Will the US Declare Economic War on China?

[jimmy olsen]

To piss off Zombie Nixon.

That was all about the Soviets though, without them the reasoning falls apart.

[grumbler]

I was concurring with him, so that it was pretty clearly directed at you, as I'm sure you knew.

And since I wasn't arguing that either, this leaves us no choice but to recognize an incoherent strawman for what it is. 

In the short term, it's free money, especially if the economy of the dollar country is functioning normally.  In the long term, this can encourage systemic imbalances.

Sure, and that is why the Chinese cannot keep it up forever, and why the US should enjoy it while it lasts, rather than trying to stop it.

There are, after all, far more countries in the world like China than there are ones like the US.  If China disappeared tomorrow, the US would buy its underwear from Vietnam and its crappy household electronics from Singapore and Mexico.  If the US disappeared tomorrow, where would China sell its underwear and cheap electronics?

[grumbler]

What throws off the standard analysis is that we are running a zero interest rate policy and still have minimal inflation. In the short term, there is a good argument that if our currency was allowed to depreciate against the yuan it would not result in any measurable domestic inflation and we wouldn't be stuck with the competitive disadvantage of an overvalued currency (either exporters or domestic companies competing with importers).

In what markets do US exporters compete with Chinese exporters or domestic producers?  Automobiles?  If US automobiles were 33% cheaper in China, how many more would the US sell?

I am not convinced that a 33% increase in the price of all made-in-China goods would not be inflationary, on the other hand.

In fact, for the highest change in exchange rates that would not be inflationary for the US, it is difficult for me to see an industry where the US exports to China would measurably benefit.

[alfred russel]

What throws off the standard analysis is that we are running a zero interest rate policy and still have minimal inflation. In the short term, there is a good argument that if our currency was allowed to depreciate against the yuan it would not result in any measurable domestic inflation and we wouldn't be stuck with the competitive disadvantage of an overvalued currency (either exporters or domestic companies competing with importers).

In what markets do US exporters compete with Chinese exporters or domestic producers?  Automobiles?  If US automobiles were 33% cheaper in China, how many more would the US sell?

I am not convinced that a 33% increase in the price of all made-in-China goods would not be inflationary, on the other hand.

In fact, for the highest change in exchange rates that would not be inflationary for the US, it is difficult for me to see an industry where the US exports to China would measurably benefit.

China isn't only propping up the dollar against the yuan, but also against other currencies indirectly.

The argument works on a macro level: there is an identity that a capital account surplus must be offset by a current account deficit. By buying huge volumes of U.S. capital assets to maintain their peg against the dollar, the Chinese are effectively exporting a capital account surplus in the amount of their purchases, or equivalently they are exporting an artificial current account deficit.

This reduces aggregate demand. In ordinary times, we could counteract the reduction in aggregate demand through either monetary or fiscal policy and enjoy lower interest rates. But current monetary policy is constrained through our current zero interest rate policy, and fiscal policy is constrained both politically and due to our already large deficit. What this means in practical terms is that our aggregate demand is lowered, and that will simply lower our GDP.

You are looking at the narrow view--the dollar is weakens, the price of imports increases. That is true. But higher domestic unemployment and increased contraction/reduced growth is deflationary. And imports are still a minority part of our economy.

[grumbler]

You are looking at the narrow view--the dollar is weakens, the price of imports increases. That is true. But higher domestic unemployment and increased contraction/reduced growth is deflationary. And imports are still a minority part of our economy.

I guess my point is that having a higher yuan (and thus increasing the prices of imported goods) will not suddenly restore the US textile, electronics, or furniture industries.  Those businesses moved offshore because transportation costs had dropped by so much that one could no longer make them in the US and compete with any low-wage country.  The lower yuan value simply means that the US buys that stuff from China, not Vietnam or Mexico.  So unemployment in the US is little, if any, impacted by the weak yuan, though Chinese, Vietnamese, and Mexican employment obviously is.

If the US was actually trying to export things to China that the Chinese would buy if they were not so expensive, this might be a reason to resent China's yuan peg.  But it isn't.  The primary US exports (AFAICT) to China are intellectual properties that the Chinese would steal even if they were much cheaper.

