Drama=China or dull trade policy discussions? Information and a caution
Lifted from an e-mail by Stormy
Financial Times notes that China’s champions-elect are going abroad, in oil, in mining and in car manufacturing, supported in almost all cases by state-owned banks. But the banks themselves are largely staying put. Why?
Global chinese capital See charts for China
Unfair China Trade Costs Local Jobs
Couple of points:
1. Currency manipulation is discussed here and here:
Neither you nor anyone else knows what the true currency exchange (dollar v yuan) should be. The only way we will know is if the yuan is allowed to float. (Ours does…the Canadian one does, etc etc…in fact, most industrialized nations allow their currencies to float… If they did not, then there would be a big stink.)
2.Walmart–both retailer and manufacturer. What we need to see is where that split between retailer and manufacturer occurs. Often, it has forced major U.S. firms to outsource production in order to keep their goods on Wal-mart shelves,,,e,g, Master Lock, to name only one. On the other hand, Faded Glory is a brand name in effect created by Wal-mart and made in China on the cheap. It is not a Chinese brand name. But again, no one knows what the proportion of foreign brands, Wal-mart brands, Chinese brands is on Wal-mart shelves.
3. China is beginning to protect and nurture certain categories of indigenous firms. It is worth watching what areas it is and will be investing in. Certainly IT.
Beyond Wal-mart:
What needs careful analysis is exactly the relationship between major firms and Chinese suppliers. In some cases, the foreign firm itself has set up shop….in terms of others, the firm– like Mattel–use Chinese firms as suppliers. In others, there may indeed be a Chinese firm.
Apparently, Walmart is responsible for 10% of China’s exports…but how is that 10% spread between foreign firms in China and indigenous Chinese firms? And what how much has it forced American firms to outsource production to cheap locales–Mexico, China, etc?
I can easily point you to declarations by Chinese officials that 60% of China’s exports are driven by foreign firms in China–in the case of IT, closer to 80%.
I pointed you and others to National Tooling and Machining Association because there is a possible shift occurring. Unfortunately, I do not think anyone bothered to read the pdf file at that site.
That association is only one of the many collections of foreign firms using China and other third world countries as export platforms. The reasons for this possible shift are many and varied.
I see that some in NakedCapitalism are sad that China is getting only 2% profit margin (on Walmart?) Well, not sure how that number is arrived at.
Anyway, the intent apparently is to allow China to continue to manipulate its currency. Weird.
As far as the cards China and the U.S. have to play in their trade spat? Certainly China can use its role as major creditor with some effect. (If I remember correctly, the U.S. government fully protected China’s investment in AIG. Does that say anything?) Now, how effective that role will be…who knows. The U.S. can try to deflate its currency…up to a point. These are tricky waters.
***The U.S. can try to deflate its currency…up to a point.***
But that won’t help with regard to China unless China unpegs its currency from the dollar. A dollar deflation with the peg still in place will just make things worse for everyone else
OTOH, it seems unlikely that China is going to float its currency. It may come as a shock, but the Chinese don’t seem to have a lot of faith in the international financial markets — I can’t think why. I suspect that they sort of feel that if anyone is going to manipulate the Chinese currency, it is going to be the Chinese, not the US, Morgan Stanley, or faceless hedge fund managers. That seems not irrational.
I imagine that the Chinese can eventually be talked into pegging higher or pegging to a marketbasket of major currencies. I infer from Geithner’s verbiage the other day that they might talking to the US about a 3% or so adjustment.
“the intent apparently is to allow China to continue to manipulate its currency.”
Perhaps this is because some factions are making a lot of money from those manipulations. Or perhaps a deal has been struck. On a vote in the UN Security Council, perhaps?
More food for corvids!
