[Whoaccio]

Peter Navarro? Are you joking? This is the guy that thinks China will try to colonize space within the next while.

 

[Glen]

Care to dispute the figure's he provided?

 

[kEiThZ]

Glen,

Assess your quote for a second:

"In the case of China, the currency market intervention necessary to maintain its yuan peg imposes a tax on Chinese firms and workers equal to nearly 9 percent of GDP, which China uses to subsidize exports to the United States and other countries. This lowers U.S. GDP by up to $500 billion or 4.4 percent, and overwhelms the U.S. efficiency gains from trade, estimated at
$125 billion."

So by that admission China loses more from its currency manipulation than the US. It's the Chinese people who should be asking if the policy is worthwhile....

 

[Glen]

Glen,

Assess your quote for a second:

"In the case of China, the currency market intervention necessary to maintain its yuan peg imposes a tax on Chinese firms and workers equal to nearly 9 percent of GDP, which China uses to subsidize exports to the United States and other countries. This lowers U.S. GDP by up to $500 billion or 4.4 percent, and overwhelms the U.S. efficiency gains from trade, estimated at
$125 billion."

So by that admission China loses more from its currency manipulation than the US. It's the Chinese people who should be asking if the policy is worthwhile....

Keith,

You have to look at what at what is motivating China. As the quote states, there is a cost to such practices. The purchasing power of a unit labour in China is considerably less than what it should, or otherwise be. The goal in China's case is to use the job creation aspects of mercantilism as a means to quell social unrest. They have a society that has little in the way of pensions and health care, so a tremendous amount of so people tend to save for such, as opposed to consuming their incomes. In order for China to create employment they must do so by fulfilling external demand.

The price they pay is that to continue such practices on any appreciable scale requires manipulations. A major one employed by China and Japan has been to purchase large sums of US treasuries as a means to inflate the value of the US dollar and by extension to deflate their own currencies.

That is what is most troubling about such practices. The benefits that they supposedly provide, a liberation of capital to be deployed elsewhere and lower prices for consumers are not sustainable. On our side of the coin, we pay the price of employment losses by being unable to compete because of the artificial environment. Eventually they whole thing collapses. Destroying the income producing ability of your best customers is not a viable long term strategy.

 

[fieras]

Hi Glen,

here's a sure fire way, I haven't thrown eggs away in the last ten years.

I keep a Komodo Dragon under the sink in the kitchen, I let him sniff one of the bad batch, if he turns his nose up at it then it's probably off. If he eats it then is't okay to use the rest. If you've only got one left then you have to be careful, he might bite your fingers off as you taunt him with the egg and he tries to bite it.

 

[Glen]

I think this article helps demonstrate the distortions that are allowed under 'free trade'.

The most notorious offender is China, the country of greatest concern to legislators in the U.S. House of Representatives, who have provided that only U.S.-produced iron and steel may be used on projects funded under the $819 billion (U.S.) American Recovery and Reinvestment Act of 2009.

The U.S. Senate's version incorporates the same provision, with the proviso that "it must be applied in a manner consistent with U.S. obligations under international agreements." What finally emerges after the Senate-House conference and any intervention by President Barack Obama is anybody's guess. But there is an emerging consensus that the main target is China's steel industry.

Since its acceptance into the WTO in 2001, China has been guilty of a number of impermissible trade practices, including the deliberate downward manipulation of its currency contrary to both WTO and IMF rules. But in the steel and iron sectors, its practices, however superficially shrewd, are clearly illegal.

China accomplishes preferential treatment for those industries through outlawed export restrictions. These restrictions have a negative impact not only on steel produced in the U.S. and other countries, including presumably Canada, but on a wide range of products, such as chemicals, ceramics, semiconductor chips, aircraft, petroleum products and fibre-optic cables, to name but a few. This is all documented in the December 2008 U.S. trade representatives (USTR) report to Congress on China's WTO behaviour.

One of steel's principal raw materials is coking coal, of which China is the world's major supplier. China currently limits exports of coke to 12 million tons per year and additionally imposes 40 per cent duties on coke exports. In 2007, China produced 350 million tons of coke, all but 12 million of which was sold in its domestic market. As the USTR reports:

"The effects of these export restrictions on pricing have been dramatic. In 2008, the world price for coke reached as high as $750 per ton at the same time that China's domestic price was $350 per ton. A $400 per ton price difference creates a huge competitive advantage for China's downstream steel producers over their foreign counterparts, as coke represents about one-third of the input costs for integrated steel producers."

