Archive for the Category International economics

 
 

Those rootless cosmopolitans

When you read the history of interwar Europe, particularly the “alt-right”, one theme shows up over and over again. On one side is the authentic, patriotic working class, with a strong attachment to the home country. But they are continually being “stabbed in the back” by a class of “smelly, rootless cosmopolitans”, who have no national loyalty. Oddly this latter group is linked to both socialism and global capitalism.  (How is that even possible?)

Of course today we are far past that sort of crude rhetoric, as shown in a recent Financial Times story:

The White House’s top trade adviser has accused “globalist billionaires” of trying to pressure President Donald Trump into ending his tariff brinkmanship with China, saying their “shuttle diplomacy” to Beijing meant that any truce would have a “stench around it”.

Peter Navarro, the most prominent China hawk in Mr Trump’s inner circle of economic advisers, called on Wall Street to “get out of the negotiations” and warned that if a deal is reached when the president meets with Xi Jinping at a G20 summit in Argentina this month, it would have “imprimatur of Goldman Sachs”. . . .

Mr Navarro’s comments came as he mounted a robust defence of Mr Trump’s protectionist trade policies, saying the president had the “courage and wisdom to stand up to the globalist elite” that was using the US as the “bank of the world”. . . .

“He didn’t need the help of Wall Street, he didn’t need the help of Goldman Sachs, and he doesn’t need it now,” Mr Navarro said. “When these unpaid foreign agents engage in this kind of diplomacy, so-called diplomacy, all they do is weaken this president and his negotiating position. No good can come of this.”

The good news is that Trump is himself a billionaire, who cares a great deal about how the stock market is doing.  Navarro sounds like a desperate man, who attached himself to the wrong sort of demagogue.  He doesn’t understand that the 1930s are over.  Look for “globalist billionaires” to eventually win this battle.

PS.  When is that trade deficit going to begin shrinking?  And if Trump is right that the economy is doing spectacularly well, does that mean that our previous problems had nothing to do with the trade deficit?  Just asking.

Every day it gets worse

Little did we know that during the golden 1990s we were complaining about things that would look utterly trivial in retrospect. The sheer stupidity of the 21st century is so mind-boggling it leaves me almost speechless.

But not quite.

Consider the “problem” of currency manipulation. Let’s start with the fact that currency manipulation is a strange term to apply to a hodgepodge of government policies that may or may not impact the current account balance. For instance, you might say that “currency manipulation” is almost the sole purpose of having a central bank.

There are some smarter economists who do worry about currency manipulation. But when you read their work, it’s pretty clear that what actually concerns them is “saving manipulation”—when countries enact policies that boost the national saving rate. These policies can “improve” the current account balance. And not all such policies, rather they worry most about a subset of relatively ineffective policies, such as swapping domestic assets for foreign assets. (I’m not saying these policies have no effect; I just don’t see how it could be very large.)  They tend not to worry as much about far more effective pro-saving policies, in the fiscal/tax area.

The Netherlands and Switzerland have CA surpluses of 10% of GDP, while Singapore’s is 20% of GDP.  Does anyone seriously believe those are due to “currency manipulation”?

Even the economists who do worry about currency manipulation find the criteria set by the US government to be absurd:

Congress’s criteria to assess if a country is interfering in its currency are: A minimum $20 billion trade surplus with the U.S., a current account surplus in excess of 3 percent of gross domestic product, and repeated intervention in currency markets.

I’ve got an idea!  Instead of labeling countries “currency manipulators” when they accumulate $20 billion surpluses with the US, how about labeling then “currency manipulators” when they, umm, manipulate their currencies?

I’ll tell you why not.  Because that would force us to actually define currency manipulation in a way that could be measured.  And that would expose the fact that what really concerns us is saving manipulation.  No, not even saving manipulation, it’s current account surpluses in other countries that actually concern us.  No, not even that, it’s bilateral deficits with other countries that concern us.  And of course bilateral deficits have nothing to do with currency manipulation in any meaningful sense of the term. Indeed they have nothing to do with anything meaningful at all.   What’s the bilateral trade deficit between New York and New Jersey?

Trump took office saying he would label China a currency manipulator from day one.  He’s failed to deliver on that promise, just as he’s failed to repeal Obamacare, secure the border, reduce the trade deficit, or stop the rest of the world from laughing at us.  He failed because the Trump’s own Treasury department wasn’t able to find evidence that China is a currency manipulator, despite using a silly set of criteria that are strongly biased toward finding China guilty, such as the provision that it’s not OK to run a $20 bilateral surplus with the US.