…and, just when things seemed that they could not get any more complicated, or any more corrupt, there is this:
The Washington Post notes:
About two-thirds of corporations operating in the United States did not pay taxes annually from 1998 to 2005, according to a new report scheduled to be made public today from the U.S. Government Accountability Office…
In 2005, about 28 percent of large corporations paid no taxes…
Dorgan and Sen. Carl M. Levin (D-Mich.) requested the report out of concern that some corporations were using “transfer pricing” to reduce their tax bills. The practice allows multi-national companies to transfer goods and assets between internal divisions so they can record income in a jurisdiction with low tax rates…
[Senator] Levin said: “This report makes clear that too many corporations are using tax trickery to send their profits overseas and avoid paying their fair share in the United States.”
It’s a global economy based on a nation of the United Corporations of Global. That nation has no taxation.
What would one expect with a mantra of “it’s a global economy”?
Of course, if we could organize the other nations such that they act as one against the new nation, that would stop the UCG from playing one nation against the others. I guess to do that the US would have to give up it’s form of imperial actions, but that would mean we would have to give up the Chicago School’s model for an economy.
Good behavior and consideration of responsibility is only enforceable when the model for living includeds such. Unfortunately, our current model based on warpped invisible hand economic ideology has no such construct within it’s house.
The MSM coverage of the trade “spat” also convienuently continues to ignore some key facts. First, the Chinese Government anounced in 2006, as part of its 11th 5-year plan, that it intended to diversify away from dollar-related holdings. Whether the gains from maintaining a depreciated currency are outweighed by the vast allocations of capital required to maintain a soft peg, is a question that can only be answered in counter-factual assumptions, but insofar as the Chinese are are concerned they have every right to make that decision for themselves. And they have made it clear, officially and openly, that they are not satisfied with the current arrangement. Here is another official statement from 2008 (Wiki):
“In the wake of the Financial crisis of 2007-2008, the governor of the People’s Bank of China explicitly named the Triffin Dilemma as the root cause of the economic disorder, in a speech titled Reform the International Monetary System. Zhou Xiaochuan‘s speech of 29 March 2009 proposed strengthening existing global currency controls, through the IMF.
This would involve a gradual move away from the US dollar as a reserve currency, and towards the use of SDRs (IMF Special Drawing Rights) as a global reserve currency.
Dr Zhou argued that part of the reason for the original Bretton Woods system breaking down was the refusal to adopt Keynes‘s Bancor which would have been a special international currency to be used instead of the dollar.
American economists such as Brad Delong have agreed that on almost every point where Keynes was overruled by the Americans during the Bretton Woods negotiations, he was later proved correct by events.
Dr Zhou’s proposal attracted much international attention; in a November 2009 article published in Foreign Affairs magazine, economist C. Fred Bergsten argued that Dr Zhou’s suggestion or a similar change to the International Monetary System would be in the United States’ best interests as well as the rest of the world’s.. While Dr Zhou’s proposal has not yet been adopted, leaders meeting in April at the
Surely no corporation with character and integrity would …. Oh, never mind.
“What we need to see is where that split between retailer and manufacturer occurs.”
Outdated thinking. Is Dell a manufacturer or marketing company? Nike? In the horizontal company where each business function stands independently and can be done by or outsourced to any of several entities either under the same corporate umbrella or not, those designations are irrelevant. Outsourcing production within the horizontal enterprise harnesses comparative advantage and creates wealth enjoyed by everybody. I insist. Though there are some wee ancillary problems which include, but are not limited to:
When production itself is outsourced margins on production become insufficient to cover indirect manufacturing costs and those other business units must be capable of supporting themselves. And it’s pretty easy for accounting, marketing, customer service, etc., but my gripe – and you may have heard this from me before – not R&D. Nobody is around to fund the development of new ideas.
The distribution of the benefits created by those producers and savers…. We could talk more about that.
But a trade spat with China is not in our interest and the exchange rate is not an overriding factor anyhow. I have read that it would require a 35% revaluation of the renminbi to make any real difference in the China/US trade balance. All that would do is create a lot of new unemployment in China and bust that horizontal (strong dollar dependent) business model.* Not a solution. We must hope that China would begin to import more of the goods we continue to produce (not the ticky tack stuff we import from them, but the high value items which are part of a higher standard of living). Health care technologies, workplace safety equipment and pollution abatement equipment comes to mind.
