27 May 2005

More on Chinese Textile Exports and the Yuan

Two recent (26 May) lengthy articles in The Economist dealt with the impact of import restictions on textiles from China and the net effect of a possible revaluation of the Yuan.

I have excerpted three paragraphs from those articles which are relevant to my post of 24 May on these subjects:

"The quotas and tariffs will not save the American textile industry or restore the 1m jobs it has lost since the 1980s. “China isn't their problem,” says Laura Jones of the US Association of Importers of Textiles and Apparel. “It's the whole rest of the world.”

"At most, the restrictions will slow Chinese export growth to the West. But any slack is likely to be taken up by other poor countries (my Italics). The “safeguard” measures—a product of the tortuous negotiations on China's admission to the World Trade Organisation—cannot be used against other countries. One of the protectionist arguments used last year for prolonging quotas was that their abolition would wipe out export-based industries in poor countries that allegedly relied on quota protection from Chinese competition. "

"The true losers from any return of quotas will be American and European consumers and the retailers that cater to them. It will mean higher prices now, and hinder lower future prices by slowing the emergence of Chinese “supply-chain cities”, as UBS, an investment bank, calls them, that will handle the entire process of making a piece of clothing from sheep to shelf. "

"a small Chinese revaluation would have virtually no impact on America's vast external deficit. China's share of America's imports is around 10%, so even a 10% appreciation would reduce the dollar's trade-weighted value by only 1%. Were China's move followed by the rest of Asia, the dollar's value would fall by something closer to 4%. But even that would do little to close America's $600 billion-plus current-account gap."

24 May 2005

China, Foreign Trade and the Yuan: Be careful what you wish for... Part IV

Recent moves by the Bush administration to punish China for America’s lack of fiscal discipline has once again underscored the US’s inability to look ahead to consequences of its foreign policy. Iraq, of course, is the most outstanding failure, and now we are faced with another colossal blunder, this time with the China policy.

The US contends that a) increased textile imports from China and b) the Yuan peg to the dollar are endangering the US and global economy. Solution: restrict textile imports from China and float the Yuan. Really?

America’s indebtedness resulting from spending more money than it generates in revenues has placed $1.98 trillion of the $4trillion in US Treasury notes in the hands of foreign investors. Japan, the largest holder accounts for $680 billion and China $224 billion. In addition, China buys dollars to ensure its currency, the Yuan, stays at about 8.3 to the dollar, where it has been fixed for nine years.

The U.S. current account deficit widened every quarter last year, to reach an unprecedented 5.6 percent of the economy at the end of the year, while the U.S. federal budget deficit grew to a record $412 billion.

The US needs the inflows, the purchases of Treasury notes to finance its current account deficit. Without ongoing purchases of US Treasury notes the US would literally go broke. There is not enough money in the treasury to pay America’s bills and interest payments on those outstanding notes, or, if you like, America’s IOUs.

If China were to cash in their bonds and demand payment in gold rather than fiat US currency, what would happen to the Dollar? Gold prices? the Yuan? At current prices there is not enough gold in existence to pay off all of China’s holdings of US Bonds. Because of a shortage of freely traded and available gold inventory, prices would likely need to increase by perhaps 8 times or more to make enough gold available to pay China. Buy gold now!

If China wants to cash in their US Bonds, the most likely scenario is that the US will merely print more Dollars as needed and voilà, skyrocketing Inflation.

Although such action by China is not presently in the cards, if China were pushed to the wall, its ace would be the treasury notes. Cashing them in would have a greater negative impact on the United States than a nuclear strike.

Restricting Chinese Imports
If the US stops buying Chinese products, then US prices for products manufactured in China will go up – again big time inflation. As for textiles specifically, limiting only Chinese exports to the US will not stop the inflow of cheap textiles. No action has been taken to reduce the import of textile products from Egypt, Latin American and African exporters of products at prices lower than those of the US textile industry, so how will simply reducing Chinese exports alleviate pressure on the US industry?

Wal-Mart in 2004 estimated purchases from China to reach $18 billion. Think of the impact of a significant increase on prices of the world’s largest retailer. One estimate has it that 80% of microwave ovens in the world are produced in China; China became the biggest producer of mobile phones, colour TVs and monitors in the world last year. The statistics showed that the nation's output for these products has respectively accounted for 35 per cent, 40 per cent and 55 per cent of the world's total.

The Yuan
If China chooses, or is pressured , to float the Yuan, the US dollar could fall as the Yuan rises. Once that happens, prices of Chinese imports could increase more, as will prices for those products in the US – higher US inflation.

If the Dollar falls enough, other countries that currently hold Dollars as central bank reserves, could decide to bail out of the Dollar so it does not drag their own currencies down. Even countries that simply peg their own currencies to the Dollar may decide to allow their currencies to float. The most likely US financial defense would be to raise interest rates significantly.

