Will the Chinese yield to external threats?

A post by Edward Harrison

I am going to talk here a little bit about the looming trade war between China and the United States. But I am going to come at it from a side angle via some historical analogies.

Common folklore in the United States says that the Soviet Empire collapsed in large part due to the efforts of American President Ronald Reagan and not due to internal forces. Others downplay Reagan’s role and see internal forces as more significant.

I want to briefly outline this debate and make a parallel to the financial crisis and the near collapse of the American financial system and ask a few questions about anti-Chinese protectionist rhetoric in this context. My basic question will be: How effective is external pressure in precipitating regime change or economic policy moves?

Let’s start off with the collapse of the Soviet Union. When Ronald Reagan died in June 2004, MSNBC ran an article, “Determination to destroy communism was a hallmark of his 8-year presidency” which eulogized the former President with credit for helping to destroy the Soviet Empire.

The article began:

He stunned the Soviet Union with his tough rhetoric, calling it an “evil empire” whose leaders gave themselves the “right to commit any crime.”

His famed “Star Wars” program drew the Soviets into a costly arms race it couldn’t afford. His 1987 declaration to Soviet leader Mikhail Gorbachev at the Berlin Wall — “Mr. Gorbachev, tear down this wall” — was the ultimate challenge of the Cold War.

Ronald Reagan’s determination to destroy communism and the Soviet Union was a hallmark of his eight-year presidency, carried out through a harsh nuclear policy toward Moscow that softened only slightly when Gorbachev came to office.

He is vividly remembered in Russia today as the force that precipitated the Soviet collapse.

“Reagan bolstered the U.S. military might to ruin the Soviet economy, and he achieved his goal,” said Gennady Gerasimov, who served as top spokesman for the Soviet Foreign Ministry during the 1980s.

The article goes on to assert that Reagan’s anti-Soviet stance was a significant departure from Jimmy Carter’s ‘mild detente’ [read: weak on defense], suggesting that this course change brought down the Soviet Union.  The article then provides yet more quotes from influential Russian dissidents to bolster this claim.

But is this really true?

Last November, an online survey demonstrated that Americans are alone in this view that external pressure applied by the Reagan Administration was principally responsible for the Soviet collapse.

The online survey of representative national samples asked respondents to assess the performance of nine political figures of the 1980s, and their effect in the eventual collapse of communism.

For Americans, Reagan is the clear winner with 69 per cent of respondents claiming he deserves a lot of credit or some of the credit for the collapse of communism. More than half of people in the U.S. also commend Gorbachev (56%) and British Prime Minister Margaret Thatcher (57%) for their efforts.

In Britain, only Gorbachev (57%) and Walesa (56%) clear the 50 per cent mark, followed by German chancellor Helmut Kohl (47%), Thatcher (45%) and Reagan (44%).

In Canada, Gorbachev is seen as the most important figure (65%), followed by Reagan (58%), Thatcher (56%) and Walesa (52%). Canadians are more likely to select Reagan and Thatcher as deserving “some of the credit”, and place former Canadian Prime Minister Brian Mulroney at the bottom of the list with 25 per cent.

The survey also shows that a considerable proportion of people in the two North American countries (47% in the U.S. and 44% in Canada) regard Pope John Paul II as an important player in the collapse of communism, while Britons (31%) are decidedly more skeptical.

People Differ on Who Deserves Credit for the Collapse of Communism, Vision Critical

On some level, it’s irrelevant if the claim that Ronald Reagan ended communism is true because the winners get the spoils. And that means they get to impose their historical narrative on past events whether this narrative is true or not.

If external pressure did bring down the Soviet Union, an analogous claim could be made for the American financial system’s near-collapse because of the focus by regulators post-9/11 on terrorism to the exclusion of financial fraud.

Last month, Bill Black, a former S&L crisis regulator gave a speech on mortgage fraud and its central role in the housing bubble and bust. he asserts that lax regulation was at the core of why this fraud was allowed to occur. What I found interesting about Black’s lecture was the section on the FBI. He starts by commenting that the FBI gave a prescient warning in September 2004 in Congressional testimony that fraud and insider trading were rampant in the mortgage market. Black says:

[The FBI] didn’t simply warn there was an epidemic of mortgage fraud, they explicitly warned that it would produce an economic crisis if it were not dealt with. So what was done in response to a warning that clear?

Not a whole lot. In fact, Black says no one wants to unearth the fraud because the majority of it came from the lenders and not the borrowers. This is a bit like the 9/11 intelligence memo warning of an imminent al Qaeda attack:

RICE: I remember very well that the president was aware that there were issues inside the United States. He talked to people about this. But I don’t remember the al Qaeda cells as being something that we were told we needed to do something about.

BEN-VENISTE: Isn’t it a fact, Dr. Rice, that the August 6 PDB warned against possible attacks in this country? And I ask you whether you recall the title of that PDB?

RICE: I believe the title was, "Bin Laden Determined to Attack Inside the United States."

Now, during the S&L crisis there were 1000 investigators on the case. In 2009 there were 150 FBI agents on the case. And that’s a large part of the problem. After 9/11, more than 500 white-collar investigative specialist FBI agents were transferred from white-collar crime to focus on national security. Had these 500 extra FBI agents been available, perhaps the fraud would have been prosecuted. Similar tales are certainly available at other regulators like the SEC as the U.S. was more interested in connecting charities to terrorist sources than investigating mortgage fraud.

So, in a very real sense, one could make the same argument about 9/11 and al Qaeda causing the collapse of the United States’ financial system  that is made about Reagan causing the collapse of the Soviet economic system. I do not find this line of thinking persuasive. But, the situations are indeed analogous.

So, here’s my question again: How effective is external pressure in precipitating regime change or economic policy moves?

We see that most Americans believe it was very effective in bringing down the Soviets. Most believe it was effective in ending Apartheid in South Africa. It has not been so successful in Cuba or North Korea. But could external pressure work in Iran or even in China?

My general take is no; politicians, especially in command economies, are relatively unconcerned with external pressure. I used to be a foreign policy specialist. And, despite my role, I was keenly aware of the primacy of domestic issues over foreign ones in a politician’s decision-making. What the ruling elite in command economies care about is social unrest that stems from a lack of civil liberties and economic progress. Even in the United States, this is true.  Do you think American politicians will yield to Brazilian threats to retaliate for American cotton subsidies? Of course not.

Threats don’t work. The only thing that can work is inflicting economic pain and creating social unrest. Yes, autarky hasn’t brought the North Koreans or Cubans to heel; nor did it topple Saddam Hussein. However, implicitly, this is the power that some American political historians ascribe to the policies against South Africa and the Soviets. They assert that it was the economic pain that caused those governments to eventually yield.

So, as Americans look to threaten to punish China for China’s protectionist exchange rate policy, we should all understand that these threats will have no effect.  The Chinese will not do anything because of threats. More likely, they will dig in their heels. The Telegraph’s Liam Halligan has it right when he says:

When it comes to China, the West needs to face the truth. The more America calls for China to revalue the longer Beijing will take to do it. Chinese politicians are as unlikely to buckle in the face of Western pressure as their Western counterparts would be given a tongue-lashing from Beijing.

China’s government is petrified of social unrest. Given the importance of the export sector for continued high growth and jobs, this again makes it impossible to Beijing to be seen yielding to pain imposed by the West.

What is more likely to occur is that American politicians, pressured by the upcoming mid-term elections, will create binding legislation to retaliate against China for their undervalued currency. China will not budge – in part out of pride and in part out of need to prevent a hard landing. As a result, the binding legislation will become operative and a trade war will ensue.

For more on how a trade war would affect the global economy read Michael Pettis’ piece How will an RMB revaluation affect China, the US, and the world?. He notes that surplus countries like China have the most to lose and feels that the short-term losses for the U.S. will be less. I agree that surplus nations have the most to lose. But I disagree about the short-term effects on the United States; any economic shock to the United States will tip into a double dip recession, precipitating higher unemployment, a renewed meltdown in the financial sector and the attendant deleveraging. That is very bearish for equities, I should add. Moreover, the Chinese would make their UN Security Council veto work and stymie any efforts the U.S. makes toward controlling Iran. I see a lot more risk in a Chinese trade war for the United States than Pettis.

