Relevant and even prescient commentary on news, politics and the economy.

Competition from China reduced Innovation in the US

Via Tyler Cowen, here is a piece by David Autor, David Dorn, Gordon Hanson, Gary P. Pisano and Pian Shu.

Cowen quoted the most important part, so let me follow his lead:

The central finding of our regression analysis is that firms whose industries were exposed to a greater surge of Chinese import competition from 1991 to 2007 experienced a significant decline in their patent output. A one standard deviation larger increase in import penetration decreased a firm’s patent output by 15 percentage points. Using data from the 1975 to 1991 period and a regression setup that accounts for the diverging secular innovation trends in computers and chemical, we confirm that firms in China-exposed industries did not already have a weaker patent growth prior to the arrival of the competing imports.

…The innovation activity of US firms did not merely shift from the US to other countries. We estimate similar negative effects of import competition on patents by US firms’ domestic employees and by their foreign employees. Instead, our results are most consistent with the notion that the rapid and large increase in competition squeezed firms’ profitability and forced them to downsize along many margins, including innovation. Consistent with that interpretation, we find that the adverse impact of import competition on patent output was concentrated in firms that were already initially more indebted and less profitable.

Here’s what I think is happening. Chinese imports typically enter a market from the bottom, with a low price and a reputation for low quality. After a few years, the quality begins to improve, though it takes somewhat longer for the reputation to follow.

From the perspective of incumbent players, the Chinese don’t play at the top of the market where the high margin flagships are, but they take up a lot of market share in the lower end products. But, though broadline products have slim profit margins, they keep the plants operating at capacity, and that’s what covers capital costs.

So… the existential threat to the incumbents comes from having higher costs than the new competitor. The natural reaction then, is to cut costs. Fire people, idle plants and reduce expenses like marketing and R&D.

Despite Schumpeterian theory, many of the most innovative (large) companies in post-WW2 America were monopolies or awfully close to it. Think Bell Labs, Xerox Parc or Skunk Works (i.e., Lockheed’s Advanced Development Projects) for classic examples from back in the day. Ma Bell could afford the time and money needed to do world-class research.  Today’s phone companies cannot. Smaller companies have other dynamics, and often they are the source of innovation in many industries.  Smaller innovators whose technology proves successful end up being bought (and sometimes ruined) by the more established players.

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Trump Invites China to Hack His Emails—and Uncover All the Details of His Business Ties to Russian Oligarchs. Cool!

Well, by now y’all know that Donald Trump held a press conference today at which he invited Russia to hack into Hillary Clinton’s email server and retrieve the 33,000 emails she deleted.  When questioned about the propriety of encouraging anyone—much less a foreign power—to commit cybertheft, he said Russia probably already had the emails and that, if so, they should release them.

When asked whether it troubled him to urge the release of stolen information, Trump said … well, you the answer.

Okay, so Russia has his back, front, sides and center.  Which must be comforting for him, if not for us.  China, on the other hand … doesn’t.  Not in the same way, anyway.  And China’s hack expertise would make Russia’s look like high school computer lab class, I’d guess.

It’s hardly a secret—except to most American voters—that Trump has extensive business interests with very wealthy Russians, and wants to partner with Russians in businesses in Russia itself.*

So here’s where China comes in: Just today, Trump made it official that he won’t be releasing his tax returns, so you can stop holding your breadth.  But copies of his tax returns, not to mention other evidence of his financial dependence, probably are on Trump’s personal or business computers.  The obtaining and release of copies of them—including emails between Trump and his son Donald Jr., and Trump and his lawyers, and Trump and his accountants, and Trump and the oligarchs—would, to borrow from a comment of Trump’s at the press conference, be highly rewarded by the media.

And also to borrow from Trump’s comments today, I want to see them.

But of course Hillary Clinton, not being Donald Trump and all, can’t openly invite China to do this.  So I will.  I’m not Trump either, of course.  But I am just swapping out one country for another, and one U.S. presidential candidate for another.

And Trump did start it.  So it’s okay for me to do this, right?

____

CORRECTION: *Paragraph edited significantly for accuracy. 7/28 at 11:41 a.m.

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China’s Place in the Global Economy

by Joseph Joyce (is a Professor of Economics at Wellesley College and the Faculty Director of the Madeleine Korbel Albright Institute for Global Affairs and maintains his blog at Capital Ebbs and Flows)

China’s Place in the Global Economy

Last week’s announcement that China’s GDP grew at an annualized rate of 7.4% in the first quarter of this year has stirred speculation about that country’s economy. Some are skeptical of the data, and point to other indicators that suggest slower growth.  Although a deceleration in growth is consistent with the plans of Chinese officials, policymakers may respond with some form of stimulus. Their decisions will affect not just the Chinese economy, but all those economies that deal with it.

