weak currency. Lets look at this in numerical form. Assuming China exports USD 200 worth of goods and imports USD 100 worth of goods and the Yuan trades at 6/USD. China is therefore exporting goods worth Yuan 1,200 and importing goods worth Yuan 600, a trade surplus in Yuan terms of Yuan 600. Now, assume that the Yuan is trading at 7/USD and all else remains equal. It wont, really, because due to the weaker Yuan, China might actually end up exporting more. But for the sake of this example, lets assume that its trade in USD terms remains the same. Now China will be exporting goods worth Yuan 1,400 and importing goods worth Yuan 700, leaving them with a trade surplus in Yuan terms of Yuan 700. Therefore, a trade surplus nation, benefits due to a weak currency. In a free market, a trade surplus nation wouldn't have a weak or stable currency because in its currency market, the flow of foreign exchange would outstrip the demand for it and the local currency would appreciate as a result.
China intervenes in the market to absorb the excess foreign exchange and builds a mountain reserves. This intervention creates a demand for foreign currency in its currency market that does not arise from trade and is hence harmful to the prospects of the market reaching an equilibrium.
In the case of Brazil, when it had a trade surplus, its currency was probably the strongest currency in the world. It hit multi year highs till 2007 but has suffered since the crisis.
As far as India is concerned, it has a trade deficit and hence following from the example above, would lose due to a weak currency and hence currency inflation would prove to be impoverishing.
As for labor costs, I understand that workers in the US may not want to accept a wage lower than their reservation wage. But this reservation wage is a function of unemployment as well. The reservation wage when unemployment is 10% (for the whole set of unemployed workers, not the same worker) would be lower than the reservation wage when unemployment is 4%. When there are more people unemployed, the probability that some of them would accept a lower wage rises.
The other impediments to job creation can be assumed to be constant through good times and bad, but only for the purposes of this argument.
As for the undervalued yuan making labor cheaper, If the yuan is cheap, all domestic resources denominated in that currency will be cheap for external buyers. If the Yuan were rise, the same labor would become more expensive in USD terms.
Now as for most people in the forum agreeing with governments stepping away from the market, Dave certainly doesn't. He seems to believe that its alright, as long as the consumer benefits. And while I would agree with him if it was really one world and one people that we were dealing with, truth is that national boundaries and currencies do play a role in enabling and distorting trade. Ideally I would also like a world where a job in Shanghai means as much to the US, as a job in Detroit, but the fact is that it doesn't. To the rest of Dave's post, I have no response. I didn't write here to engage in a mud-slinging competition, but to have a discussion. And I prefer to keep it at that.
ladyattis, I said that I agree on the regulations part. India does need to reduce red tape. I was just responding to your statement that I am looking for a way to make Indian manufacturers more competitive. Its not about that at all. Its about government intervention in a market. Yes, the Indian government does it as well, but mostly through the Public Sector Companies, which thankfully is reducing with each passing year.
Rajiv Shastri: Lets just look at the US and China for the moment. As a result of an artificially weaker Yuan, consumers in the US gain while manufacturers and workers in the US lose. What the consumer gains is the price difference in US made and Chinese made goods. What the manufacturers and workers lose is the value addition in producing the goods from raw material. This value addition now goes to China because the goods are produced there. So for the US economy as a whole, its not all gain and there is a distinct possibility that wages lost may outstrip the benefit.
Manufacturers in the United States actually gain because raw materials purchased from China are effectively being subsidized by the Chinese government. The only difference is that while factory jobs of relatively cheaper goods go to China due to lower wages, the United States gains in "high-end" manufacturing, or goods at which the entrepreneur would make the necessary profit margin. Irregardless, what you are describing is not necessarily only the result of monetary inflation, but the result of the extension of division of labor which is completely natural. The structure of labor is bound to change during globalization, as economic efficiency increases. The United States lost some factory jobs and gained some jobs in retail.
Any issues with employment in the United States are not the result of an undervalued Yuan, because an undervalued Yuan does not make production cheaper. The issue lies totally in government intervention within the United States.
Now looking at China, due to a trade surplus, China gains more than it loses due to a weak currency.
No it doesn't. I have already explained why in my previous posts. You are not looking at the issue from the perspective of an individual, and you are getting confused by the macroeconomics.