This is what I have labelled Murder-Suicide in Chimerica. But, I believe this could be where we are headed -  now more than ever.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward http://www.creditwritedowns.com

93 comments

  1. DMorris

    In terms of the collapse of communism, one key factor was the collapse of the price of oil from a high of about $35 a barrel when Reagan took office to a low of below $10 per barrel. That took many billions from the Russian treasury. The other was the Afghanistan war, which I guess could be credited to Reagan although Carter precipitated our involvement.

    1. Kievite

      I would add to oil the economic inefficiency of over-centralized planning plus nationalism fuelled by poverty and with the advent of Perestroika well financed by western agencies. As communist ideology faded, nationalism filled the vacuum and that led to a the logical end of the multinational state creating a region very similar to Balkans. Caucasus in this respect is real powder keg.

      Another factor was that Gorbachev tried to transform the system too fast and lost control in the process. China did the same in more gradual manner and their neo-feudal variant survived and even prospered. Still the same problems remains.

      I think that the key problem was that the USSR was not a new, better then capitalism, social system, it was an attempt to revive feudalism, a neo-feudal state with the doctrine of communism as a new religious ideology cementing the society. As such it was unable to provide higher standard of living for the population. The communist ideology was dead in 70th and even Politburo of CPSU indirectly accepted that (they send their wifes to shop in Paris and their daughters and sons to study in London). So capitalism eventually prevailed as it should.

      As for USSR Afghan war the USA acted really recklessly by organizing, arming and financing Islamic religious fundamentalists. True, the USSR got thier Vietnam and it might play some minor role in speeding the collapse. But tremendous blowback for the USA and the world as a whole was inevitable.

        1. Moopheus

          Speaking of Ukraine, people in the West often forget, among other things, the influence of the Chernobyl disaster on the internal politics of Ukraine, in that it moved many Ukrainians, especially Russian-speaking Ukrainians, to be more active in seeking independence from the Soviet Union. And without Ukraine, there really couldn’t be a Soviet Union.

  2. MyLessThanPrimeBeef

    The Fed should start buying RMB to drive it up.

    You gonna peg me @ 0.1465 dollars to 1 Yuan?

    No, I will peg you back 0.196 dollars to 1 Yuan.

  3. Dan Duncan

    This is a muddled post.

    You write: “Threats don’t work. The only thing that can work is inflicting economic pain and creating social unrest.”

    OK, fine.

    Then, you write: “So, as Americans look to threaten to punish China for China’s protectionist exchange rate policy, we should all understand that these threats will have no effect.”

    A reasonable statement.

    And finally: “What is more likely to occur is that American politicians, pressured by the upcoming mid-term elections, will create binding legislation to retaliate against China for their undervalued currency.”

    The last excerpt is no longer describes a “threat”. It is the follow-through on a threat…which you describe as manifesting itself through a Trade-War.

    The question, then, is: Would China’s involvement in a trade-war circle back to proposition #1 and “inflict economic pain and social unrest within China”?

    If so, would the pain and unrest be enough to effect change and would it be worth the cost to the US?

    1. Edward Harrison Post author

      Dan, It’s not muddled at all. I am taking you through the logic of a decision tree.

      The protectionist rhetoric in the U.S. will take on a life of its own. This means a threat met with intransigence – as is likely – quickly becomes follow-through, yes. So, yes, the U.S. moves from a threat into something more concrete which can inflict pain.

      You add:
      The question, then, is: Would China’s involvement in a trade-war circle back to proposition #1 and “inflict economic pain and social unrest within China”?

      The answer there is most certainly yes. It will inflict pain. However, I seriously doubt the Chinese would then yield. The damage is done. More likely is escalation, retaliation (think tariffs, think Taiwan, think Iran).

      So, in essence, i am saying very concretely that a threat of protectionism will necessarily become real because I do not expect the Chinese to yield. This, in turn will escalate because the damage done to the Chinese will engender retaliation. So this is a lose-lose situation – a reckless move.

      I should also point out that protectionism transfers wealth from domestic consumers to the protected producers and decreases consumption demand.

      1. Dan Duncan

        I hear what you’re sayin’. And, I certainly agree with your end conclusion. But I still think it’s a bit muddled when you state:

        “Threats don’t work. The only thing that can work is inflicting economic pain and creating social unrest.”

        Only to loop back with:

        And these threats will definitely culminate in a trade war, which invariably brings…”economic pain and social unrest”.

        From your logic tree, the US might just be correct in its course of action…

        Regardless, neither of us thinks the US would be correct in this lose-lose scenario, so I’ll just leave it at that. Thanks for the response…and your last sentence certainly is an important insight:

        “I should also point out that protectionism transfers wealth from domestic consumers to the protected producers and decreases consumption demand.”

      2. RagingDebate

        Nice piece Mr. Harrison. The Chinese will release their dangerous Frankenstein, the North Koreans. I would expect nuclear terrorism on the U.S. West Coast and North Korea invading the South. Taiwan and conflict in the Sea of Japan. The Year of the Ram, 2015 will be the timeframe and this will become the epicenter of World War 3. I hope I am very wrong.

      3. jonboinAR

        Man, I don’t understand how you can say that the Chinese would be willing to go toe to toe with us in a trade war. They can hurt us a bit, but a full trade war with the US would demolish their economic miracle completely, would it not? I take it from other things you say in this thread that we SHOULD force change on them, but in a sophisticated, face-saving manner. I hope that’s what you mean.

  4. EmilianoZ

    So, what do you suggest? Secret negotiations? The value of the whole thing is in the posturing. Obama did not stand up to big pharma. He did not stand up to the health insurance industry. He did not stand up to the financial industry. Now he wants to show he can stand up to something before the elections. Too bad the only thing he can stand up to can precipitate Big Depression 2.0. What a loser!

    1. Vangel

      Obama did not stand up to big pharma.

      What exactly is ‘big pharma’ guilty of and why should Obama ‘stand up’ to it?

      He did not stand up to the health insurance industry.

      I am confused on this point. The health care industry is one of the least profitable in the US. How and why should Obama ‘stand up’ to it?

      He did not stand up to the financial industry.

      He can’t. He was bought and paid for by the financial industry. Without all those donations he would never have won the nomination and would not have been running for president.

      Now he wants to show he can stand up to something before the elections.

      Obama does not want to stand up to China and would rather hide because he is aware of the dangers. It is the idiots in Congress who are itching for a fight that they cannot win.

      Too bad the only thing he can stand up to can precipitate Big Depression 2.0. What a loser!

      If Congress manages to trigger a collapse there is a lot of money to be made for those who are prepared. Buy gold and short treasuries.

      1. liberal

        “What exactly is ‘big pharma’ guilty of and why should Obama ’stand up’ to it?”

        Massive economic rent collection.

  5. alex

    Edward Harrison: “trade war … any economic shock to the United States will tip into a double dip recession”

    There’s no reason for trade rebalancing to be a shock to the US (or even China). If China won’t float (or at least revalue) the yuan, then we can start with a low tariff and gradually ramp it up. All the while we should make clear that our preference would be revaluation, and that we’ll reduce or eliminate our China tariff in response.

    1. Edward Harrison Post author

      This doesn’t reflect an understanding of the likely Chinese response. They have a domestic constituency to think about. There is no way that the Chinese are going to revalue the Yuan AFTER tariffs have been enacted. That would be perceived as a sign of weakness domestically. That is one thing that would never happen.

      This is why this threat is so dangerous. Once a binding threat is implemented, you’re practically guaranteeing a trade war.

      1. alex

        You may be right about the likely Chinese response. I don’t pretend to understand Chinese domestic politics (which make Byzantium look straightforward) and am frankly skeptical of anyone who claims to – even if they’re Chinese!

        However my main point was that a gradually increasing tariff is not a sudden shock. If anything it will give confidence to domestic manufacturers that they can invest for the future, and give them time to make those investments.

        Also tariffs to compensate for yuan undervaluation can’t _start_ a trade war because we’re already in one. In general using terms like “trade war” and “protectionism” to describe trade balancing tariffs is one-sided, as those terms are at least as accurately used to describe China’s currency manipulation (more accurately as trade balancing tariffs would be compensatory).