China has been confronted on this illegal practice for the past several years by the U.S., the European Community and Japan (where was Canada?) and asked to cease and desist from its widespread use of outlawed export restrictions. However, as recently as last year, China repeated that it had no intention of modifying its policies.

 

[Glen]

Previously, I used the example of non labour intensive fastener production to illustrate how unfair trade can be to local producers. As witnessed above, there is no amount of efficiencies that can overcome such distortions. At least Europe was smart enough to protect their producers. So should we!

EU Imposes Tariffs of Up to 85% on Chinese Screws and Bolts

 

[urbanfan89]

Starting a global trade war as a global recession deepens?

What could possibly go wrong?

 

[Glen]

Starting a global trade war as a global recession deepens?

What could possibly go wrong?

Yes Smoot-Hawley worsened the depression for the US. But unlike this crisis the US was playing the role China is today. They were the major exporting country, running large trade surpluses and financing Europe. It was inevitable that there would be retaliatory measures from trade restrictions and the brunt of those would be felt by the largest exporter.

The world today is not suffering from a lack of supply, it is demand that is lacking and thus creating the imbalance.

I wonder how some would react if we could bring in Chinese Urban planners as migrant labour or on work permits. House them in spartan dormitories and provide rationed food. The expense of which we would deduct from wages. Then we could exclaim that Chinese Urban Planners are much more efficient than western ones because they work for less than $10 an hour.

 

[Glen]

Michael Pettis comments on his blog today;

It never makes sense for the leading trade surplus country to resort to protectionism if there is any chance of a global backlash, as the US discovered to its chagrin in 1930. It may, however, make a lot more sense for countries with trade deficits to turn to protection, and there is now overwhelming evidence that this is exactly what they are doing or thinking about doing.

http://mpettis.com/2009/02/more-terrible-trade-numbers-from-china/

 

[Dilla]

Yes Smoot-Hawley worsened the depression for the US. But unlike this crisis the US was playing the role China is today. They were the major exporting country, running large trade surpluses and financing Europe. It was inevitable that there would be retaliatory measures from trade restrictions and the brunt of those would be felt by the largest exporter.

Retalitory measures are felt by importers, too. If they weren't, then why would anyone bother to retaliate? You can't dismiss supply side economics in all this, even though to acknowledge it only hurts your point.

The world today is not suffering from a lack of supply, it is demand that is lacking and thus creating the imbalance.

That's a tad simplistic.

I wonder how some would react if we could bring in Chinese Urban planners as migrant labour or on work permits. House them in spartan dormitories and provide rationed food. The expense of which we would deduct from wages. Then we could exclaim that Chinese Urban Planners are much more efficient than western ones because they work for less than $10 an hour.

Well, yes. They would be much more efficient. What's your point here? That everyone should be paid the same for the same work world wide? Is it unfair to pay someone $10 an hour when that's twice the average wage? The current system has its problems, to be sure, but nothing else has even come close to producing the wealth that it has.

Globalization has had it problems as of late, but these choruses of "let's let the government handle how trade rules, CEO salaries, etc.; that ought to fix things" seems odd to me. I really don't see how trade rules imposed from Ottawa are going to fix what's broke here. Rules will just be made for terrible, political reasons. I would like to see more governments making more sensible rules for capitalism to work within, but I don't think them micromanage the price of screws and bolts is going to help anyone.

I mean, so what if Europe is doing it, it doesn't mean they're benefiting from doing it. It might be worth talking it about if they were, but I don't see how it's worth mentioning otherwise.

 

[Glen]

Retalitory measures are felt by importers, too. If they weren't, then why would anyone bother to retaliate? You can't dismiss supply side economics in all this, even though to acknowledge it only hurts your point.

Of course it will raise prices for importers. But it will also save or create jobs in those countries as production will be sourced locally. That income then gets further recycled locally.