Assuming China exports USD 200 worth of goods and imports USD 100 worth of goods and the Yuan trades at 6/USD. China is therefore exporting goods worth Yuan 1,200 and importing goods worth Yuan 600, a trade surplus in Yuan terms of Yuan 600.
Impressively, you managed to oversee the fact that the value of what China imported is much less than what it exported, meaning that it is a net loss for China.
Therefore, a trade surplus nation, benefits due to a weak currency.
Given what I've been saying, do you now realize why the concept of a "trade surplus" is so fallacious? Chinese monetary policy has been hurting not helping the Chinese economy.
First of all, China does not keep a reserve of U.S. dollars. U.S. dollars held by Chinese are invested into securities: I cover this briefly in "Paul Krugman and the Consumption Myth". U.S. dollars do not stay in China, because the U.S. dollar is absolutely worthless to the Chinese. The only value the U.S. dollar has is in what it is worth to another individual willing to exchange capital-goods or consumer-goods.
It is being actively inflated by the Brazilian central bank.
I think you mean the opposite. When there are more people employed wages tend to rise because businesses have to compete for labor. Yes, with high unemployment the reservation wage would go down, but this still doesn't mean that an American worker would accept Chinese wages.
As for the undervalued yuan making labor cheaper, If the yuan is cheap, all domestic resources denominated in that currency will be cheap for external buyers.
Err, but Chinese labor is being bought in yuan, so when the yuan is devalued it makes everything more expensive in terms of yuan. The price of labor, for all intents and purposes, goes up.
He seems to believe that its alright, as long as the consumer benefits.
No, Dave is disagreeing with your assertion that Chinese intervention hurts the average American. I disagree, as well.
Rajiv Shastri:Now as for most people in the forum agreeing with governments stepping away from the market, Dave certainly doesn't. He seems to believe that its alright, as long as the consumer benefits. LOL, nope. Ideally no govt should get involved, as I wrote several times in the two posts here. What I did say was that what the Chinese govt decides to do is between them and the Chinese. Everyone else's job is to deal with it. In this particular case, by selling stuff cheaply to the whole world, they are benefiting the whole world and hurting the porr Chinese citizenry. One day they will realize this, maybe. And while I would agree with him if it was really one world and one people that we were dealing with, truth is that national boundaries and currencies do play a role in enabling and distorting trade. Why do you call it "distorting"? Any decision to sell or not sell at any price is part of trade. it is not a distortion of trade. Ideally I would also like a world where a job in Shanghai means as much to the US, as a job in Detroit, but the fact is that it doesn't. Of course it does. Let's say everyone in China dropped dead tomorrow. It would hurt the whole world. To the rest of Dave's post, I have no response. I didn't write here to engage in a mud-slinging competition, but to have a discussion. And I prefer to keep it at that. Fine with me. I write this stuff to test myself. I want to see if I can find the flaw in the arguments. Also I write to have fun and hopefully amuse. If my main interest was in educating, I'd write differently. At any rate I have not slung the mud. I did not accuse you of having a personal bias, for example. Or of being Chinese. Not that there's anything wrong with being Chinese. But there is a lot of mud being slung saying I write what I write not because I think it's true, but because I am Chinese. And yes, it is a clever way of avoiding the actual questions I raise, attacking me personally and then saying I am singing mud. Karl Marx first introduced that level of debate into economics, as Mises pointed out in his book on Socialism.You are following in the footsteps of the great by doing this. Oh, yes, I did say are not God. That might be the mud slinging you refer to. Hahahaha.
LOL, nope. Ideally no govt should get involved, as I wrote several times in the two posts here.
What I did say was that what the Chinese govt decides to do is between them and the Chinese. Everyone else's job is to deal with it.
In this particular case, by selling stuff cheaply to the whole world, they are benefiting the whole world and hurting the porr Chinese citizenry. One day they will realize this, maybe.
And while I would agree with him if it was really one world and one people that we were dealing with, truth is that national boundaries and currencies do play a role in enabling and distorting trade.
Why do you call it "distorting"? Any decision to sell or not sell at any price is part of trade. it is not a distortion of trade.
Ideally I would also like a world where a job in Shanghai means as much to the US, as a job in Detroit, but the fact is that it doesn't.
Of course it does. Let's say everyone in China dropped dead tomorrow. It would hurt the whole world.
To the rest of Dave's post, I have no response. I didn't write here to engage in a mud-slinging competition, but to have a discussion. And I prefer to keep it at that.