But it’s even worse.  Not satisfied with the fact that the Treasury’s own criteria show that China is not a currency manipulator, they are thinking of changing the criteria so that the evidence will match the predetermined verdict—guilty as charged:

Treasury Secretary Steven Mnuchin is open to changing how the U.S. determines which nations are gaming their currencies, a move that could give President Donald Trump the chance to officially brand China a foreign exchange-rate manipulator as he seeks leverage to redefine trade terms between the world’s largest economies.

One method Mnuchin would consider: Using a 1988 trade act with a broad definition of currency manipulation to designate a country a manipulator, even if the label isn’t warranted by specific tests under a 2015 law, he said. The other would be to change the criteria that help establish whether a country is engaging in competitive devaluation of its currency, according to Mnuchin.

Treasury applies three tests to measure whether a country should be labeled a currency manipulator. The framework of the criteria is provided by Congress, but the specific thresholds in the tests are at Treasury’s discretion.

Again, foreign current account surpluses are not a problem for the US.  But if you disagree with me and agree with those pundits who do worry about current account imbalances, you should be focusing on the Eurozone and Japan and Switzerland, which really do have big CA surpluses, not China, whose CA is nearly balanced.

Trump seems determined to launch a cold war against China, a country with an economy that will be twice as large as the US economy by 2035.  In the old days, militaristic countries would engage in warfare by inventing some silly pretext—say demanding that a smaller neighboring country apologize for some imagined slight.  Trump wants a cold war with China, and demands the federal bureaucracy find some sort of fig leaf to justify it.  Why not point to China’s bad human rights record in Xinjiang?  Unfortunately, mentioning human rights would simply highlight Trump’s embarrassingly friendly relationship with the Russians and the Saudis, despite their war crimes in the Ukraine and Yemen.  So Trump needs to seek out an economic rationale for war with China.  In this post-truth world, currency manipulation is as good as any.

China should raise the price of Big Macs

Here’s Noah Smith at Bloomberg:

Instead, the U.S.’s best bet is to concentrate on a key Chinese government intervention that can be measured easily — currency manipulation. Though China no longer pegs its currency to the U.S. dollar, it still closely manages the yuan’s value and maintains an extensive system of capital controls. In recent years, China usually hasn’t had to intervene in order to keep its currency cheap, since the yuan has fallen:

But the threat of intervention is still there, which undoubtedly keeps a lid on the currency’s value. Meanwhile, measures like the Economist’s Big Mac Index show that the yuan is undervalued against the dollar by about 44 percent. This effectively provides a subsidy to all Chinese exporters, and a tax on U.S. goods sold in China, thus distorting the global economy and the patterns of world trade.

As his main goal in the trade war, Trump should push for a large upward valuation in the yuan, followed by a much freer float of that currency against the dollar.

Actually, that would be a disastrous policy for China, which (fortunately) they are unlikely to adopt.  The Chinese economy is already struggling with a slowdown due to a crackdown on debt and a looming trade war with the US.  A sharp revaluation in the yuan could easily push them into a depression.  Think about it.  A rising power in the East, with a history of being humiliated by Western powers, and with a prickly nationalistic public that is intensively resentful of these past actions, is pushed into depression by a combination of a rabidly anti-Chinese American administration and some really bad exchange rate advice by Western experts.  What could go wrong?

[BTW, even if the yuan were undervalued, which it isn’t, it would not constitute a “subsidy” to Chinese firms or a “tax” on US exporters.  Words matter.  Taxes and subsidies are inefficient because they drive wedges between the prices faced by buyers and sellers.  Undervalued currencies do not do this.  If you want to argue an undervalued currency is inefficient, you need a completely different argument centered on saving rates.]

So what’s my solution?  Simple.  Have the Chinese government order McDonalds to raise Beijing Big Mac prices by 44%.  Problem solved, no more undervalued currency.  Seriously, the Big Mac index tells us absolutely nothing about whether a currency is undervalued or overvalued.  If it did, then the Swiss and Norwegians should demand that the US massively revalue the dollar, so that Big Macs over here are as expensive as in Oslo and Zurich.  In fact, all the Big Mac index illustrates is the Balassa-Samuelson theorem, which says that lower wage countries tend to have lower price levels because their comparative advantage lies in non-traded goods.  (I.e. rich countries are much more productive at building complex products, but not much more productive at cutting someone’s hair or cooking Big Macs.)