        Finally, if we can’t negotiate with China, what alternative do we have but to enact compensatory tariffs? Should we just continue to be a toothless tiger and accept China’s waging of a one-sided trade war?

        1. Edward Harrison Post author

          alex, you’re probably right about the phrase ‘starting a trade war’ because, clearly, a undervalued peg can be seen as a protectionist move.

          There aren’t a lot of options really. The real problem lies in an artificially low Yuan peg and an artificially low U.S. interest rate. The peg makes Chinese goods cheaper. The interest rates discourage saving and increase the US deficit.

          As I indicated, the Chinese may actually revalue themselves to prevent over-heating, but they want to do it at their pace. They had revalued 20% before the financial crisis, and ostensibly they would continue to do so going forward.

          Should we accept that? China’s peg is reportedly 25-40% too low. If we don’t accept this, what else could we do? Obviously, increasing interest rates would certainly increase savings and decrease consumption growth. This would decrease the trade deficit. But that’s not what the Obama Administration wants and it would probably lead to a double dip.

          Frankly, this is a cul de sac partly of our own making. No one told American policy makers to lower interest rates to 1% and encourage people to go on a reckless spending spree. Now, we are paying the price.

          1. alex

            “you’re probably right about the phrase ’starting a trade war’ because, clearly, a undervalued peg can be seen as a protectionist move.”

            Arguably I’m being pedantic, but I think the rhetoric is important because the terms like “free trade” and “protectionism” have become so powerful they’re almost totemic. Hence I’ve gone from decrying what was called free trade to pointing out that the status quo is anything but. At heart I’m not a fanatical free trader as I think that (absent one world government) free trade is but a Platonic ideal, and because efficiency is not the only consideration in economics (stability and distribution are among others). Nevertheless I’m not a big believer in high tariffs and quotas. Senator Smoot and Representative Hawley are no friends of mine.

            “the Chinese may actually revalue themselves to prevent over-heating”

            Great, but how much patience should we have?

            “They had revalued 20% before the financial crisis, and ostensibly they would continue to do so going forward. Should we accept that? China’s peg is reportedly 25-40% too low.”

            If they started revaluing at a reasonable rate it would be great. But the revaluation not only stopped, it was never sufficient to compensate for gains in Chinese productivity.

            “Obviously, increasing interest rates would certainly increase savings and decrease consumption growth. This would decrease the trade deficit.”

            But don’t higher (real) interest rates also tend to raise a currency’s value as non-Americans buy dollar denominated bonds?

            “Frankly, this is a cul de sac partly of our own making.”

            Agreed. I’m not a China basher so much as a US government basher for letting this situation get out of hand. In addition to the housing bubble and domestic financial irresponsibility, our whole China trade policy has been nuts. Clinton pushed for premature Chinese PNTR and WTO membership (as many warned at the time) and Bush did nothing to deal with the trade deficit before it got worse.

            Nevertheless I think that at some point (soon) it would be the lesser evil for us to implement trade balancing tariffs. Ideally we would first enlist the help, at least for IMF and WTO complaints, of other countries that are also hurt by China’s currency manipulation – we have many potential allies in this.

          2. mac

            From Alphaville
            http://ftalphaville.ft.com/blog/2010/03/17/177526/renminbi-revaluation-its-a-world-war-out-there/

            UN trade body UNCTAD

            “In fact, as a response to the current global crisis that originated elsewhere, China has done more than any other emerging economy to stimulate domestic demand, and as a result its import volume has expanded significantly. Private consumption is rising at breakneck speed…

            …Expecting that China will leave its exchange rate to the mercy of totally unreliable markets and risk a Japan-like appreciation shock ignores the importance of its domestic and external stability for the region and for the globe.”

            note from Goldman Sachs on the BRIC currencies

            “Among the BRICs, the ‘fair value’ of the CNY has appreciated the most against the Dollar since 2000. This has been due primarily to productivity gains. According to GSDEER [Goldman’s proprietary ‘dynamic equilibrium exchange rate’], the CNY no longer looks ‘undervalued’ against the Dollar, contrary to popular belief…

            …there are two possible explanations for this: (1) the CNY has already appreciated almost 20% in trade-weighted terms, and (2) since the global recession China’s current account surplus has begun to shrink as imports have grown relative to exports.”

          3. alex

            “Expecting that China will leave its exchange rate to the mercy of totally unreliable markets …”

            Strawman. No reasonable person is saying that the have to completely float it. A controlled appreciation is not only acceptable, but desirable.

            “and risk a Japan-like appreciation shock”

            After the Plaza accord the yen revaluation was controlled and gradual – there was no shock. Japan’s mistake was in promoting stock and RE bubbles that pale compared to ours.

            “note from Goldman Sachs on the BRIC currencies”

            Ah, Goldman Sachs, a wonderfully disinterested party of unimpeachable integrity. They base their currency evaluations on a secret and proprietary model. What’s not to trust?

            “Among the BRICs, the ‘fair value’ of the CNY has appreciated the most against the Dollar since 2000. … CNY has already appreciated almost 20%”

            Since 2000? What about since 1900? The appreciation stopped after they re-pegged, and the 20% they allowed wasn’t nearly as large as their productivity gains.

  6. plschwartz

    I lost the quote so I will have to paraphrase Mencken -One say Americans will elect a president as stupid as they are. Another place he say One day Americans will elect the President they deserve. Bush 43 filled his prophecy.
    Another huge mistake is letting China out of the bottle.We have to get them back in.
    I suggest that Health care is Obama’s diversion. It has tied up the Right-wing and allowed other matters to slip through. As cutting useless weapons.
    And policy toward China.
    China is so much el Toro in the corrida. Previously China was lanced by Taiwan arms sales and Dalai Lama visit.Now Schumer and Graham offer the currency manipulation sword to the matador. Will he have the heart to get the bull to charge onto the sword? Let us hope so.
    It is a perfect time, as China is now faced with the results of its stimulus package.
    I believe that the decision to label China a bad boy is Apr.15 so passage must be quick.
    Cosponsors are two rust-belt Democrats and Brownback.
    Since Schumer is the Senator from Wall Street, Big Money must be behind it. Schumer and Graham are also co-sponsors of immigration reform so there may be an attempt to bring factories from China to Mexico.
    Ah spring is in the air.

    1. Vangel

      I lost the quote so I will have to paraphrase Mencken -One say Americans will elect a president as stupid as they are. Another place he say One day Americans will elect the President they deserve. Bush 43 filled his prophecy.

      Bush 43 was a bad president but Obama seems to be even worse. Americans seem to have a knack of picking terrible presidents. The last one that was decent was Silent Cal.

  7. don

    Japan yielded to pressure to revalue the yen. But maybe they are more adult.
    I’m not sure your attitude approach works well in this case. For example, China could effectively capitulate without losing face by simply failing to respond (other than with political statements decrying protectionism) to tariffs erected against its exports by Europe and the U.S. It would even allow them to take the high ground, at least among non-economists, who mostly fail to realize that currency intervention is the ultimate protectinist measure and the largest most important trade distortion present today.

    1. Edward Harrison Post author

      Japan responded because the U.S. was giving everyone military cover during the Cold War. This was the backdrop during the Plaza Accord. Things are a lot different today – and China and the U.S. have a more adversarial relationship.

      I assume Schumer and Graham want to create “binding legislation” which would kick in if China fails to respond.

      Nouriel Roubini and Jim O’Neill both think the Chinese would revalue 4-5% WITHOUT coercion. I think the chances of revaluation actually DEcrease with the overt threat.

      1. alex

        “Japan responded because the U.S. was giving everyone military cover during the Cold War. This was the backdrop during the Plaza Accord.”

        Another factor is that the US made credible threats of tariffs and quotas. Back then “free trade” hadn’t become a slogan used in defense of whatever one-sided trade war was being waged against us. Also, the lack of foreign direct investment in Japan meant that the interests of “American” companies favored balanced trade.

        “Nouriel Roubini and Jim O’Neill both think the Chinese would revalue 4-5% WITHOUT coercion.”

