Wednesday, January 12, 2011

Horribly Misplaced China Priorities, Ctd.

From Steve Craven comes more evidence today that the Mainstream Media are finally catching on to the fact that the US government's obsession with China's currency is really misguided.  On monday, the WSJ's Peter Stein saw the light, and today the NYT's David Leonhardt does the same:
When China’s president, Hu Jintao, visits here next week, the exchange rate between Chinese and American currency will inevitably become a big topic of conversation....

Yet the focus on the currency has nonetheless become excessive. The truth is that the exchange rate is not the main problem for American companies hoping to sell more products in China and, in the process, create more jobs in this country. The exchange rate does not need to be the focus of next week’s meetings.

For the United States, the No. 1 problem with China’s economy is probably intellectual property theft. Technology companies, for example, continue to notice Chinese government agencies downloading software updates for programs they have never bought, at least not legally.

No wonder China has become the world’s second-largest market for computer hardware sales — but is only the eighth-largest for software sales.

Next on the list, say people who work in China or do business there, is the myriad protectionist barriers China has put up. These barriers make this country’s recent efforts at “buy American” protectionism look minor league. In some cases, Beijing has insisted that products sold in China must not only be made there but be conceived and designed there. The policy goes by the name “indigenous innovation.”...

Arthur Kroeber, a Beijing-based consultant and editor of the China Economic Quarterly, goes so far as to call the currency discussion a distraction. “What exactly there is to be gained by quibbling over a point or two in the annual appreciation rate,” Mr. Kroeber says, “is beyond me.”
Be sure to read the whole thing.  I don't agree with everything in there (especially on the value of congressional attacks on China's currency policies or of "Buy American" legislation), but it's an informed and fair-minded piece.  And it provides further proof that, the more that people really look at US-China trade issues, the more they see that currency is a red herring that diverts finite government resources from far more important US-China trade issues, like market access and IPR.

And speaking of that red herring, it appears that, just as predicted, inflation is doing to the real value of China's currency (and thus Chinese exports) what the Chinese government's interventions are trying to prevent via the nominal exchange rate:
When garment buyers from New York show up next month at China’s annual trade shows to bargain over next autumn’s fashions, many will face sticker shock.

“They’re going to go home with 35 percent less product than for the same dollars as last year,” particularly for fur coats and cotton sportswear, said Bennett Model, chief executive of Cassin, a Manhattan-based line of designer clothing. “The consumer will definitely see the price rise.”

Inflation has arrived in China. And after Tuesday’s release of crucial financial statistics by China’s central bank, few economists expect Beijing officials to be able to tame rising prices any time soon....

Higher global commodity prices, as well as rising wages in China, play roles in the increasing cost of Chinese goods. But economists say the main reason for the inflation now is China’s foreign exchange reserves, which surged by a record amount in the fourth quarter....

[T]hat cheap currency policy seems to be reaching its limits. The extra renminbi are feeding inflation. That is starting to undermine exporters’ price competitiveness — just as a stronger renminbi would do if Beijing was not intervening to begin with.

Money supply figures for December, which the central bank released on Tuesday, showed that cash and bank deposits were increasing at a rate twice as fast as even China’s soaring economy. Ever more renminbi are available to buy goods and services.

Victor Fung, the group chairman of Li & Fung in Hong Kong, a 35,000-employee trading company that supplies most of the world’s big retailers with Asian goods, said that contracts signed late last year would produce a jump of 10 to 20 percent in the import prices of consumer goods arriving at American ports by the second quarter of this year.

“By the middle of this year, you’ll see considerable diversion of trade away from China,” which will start to bring down the United States trade deficit with China, Mr. Fung said in an interview.

But there are only limited alternatives to China as a supplier of cheap goods. As American retail chains scramble to shift orders to other countries like Bangladesh and the Philippines, they are finding that inflation is emerging as an issue across much of Asia.

What is more, the far smaller factories in other Asian countries have little capacity to absorb the huge orders that Chinese factories routinely handle, corporate executives and economists said....