[alfred russel]

You are looking at the narrow view--the dollar is weakens, the price of imports increases. That is true. But higher domestic unemployment and increased contraction/reduced growth is deflationary. And imports are still a minority part of our economy.

I guess my point is that having a higher yuan (and thus increasing the prices of imported goods) will not suddenly restore the US textile, electronics, or furniture industries.  Those businesses moved offshore because transportation costs had dropped by so much that one could no longer make them in the US and compete with any low-wage country.  The lower yuan value simply means that the US buys that stuff from China, not Vietnam or Mexico.  So unemployment in the US is little, if any, impacted by the weak yuan, though Chinese, Vietnamese, and Mexican employment obviously is.

If the US was actually trying to export things to China that the Chinese would buy if they were not so expensive, this might be a reason to resent China's yuan peg.  But it isn't.  The primary US exports (AFAICT) to China are intellectual properties that the Chinese would steal even if they were much cheaper.

It isn't just a problem with the yuan, by managing the exchange rate to keep the dollar artifically high against the yuan they also keep it artificially high against everything else.

Plus, a lot of american companies are expanding their operations in china as fast as possible--Coca-Cola, Nabisco, Wal Mart, and McDonald's to name a few. The Chinese consumer is going to provide a lot of the world's consumption growth in the next few decades.

[grumbler]

It isn't just a problem with the yuan, by managing the exchange rate to keep the dollar artifically high against the yuan they also keep it artificially high against everything else. 

Which helps the US consumer and harms the Chinese consumer, without harming the US producer.  Seems like something I want to keep up.

Plus, a lot of american companies are expanding their operations in china as fast as possible--Coca-Cola, Nabisco, Wal Mart, and McDonald's to name a few. The Chinese consumer is going to provide a lot of the world's consumption growth in the next few decades.

All those companies produce in China what they market in China, so the exchange rate doesn't really effect them much at all (other than to make their profits there worth more).  They are, I am sure, delighted with the artificially high exchange rate.

[alfred russel]

It isn't just a problem with the yuan, by managing the exchange rate to keep the dollar artifically high against the yuan they also keep it artificially high against everything else. 

Which helps the US consumer and harms the Chinese consumer, without harming the US producer.  Seems like something I want to keep up.

Plus, a lot of american companies are expanding their operations in china as fast as possible--Coca-Cola, Nabisco, Wal Mart, and McDonald's to name a few. The Chinese consumer is going to provide a lot of the world's consumption growth in the next few decades.

All those companies produce in China what they market in China, so the exchange rate doesn't really effect them much at all (other than to make their profits there worth more).  They are, I am sure, delighted with the artificially high exchange rate.

You are backwards--a strong dollar makes overseas profits worth less, and for many multinationals the exchange rate is one of the major concerns regarding overall profitability.

It is too bad we can't go back to the Great Depression, with the reduced prices in the era, that was a great time for consumers. 

[DGuller]

Which helps the US consumer and harms the Chinese consumer, without harming the US producer.  Seems like something I want to keep up.

It does harm the US producers if the dollar is too expensive.  Their exports are less competitive (and, yes, we do export a bunch of stuff, just not as much as we import).

]All those companies produce in China what they market in China, so the exchange rate doesn't really effect them much at all (other than to make their profits there worth more).  They are, I am sure, delighted with the artificially high exchange rate.

Just think things through for a second.  If yuan is too cheap, then you need to earn more yuan for the same dollar of profit.  How is that making their profits worth more?

[grumbler]

You are backwards--a strong dollar makes overseas profits worth less, and for many multinationals the exchange rate is one of the major concerns regarding overall profitability.

You are, of course, correct.  Higher dollars will make US dollars spent buying stuff in China more economical, but repatriating profits will be problematical.  Still, that doesn't make me want to lose my free shit.

It is too bad we can't go back to the Great Depression, with the reduced prices in the era, that was a great time for consumers. 

Indeed, for people who kept their heads and had a bit of money, the Depression was quite profitable.

Not that you comment is not a complete non sequitur in this conversation, of course.