        Revalue in response to what? Negotiation hasn’t worked so far. Also, 4-5% is but a start. Ultimately we need more like 30%, albeit preferably over a period of say 5 years.

      2. don

        Yes. China would not revalue the renminbi, but would face tariffs instead. It could then rail against the tariffs without taking effective action, in effect capitulating but at the same time saving face.

        1. ca

          China can also selectively restrict exports to US particularly rare-earth metals which China was reported to control 95% of world market. Or it could also buy more from US. It can also divert orders to EU companies to US companies….

  8. scharfy

    One mans protectionism and is another’s sound policy.

    If I say – Henceforth, we will tariff imported oil down to the point where we only import x% from abroad – is that protectionism of Exxon or sound policy in terms of National Security?

    We as a populous would likely pay higher prices at the pump in exchange for reduced dependency from Arab states. It is a tradeoff many won’t make, but it is a tradeoff.

    I lean free market, but when you outsource everything on a marginal cost basis, you create an inherently unstable operating system. Thus, the costs you had not even acknowledged to exist at all – come later, and they arrive all at once and by surprise.

    If we outsource our manufacturing to China in the interests of labor costs, we must be mature and acknowledge that there are no free lunches. Attempting to assess the actual risks/rewards of unbridled globalization is a better approach than gloating over the cheap flat screens in all their glory.

    I mean, we could sell Alaska to China, let them import slaves and drill the oil cheaper? But we wouldn’t. Is that protectionism or sound policy?

    1. Kievite

      “when you outsource everything on a marginal cost basis, you create an inherently unstable operating system.”

      I think any “race to the bottom” is inherently destabilizing. Outsourcing just confirms the rule.

  9. Entelechy

    So in a trade war between China and US, what happens? I mean, we throw up a tariff, they dump treasuries days before auction, chinese exports dry up, us interest rates skyrocket. As I see it, there is no winner. I also don’t see much in the way of long term solutions that both sides can compromise to.

    The Chaos and volatility in the next couple of years are going to be extraordinary as the world lurches to find some semblance of balance in what has long been unbalanced.

    We are all going to get hurt.

  10. Tim Coldwell

    I agree with you and have the feeling that the various proponents of tariffs are posturing for domestic political reasons and/or trying to get the IMF and/or WTO to take up then baton. Some hope.

    I find it amusing to listen to Paul Krugman et al suggesting that China should boost its domestic economy which in reality means being more “socialist” by providing better social services for its citizens. Capitalism is already rampant in China. Advice from the US, struggling to find a way to bring its own health care system up to more progressive standards, is hardly going to be welcome.

    Entering into genuine negotiations with China and others on a new reserve currency construct may be the optimum route to them softening their US$ peg policy. Might be tough medicine for the US but good for many others and probably for China too.

    1. RagingDebate

      I am going to be quite happy to see the cosmic charma of the CFR types that sold out the American people lose their asses in China. No where left to really ‘pong’ anymore. Perhaps it is time to build a better balanced world then the dirty pool of CB. What a foolish notion to believe the Weat can mandrake to China, have them receive the peg prize and believe they will stay under the thumb of CB. Duh. Talk about hubris.

      1. ca

        I think China actually has been one of the early and strong advocates of a new currency reserve system from which base global rebalancing could be built upon.

        1. alex

          They’ve made noises about SDR’s (Special Drawing Rights), but nothing like Keynes’ Bancor that would have specific mechanisms for keeping trade balanced.

          If China doesn’t want to hoard trillions of USD they’re free not to do so – in fact we’re asking them not to! Their USD accumulation is way beyond anything they need for normal trade and reserves.

  11. sam hamster

    In our trade oriented, globalized world, we have succeeded our sovereignty by letting China determine the value of the dollar. The only question is: will Wall Street let us change this situation?

    Link to unilateral control of our currency:

    “..It is worth noting that the United States does not have to beg China to change its currency policy as the article implies. It can unilaterally set an exchange rate that has a lower value for the dollar against the yuan. This would be an extraordinary measure, however if China refused to raise the value of the yuan, the U.S. government could announce its willingness to trade yuan at a higher value (e.g. 5 yuan to a dollar) than China’s official exchange rate..” –Dean Baker

    http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=02&year=2010&base_name=why_would_china_find_it_surpri

    I would ask you, Edward, what is your cost/benefit analysis of this issue from Wall Street’s perspective? That is where the meat lies. They may loose a few Chinese clients, but they could pacify the home crowd.

  12. cb

    A huge part of the narrative that the CCP has written for its population, is the story of victimization by the “imperial” West and China’s underdog vigilant resistance to it. Every time, from Tibet to trade to suspicions about preteen gymnasts, that Western govts or media rightly criticize CCP actions, the party leadership stirs up that victim sentiment to consolidate public support.

    This narrative is unimaginably more salient and resonates deeper than anything we have in the West. It was fiery 24/7 party-line propaganda in an isolationist country only a couple decades ago. Its still a big part of children’s education, and most heads of a household came of age when it was nearly the only narrative in education, media, and entertainment,

    China is a bat shit child.. never should have been given the power it has. The cognitive dissonance there is deep enough to drown in.

    1. RagingDebate

      Exactly! I did business in China. You learn to give them 10% of a deal in cash and get double in goods and services. Rinse and repeat for five or six more decades is what shoukd have happened. Ruined nations are littered with the history of a handful that destroy a good thing.

    2. mac

      From a historical perspective, it was a fact that China was toy of the west’s colonisation, vast territory of the country was ceded and unequal trade treaties imposed by the west. In history of last 500 years, when was the time the West has been shown to be non-hostile or ungreedy to China ever since the Europeans come out of their ‘wintry cage of dark ages’. China’s experience with the west most of the time has always that of dealing with a pack of wolve, cunning, deceitful and immoral.

      1. alex

        Right, as opposed to the ever peaceful and non-imperialistic history of China. This victim mentality gets tiresome. India didn’t just cede postage stamps of its territory and make trade concessions, it was taken over wholesale. Yet India doesn’t base its national identity on having been a victim of the West.

        1. sac

          I am just pointing out a fact. The impression and experience with the Europenas have not been a good one at all for a long time. Why shouldn’t China learned from this past experience with Europeans? The Europeans colonised China and China did not colonise Europe.

          1. alex

            “I am just pointing out a fact.”

            The most important fact you’re pointing out is that China chooses to promote an obsession with past Western imperialism as a part of their national identity. Countries like India that actually were colonized by Western countries (as opposed to China where the colonies were only a few trading ports) don’t base their identity on this obsession. This is not to excuse western imperialism, or to suggest that they forget it, but to put it in proper perspective.

            Nor should we forget that Japan’s imperialism had a far worse effect on China, or that fears of border conflict with Russia are pretty recent. As for Chinese imperialism, we can always talk about Tibet and the numerous minorities that are dominated by the Han government. Hypocrisy is a terrible thing.

            “Why shouldn’t China learned from this past experience with Europeans?”

            They should, but no one is insisting that we be allowed to export opium to China. You, and perhaps the Chinese, are attacking a strawman.

            An irony of this discussion is that a cause of the Opium Wars was Chinese mercantilism. Again, not to excuse the British insistence on being allowed to sell opium there, but the British problem was that the Chinese were hoarding silver, which led to a trade imbalance. China was happy exporting tea, silks, porcelain, etc. but had policies that discouraged buying from the West and helped hoard silver.

            Personally I don’t favor gun boat diplomacy, and prefer currency revaluation (or tariffs if that fails), but if China was really concerned about the Mandate of Heaven’s preference for good foreign relations, they might do well to consider that ill relations were historically fostered by Chinese protectionism.

          2. cas

            @Alex

            “The most important fact you’re pointing out is that China chooses to promote an obsession with past Western imperialism as a part of their national identity.”

            What constitue choosing here? I thought it is the west that are constantly bashing China on Tibet, Xianjiang and…while pretending they are saints or angels sent to do god’s work on this planet. China did not go around the world critise the west imerialist past and present tendency and organise mass rallies and msm campagne to paint west in bad light. I think it is the west that remember their past deep down in their hearts and trying hide their most terrible past.