Hu Xingdou, an economist at the Beijing Institute of Technology, said that a more accurate gauge of inflation would show consumer prices rising 10 percent a year. The National Bureau of Statistics has said it is actively studying ways to improve the consumer price index.

Inflation in China is not just the result of China’s currency market intervention, although Mr. Hu and other economists describe it as the biggest single cause. Another cause is aggressive lending by Chinese banks, despite repeated demands by regulators to slow things down.

Rising prices for exports are also caused by wage increases for Chinese blue-collar workers, whose pay has been climbing as much as 15 percent a year. Those workers have more clout than they once did because the supply of factory labor from rural areas, which once seemed inexhaustible, is starting to dry up — a result of three decades of China’s “one child” policy of family planning, as well as a big expansion in university enrollment.

And globally, strong demand from consumers in China and other emerging economies is pushing up not only gasoline prices, but also the prices of cashmere, rabbit fur, cotton, copper and many other commodities....

The effect of higher prices in China on broad measures of American inflation is far from clear. The rule of thumb for many consumer products, from shoes to garments to toys, is that the import price is only a quarter to two-fifths of the final retail price, which also includes transportation within the United States and the wages, rent, electricity bills and other costs incurred by stores.

After showing little change for nearly two years, import prices for goods arriving from China at American docks rose from September to November at a rate equivalent to an annual rise of 3.6 percent....

Mr. Model of Cassin, who is visiting Beijing this week from his company headquarters just off Seventh Avenue, said that the world had changed and that Chinese manufacturers were now more interested in catering to their domestic market than in offering rock-bottom prices to big American companies.

“All of a sudden, they’re more interested in selling domestically,” he said. “The American wholesaler will fight them on $5. The domestic retailer doesn’t care as much.”
The Economist has more on this very interesting issue here, and let's please not forget that all of these changes are happening without self-defeating American protectionism.  In short, basic economics is doing what aggressive American unilateralism can't - and should never try to - do, and it's doing it pretty quickly at this point.  Or put another way: contrary to the doomsaying "experts" like Paul Krugman, doing nothing re: China's currency is working out just fine, thankyouverymuch.

The media are starting to understand these facts.  Better late than never.  The big question is whether our politicians will ever catch on and ditch the currency obsession for a smarter China trade policy. 

Speaking of which, the Australian reports that - hey look at that! - the WTO's Doha Round talks have been resuscitated and that completion in 2011 is a real possibility that will depend entirely on the leadership of the US, China, India and Brazil:
Ten years later, and having been revived twice after collapsing under a mountain of disagreements, the round continues to limp along under the guidance of singleminded Director-General Pascal Lamy, who is resolutely determined to extract an agreement from the WTO's 153 members.

Lamy, a former European Union trade commissioner and French political adviser who succeeded Supachai Panitchpakdi in 2005, told The Australian in Sydney that the leaders of the G20 agreed in Seoul in October that 2011 presented "a window of opportunity" to conclude the round. "I have been saying since July 2008 that 80 per cent of the deal is already on the table. The question is how to get the remaining 20 per cent done," Mr Lamy said.

This is up to the US, China, India and Brazil, who must resolve their differences to close the gap. "The US wants the emerging countries to pay a bit more than what is on the table in a number of areas. China, Brazil and India are saying maybe (we can do more), but we also need to see the price that the US is willing to pay for that," he said.

Intensive negotiations to bridge the final gap started in September and hopefully in the next few months, it will be possible to draw up a new global trade agreement. Other trade developments this year, such as the 10th anniversary of China's accession, and the entry this year of Russia into the WTO, may act as an impetus to wind up the decade-long, sometimes fractious Doha negotiations.
Some of us have been trying to spread the word on the Doha Round, and the desperate need for US leadership, for a while now.  Lamy's comments and more stories like this one will certainly help with that. 

But is President Obama listening?

1 comment:

Whiskey Jim said...

Why do so many economists and politicians view the world as a standard sized pie that does not grow?

In their world, I do not understand how they think the world gets richer.

For first and foremost, my perception is that manipulating currency rates in their view is a way to divide the pie 'equitably.'

In my world, it makes no sense at all.