One considered opinion on the net effect of appreciation of the Yuan by an economist is, “China gains its comparative advantage by low material and labour cost, highly efficient machinery as well as good quality control system. Hence, the appreciation of the Yuan would not exert too much impact on China’s comparative advantage and the US demand for Chinese exports. Besides, China’s share in the US total trade is only about 10%, and even if the Yuan appreciates by 20%, the real effect reflected on the US current account in dollar term will only be about 2%, which is too small to influence the US current account imbalance and relieve its unemployment pressure.”

Conclusion
It would appear then that China holds three trump cards: (1) Remove Yuan peg to the Dollar (US inflation), (2) Cash in their US Bonds (US interest rate rise, US inflation or much, much worse), (3) Threaten to stop or reduce all exports to US (US mega inflation).

America’s Shock and Awe approach will work no better economically with Chiina than it has in Iraq militarily. The consequences of this ill thought out knee jerk reaction to China will have even more serious repercussions than the debacle in Iraq.

16 May 2005

Latin America - a crisis in the making Part II

With reference to my previous post "Latin America - a crisis in the making", I submit the following recent article from The Economist, an article which reflects both my previous comments and which highlights and underscores my criticsm of US Foreign Policy in this region.

Trouble in the "backyard"
Apr 28th 2005 SÃO PAULO From The Economist print edition

Just stop calling it that
Rice and Lula: wary allies

AFTER four years in which South Americans complained of neglect by the United States, George Bush is paying attention. He sent his defence secretary, Donald Rumsfeld, to the region in March. Condoleezza Rice, the new secretary of state, set off on a four-nation tour this week. Mr Bush himself is expected in Argentina and Brazil in November. Why the sudden interest? Because things are going badly.

The United States' long-standing project for the region, free trade among the hemisphere's 34 democracies, is stuck. Mr Bush's newer idea of spreading democracy everywhere could suffer reversals in South America. Last week Ecuador's Congress ousted its pro-American president. Democracy in Bolivia and Peru is fragile.

As America's influence in South America has waned, China's has waxed. The noisiest problem for Mr Bush is Venezuela, led by an implacably anti-American populist, Hugo Chávez. He is thought to be fomenting unrest in other Andean countries, and this week scrapped a longstanding military co-operation accord between Venezuela and the United States. The Bush administration has so far failed to persuade fellow members of the Organisation of American States to back its candidate to be the group's secretary-general.

Michael Shifter, an analyst with Inter-American Dialogue, a think tank in Washington, DC, says that the United States needs to abandon its traditional attitude that Latin America is merely its “backyard”. Ms Rice, who has recently carried emollient messages to several continents, seems to understand this. Her tour takes in two reliable allies, Colombia and El Salvador. But much of the business that matters is with pricklier countries. She was to attend a pro-democracy jamboree in Chile. She started her tour in Brazil, the region's main power, which the United States hopes will be a bulwark against instability.

Brazil is wary of pan-American free trade, bitter about American farm subsidies and suspicious of American military aid to Colombia. It is too big and ambitious in its own right to accept American leadership. For their part, the Americans deem Brazil's president, Luiz Inácio Lula da Silva, a tad too friendly to Mr Chávez.

In Brasília, however, Ms Rice played down differences. A joint statement spoke the local language of “liberty, democracy and social justice”, though the secretary mentioned drugs, terrorism and trade in a later speech. The statement called on Ecuador to respect “democratic order”, though neither country may do much to ensure this. Brazil leads the United Nations' peacekeepers in Haiti and probably restrains Mr Chávez. If other Andean governments fall into anti-American hands, its moderating influence will be sorely needed.

The best hope for stability in South America is to make it richer. The United States alone cannot make that happen, but could do more to help.

The Prescience of George Kennan

The Prescience of George Kennan

George F. Kennan (1904-2005), a distinguished US diplomat and historian, was one of the primary architects of US strategy during the Truman Administration. Kennan was one of the most thoughtful and eloquent writers not just on history, international politics, and US-Russian relations, but on American society, questions of personal and political philosophy, and contemporary problems such as nuclear weapons, the environment, population growth, and urbanization

The following quote from PPS/23, written in February 1948 when he was head of the US State Department's Policy Planning Staff, is often given as evidence of the iniquity of US foreign policy.

"We have about 50% of the world's wealth, but only 6.3% of its population.... In this situation, we cannot fail to be the object of envy and resentment. Our real task in the coming period is to devise a pattern of relationships which will permit us to maintain this position of disparity.... To do so, we will have to dispense with all sentimentality and day-dreaming; and our attention will have to be concentrated everywhere on our immediate national objectives.... We should cease to talk about vague and ... unreal objectives such as human rights, the raising of the living standards, and democratization. The day is not far off when we are going to have to deal in straight power concepts. The less we are then hampered by idealistic slogans, the better."

Fifty seven years later that sensible advice is still valid and ignored.

baoluo