*Actually any multi-national worth its salt already has a China +1 procurement policy and given a revaluation of the renminbi would quickly adjust. Same doesn’t apply to a collapse in the dollar.
***This would involve a gradual move away from the US dollar as a reserve currency, and towards the use of SDRs (IMF Special Drawing Rights) as a global reserve currency.***
FWIW, the Brazil, Russia, India and China just concluded a BRIC summit that called for changes to the global financial system. http://www.chinadaily.com.cn/world/2010-04/17/content_9742491.htm
I have no idea if this is posturing or if the Chinese are headed somewhere specific.
*** but the high value items which are part of a higher standard of living). Health care technologies, workplace safety equipment and pollution abatement equipment comes to mind. ***
I fear that may be a fantasy. There is some stuff like that. But the Chinese already import it. The problem looks to be that — unilke 1970 — the Chinese can make most things they want about as well as we can … and cheaper.
While wandering around the world in the 1960s, I spent a month in London. I ran into a number of older brits who genuinely thought that Brittania still ruled the waves and the world revolved around London. I didn’argue with them — it’d have been pointless. But they were living in a glorious past rather than a not terribly uncomfortable, but rather unglamerous, present. I fear that a lot of Americans are equally delusional about our “superior technology”.
I could be wrong of course, But I wouldn’t bet that I am.
Stormy:
WalMart is a distributor who buys manufactured product.
Turns out that the renminbi was pegged to a marketbasket of currencies from 2005 to 2008. It was apparently repegged to the dollar in 2008. It appreciated by more than 10% while it was pegged to the marketbasket. I don’t recall any significant effect on US imports or exports. http://en.wikipedia.org/wiki/Renminbi#Managed_Float
In fact, scanning the numbers it looks like the trade deficit with China increased a bit during the time when the renminbi was appreciating against the dollar. http://www.census.gov/foreign-trade/balance/c5700.html#2010
Between China and Greece It crosses my mind that we collectively (Economists and layfolk alike) quite likely don’t have the slightest idea what we are doing with regard to foreign exchange.
@VtCodger, it has been a fantasy. Therefore the imbalance. But rebalancing can come in constructive ways or distructive ways. A trade spat in which Chinese labor is forced to make the adjustment isn’t helpful and creating a Chinese consumer market is as you say fantasy. So, the imbalance remains or we will wish that it did.
run,
While you are technically correct it is also true that Walmart plays a key role in the actual manufdacturing of the products that it then “buys” from its suppliers. Once a supply contract connects a manufacturer to the Walmart system that producer is virtually bought into the Walmart supply chain. It is no different from calling Microsoft an assembler because some of its hardware is provided by contractors. That holds true for a great many “manufacturers” and distributors.
No clue about money supply, interest rates, and credit growth either. Any mal investment is good investment, money doesn’t cost anything. As long as you can concoct an inflation index that’s stable, i.e. one that separates out “volitile” things like food and energy, weights HC at 4% even tho it’s 18% of GDP, ignore housing prices and any other “assets”, put lots of Chinese products in the index, etc… then we can say everything is fine. Then when investment goes bad, transfer bad investment from the private sector to government debt and print more money. The banks get to intermediate the new money, anyone who earned it loses. Fine plan.
Jack:
I am gonna disagree.
Because I contract a vendor and I know all of their capacity, overhead, and labor doesn’t make me a manufacturer. They are still the manufacturer and I the customer or distributor even though I may supply them with raw material. I did this also in automotive and my responsibility ended at the contract to manufacturer, I the customer and distributor to Ford and whoever they designated.
Codger,
Thanks for link. The world is slowly but surely changing.
Codger,
Thanks for the link on the BRIC meet. It seems the world is slowly but surely being rearranged.
China may develop a consumer economy. But I think that it’ll mostly be serviced by China and its neighbors.