Outside the Trump administration, I doubt you’d find many international economists who think PPP should determine the proper exchange rate between any two countries.  And even within the Trump administration they’d be more likely to use “trade imbalances” as an excuse for demanding that China revalue.  The problem, of course, is that China now has the most balanced trade of any major economy in the world, with a current account surplus estimated to be 0.5% of GDP this year and 0.3% next year.  So it’s not clear what sort of “distortions” Smith is referring to.  Many of the same people who a decade ago insisted that China needed to revalue because of its current account surplus (which really was large at that time) now seek out some other reason for demanding Chinese revaluation.  I guess cheap hamburgers are as good as any, as the importance of maintaining PPP and “balanced trade” are roughly equally invalid arguments.

There is one economy that does have a massive CA surplus, the Eurozone.  And to his credit, Smith does not advocate that we demand a sharp euro appreciation (which would also be a disaster—ciao Italia):

Trump has also turned his attention away from Europe, avoiding the mistake of getting into a harmful spat with allies he should persuade to form a trading bloc and a unified front.

This also caught my eye:

There’s no way to measure the amount of state interference that China is using to shut out foreign companies. And IP theft, by definition, happens in secret and is thus difficult to detect or to prove. China’s entire economy is centered around pervasive state intervention and skullduggery — even if it made some moves to change that model, the U.S. couldn’t verify that changes had really been made.

If it can’t be measured, how can we be confident that China’s entire economy is centered around this intervention and “skullduggery”?  You might say, “it’s obvious”.  No, it’s obvious that these things happen pretty often in China, but it’s not obvious how big a problem it is.  If it were, then Smith would be wrong in claiming we can’t measure it.  How do we know that the “center” of their economy is not growing rice, or building subways, or selling life insurance?  For instance, China’s goods imports are about 15% of their GDP.  The same is true of the US, but because the US figure is for both goods and services, I presume China’s total imports are actually a larger share of GDP than in the US.  So how important are their barriers to imports? Who knows?

I am not claiming that China has fewer trade barriers than the US, indeed I believe the opposite is true; my point is that the data doesn’t provide any way of knowing how much of this is anecdotal, and the extent to which China really is much more closed than other countries like the US.  Let’s not forget that the US also does lots of “skullduggery”, like “Buy America”.

Note that if Smith is right that it’s hard to measure this stuff, then Trump may be wasting his time.  How would we even know if they adhered to any trade agreement?  That’s why Smith suggests that we instead press for yuan revaluation.  But that won’t work either.  China could simply stop having a crawling peg with the dollar, and instead have a crawling peg with the euro, yen or pound.  When you have a crawling peg, it really doesn’t matter which currency you choose.  And there is near-zero chance that China will agree to set their exchange rate according to PPP.

Smith also seems confused about the implications of what’s often called the “China shock”:

And Chinese import competition has been much more harmful to American workers than competition from Mexico, Europe or any other country. Even some Democrats support pushing back against China.

He’s referring to a study that showed the import surge from China had depressed a number of industrial towns in the US.  But then he advocates a Chinese policy that would cause an even bigger China shock:

What would constitute a win in a trade war against China? A simple goal would be to get that country to cut tariffs on U.S. imports. Indeed, China’s leaders have already offered some tariff cuts, suggesting that they’re in a mood to deal. But although tariff cuts are good, they don’t form the bulk of China’s unfair trade practices. The government underwrites its industries in a variety of ways, from cheap loans from state-owned banks to energy subsidies to export subsidies. Costs are held down because of lax environmental regulations and low labor standards — China crushes independent labor unions, for example. The U.S. government could demand that the Chinese reduce subsidies, do more to protect the environment, or improve worker rights.

Chinese tariff cuts would cause the US to export more movies and food and high tech stuff to China, and also cause China to export more “mid-tech” industrial goods to America.  If you thought the China shock hurt America (I don’t), you should not advocate an even more open China, an even bigger China shock.  You should advocate they go back to Mao’s policies, when China was closed to the world and American workers were not “threatened” at all.  Of course I don’t worry about China shocks, and thus agree with Smith that fewer Chinese tariffs would be a good thing.

Some might argue that lower Chinese tariffs would reduce America’s trade deficit.  They won’t.  But what is true is that Trump’s policies are likely to raise our deficit.