Fine with me. I write this stuff to test myself. I want to see if I can find the flaw in the arguments. Also I write to have fun and hopefully amuse. If my main interest was in educating, I'd write differently.
At any rate I have not slung the mud. I did not accuse you of having a personal bias, for example. Or of being Chinese. Not that there's anything wrong with being Chinese. But there is a lot of mud being slung saying I write what I write not because I think it's true, but because I am Chinese.
And yes, it is a clever way of avoiding the actual questions I raise, attacking me personally and then saying I am singing mud. Karl Marx first introduced that level of debate into economics, as Mises pointed out in his book on Socialism.You are following in the footsteps of the great by doing this.
Oh, yes, I did say are not God. That might be the mud slinging you refer to. Hahahaha.
Rajiv Shastri:A lot has been said recently about the manner in which China manipulates it's currency, the Yuan. But China wants to hear none of it.
China does not manipulate its currency any more than any other nation. Currency pegs and fixed exchange ratios are normal, and in fact, extremely rational (for governments) in our current Neo Mercantilist international economic system. As long as the American dollar is extremely over-valued, all other currencies will remain undervalued, and will automatically finance U.S. debt.
Rajiv Shastri:Such denials are reflective of what the world is dealing with. An issue, which should have unified the world against China has, over time, become one which has divided it between Free Trade Proponents and "Protectionists".
Why should the world unify against China? All parties lose in trade wars, especially when one side is a major manufacturer with a huge comparative advantage in labor intensive products. Cutting off one arm in order to make the other longer is not a smart strategy.
Rajiv Shastri:Free Trade relies on free markets to be effective.
No it does not. International exchange doesn't depend on anything to be effective (though free trade only magnifies its beneficial effects); It is effective by its very nature (law of comparative costs). When you don't exchange, you have to produce everything yourself, even the products you are extremely inefficient at. A simple partial equilibrium analysis shows you that protectionism maximizes dead-weight losses, and leads to suboptimal resource allocation, making only yourself poorer in the end. America shouldn't try to grow banana's, for example. It would take away too many resources from other, more warranted productions. It can instead swap surpluses with a nation (Jamaica) which produces banana's efficiently.
Rajiv Shastri:By intervening in its currency market, China has demolished the very foundation of free trade. If Mr. Jiabao is a staunch supporter of free trade, as he professes, the Chinese government should let the currency float and allow a free market to determine its value.
And why should it do that?
Rajiv Shastri:This appreciation would make manufacturers in other countries more competitive and reduce China's trade surplus. In other words, the markets would restore equilibrium and free trade would continue unhindered.
No, the dollar would still be overvalued, and American consumers would still absorb the vast majority of consumer goods produced all over the world. And all the other nations who arbitrarily devalue their currency would have their illusory comparative advantages magnified at the expense of China. China is logical and rational; it simply won't shoot itself in the foot because you cry foul.
Rajiv Shastri:Except that in India's case, the trade balance is unfavorable and currency weakness actually costs India more on its imports than it's benefit to exports. In essence, currency manipulation by China enriches itself but impoverishes India.
So India tried to secure the same advantage as every other nation, but couldn't do it successfully. India's failure is not the fault of China; it was probably unable to keep its peg because of irresponsible monetary policy and/or the unwillingness to directly finance American debt. So basically, you want America to get into a trade war with China, because India can't devalue its currency enough to create its own illusory comparative advantages? I see.
Rajiv Shastri:Ever since Paul Krugman proposed the controversial 25% levy on Chinese Imports into the US, eminent economists like Donald Boudreaux, Greg Mankiw and most recently, Stephen Roach have launched vicious attacks against him labeling him a protectionist who would not only stop world trade, but probably cause World War III.
Paul Krugman is a Mercantilist who thinks that he can over-turn 300 years of economic thought by re-introducing already refuted doctrines (sound familiar?). But you're right about our current international monetary system; it will most definitely cause another world war, the same way that the international economic system of the 15th, 16th, 17th, and 18th centuries eventually lead to the Napoleonic wars.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
Rajiv Shastri:Lets assume that a product can be manufactured in both US and China for USD50 in raw material and 2 man-days of labor. If labor cost in China is USD 12.50/man-day and labor cost in the US is USD 25/man-day, the US manufactured product would cost USD 100 while the China manufactured product would cost USD 75. If US consumers buy the Chinese product, they gain USD 25 while US workers lose USD 50 in wages. The net loss to the US economy is USD 25. China gains USD 25 in wages.