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Fear of China syndrome

I overheard a conversation at a local restaurant on the impact of the US being dependent on China buying US bonds to finance federal debt.  Usullay missing from such conversations is the % of money involved, whether that is a lot, and what effect it has on federal debt and trade (and some kind of political or ‘war’ value?)  Then via Mark Thoma came the Krugman piece on bonds and how the market works in Fear of China syndrome, so thought I would post the Krugman piece and some comment by Mark Sadowski from the post:

Paul Krugman tries, once again, to explain why there’s no reason to fear that “terrible things will happen” if China stops purchasing our government bonds:

Wicksell Goes To China, by Paul Krugman

The idea that we are at the mercy of the Chinese — that terrible things would happen if they stopped buying our bonds — is very influential. Yet it’s just wrong.
Think of it this way: the argument that interest rates would soar if the Chinese bought fewer bonds is the same as the argument that interest rates would soar when the U.S. government sold more bonds — which, as you may recall, was the subject of fierce debate more than three years ago — and you know how that turned out. 

Again, you can think of this in terms Wicksell: we’re in a situation in which the incipient supply of savings — the amount that people would save at full employment — is greater than the incipient demand for investment. And this excess supply of savings leads to a depressed economy. 

What China does by buying bonds is add to the excess savings — which makes our situation worse. (This is just another way of saying that the artificial trade surplus hurts our economy — just another way of stating the same thing). And we want them to do less of it; far from fearing that they will stop, we should welcome the prospect.

Lifted from comments from Economistview:

Mark A. Sadowski said in reply to Matt C…

This is old news. FYI QE2 ended in June of 2011.

On June 30, 2011 the Fed held $1,617 billion worth of Treasuries:
http://www.federalreserve.gov/releases/h41/20110630/

According to the most recent release (August 30) the Fed now holds $1,639 billion worth of Treasuries.
http://ftalphaville.ft.com/blog/2012/08/31/1140881/if-qe3-is-so-close-why-is-the-feds-balance-sheet-shrinking/

According to SIFMA:
http://www.sifma.org/research/statistics.aspx

$1,274 billion in Treasuries were issued between the end of June 2011 and the end of July 2012, meaning the Fed has bought less than 2% of all Treasuries issued in that time.

Moreover, the Fed’s balance sheet has actually been shrinking since December. That’s why there are tons of stories such as this if you bother to do the google:
http://ftalphaville.ft.com/blog/2012/08/31/1140881/if-qe3-is-so-close-why-is-the-feds-balance-sheet-shrinking/
..
Correct current release link:
http://www.federalreserve.gov/releases/h41/Current/

Matt C asked:
Even if QE2 is old news, what is the big change in the financial landscape since 2011?

Was it not bad in 2011 for China to be buying bonds then? If China was depressing the economy by buying bonds then, why wasn’t QE2 doing the same thing?

Mark A. Sadowski answers:
It makes a big difference who’s buying the bonds.

Krugman describes the situation as an excess of savings over desired investment. But another way of looking at it is as an excess demand for money over its supply.

When the Chinese buy US Treasury bonds they increase the demand for US dollars and drive up the dollar’s value (they were of course doing this intentionally to increase their net exports). When the Fed buys bonds they’re adding to the supply of dollars. This of course drives down the value of the dollar.

Increased demand for dollars is depressing. Increased supply of dollars is stimulative.

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Most U.S. Trade Agreement Improve Trade Balance, but Effect Overwhelmed by NAFTA and China Trade

by Kenneth Thomas

Most U.S. Trade Agreement Improve Trade Balance, but Effect Overwhelmed by NAFTA and China Trade

The U.S. trade deficit figures heavily in the analysis of Jeff Faux’s new book, The Servant Economy. Faux, the founder of the Economic Policy Institute (EPI), was one of the most important voices speaking out against NAFTA when it was debated and ultimately passed by Congress in 1993.
According to EPI’s 2011 Annual Report,”Presently, the United States’ non-oil deficit alone costs more than five million U.S. jobs.” This underscores the importance of the deficit and what is at stake. In the book, Faux points out that the theoretical benefits of free trade assume full employment, but that is hardly ever the case. Thus, he argues, the trade deficit is indeed a job killer.