At a deeper level, all of this focus on the domestic policies of other nations is deeply misguided.  I agree that better economic policies in China would benefit the US.  However that same argument is even more true of India, Africa and lots of other places, which buy far fewer US goods than they would with more sensible policies.  But that’s because with better policies they’d be richer, not because they would no longer be “cheating” at trade.  Since the time of Ricardo, we’ve known that factors such as subsidies, weak environmental laws and low wages do not give countries any competitive advantage of international trade.  Paul Krugman demolished all those arguments a second time back in the 1990s.  Read Pop Internationalism.

I hope this post doesn’t come across as too negative, but I get frustrated reading the same misconceptions about trade, over and over again.  In fairness, there are also things I agree with in Smith’s article:

That doesn’t mean a trade war with China is without downsides and risks. Chinese retaliation against U.S. agriculture has already forced many farmers to accept handouts from the government in order to stay afloat. Disrupting the cozy economic symbiosis that has developed between the U.S. and China will cause painful adjustment, and will also increase the risk of military conflict. If Trump decided to call off his trade war against China right now, it would certainly be a safe course of action.

He’s rightfully skeptical of the Trump approach, and opposes some of the current protectionist policies:

President Donald Trump’s trade war is less bad than it was just a short time ago. After some tense negotiations, the North American Free Trade Agreement has been replaced with a new, very similar arrangement, meaning the disruption to trade — and to U.S. relations with Canada and Mexico — will be contained. The agreement might even ease the damage from the president’s misguided steel and aluminum tariffs.

Unfortunately, China pushes people to advocate policies that are highly counterproductive.  Perhaps it’s partly due to the fact that China is an increasingly powerful and successful country that really does have lots of bad public policies, especially in terms of repressing free speech, minority rights, etc.  That’s frustrating—I really wish they had better policies (Ditto for Myanmar, Vietnam, Venezuela, Saudi Arabia, Russia, Cuba, Iran, Nigeria, and 100 other countries.)  But when I read the arguments for focusing our trade war on China, none of them make any sense.  Whether it be “undervalued currencies”, trade imbalances, or domestic policies that discourage US exports, you can always find much worse offenders than China.

So what’s my solution for bad Chinese policies?  Push China to high income status as quickly as possible and hope for the best.  It worked pretty well in the rest of East Asian, where it was tried. It may not work with the mainland, but going back to the 1930s is even less likely to work.

Economic nationalism in action

The Canadian dollar is up today on news that the new free trade agreement will be essentially identical to the old agreement.

This got me thinking about the 2016 campaign, economic nationalism and related issues.  Here are a few observations:

1. Much of the punditry of 2016 now looks pretty hyperbolic, almost ridiculous.  There was lots of talk that “neoliberalism” was passé, that American workers were being crushed by foreign trade, and that the Trump campaign represented a rejection of globalism.  Two years into his 4-year term, Trump has precisely one major achievement to help blue collar workers—a big corporate tax cut.  It’s hard to find a more neoliberal policy than corporate tax cuts. Any time you are reading a political pundit and come across the term “neoliberalism”, just stop.  You will be getting dumber if you continue to read.

2.  Some will argue that Trump never really believed in economic nationalism, that it was all an act to get votes.  That’s possible; although I suspect he really does believe some of the nonsense he spouts about winning trade wars.  But surely the people around him are serious economic nationalists.  Peter Navarro, Wilbur Ross, Steve Bannon and others didn’t suddenly adopt these ideas for the 2016 campaign.

3.  Economic nationalists are really, really, really dumb, and this has a big impact on how the events have played out.  Their number one goal has been to reduce the US trade deficit, and they don’t even have a clue as to how this can be done.  As a result, they flounder around trying to negotiate trivial changes in trade deals, while the rest of the Trump administration enacts policies that will make the trade deficit even bigger.  What would a policy of reducing trade deficits look like?  Something like this:

A. Large budget surpluses to boost national saving.  Instead, Trump is increasing the budget deficit at a rate far beyond anything we’ve ever seen in a time of peace and prosperity.

B.  A big increase in the corporate tax rate, to reduce domestic investment.  Policies to discourage domestic homebuilding.  Again, Trump has done mostly the opposite, although the incentive to take out a home mortgage was modestly reduced in the new tax bill.

C.  Public policy changes to encourage domestic saving, as you see in places like Singapore.  As far as I know, there’s almost nothing being done in this area.

As a result, the trade deficit will likely get bigger.  (Especially the actual deficit.  The recent change in the corporate tax code will lead companies to report more output as domestic, which would modestly reduce the measured deficit without impacting the actual deficit.)