            “Countries like India that actually were colonized by Western countries (as opposed to China where the colonies were only a few trading ports) don’t base their identity on this obsession. ”

            What makes you conclude this? My understanding is that there are big number of Indians do not take kindly to trusting westerners.

            “This is not to excuse western imperialism, or to suggest that they forget it, but to put it in proper perspective.”

            This I agreed.

            “Nor should we forget that Japan’s imperialism had a far worse effect on China, or that fears of border conflict with Russia are pretty recent.”

            I think China remember and try to learn from this experience as well.

            “As for Chinese imperialism, we can always talk about Tibet and the numerous minorities that are dominated by the Han government. Hypocrisy is a terrible thing.”

            I am not saying China is perfect. Tibet should not be an excuse for you to think that it justify the Europeans’ colonisation the rest of the world and destruction of civilisations. China is still less of a culprit in the sense that it has always keeps to its sphere of influence at least and not go thousand of miles away like Europeans to plunder and steal resources and colonise.

            I am also not saying China ruling many ethnic people is surely a right thing but almost all country has got different ethnic minority. Does a country give independence whatever a ethnic minoroty people ask? What the world ought to do about this? May be work out a internationally acceptable guie on this issue. To single out just China is just hypocricy on the part of the west isn’t it?

            “They should, but no one is insisting that we be allowed to export opium to China.”

            So you meant the party with the stronger military muscles can d what the one and say “no one is insisting that we be allowed to export opium to China.” .

            An irony of this discussion is that a cause of the Opium Wars was Chinese mercantilism. Again, not to excuse the British insistence on being allowed to sell opium there, but the British problem was that the Chinese were hoarding silver, which led to a trade imbalance. China was happy exporting tea, silks, porcelain, etc. but had policies that discouraged buying from the West and helped hoard silver.

            The trade system then was not developed. China did not invite European to buy stuff from China and has no need of Europena goods. In fact they prefered all westerners to leave China alone.

            “Personally I don’t favor gun boat diplomacy, and prefer currency revaluation (or tariffs if that fails), but if China was really concerned about the Mandate of Heaven’s preference for good foreign relations, they might do well to consider that ill relations were historically fostered by Chinese protectionism.”

            Your comment smack of colonialist mentality. China does not prefer to use force but not kowtow to the west who behave like a pack of wolves.

  13. fromchina

    There’ll be no trade war. This is all political posturing for the November elections.

    In gauging the probability of a trade war, all you need to ask is, will Wall Street benefit from it?

    The answer is no. Wall Street is the biggest promoter of globalization. China’s support of the dollar is critical to the dollar’s perceived value even when massively printed. Too Big To Fails depend on free money from the Fed.

  14. zaknick

    Man, I don’t know if there is or not going to ba a trade war over this crap, probably not as the Chinese would prefer half-a-loaf (some export jobs and growth as opposed to none at all), but it would be freaking grand to watch such a conflict. The end of the dollar would actually liberate the US economy as its fascist financial Ancien Régime in charge lost control. I mean what can the “fed mafia” do if China really were to dump treasuries? Raise interest rates you say? Volcker style rates? No way, with that mountain of debt it would be Weimar Republic time!!

    Beautiful.

    1. fromchina

      We are watching two corrupt governments in collusion loot people in both countries while at the same time accusing each other of grand theft.

      1. RagingDebate

        The most salient comment yet. See you in a decade or two so our two peoples can enjoy each others company. The Dragon and the Lady will be long term friends no doubt. Was so in the past and will be so again in the future.

        1. fromchina

          Thank you.

          To address the trade issue many here are interested. There is always going to be a problem between the West and Confucian economies on trade. It’s ultimately about the Confucian culture. We only hear about Japan in the past and China now because the smaller states don’t matter in the grand scheme of things.

          If the objective is trade balance, I’m afraid it’s going to take a fundamental change in Confucian culture. That kind of change can not happen without extraordinary external forces.

          So, ironically, trade barrier or trade war is the right solution in this case. It would force China to develop a healthy domestic market and America to end the insane money printing and paralysis of democratic institutions.

          But, I don’t think that’s going to happen, not when the current ruling elites are in power.

  15. lark

    Trade war or not, the fundamental problem is that there is no way to address undervalued currencies. We are boxed in by the system.

    That means that the system will most likely break.

    We have surplus countries and deficit countries and they cannot negotiate a voluntary solution and there is no international body with jurisdiction and power to enforce a solution.

    Since the problem is in the structure of the system, bring on the trade war. Eventually something better than the current set of regulatory bodies will be erected and we will have a better architecture.

    In any case, this spasm of globalization has been run for the benefit of elites and I am ready to get their boots off of my neck.

  16. steve from virginia

    The reason there is no forward progress regarding the current economic meltdown is the inability to come to terms with reality.

    For instance, China’s advantage with regards to the rest of the world’s commerce including the US’ is cheap labor on the grand scale, not cheap money.

    What is the Chinese money ‘worth’, exactly? What is is supposed to be worth?

    China’s currency can be ‘worth’ many times more than what it is now relative to dollars and the Chinese economy will still have a labor price advantage against the US. I know, I know, marginal utility v. input costs which don’t matter … but exchange rate is simply another input.

    What the pundits are asking along with the idiots in charge is for China to increase the price of its goods, raising the value of its currency proxy in the process. Why should China do that? They are selling less and less all the time – shipping utilization is collapsing again – so their response is to cut prices rather than raise them. Why are Americans and other asking China to price itself out of business? Is this because these other countries have already done so?

    Look at Greece, Spain, UK … all with current account ‘difficulties’. All have priced themselves out of business and have done so because of massive increases in fuel cost over the past ten years.

    This is another reality that is being ignored by the establishment; the stable exchange between crude oil and the US dollar at the highest price that the market will bear. This makes the dollar a deflationary exchange medium both in the US and abroad. The yuan is now as hard as the dollar due to the two countries’ currency peg. The Chinese are consequently frantic to break the peg to avoid an immediate collapse of their dollar- fueled real estate bubble.

    How can the Chinese have a non- traded currency that is harder than the oil- pegged US currency?

    If I’m wrong about the peg right this minute and oil shoots up to $100+ a barrel, the OECD economies will collapse (oil shock) and the yuan will float … for a little while until oil price in dollars collapses due to demand destruction, then rebounds again until the dollar/crude peg is reestablished.

    What is happening with the dollar- euro, dollar- yen, dollar- yuan is similar to the mess that took place as Great Britain struggled to support its gold peg back in the good ol days.

    You know, back in those ‘Hooverville’, bank ‘holiday’, breadline, apple selling on Wall Street days …

  17. mac

    To placate politician in US, China may cancel come orders from the US to an extent that trade balances. This is probably the easier way to deflect pressure. Another way is to buy more(I suspect this is the real US motivation) from US. China has a couple of hundred billions budget for aircraft(if I remembered correctly, closed to a hundred billion orders were already given to Airbus) may be the orders could be place with Boeing instead. But US could be viewed as practicing a form o indirect trade protectionism of some sort.

    1. alex

      “US could be viewed as practicing a form of indirect trade protectionism of some sort.”

      Right, and the chocolate ration has been increased to 10 grams. If China’s manipulation of the yuan isn’t protectionism on a grand scale, I have no idea what is.

      1. mac

        What do you say about the non-stop printing of the US dollars to support US excessive consumption?

        1. alex

          It isn’t working too well – consumption is still down. Moreover, so long as we don’t have rampant inflation, this policy benefits China. With higher interest rates and lower consumption we’d buy less from China.

        2. alex

          Moreover, if the Chinese government thinks the US dollar is overvalued, it’s free to sell some of its US dollar holdings. In fact that’s what we want them to do.

  18. pigeon

    If you read the site of Michael Pettis carefully you will find that there are a numer of ways in which Chinas subsidizes its export sector. A lot of them do not directly take from foreign economies but from their local citizens. Likewise China has several choices in yielding to foreign political pressure other than directly revalueing its currency. Some of these messures would be to the great benefit of the chinese people as Pettis points out. Maybe it just takes more time and that time should be given to China.

    1. alex

      “Maybe it just takes more time and that time should be given to China.”

      Chinese undervaluation has been a growing problem for a decade. How long should we give them?