Well, yes. They would be much more efficient. What's your point here? That everyone should be paid the same for the same work world wide? Is it unfair to pay someone $10 an hour when that's twice the average wage? The current system has its problems, to be sure, but nothing else has even come close to producing the wealth that it has.

My point is that it is a misnomer to call it efficient in the first place. It is cheaper, but the reasons and extent are a heavily influenced by policy which is unequally applied and tolerated.

Globalization has had it problems as of late, but these choruses of "let's let the government handle how trade rules, CEO salaries, etc.; that ought to fix things" seems odd to me. I really don't see how trade rules imposed from Ottawa are going to fix what's broke here. Rules will just be made for terrible, political reasons. I would like to see more governments making more sensible rules for capitalism to work within, but I don't think them micromanage the price of screws and bolts is going to help anyone.

I mean, so what if Europe is doing it, it doesn't mean they're benefiting from doing it. It might be worth talking it about if they were, but I don't see how it's worth mentioning otherwise.

The issue is not about micromanaging anything. It is about addressing fundamental distortions as the coal article above demonstrates.

 

[Dilla]

Of course it will raise prices for importers. But it will also save or create jobs in those countries as production will be sourced locally.

It will raise prices for consumers, taking away from overall wealth. I'm not sure anyone knows which path is better. One is certainly more visible, but that doesn't mean it will create the most benifits.

That income then gets further recycled locally.

Think of all the income we take in from other countries that we then get to recycle locally. This isn't a one way stream by any means. Nor is it a zero sum game (although I'll give you, it is in the short term, to an extent), wealth can be created without having to be at someone else's expense.

My point is that it is a misnomer to call it efficient in the first place. It is cheaper, but the reasons and extent are a heavily influenced by policy which is unequally applied and tolerated.

There's no misnomer here, producing the same thing using less (indeed, the fewest possible) resources is pretty much the definition of efficiency. I'm not sure where policy comes into the definition of efficient.

The issue is not about micromanaging anything. It is about addressing fundamental distortions as the coal article above demonstrates.

Right. But who will be addressing these distortions? I see how the temptation would be irresistible to politicians to get more and more involved. I think the nuts and bolts story is a good example, I wouldn't call nuts and bolts an industry; metals, sure. Should the trend continue, they'll just keep drawing up more specific laws to deal with less important industries and will try and plug every leak in the dam that might cost them a vote. Populism rarely makes good economic policy.

Moreover, it's not just banks and big business that brought on our current situation, governments are quite complicit in our current screw up, they control the money supply, and the world was awash in liquidity for the last decade, even though there was a gigantic commodity and housing bubble. Inflation was low (which is the only goal of most central banks), and no one wanted to ruin the party.

Let's not forget, there was a reason free trade agreements were drawn up in the the first place. I know some think it was because trans-national corporations demanded it, but I don't think so. Most who study economics agree that breaking down trade barriers aides in the creation of wealth.

There's a lot that needs fixing in our current system, but I'm not sure trade barriers are going to help.

 

[Glen]

It will raise prices for consumers, taking away from overall wealth. I'm not sure anyone knows which path is better. One is certainly more visible, but that doesn't mean it will create the most benifits.

Feed a man a fish. Teach a man to fish.

There's no misnomer here, producing the same thing using less (indeed, the fewest possible) resources is pretty much the definition of efficiency. I'm not sure where policy comes into the definition of efficient.

But the issue is not the amount of resources. Paying someone less to do the same work is not an increase in efficiency. It is merely a saving in money, which as a proxy for resources can be diluted or distorted in absolute value. Especially when it is a third party (state) that is determining the currency value.

Right. But who will be addressing these distortions? I see how the temptation would be irresistible to politicians to get more and more involved. I think the nuts and bolts story is a good example, I wouldn't call nuts and bolts an industry; metals, sure. Should the trend continue, they'll just keep drawing up more specific laws to deal with less important industries and will try and plug every leak in the dam that might cost them a vote. Populism rarely makes good economic policy.

Moreover, it's not just banks and big business that brought on our current situation, governments are quite complicit in our current screw up, they control the money supply, and the world was awash in liquidity for the last decade, even though there was a gigantic commodity and housing bubble. Inflation was low (which is the only goal of most central banks), and no one wanted to ruin the party.