That is incredibly flawed.
It assumes there is an equal number of guys laboring to make the product and consuming the product. This is rarely the case. If a manufacturer only sold to the guys in his factory, he would be in deep trouble most of the time.
For example, there are about a million auto workers in the USA [http://www.usatoday.com/money/autos/2008-12-04-auto-workers-by-state_N.htm]
The number of passenger vehicles ALONE sold in the USA is about 7 million. [http://en.wikipedia.org/wiki/Passenger_vehicles_in_the_United_States]
So using you numbers, consumers gain 175 million, and the workers lose 50 million.
'No it doesn't. I have already explained why in my previous posts. You are not looking at the issue from the perspective of an individual, and you are getting confused by the macroeconomics.'
Its simple math you're denying through the use of theory. I would be grateful if you could explain it using a model.
"Impressively, you managed to oversee the fact that the value of what China imported is much less than what it exported, meaning that it is a net loss for China."
And what you have stated is that a nation that sells more than it buys actually suffers from a net loss... If this is actually true, then India, due to its trade deficits, would be in making a 'net gain'. Are you sure thats how it works?
"Err, but Chinese labor is being bought in yuan, so when the yuan is devalued it makes everything more expensive in terms of yuan. The price of labor, for all intents and purposes, goes up."
Chinese labor is being bought in yuan locally, but through the exchange rate, in terms of other currencies externally. If labor continues to cost the same in yuan terms and the yuan weakens, it results in cheaper labor in terms of all other currencies.
Esuric,
'Why should the world unify against China? All parties lose in trade wars,'
"And why should it do that?"
My contention is that Chinese intervention in the currency market amounts to protectionism. It makes Chinese goods cheaper and imported goods more expensive. Yes, external consumers benefit and that isn't something that I haven't stated. And I agree that all parties lose in trade wars. Its a trade war which has been started by China. I am looking at the issue from the perspective of the whole economy including production and consumption. If your contention is that consumption is the only part of the economy that matter, then we should probably stop looking at the size of any economy as GDP and start looking at is as GDC.
"No, the dollar would still be overvalued, and American consumers would still absorb the vast majority of consumer goods produced all over the world. And all the other nations who arbitrarily devalue their currency would have their illusory comparative advantages magnified at the expense of China."
Possibly, though I would believe otherwise. But thats something only the future will show. To figure out how it works, the Chinese Government needs to stop intervention. That would be a good starting point
China is logical and rational; it simply won't shoot itself in the foot because you cry foul."
Definitely. So you agree that by keeping it's currency weak, China is benefiting. Why else would it amount to them "shooting themselves in the foot"?
"So India tried to secure the same advantage as every other nation, but couldn't do it successfully. India's failure is not the fault of China; it was probably unable to keep its peg because of irresponsible monetary policy and/or the unwillingness to directly finance American debt. So basically, you want America to get into a trade war with China, because India can't devalue its currency enough to create its own illusory comparative advantages? I see."
No, you don't. Sadly, India has also manipulated it's currency and kept it weak. It has been able to keep a soft peg for a very long period of time and has had irresponsible monetary policy only so that it could maintain the peg. No, it's not because India can't devalue its currency enough. Devaluing one's own currency is the simplest thing for a central bank to do, except when its currency is a reserve currency for the world. My objection to manipulation is because it doesn't allow the value of the currency to rise, not because it cant be devalued further.
As for mercantilism, your support for a distorting intervention by the Chinese government can also be seen as that. If China has a right to manipulate it's currency, then the US has a right to impose a duty.
Dave,
I do not assume that there are an equal number of guys making the product & consuming it. The example was not about the number of people involved, but about the number of units produced.
Therefore in my example, US workers lose USD 50/ unit of product not USD 50/worker... Extending it to your car figures, the US consumers gain 175 million and US workers lose 350 million.
Rajiv Shastri:My contention is that Chinese intervention in the currency market amounts to protectionism.
It's not protectionism; it's monetary manipulation. Your proposal is to fight monetary manipulation, which every nation is guilty of, with protectionism. This can only lead to an enormous international economic and political disorder. Furthermore, It is my belief that you focus on China because you are essentially a rent seeker. India competes with China and frequently loses. You're not arguing for free markets; your arguing for protectionism in order to eliminate your biggest competitor. Your like the firm which seeks government protection from foreign competition.