Yet, as David Cay Johnston notes, the United States continues to negotiate new trade agreements while government agencies and government officials from the President down, tout them as engines of job creation. Johnston points out that the government predicted that our small pre-NAFTA trade surplus would continue, when instead we quickly went into a deficit that in 2011 reached $64.5 billion. Similarly, he says, the U.S. International Trade Commission predicted that normalizing trade relations with China would lead to a trade deficit of just $1 billion, when in fact it grew by 2011 to $295 billion!

How have these trade agreements performed? At present, according to the U.S. Trade Representative, the U.S. has free trade agreements with 19 other countries, with a 20th (with Panama) approved but not yet implemented. The 19 countries are: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, South Korea, Mexico, Morocco, Nicaragua, Oman, Peru, and Singapore.
   
The U.S. Census Bureau (then click on individual countries) has the answer to this. In 11 cases, the goods trade balance has improved from the year prior to the agreements’ coming into effect through 2011, in one case it’s too soon to tell (Colombia, effective May 15, 2012), and only in seven cases did the trade balance worsen.

Unfortunately, that’s the end of the good news, because our trade with most of these countries is relatively small: in six cases the improvement was under $2 billion dollars, which pales against the country’s overall goods deficit of $727.4 billion in 2011. The biggest gains have been with Singapore ($10.7 billion) and Australia ($9.1 billion).

The losses, on the other hand, have been huge, with the culprits being NAFTA and liberalizing trade with China (not even a full free trade agreement, just making it easier for U.S. firms to offshore their production to China). In the wake of NAFTA, the U.S. goods trade balance with Mexico has worsened by $66.2 billion, while our Canadian goods trade balance has worsened by $23.7 billion. Just since 2001, when China joined the WTO, and 2011, the goods trade deficit has increased from $83 billion to $295 billion. Robert E. Scott of the EPI estimates that this massive deficit has “eliminated or displaced nearly 2.8 million U.S. jobs since 2001.” In addition, our Israel free trade agreement has added about $10 billion more to the deficit.

As Faux argues, the trade deficit reduces demand for U.S. labor, and pushes wages down in the aggregate. Indeed, this is the tendency of trade in general for a labor-scarce country like the United States. Faux’s vision of where this is leading us in the long term is a depressing one, which I will discuss in more detail in a future column.

cross posted with Middle Class Political Economist

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Wired’s Embarrassing Whitewash of Foxconn

Yves comments on Wired’s Embarrassing Whitewash of Foxconn :

But Johnson admits he’s a tech toy writer who apparently has no knowledge of manufacturing …. Yet he’s remarkably uninhibited in using his fantasies and abject ignorance as a basis for making sweeping generalizations about the Taiwanese powerhouse.

I find this little chart (hat tip Richard Smith) from ninety9 via Alea (who is the antithesis of a socialist) to be more though-provoking than the entire Wired piece:

appleproducts

More can be found here.   Lots of links as well adding to the state financed aspects of Foxcomm.

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Baby Steps

By Rebecca Wilder

Baby Steps

In the FT today, Martin Wolf discusses the symbiotic relationship of global creditors and debtors. According to the September 2011 IMF World Economic Outlook, China ran the largest current account surplus in 2007, while the US ran the largest current account deficit (in $). Well, if this creditor-debtor relationship is to become more ‘balanced’, then evidence of success should stem from these two giants.

Progress has been made. The IMF forecasts China’s 2011 current account surplus will be broadly unchanged since 2007 (in levels $). In contrast, the 2011 US current account deficit is expected to have improved by 35% compared to 2007 levels. It’s baby steps toward a more balanced global capital market place. What’s driving this? Primarily the real exchange rate.

The chart below illustrates the real effective exchange rates for China and the US, as measured by a broad set of trading partners and relative inflation. The BIS releases this data. Notably, the Chinese economy experienced real appreciation coincident with US real depreciation (I chose the colors pink and blue for consistency with the ‘baby steps’ theme). Spanning the years 2005 – current, the Chinese yuan appreciated 25% in real and trade-weighted terms, while that of the US dollar depreciated 14%.

Progress is being made.

Filed under: China, Global Imbalances, Real Exchange Rates, USA

Originally published at The Wilder View…Economonitors

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Retaliating Against Currency Manipulation: A Primer

Kash at The Streetlight points us to other aspects of the world, touching upon the WTO and the IMF roles in global trade and China in particular:

Retaliating Against Currency Manipulation: A Primer

You’ve probably heard that this week the US Congress has been addressing the issue of how China controls its exchange rate with the US dollar. In particular, many have argued that China’s policy of only allowing the yuan (CNY) to appreciate very gradually against the dollar has kept Chinese products unreasonably cheap to American consumers, and American products unreasonably expensive to Chinese consumers. (See for example Paul Krugman’s column on Monday.)