  19. a

    “If external pressure did bring down the Soviet Union, an analogous claim could be made for the American financial system’s near-collapse…”

    Yes, a case could be made.

    “… because of the focus by regulators post-9/11 on terrorism to the exclusion of financial fraud.”

    But hardly because of that. A case can be made that external pressure caused the American system to crack when 9/11 caused Americans to go berserk and invade 2 countries half-way around the world at a cost of many trillions of dollars, which, because of help from the Fed and Republican intransigence, was paid for by borrowing from abroad
    rather than raising taxes. It’s this which was the final nail in the coffin of American over-indebtedness.

  20. Paul Tioxon

    In December of 1988, Gorbachev, in front of the UN, announced the unilateral reduction of soviet forces from Eastern Europe, as well as 6 tank divisions, some 1800 tanks. Additionally, the Red Army would be reduced in numbers by 500,000. This was the immediate result of Gorby asking for and seeing accurate economic data on the Soviet Union. Not something that was passed up to the decision maker in previous regimes for obvious reasons. Needless to say, the Marcus Aurelius of Communism was smart enough to know the country was broke and going into a worse situation by propping up the military at the expense of the populace.

    In addition to the long standing policy of the USA, the containment doctrine, formulated by George Keenan, the wars in Korea, Viet Nam, the proxy wars and the final blood letting of Afghanistan, the largest secret war waged by the CIA in its history, funded by the Democrats concurrent with the anti Sandinista support illegally funded by the WH, and the falling price of oil in the 1980’s, all were contributing factors to the fall of the Berlin Wall.

    Ronald Reagan continued the containment policy, the Polish trade unions with a Polish Cardinal create something of a stir and the rest is history. The Imperial overreach of Soviet Russia was not sustainable with its meager economy and political dictatorship. That being said, the Chinese who are in control of todays China, are not of the mindset of the leadership from the 1980’s who set upon the capitalist road. This was a long running debate among the very Nationalistic Chinese. What path to take for a better China. A stronger, prosperous and not easily pushed around China was never fully achieved under Mao’s helmsmanship. The leader, Zhao Ziyang, who did allow for the liberalizations of the economy and some political freedoms, was against the military being set upon the protesters in Tiananmen Square. He was packed off into house arrest, where he died, a relative unknown, in isolation. His thoughts however were faithfully recorded and published by a close friend who was allowed access to him over the years of captivity. He really saw and understood the Western societies, with parliamentary deliberation for major decision making as key to creating a vital economy and a healthy society. The other more well know leaders appreciated the virtues of the dictator in keeping messy disagreements under control. While there are many well educated Chinese leaders, the small group of men who do not necessarily believe in the capitalist road and what it all entails are in charge. What they will do is not as clear as policy debates for direction take in our society. I am not sure how great the cognitive dissonance is between the Communist Party leaders and an authentic appreciation and respect for the rest of the world’s politics, culture and economies.
    I am not sure we get, how the one man who gave us the modern China we are joined at the hips with, and his mindset, are no longer the informed opinion guiding a very globally integrated Chinese economy.

    1. Mickey Marzick in Akron, Ohio

      Paul,

      “While there are many well educated Chinese leaders, the small group of men who do not necessarily believe in the capitalist road and what it all entails are in charge.”

      This is precisely what is the crux of any action taken – determining who’s in charge and how they will react.

      The mistaken assumption is that with time the Chinese will become more like US – fat, dumb, happy consumption oriented zombies. I simply do not see this happening there… The Chinese elites – communist or otherwise – will always have “The Mandate of Heaven” in the back of their minds, forgetting it to their peril. It dictates a very different course…

      1. sac

        The ‘Mandate from Heaven” is always to rule the country and people with the best efforts and have good relationship with foreigners, to the best of the rulers’ ability.

  21. Mickey Marzick in Akron, Ohio

    Since we’re back to China again I’ll repeat what I said a few days ago as it is still relevant to what is proffered here. I have modified it a bit to accommodate other viewpoints:

    “Protectionism” for whom and when is highly unlikely given the liberalization of trade promoted by this country since 1945. It would take a political earthquake to undo this.

    Neither political party is in a position to play the protectionist card without first offing the globalists in its camp – not likely. For the Republicans there has always been an uneasy tension between the small business, entrepreneurial, local/regionally oriented business versus the large, modern, bureaucratic global corporation [MNCs] free trade crowd – the globalists. The former tend to be more socially conservative, more inclined to favor less government and lower taxes a la Tea Party adherents but at the same time finds itself up against the wall of cheap imports and increased requirements for creditworthiness. The perception is that they are being squeezed by big business! The latter is more liberal on social issues and may pander to many of the same policies but not if it translates into what are seen as protectionist measures to restrict the current regime of free trade. [Modified to acknowledge Alex’s differentiation.] The small business wing may have the footsoldiers – the numbers – but the globalist wing has the deeper pockets. Crony capitalism favors the latter.

    The Democrats do not fare much better. The “marriage” between the more probusiness SLC Clintonian Democrats and the more left leaning Democrats allied to the blue collar trade unions has always been tenuous. As the latter have hemorrhaged jobs the protectionist banter has increased. Yet a full blown divorce is not likely. The Democrats cannot afford to be seen as beholden to this special interest, particularly among INDEPENDENTS with a visceral anti-union or libertarian bent. Yet without some mechanism to create jobs, the troops will cast their votes elsewhere. Witness the recent election in Massachusetts. The union leadership endorsed the Democratic candidate and the voters went south… But those with jobs dependent on the current regime of free trade will not likley support efforts to create jobs if they perceive that such efforts may cost them their’s, especially if the jobs created pay less! The “safety first” mentality of the technopeasantry here is akin to that of the peasantry in China. Both are risk averse!

    The wildcard in all this is the electorate. And here regionalism will play a big role. While the containers offloaded at the ports of Long Beach/LA and Seattle may be seen as the cheap IMPORT problem responsible for the loss of manufacturing jobs in Ohio or Michigan further east, the exports of Montana coal, northwest timber, grain, foodstuffs, etc from these same ports will be viewed differently by those employed in such industries. Likewise in the South where transplant assembly plants may be “foreign”, when they’re the only game in town, it sure beats workin’ down on the farm! Working for the Japanese or Koreans is still more preferable to not working at all. To pretend that these regional differences will not be reflected in Congressional voting behavior is a bit myopic, particularly after the campaign contributions from the globalist camp and advertising blitzkrieg are factored into account.

    Calls for LIMITED GOVERNMENT and LOWER TAXES are not consistent with calls for PROTECTIONISM. Only if the advocates of protectionism from both the left and the right can get beyond the more shrill debates that divide them will the political elites in either party favoring globalization have a problem. Then these globalist elites in both parties will have to protect more than trade… as the Washington Consensus enjoined by both will have been repudiated with ramifications far beyond domestic politics.

    To think that the Chinese are unaware of these “fissures” in American domestic politics is even more myopic. After all, it was Sun Tzu who authored “The Art of War”. If American MBAs and military strategists read the latter, do you think the current crop of Chinese leaders have forgotten to do so? It is so ingrained in their political calculus that “external threats” have already been factored into the equation. The question is are we listening to what they’re saying and what they’re not saying?

  22. jonboinAR

    Yes, trade war will cost us. It will cost the Chinese more (Their whole economic miracle to date). They’re intelligent enough to understand this. When they see that we’re serious about elimiminating their continuing preying on our manufacturing capability, they’ll back down.

    Say they don’t, as you say with what I see as a false analogy to the fall of the Soviet Union. Why do we want to risk a costly trade war? It is because the current state of affairs is on the brink of destroying us as an advanced economy. We have been foolish to allow and encourage the Chinese and others to take over, with our MNC’s assistance, our manufacturing.

    To China (and others, including our MNC’s) with Love: Pay your workers a wage that will allow them to consume, or else pay us the difference in terms of tariffs.

    Period.

    1. KJMClark

      Agreed. The Chinese have shown very little inclination to change a situation that they think suits them. Various people claim that our doing *anything* will cause them to dig in their heels. In the meantime, their currency manipulation is bleeding our economy of jobs for unskilled or less skilled labor.