Rajiv Shastri:Possibly, though I would believe otherwise. But thats something only the future will show. To figure out how it works, the Chinese Government needs to stop intervention. That would be a good starting point
Monetary devaluation and fixed ER's will continue as long as the current international monetary system exists (dollar as world reserve currency). As long as American's are given an arbitrarily exalted international economic privilege (increased purchasing power due to dollars position), which it uses to absorb the various productions of the world (mass consumption), other nations will compete through monetary manipulation in order to capture the American consumers. We shouldn't expect anything else. Do we blame welfare recipients for taking welfare? Of course not, it's free money. We blame the government.
Rajiv Shastri:Definitely. So you agree that by keeping it's currency weak, China is benefiting. Why else would it amount to them "shooting themselves in the foot"?
Yes, I agree. Every nation does this, as I've already mentioned on numerous occasions.
Rajiv Shastri:Sadly, India has also manipulated it's currency and kept it weak. It has been able to keep a soft peg for a very long period of time and has had irresponsible monetary policy only so that it could maintain the peg.
I know.
Rajiv Shastri:No, it's not because India can't devalue its currency enough
Of course it is. Why doesn't India devalue its currency enough to out-compete China? Because it simply can't inflate enough (crate illusory comparative advantages) to do so.
Rajiv Shastri:As for mercantilism, your support for a distorting intervention by the Chinese government can also be seen as that. If China has a right to manipulate it's currency, then the US has a right to impose a duty.
I don't support China's devaluation of the RMB. My point is that you're focusing on a necessary effect, instead of the actual cause, the actual disease. The problem is not China's rational response to America's economic hegemony (dollar reserve status), but America's international economic hegemony itself. Also, even without monetary manipulation, India would still lose to China (but this is beside the point). The Indian government, and not the CCP, is India's biggest problem.
The Prime Minister of India is an imbecile.
I wont go into my reasons for wanting China to step out of the Currency market again as I have already done it. And given your response, I don't think stating it again will change your beliefs about my intentions. So lets just leave it at that.
As for the status of the USD as the global reserve currency, it's true that the US was probably the only country that wanted the USD to be the reserve currency going into Bretton Woods. It strengthened it's case by offering fixed price convertibility to Gold, something no other nation was willing to offer. But when it announced a discontinuance of fixed price gold convertibility (unilaterally, which was to my mind the single largest sovereign default in history) the world had a choice to move away from the USD. In making the choice to stay with the USD, all countries of the world assumed equal responsibility for the continuance of the USD standard.
China, India, Japan, Russia and all other nations who hold their reserves in USD assets, make that choice everyday. At this point of time it doesnt make sense to blame the US alone for the situation.
Yes, removing the USD from its pedestal would be the right thing to do, but the ideal thing to do would be to abolish all fiat currencies and have monetary competition. Yesterday, the UAE proposed the launch of gold coins as legal tender (link). Its a small step, but a step nevertheless. It may or may not be successful, because to lay folk, gold is still an investment. Not money.
Probably a trade war will generate the global crisis needed to change the way money is looked at by people. Probably it will generate inflation of a magnitude required for people to shun currencies. Maybe it won't.
The empirical definition of Mercantilism includes only tariffs and duties, probably because when it was coined, even fiat currencies were backed by hard assets and currency manipulation hadn't even begun. It began in earnest only after the US default of 1971, when the issuance of currencies was effectively de-linked from ownership of assets. Unfettered, so to say. Probably a modern definition for mercantilism would include currency manipulation.
I look forward to your response.
Rajiv Shastri: Its simple math you're denying through the use of theory. I would be grateful if you could explain it using a model.
Your math supported my argument, and so did my math. China is subsidizing foreign importers through inflation.
Yes, you are still not looking at it from the perspective of individual sellers. You are committing a mercantilist fallacy. I invite you to re-read my argument:
Chinese labor is not bought with foreign currency. Chinese labor is being bought in yuan, because Chinese laborers don't value dollars or any other foreign currency. Chinese labor is being bought with yuan, by Chinese entrepreneurs, and so with inflation the cost of labor increases. This is probably one of the reasons why Chinese wages doubled before the recession.
EDIT: I wrote a long article last night on the topic. I'm going through the stages of copyediting it; I'm going to submit it to Mises.org, but a rough draft will be posted on my blog on Monday. I hope that will clarify my argument.