In the long run, China and India and their friends may become prosperous and the trade deficits with the US and EU may largely go away because they make the same stuff we do at about the same cost, and it’s all trade between equals. And we’ll go through the same process later with other countries that are now economic backwaters — Afghanistan, Burkino Faso, etc.
And in the very long run, everybody will be developed and living at much the same standard and the economists will start being right about trade.
My thought is that It’s just the next 50-100 years or so that we need to muddle through. Somehow, we developed countries need to manage our economies such that growth overseas is not fueled by deterioration of our economies. So far, we seem to have done a dismally poor job of that.
hi, run! very o/t, but i’ve lost your email address. could you send me an email to the address here when you have a moment?
I don’t think it’s much of a spat, or the ‘spat’ is for naive domestic audiences on both sides of the Pacific. The Chinese elite has done exceedingly well in the US – led capitalist order and there is absolutely no reason for them to rock the boat. The US is using the yuan issue to get China in line regarding Iran, and eventually they will fall in line, probably with a guarantee of supplies from Saudi Arabia.
run,
On the other hand, to what extent are the price demands of the “distributor” contributory to the manufacturing methods and localities of the supplier? Walmart’s dominance of the retail market has given it disproportionate leverage on its own suppliers in regards to pricing and control over how those pricing targets are reached. It’s not quite the same as a retailer/distributor sending a buyer to the supplier and agreeing to purchase at a given price those products that the supplier manufactures. The relationship is far more incestuous with Walmart’s demands driving supplier manufacturing and cost control decisions. The result is that msot of Walmart’s products are manufactured outside of the US and the same has become true across almost all sectors of product manufacturing and distribution. I would think that a job as a stevedor on the west coast is still a secure position. Or, have the cargo handling firms and importers found away to out source dock work?
Offshoring to China. A case study.
Check this out.
Microsoft contractor operation in China: “We are like prisoners… We do not have a life, only work.” -Teenaged Microsoft Worker
A story about these conditions ran in the Seattle pi last week.
Here’s the National Labor’s Committee report on operations at KYE Systems Corporation factory in China.
China’s Youth Meet Microsoft
KYE Factory in China Produces for Microsoft and other U.S. Companies
http://www.nlcnet.org/reports?id=0034
• Over the past three years, unprecedented photographs of exhausted teenaged workers, toiling and slumping asleep on their assembly line during break time, have been smuggled out of the KYE factory.
• KYE recruits hundreds-even up to 1,000-“work study students” 16 and 17 years of age, who work 15-hour shifts, six and seven days a week. In 2007 and 2008, dozens of the work study students were reported to be just 14 and 15 years old. A typical shift is from 7:45 a.m. to 10:55 p.m.
• Along with the work study students-most of whom stay at the factory three months, though some remain six months or longer-KYE prefers to hire women 18 to 25 years of age, since they are easier to discipline and control.
• In 2007 and 2008, before the worldwide recession, workers were at the factory 97 hours a week while working 80 ½ hours. In 2009, workers report being at the factory 83 hours a week, while working 68 hours.
• Workers are paid 65 cents an hour, which falls to a take-home wage of 52 cents after deductions for factory food.
• Workers are prohibited from talking, listening to music or using the bathroom during working hours. As punishment, workers who make mistakes are made to clean the bathrooms.
• Security guards sexually harass the young women.
• Fourteen workers share each primitive dorm room, sleeping on narrow double-level bunk beds. To “shower,” workers fetch hot water in a small plastic bucket to take a sponge bath. Workers describe factory food as awful.
• Not only are the hours long, but the work pace is grueling as workers race frantically to complete their mandatory goal of 2,000 Microsoft mice per shift. During the long summer months when factory temperatures routinely reach 86 degrees, workers are drenched in sweat.
• There is no freedom of movement and workers can only leave the factory compound during regulated hours.
• The workers have no rights, as every single labor law in China is violated. Microsoft’s and other companies’ codes of conduct have zero impact.