      So the trade war has already started; China started it years ago. Fine, let’s have a trade war then. I say we move on to the effects of said trade war on the US economy and get started mitigating. When both sides have felt enough pain, we can come back to the negotiating table. I suspect the Chinese “miracle” will turn into the Chinese “bubble” and riots faster than Americans will complain about higher prices at Walmart. Besides Walmart will quickly shift suppliers to other countries with no tariff.

  23. jonboinAR

    Also, I believe the Chinese leadership is a little more rational, and cunning, then you may wish to give them credit for. I don’t “blame” them for this, for their strictly looking out for their own interests. We’ve done so many times in the past. Some of our own rise was on the back of the British Empire, if I understand my smattering of history correctly. However, if, at this juncture, we fail to look out for our own, longer-term interests, and behave fearfully, we are weak fools who will get what we deserve. They, and our multi-nationals, have played us this way so far (I guess the MNC’s since Reagan, at least).

    China and everyone else: Pay your workers a wage that will allow them to consume, or face tariffs.

    Period. Let’s get it on!

  24. RN

    This is a ridiculous post.

    The simple fact is that global rebalancing must start. The Chinese won’t let it. So we must.

    You and all the others who complain about “negative consequences, oh my!” never offer an affirmative solution.

    That makes your opining worthless, more or less, as you have nothing useful to offer. And the world very much needs something useful.

    It is rather simple, in fact. The Chinese have only the stability of the Chinese command economy at interest. No one begrudges them that. But they’ve forced the world to deal with their hyperbolic export sector growth as millions of jobs moved to China, and even when the world is struggling for a growth solution, they continue to bleed the world for all its worth.

    It’s time to bleed China. The US must endure a standard of living drop one way or the other. Better it be one that at least has a hope of creating export industries, than a purely deflationary one, which is likely the world we would endure if you and all the other scaredey cats were listened to.

    China’s economy will implode like a limp balloon if they lose unfair competitive advantage in US markets. Of course it will never get to that point, because they will revalue and a domestic demand base will start to build. There will be much grumbling, but the imbalances will start to unwind.

    I used to like reading Yves’ blog, but with garbage like this on it, I keep being repelled.

    1. Edward Harrison Post author

      What should I say to that, RN? Your emotion is clearly showing through. Is this ‘garbage’ because I don’t agree with you or because I don’t offer a solution?

      I have offered a solution in terms of what China should do in my next post on the topic, actually. Obviously, I am less likely to post it here if people think the posts are ‘garbage.’

      As for the rest of your comments, I don’t find them well-substantiated. It’s not time to ‘bleed China.’ That’s emotional rubbish. It’s time to take a well-reasoned economic stance on what Americans should see as a competitive currency devaluation by China.

      An overt act of protectionism is not going to get the job done. On the other hand, getting Europe and multilateral organizations on side behind the scenes is the right approach. The Europeans are as fed up with this as the Americans.

      After the US has its allies coordinated, it can go to the Chinese and say, look, its in your best interest to revalue. It increases your citizens standard of living, it decreases the value of commodities upon which you’re dependent and it increases your purchasing power of other hard assets. How much are you willing to move your peg per annum. We want 9%. No that is a reasonable negotiating stance that could work. It also has the hidden threat of retaliation which is credible given the support of multilaterals and the EU. To me, this is a much more well-thought out approach than ‘bleeding China.’

      1. alex

        “The Europeans are as fed up with this as the Americans.”

        And various Asian countries as well, like Vietnam. The Chinese peg constrains them to keep their valuation low lest they loose market share to China. Even India is said to be getting fed up with Chinese currency policies. IIRC they have a big trade deficit with China and it hurts their industry.

        Thanks for pointing out our natural allies in this. Too many people see this as strictly a US-China issue.

        “To me, this is a much more well-thought out approach than ‘bleeding China.’”

        Also very true. Many people don’t seem to realize that played properly this is not a zero sum game. The last thing we want, even from a purely selfish POV, is for China to become impoverished. Look at the Asian crisis. It was the collapse of various Asian economies that caused their currencies to devalue and our trade deficit to soar. What we actually want is for China to be more prosperous in the sense of having higher domestic consumption.

      2. jonboinAR

        Thanks. I understand that better. I thought you were more suggesting capitulation. So, what I said but in a more sophisticated, veiled-threat sort of way.

        Bottom line though, they change their currency policy…, or else! Somehow, if they want to compete here with their products, they have to pay their workers to consume their products, and ours. Otherwise, just forget it. We may not be energy independent, but we’re close enough to having the ability to be more or less independent in a lot of other ways that it’s time we behaved as though that were the case.

      3. jonboinAR

        Also, quit yer whinin. You created a MOST excellent thread. We aren’t all as polite as we should be here in cyberspace, but there’s still really good, edifying conversation.

        1. Edward Harrison Post author

          thanks, jonboinAR. I’ll quit my whining! I do think most people telling Krugman or Schumer or Graham to lay off don’t think the US should just ‘take it.’ It’s just that labelling the Chinese a manipulator, chastising them like some schoolboy, is just going to engender a negative response. It won’t DO anything. Threats are not going to be heeded. So that’s what I was getting at – it’s just a threat, and a dangerous one that only leads in one direction – trade war.

          The US, if it acts publicly, can’t act unilaterally because then this becomes a bilateral issue and that is a losing proposition.

          I think the Chinese will revalue gradually and I also think that the US can influence them to do it more rapidly if they do it through the right channels and in concert with others.

          1. Mickey Marzick in Akron, Ohio

            Ed,

            Not to whine but who controls domestic politics in this country? The globalist elites in both poltical parties – Republican and Democrat alike? Have they lost their grip? How do you break the Washington Consensus that these elites have promoted for the past two decades, if not longer? I haven’t seen anyone on this blog address domestic political realities in this country as to how we get from here to there… Who in this country will nudge the Chinese in the appropriate direction? US Chamber of Commerce? National Association of Manufactures?

            Does revaluation of the yuan upwards comport with these global elites’ interests? Cheap imports from China benefit hard-pressed American consumers who bargain shop at WalMart because they have to! At least that’s the argument. Moreover, will revaluation automatically result in more US exports as the Chinese begin to consume more? The latter is an assumption based on theory. What do we have that the Chinese want to consume – Buicks? What if they decide European goods are more preferable? Then not only will there be less imported goods from China but also a drop in US exports. A double whammy… double dip recession, if not worse!

            Higher wages in China will not automatically translate into jobs in manufacturing for Americans when production can be shifted to Vietnam or elsewhere… When Mexican wages became “too high” production migrated to China and Vietnam. Many of those manufacturing jobs are gone forever. This is perhaps the biggest lie being proffered by politicians and pundits alike.

            Is anyone suggesting a “global minimum wage” adjusted for regional differences, etc? Is such a proposal even consistent with the Washington Consensus? The snow ball in hell… Who will constrain the MNCs still based in this country and their financiers on Wall Street? These are domestic political realities that will not be unwound over night, if at all. Much like the military-industrial complex there is also a global-industrial complex that has insinuated itself into politics at the local, county, state, and national levels in this country. How do you break this grip? Maybe a trade war is the only thing that will…

            Living in NE Ohio I hope I’m wrong as manufacturing has been gutted for the past 40 years but I do not see anything on the horizon that suggests a seachange of this magnitude. I wish I did!

          2. Edward Harrison Post author

            Mickey, globalization is a scam that transfers income to US owners of capital and Chinese workers at the expense of U.S. workers. When people talk about the efficiencies of globalization, they don’t really consider intra-country transfers of wealth.

            While I don’t think a trade war is a good solution, we do need to see a scale back of globalization. We also need a new monetary system that reduces the tensions created by bilateral trade imbalances.

            The question is, now that globalization is out of the bottle, what can we do to cork it without tanking the global economy? Big question. I have some thoughts. It might be a good topic for a post later.

            Thanks for your thoughts in Ohio.

            ps. – I have relatives there and in Milwaukee and I can tell you I see first hand what globalization has done to American industry. This is something you do see in Germany as well, but not on the same scale.