No doubt commenters will insist that they can’t be that dumb; there is some sort of secret plan to fix the trade deficit.  Sorry, but read the stuff written by Peter Navarro and Wilbur Ross; they really are that dumb.  (The smart ones like Gary Cohn are gone.) These are guys who think the GDP = C + I + G + NX equation somehow demonstrates that trade deficits reduce GDP.  No, I’m not joking.

Economic nationalism is a profoundly self-destructive philosophy, but we are blessed to have economic nationalists who are so incompetent that they don’t even know how to reduce the trade deficit.  That’s why stocks are up today.

A bigger China shock?

I have a new piece at The Hill.  Here’s an excerpt:

The biggest puzzle is what the Trump administration is trying to achieve with its trade war. Is it a move to pressure the Chinese to open up their economy, thus reducing barriers to U.S. trade and investment? Maybe, but it was precisely the opening of the Chinese economy that first created the “China shock.”

Indeed, China was no threat at all to U.S. firms when its economy was closed under the leadership of Chairman Mao. An even more open China would create an even bigger shock, resulting in even more economic dislocation in the Rust Belt. Presumably, Ohio manufacturing workers who supported candidate Trump were not hoping China would buy more Hollywood films and computer software, so that America could buy more auto parts from China.

Read the whole thing.

PS.  A recent NBER paper by Zhi Wang, Shang-Jin Wei, Xinding Yu, and Kunfu Zhu reversed the finding of the famous Autor, Dorn and Hanson paper on the “China shock”.  Here is the abstract:

The United States imports intermediate inputs from China, helping downstream US firms to expand employment. Using a cross-regional reduced-form specification but differing from the existing literature, this paper (a) incorporates a supply chain perspective, (b) uses intermediate input imports rather than total imports in computing the downstream exposure, and (c) uses exporter-specific information to allocate imported inputs across US sectors. We find robust evidence that the total impact of trading with China is a positive boost to local employment and real wages. The most important factor is employment stimulation outside the manufacturing sector through the downstream channel. This overturns the received wisdom from the reduced-form literature and provides statistical support for a key mechanism hypothesized in general equilibrium spatial models.

I don’t “believe” either result.  The science of economics has not advanced to the point where it’s possible to have a high level of confidence in these sorts of empirical studies.

PPS.  Off topic, this made me smile:

Trump has moaned to donors that Powell didn’t turn out to be the cheap-money Fed guy he wanted. The president repeated the effort this week in an interview with Reuters, adding the ridiculous claim that the euro is manipulated and the more credible notion that China is massaging the yuan. (The European Central Bank rarely intervenes directly in currency markets; when the ECB does, it’s usually with the Fed.)

Where to begin:

1. Trump had a choice between Yellen and Powell.  I suggested Yellen, as she had done a very good job.  Trump’s advisors said he shouldn’t pick Yellen because she’s not a Republican.  So Trump picked Powell, even though he was slightly more hawkish than Yellen.  Trump is tribal and assumes everyone else in the world is just as corrupt as he is.  He thought Powell would be “better” because he’d want to help a Republican president.  And now Trump is shocked to find out that Powell is not his lapdog.  (Actually it’s too soon to know for sure, as Trump also wrongly assumes that higher interest rates mean tighter money.  But we can cut him some slack, as lots of other people make the same mistake.)

2. I also smiled at the notion that the ECB doesn’t intervene in the currency market.  Of course they have a 100% monopoly on the entire supply side of the euro currency market.  Yes, I understand the reporter meant “foreign exchange market” when he said “currency”.  But even that’s a bit misleading, as ECB policy does affect the forex value of the euro, and there have been ECB actions in recent years that were clearly aimed at depreciating the euro.  Ditto for the Fed and the Chinese central bank.  Still, the reporter is correct in claiming that Trump has no grounds to complain about ECB policy; I wish he had made the same point about China.

PPPS.  Another day, another two convictions of close Trump advisors.  In one case it was for for a crime that Trump ordered him to commit.  Trump’s now as deeply enmeshed in scandal as Nixon was back in 1974.  The good news for Trump is that none of this matters.  Trump’s support is in the low 40s and it will not decline at all.  There was no Nixon cult—his supporters abandoned him in droves.  But the Trump cult would support him if he murdered someone in the middle of Times Square, at least that’s what Trump himself claims.  As long as those 40% of voters stick with Trump, frightened GOP Congressmen will do the same.  Trump is safe.

Still, it will be fun watching the scandal play out—lots more to come!

Screen Shot 2018-08-21 at 6.53.56 PMPPPPS.  Focus on the blue line, as the yellow line partly reflected the worsening economy.