[grumbler]

It does harm the US producers if the dollar is too expensive.  Their exports are less competitive (and, yes, we do export a bunch of stuff, just not as much as we import). 

What US exports to China are made less competitive, and how does that reduce sales to China?

Here is the total list of US exports to China in 2009:

Code Select Expand

[table]
[tr]
[td]HS#  Commodity description  Volume  % change over 2008
85  Electrical machinery andand equipment  9.5  -16.8
12 Oil seeds and oleaginous fruits 9.3 26.5
84 Power generation equipment 8.4 -13.8
88 Air and spacecraft 5.3 4.5
39 Plastics and articles thereof 4.4 14.1
90 Optics and medical equipment 4.0 6.0
72, 73 Iron and steel *3.5 *6.9
47 Pulp and paperboard 2.5 9.4
29 Organic chemicals 2.4 15.1
87 Vehicles, excluding railway 1.9 2.3[/td]
[/tr]
[/table]Formatting sucks, sorry.

Of those, i can see just a couple (electrical machinery and power generating equipment) that are likely to be significantly price sensitive and exported in significant volume, and both are edeclining already 9maybe because of the exchange rate).  $Saving some hunk of a measly $18 billion in trade is not enough to make me want to give up me free shit.

[DGuller]

It does harm the US producers if the dollar is too expensive.  Their exports are less competitive (and, yes, we do export a bunch of stuff, just not as much as we import). 

What US exports to China are made less competitive, and how does that reduce sales to China?

Why are you emphasizing "to China"?  Did you miss the point that AR was making that China's currency manipulation makes the dollar too expensive in general, and not just in relation to China?  It's stated in the quote to which you replied.

[alfred russel]

Indeed, for people who kept their heads and had a bit of money, the Depression was quite profitable.

Not that you comment is not a complete non sequitur in this conversation, of course.

It isn't a non sequitor--in the Great Depression, going into the depression, tariffs rose, which typically might be inflationary, but there was actually severe deflation. Why? In large part because of a severe output gap, which is disinflationary. When lots of people are out of work, there is a downward pressure on wages, and when there is reduced demand for products and services pricing becomes increasingly competitive.

Today we have unemployment of close to 10%--another large output gap. Inflation is expected to be very low this year, even though the dollar has depreciated significantly off of last year's highs. I question whether another 20% depreciation would really be inflationary in this environment.

[The Minsky Moment]

The argument works on a macro level: there is an identity that a capital account surplus must be offset by a current account deficit. By buying huge volumes of U.S. capital assets to maintain their peg against the dollar, the Chinese are effectively exporting a capital account surplus in the amount of their purchases, or equivalently they are exporting an artificial current account deficit.

This reduces aggregate demand. In ordinary times, we could counteract the reduction in aggregate demand through either monetary or fiscal policy and enjoy lower interest rates. But current monetary policy is constrained through our current zero interest rate policy, and fiscal policy is constrained both politically and due to our already large deficit. What this means in practical terms is that our aggregate demand is lowered, and that will simply lower our GDP.

You are looking at the narrow view--the dollar is weakens, the price of imports increases. That is true. But higher domestic unemployment and increased contraction/reduced growth is deflationary. And imports are still a minority part of our economy.

I agree with the first para.  But a current account deficit does not reduce aggregate demand.  This seems to be a confusion of terms - in fact, it is strong aggregate demand that helped facilitate the situtation of current account deficits.  What is true is that a current account deficit (ceteris paribas) decreases GDP - that simply follows from the accounting definition of GDP.   But if the imports are associated with higher levels of domestic consumption (regardless of the way in which the causal arrow points) there is no net negative impact on GDP.

I do mostly agree with your essential point that a decline in the value of the dollar against the renminbi would not necessarily be inflationary over the short tem, due to the persistance of the deflationary conditions and apparent output gap as noted in your last post.

[The Minsky Moment]

Why are you emphasizing "to China"?  Did you miss the point that AR was making that China's currency manipulation makes the dollar too expensive in general, and not just in relation to China?  It's stated in the quote to which you replied.

I saw that point too, but not an explantion for it.  To the extent other currency pairs trade relatively freely, I don't quite get how China can manipulate those rates by setting a dollar target.