And indicates a source worth reading:

if you’re interested in more details regarding the legal options and implications of possible US retaliation against Chinese currency manipulation, you can’t do better than this paper by Jonathan Sanford of the Congressional Research Service: “Currency Manipulation: The IMF and WTO“.

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Random Notes 3 June 2011

  1. Buce has been on fire recently, so I’ll probably have to do a post about why this post is so off-target, though his conclusion is correct (short version: he’s been misled).
  2. If I’m reading this morning’s SIFMA Brief correctly, Moody’s—whose rating skills Robert has discussed at length—(1) may downgrade US debt if we spend too much and (2) will downgrade US banks unless we spend too much on them. Oh, and the banks object to regulation because it would “artificially” reduce asset values (presumably, many of the same ones Moody’s wants protected).
  3. Relatedly, James Salt (probably h/t Felix) notes that “generous” UK banks are playing reporting games. (The US version is to deny the rework and leave the asset marked at unsustainable levels.)
  4. That this is spot-on would make me sadder if I thought we still lived in anything resembling a meritocracy, or even a developing economy.
  5. If we needed further evidence of that, the state with the best secondary eduction system in the country is pushing forward with privatize-the-gains.
  6. I’m more and more convinced that China “is different,” but very much not certain the differences will make an ultimate difference. Daniel Gross is inclined to think not. More on this as I finally finish my review of BoomBustOlogy, which you should expect to see some time before the apocalypse.
  7. I assume everyone has already seen this. Just in case, check out the facts, stylised or not.
  8. Oh, and Felix is wrong here. But that’s a post that will probably never be written by me. Someone else want to send it in?

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It’s pretty obvious how China can achieve its top economic priority of price stability

Premier Wen Jiabao made stabilizing prices China’s top economic priority for 2011. Amid the surge in world energy costs, this story didn’t make the front page. However, Chinese policymakers did take their time spent out of the limelight to allow the Chinese yuan to appreciate roughly 0.3% against the US dollar.

Chinese inflation is elevated and near 5% (4.9% is the official rate as of January 2011). I understand that China’s growth adjustment will take time; but if you’ve got unwanted inflation, then domestic policy is too loose (fiscal or monetary). And in this case, it’s the monetary policy that’s too loose – that goes for both currency and rates policies.

On the rates front: there’s a very frothy feel in domestic asset markets, specifically the property market. Low rates and easy money have sparked a(nother) property boom in China, one that policymakers are trying to tamp down. The Economist published a recent article to the point.

But it’s going to take much, much more than raising down payments and reserve requirements to shore up demand for risk assets. I mean, it really doesn’t take a genius to see that real rates are entirely too low. What’s the investment strategy here: nominal GDP is expected to grow at a 11% in 2011 (according to Economic Intelligence Unit, no link), while the lending rate is just 6.06%. There’s no rocket science here: money’s entirely too easy and inflationary pressures are there.

Furthermore, deposit rates are too low and capping domestic consumer demand. Rates need to rise.


On the currency front. Although there’s been some appreciation in the nominal currency, the yuan, Chinese policymakers only recently allowed their currency to fluctuate at all (again) on an annual basis (see chart below). Notice how the annual appreciation was near 0% spanning Q3 2009 to Q4 2010 (October). Since the central bank doesn’t fully sterilize the inflows of foreign currency from export sales, the depressed nominal rate on the yuan feeds through to the economy via inflation.


Inflation is rising, which is perking up the Chinese real exchange rate. In January 2011, the trade-weighted real effective exchange rate appreciated at a 4% annual rate (according to the JP Morgan Index). The real exchange rate takes into account the nominal rate plus shifts in the purchasing power of the domestic currency, as measured by relative price fluctuations.

The chart illustrates that the nominal exchange rate is now gaining traction on an annual basis, since the Chinese government halted its movement against the USD in 2009. I suspect that the nominal momentum will continue to grind upward throughout this year in order to temper some of the inflationary impetus coming from outside its borders (like Fed policy). But as I said before, it’s Chinese policy that’s too loose at home.

The problem is, that Chinese policymakers want to rein in accommodative policy without raising rates too much because they don’t want the currency to appreciate markedly and are unable to fully sterilize all the flows. Inflation results.

If Chinese policymakers question how to achieve their top economic priority, price stability, then the answer to this self-induced problem is pretty obvious: significantly raise rates and the value of the currency.

Rebecca Wilder

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