Let's not forget, there was a reason free trade agreements were drawn up in the the first place. I know some think it was because trans-national corporations demanded it, but I don't think so. Most who study economics agree that breaking down trade barriers aides in the creation of wealth.

There's a lot that needs fixing in our current system, but I'm not sure trade barriers are going to help.

I agree that it would be foolish to try and micro manage such distortions but there are global ones that are easy enough to address. Currency, export tax rebates, semiconductor tariffs, steel. etc.

For example any product containing Chinese steel should face a tariff of 25% of the value of the steel portion (as per above). You do not have to make it specific to products because it subsidy itself is not product specific.

 

[Glen]

http://www.eurofer.org/index.php/en...distortions-in-the-international-steel-market

Report shows Chinese state-business relations provoke severe market distortions in the international steel market
25/02/2009 1:18 pm

Basis for future EU action / EUROFER asks Commission for strict enforcement of EU trade laws

EUROFER presented yesterday at the European Parliament, under the patronage of Elisabetta Gardini MEP, a 166 pages report on The State-Business Nexus in China’s Steel Industry - Chinese Market Distortions in Domestic and International Perspective, which has been prepared by Prof. Dr. Markus Taube of the renowned THINK!DESK China Research & Consulting.

“The report reveals in astonishing precision how the Chinese government organizations are severely interfering in the global market system by distorting the cost/price competitiveness of Chinese steel enterprises to the disadvantage of foreign steel makers. We are asking the European Commission and the Member States to strongly react on this by a strict enforcement of EU trade laws, based on the results of this important report. Any further dialogue with China must have the objective of securing a level playing field for European steel makers. This is even more important in order to reduce the impact of the current economic crisis over the next yearsâ€, says Gordon Moffat, Director General of EUROFER.

The report reveals in detail how China’s steel industry is firmly embedded in a powerful state-business relationship. Chinese steel companies are not operating in a competition based domestic market environment, but rather uphold very close relations to government agencies on local, provincial as well as central levels. The Chinese government programs the development of the steel industry by means of comprehensive and detailed catalogues outlining development goals and instruments of government intervention. A multi-layered system of politico-business alliances can be identified on the national level: ‘China steel Inc.’ made up of the National Development and Reform Commission (NDRC), the China Iron and Steel Association (CISA), the State-owned Asset Supervision and Administration Commission of the State Council (SASAC) as well as the top management of China’s leading steel enterprises; and on the local level: Local governments and enterprises form their own local alliances promoting local steel production activity, protecting them in the face of adverse central policies. The politico-business alliances (“China Steel Inc.â€) as well as local levels result in irrational capacity expansion and creation of massive excess steel capacities (pre-crisis estimation of more than 100 million tonnes per year). Chinese governments support their steel companies by a broad array of mechanisms including, inter alia, grants, various kinds of ‘in-kind’ as well as fiscal subsidies, capital market interventions, preferential tax arrangements, subsidized loan facilities, access to systematically under-priced inputs, non-execution of internationally accepted minimum standards of labor protection and environmental sustainability.

China has shifted from a net importing country to the – by far – largest steel exporter worldwide (20.7 percent of global steel exports in 2007). Chinese steel exports to Europe have increased at an even greater speed than China’s total steel exports. The Chinese share of total EU steel imports has quickly risen to reach almost 30 percent in 2007 from only 2 percent in 2003 – with a growing share in the area of higher value-added flat products. But China does not have a genuine competitive cost advantage in steel making; cost structures and sales prices of China’s steel enterprises do not reflect real market constellations and scarcities. In general, China’s steel enterprises are operating at artificially depressed cost levels. Chinese steel exports to Europe actually incur higher costs than those that arise to European producers supplying the local markets. Chinese steel mills have a clear cost disadvantage when trying to sell their products on the European markets.

However, the Chinese government is promoting export activities by domestic steel producers on a highly selective basis. Measures include an intricate set of cascading value added tax (VAT) rebates, export taxes and even export quota (coke), which may be coupled with income tax reductions, preferential export credits and guarantee schemes provided by the China Export Import Bank (China Eximbank) and other state-owned financial institutions.

By distorting the cost/price competitiveness of Chinese steel enterprises vis-à-vis foreign companies, Chinese government organizations are interfering in the global market system.