          3. jonboinAR

            Hmm, So long as our leaders work in OUR interests, I’m happy. I’ll put down my pop-gun for awhile. I do think that, to a certain extent, fellers like Mr Krugman stirring up popular sentiment might do some good. (It riles ME up, FWIW. LOL) It might give our negotiators in their quiet talks with Chinese leadership a speck of leverage. “Hey, We’re having a problem over here.” You can count on the Chinese leaders using the popular sentiment in their nation (which, as some have pointed out, they have helped to stir up) as an excuse to accomodate us less than they otherwise might.

          4. Edward Harrison Post author

            jonboinAR,

            I agree about Krugman being a good foil. That does give negotiators some leverage. I have less problem with him (although I don’t buy his arguments) and more with Schumer and Graham. That’s the real problem; Schumer especially because he’s constantly looking to impose tariffs. This is coming to a head. We shall soon learn if Schumer and Graham succeed in prodding the U.S. government to officially label China a currency manipulator.

  25. /L

    Trade war shouldn’t that be about who is amassing most wealth from the other combatant? In the current situation USA is getting real tangible wealth from China and China is amassing what? Small pieces of paper (figuratively speaking) made in USA – Federal Reserve notes – that can be created by fiat. Those notes will sooner or later come back home to the Federal Reserve. Before the bush administration those Federal Reserve notes was returned to USA mainly by the global private sector when the yield they could return in USA diminish the global private sector lost its interest in returning Federal Reserve notes to USA and foreign Central Banks became the main vehicle that returned dollars.

    USA can of course take measures to prevent Americans to buy cheap foreign stuff and maybe print a huge pile of Federal Reserve notes that they lock in to Fort Knox and declare them self as the winner, hurray WE got the largest pile of Federal Reserve notes.

    We trade little pieces of paper (our currency, in the form of a trade deficit) for Asia’s amazing array of products and services. We are smart enough to know this is a patently unfair deal unless we offer something of great value along with those little pieces of paper. That product is a strong US Pacific Fleet, which squares the transaction nicely.
    “Asia: the Military-Market Link,” and published by the U.S. Naval Institute in January 2002

    As usual the splendid BillyBlog have sensible take on current economic matters

    1. alex

      “In the current situation USA is getting real tangible wealth from China and China is amassing what? Small pieces of paper (figuratively speaking) made in USA – Federal Reserve notes – that can be created by fiat.”

      That’s the credit card theory of prosperity. With a decent credit rating you can quit your job and live pretty high off the hog for while. The problem comes when you run out of credit and find that your job skills have withered.

      “We trade little pieces of paper (our currency, in the form of a trade deficit) for Asia’s amazing array of products and services. We are smart enough to know this is a patently unfair deal unless we offer something of great value along with those little pieces of paper. That product is a strong US Pacific Fleet, which squares the transaction nicely.”
      “Asia: the Military-Market Link,” and published by the U.S. Naval Institute in January 2002

      I’m not convinced that China sees the US Pacific Fleet as something of great value to them.

      1. /L

        The issue of the Pacific Fleet is of course a matter of perspective.

        One can have much to critic USA as imperial power but I have no illusions of USA as No1 suddenly depart from that position the world would be a better place, it will probably be troublesome times when others try to fill the gap. USA is policing the global waterways with 12-14 carrier strike groups each at cost that is greater than many nations total defense costs.

        Chinese shipping of its goods around the globe do benefit from the stability this gives.

        The commies did make the Chinese self-sufficient on food rice/grain, according to some expert the Chinese agriculture capacity is in decline and some predict the China is to be a large buyer on the global grain market to sustain its huge population. USA is the big supplier to the global grain market, a nation that can’t feed its own population have a slim chance to be a No1 global super power. A coming trade war China to US? if you don’t sell grain to us we will not make Barbie dolls for you.

        1. alex

          I have nothing against selling food to China, but I’m not thrilled with a development strategy that sees the US strictly as an agricultural exporter.

          1. /L

            USA have for long achieved the position to be the dominant global grain supplier without retreating to the position as strictly agricultural exporter. I believe it’ one of many strategic advantage in a geopolitical context that will be one of the things that will keep US on top of things in the global order. But of course if the loony neo-liberals will get their way they would probably squander this strategic advantage.

  26. purple

    The US political class is trying to find a scapegoat for what they promise us will be years of high unemployment. There’s nothing new here – it’s what any decrepit leadership does. The Chinese undervalue when it suits them? And so does the Fed. This is what nation-states do.

    1. jonboinAR

      Well, we’re going to force them to revalue if I have anything to say about it. Why? Because it suits our interests, and, I believe, we’re in a position, still, though maybe not for long, where we still can.

      That’s what nation-states do.

  27. alex

    “The US political class is trying to find a scapegoat for what they promise us will be years of high unemployment.”

    This is hardly an excuse – it’s a fundamental part of our problems. If anything Chinese currency manipulation has gotten amazingly little press over the last decade. That’s in stark contrast to the complaints about Japanese practices in the 80’s. One reason is that Japan had very little foreign direct investment, so a trade deficit with Japan hurt American companies. By contrast there’s loads of foreign direct investment in China, and about half of our trade deficit with them consists of intra-company transfers of “American” MNC’s. Ergo, unlike the case with Japan, the interests of American workers and large “American” companies are not aligned.

    Currency revaluation is not a panacea for US economic problems, as we’ve shot ourselves in the foot in many ways, but it is an essential part of the fix unless you subscribe to the credit card theory of prosperity.

    “The Chinese undervalue when it suits them? And so does the Fed. This is what nation-states do.”

    The Chinese are doing a hell of a lot better job of it than the Fed. Come to think of it, how is the Fed doing it at all? Inflation is low and our currency is overvalued.

    As to the “this is what nation-states do” idea, nation-states do all sorts of undesirable things. Is that a reason to just shrug our shoulders?

    Keynes and his Bancor proposal had this pretty well figured out at Bretton-Woods. Unfortunately the US nixed the idea. Keynes understood that there had to be specific enforceable mechanisms for discouraging countries from running overly large trade surpluses, and not just moralizing about countries that run trade deficits. Takes two to tango and all that.

    Keynes had recent history to draw on too. It was in part US trade surpluses (enforced by high tariffs) in the post-WW1 era that prevented European countries from paying off their war debts to us, and helped cause the European central banking crises. Those were a far bigger contributor to the Great Depression than the stock market crash of 1929.

  28. /L

    A few years ago the Chinese government did have a go to legislate improved wages and workers conditions but they did get strong opposition from the organizations represent the multinationals that operate in China. How it did turn out I don’t remember. One could think that would have been something positive in the eyes of trade deficit countries then it could give the Chinese more room for consumption. I don’t know if politicians in the west did have any opinion but I’ll guess if they had any they probably sided with the multinationals.

    There is probably a lot of hypocrisy in the Chinese blame game.

    1. alex

      I wouldn’t be at all surprised if you’re right about the effect of MNC’s on Chinese politics, and their domestic exporters are probably no different (every country has its special interest groups).

      As to “the Chinese blame game”, I don’t blame China so much as the US government. Calling it a Chinese blame game distracts from the real issues.

  29. Robert Dudek

    Edward Harrison wrote:

    “I should also point out that protectionism transfers wealth from domestic consumers to the protected producers and decreases consumption demand.”

    Wouldn’t increased wealth for the protected producers lead to higher wages (and/or more jobs) for workers and management in those industries? Would this not increase consumption demand from them and somewhat offset the decline in consumption demand in the non-protected sectors?

    Maybe if goods in Wal-mart were 15% more expensive, consumers wouldn’t waste so much money on that crap.

    The US really has to focus more on production – and so a little more protectionism seems like a good idea.

    Maybe it would force the Chinese to try to stimulate their domestic demand instead of relying so much on their export sector, thereby reviving the world economy and eliminating some of the global imbalances that have obtained the last few decades.

  30. Martin

    I see, I’m late to this post. But I want to add, that China preventing the US from trade sanctions against Iran would be an unambigously good thing for the US.
    Further more, I think every US or Western politician engaging on trade sanctions against Iran should be shot. The trade sanctions against Irak caused ca. 400000 dead according to the UN. For killing an evil mass murderer Bush and Cheney could have bombed just as well the home of the Clintons.

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