Rajiv Shastri:China, India, Japan, Russia and all other nations who hold their reserves in USD assets, make that choice everyday. At this point of time it doesnt make sense to blame the US alone for the situation.
Well, the U.S. won't just let this condition peacefully come to an end (Iraq), and many nations hold trillions in dollar denominated debt. So this "arrangement" is not as voluntary as you make it seem. But it's true that some nations benefit from the current conditions; unfortunately, it cannot last, and it is keeping billions of individuals (especially in East Asia) trapped in poverty.
Again, my only point is that condemning China for currency manipulation is like condemning a young college student that accepts government financial aid. It's only rational for them to do so. None of this can change until this system comes to an end, and international trade wars will only make things worse.
Rajiv Shastri:Probably a trade war will generate the global crisis needed to change the way money is looked at by people
It could lead to WW3, who knows? Each world war took the international monetary system in the wrong direction. A third world war, if the human race is not obliterated, may introduce an international central bank with a unified global fiat paper currency (which may be worse than total obliteration).
There's a lot of anti-China rhetoric these days. Its like America, rather then defaulting on its debt, may just invade all of its creditors.
Rajiv Shastri:The empirical definition of Mercantilism includes only tariffs and duties, probably because when it was coined, even fiat currencies were backed by hard assets and currency manipulation hadn't even begun.
Mercantilism views money as wealth, sees the interest rate as purely a monetary phenomenon, and believes in "favorable balances of trade."
Dave, I do not assume etc. etc.
I do not assume etc. etc.
My apologies. I didn't see this paragraph, buried as it was in a long post to Jonathan.
To get the reader up to speed, Rajiv had earlier written:
Lets assume that a product can be manufactured in both US and China for USD50 in raw material and 2 man-days of labor. If labor cost in China is USD 12.50/man-day and labor cost in the US is USD 25/man-day, the US manufactured product would cost USD 100 while the China manufactured product would cost USD 75. If US consumers buy the Chinese product, they gain USD 25 while US workers lose USD 50 in wages. The net loss to the US economy is USD 25. China gains USD 25 in wages.
I wrote in reply:
That is incredibly flawed. It assumes there is an equal number of guys laboring to make the product and consuming the product. This is rarely the case. If a manufacturer only sold to the guys in his factory, he would be in deep trouble most of the time. For example, there are about a million auto workers in the USA [http://www.usatoday.com/money/autos/2008-12-04-auto-workers-by-state_N.htm] The number of passenger vehicles ALONE sold in the USA is about 7 million. [http://en.wikipedia.org/wiki/Passenger_vehicles_in_the_United_States] So using your numbers, consumers gain 175 million, and the workers lose 50 million.
So using your numbers, consumers gain 175 million, and the workers lose 50 million.
And Rajiv pointed out [correctly]:
Dave, I do not assume that there are an equal number of guys making the product & consuming it. The example was not about the number of people involved, but about the number of units produced. Therefore in my example, US workers lose USD 50/ unit of product not USD 50/worker... Extending it to your car figures, the US consumers gain 175 million and US workers lose 350 million.
Rajiv is mistaken, of course, but his mistake lies deeper than where I thought it did. It's in the very first sentence of his thought experiment:
Lets assume that a product can be manufactured in both US and China for USD50 in raw material and 2 man-days of labor.
Now wait just a minute, Rajiv. You are saying that the US and Chinese worker are equally productive. Which means, by the laws of economics, that they should be getting the same wage. Which of course crumbles to dust the rest of your scenario, where the Chinaman gets half the wages of the American.
Now there might be some who ask, why, oh Smiling Dave, do you say the Chinaman must get the same as the American [if they are equally productive]? Aren't the Chinese slaves or something, who just are stuck with whatever peon wage they can get, while the American is free in a free society, empowered by the mighty justice seeking unions and the watchdog politicians, to ensure he gets a fair wage?
No. Nothing could be further from the truth.
Tell you what, Rajiv. I'll let Rothbard do the work for both of us. Read this fine article of his: http://mises.org/rothbard/protectionism.asp
He explains in detail why you are wrong, as if he had risen from the grave, read your very post, and written that article. [Except that he wrote about Japan, not China.]
He also explains why equal work gets equal pay, no matter what the country.
So the proper continuation here should be that you summarize his position correctly, the standard thing in intellectual discussion, and then explain why he is wrong in your opinion.