Do You Agree With This?

The webmaster doesn't claim to have an economics degree which would help decode the intricacies of international trade, however, the author of the attached article from Forbes seems to be living is some sort of isolation chamber based on a tread-mill theory of economics...keep running as fast as you can and poor industrial policy will never catch up with you.  Such are the words of people that make their living on money rather than making things. (Since this was originally posted, yet another article has been published in Fortune magazine which espouses nearly the same thing.  Again, such are the words of people that make their living on money rather than making things.)

Pure logic would say that economic growth is based on producing goods and services that are attractive not only to domestic consumers, but international consumers, as well.  If we only produce commodity products, we will forever be under strong attack from lower cost producers abroad.  Our approach has been to push the limits of technology and the value we add will continue to support our standard of living...until recently.

We have been exporting these value-added jobs at an increasing rate without creating replacements according to the old scheme.  As a result, job growth for higher paying jobs is severely lacking and job seekers must accept not only lower pay, but a position that does not use the person's capabilities.

The bottom line is that we DO NOT produce what other economies want at a level which would minimize trade deficits...and it seems to be getting worse.

The author of the Forbes article seems totally oblivious of the other factors impacting trade deficits and seems to simplify it to big corporations' levels of profit or putting it on the back of small business, which is under pressures unknown 15-20 years ago.

At the end of the day, the issue is putting people to work.  High-handed talk of international monetary reform and globalization, doesn't give Mr. Unemployed a paycheck.

The author's only valid point is to avoid protectionism.  However, it may be necessary in some areas to let strategic sectors catch their breath.  The real issue is the parallel and insidious parasitic economy, that consumes more and more of the annual GDP, which must be addressed.  Taxation and overlapping regulations must be simplified to encourage domestic production and the higher standard of living and better products that comes with it.  Redeployment of labor will be necessary, long-term, to avoid catastrophic displacements due to paradigm shifts in technologies or markets catalyzed by missteps of soulless multinational corporations .  Put in other terms, give the people better control over their lives and their future, through self-determination.

On My Mind
Trade Deficit? So What?
David Malpass, 12.08.03

Stop sweating over the fact that we import capital from abroad. It's being put to good use.

From corporate chieftains to members of Congress, many people are wringing their hands about the trade deficit. They shouldn't. The U.S. is growing faster than Europe and Japan and is demographically younger, causing logical differences in trade, investment and savings. It would be more helpful to focus on ways to speed growth abroad and improve the U.S. savings climate.

A trade deficit is not a problem by itself. Trade deficits indicate an "imbalance" between investment and savings, not an excess of consumption. Say a German manufacturer ships a machine tool to a U.S. company, offering a favorable lease. That creates a U.S. trade deficit and a debt to Germany. Both the company and the U.S. are more leveraged. But that's not bad, if the tool adds enough to growth and output to pay its way.

There's no magic limit on the size of the trade deficit. However, just as with corporate borrowing, the quality of the new investment and the cost of new funds matter a lot. If the U.S. has projects that can earn, say, 10%, then it is profitable, pro growth and sustainable for the U.S. to borrow from abroad when the cost of foreign capital is below 10%. In the example, the profitability of the machine tool and the cost of the lease should be deciding factors, not the trade deficit.

Thus the real challenge to the U.S. trade deficit is the same as the challenge to U.S. leverage--profitability. Whether this is a problem depends more on small U.S. businesses, not economics. To date they have been an efficient user and deployer of global capital. As a result, U.S. growth accelerated as the trade deficit expanded in the 1990s. With its trade deficit the U.S. gets new, profit-oriented investments and growth, drawing in imports. Foreigners get better investments than they could at home, often buying low-yielding U.S. government securities to meet their needs for safety, long maturity and yield.

If you want to worry about something, worry about the politics--not the economics--of deficits. First, Washington, misunderstanding the trade deficit, might turn even more protectionist. We've already seen a miniflood of protectionist bills coming out of the woodwork, proposing steep new tariffs on products from China. Then there's Warren Buffett's scheme to ration imports by auctioning licenses. Fortunately the Great Depression discredited protectionism so thoroughly that the world has an intense, justifiable fear of it.

The second risk is that the rising trade deficit will stampede Washington into a sure-to-fail policy of weakening the dollar. As currencies weaken, the losses outweigh other investment considerations, forcing capital flight. Rather than produce an "improvement in competitiveness," as some claim, a weak-dollar trend would more likely slow U.S. investment and economic growth. The trade deficit might improve as imports sag, but jobs and living standards would decline.

Economics should put less emphasis on trade balances. The economic focus should be on sustainable growth and rising living standards, which often lead to a trade deficit. The best recipe for narrowing the global imbalances in a constructive way is faster growth and higher living standards abroad--meaning less socialism in western Europe, a more stable yen to end Japan's deflation and sweeping International Monetary Fund reforms aimed at truly helping developing countries grow.

Why We Ought to Be Thanking the Chinese
China plugs a big, made-in-Washington hole in the U.S. economy.
Monday, March 8, 2004
By Stephen S. Roach

A fickle world has changed its mind about China again. A year ago the miracle of Chinese growth was widely seen as a bonanza for an otherwise sluggish global economy. Today China is being cast as a threat—in effect, it has become a scapegoat for many of the more intractable problems that a dysfunctional world has been unable to solve.

This role reversal is both disturbing and ill founded. It probably says a good deal more about the West than it says about China. The case for China-bashing stems largely from the angst about jobless recoveries in the world's wealthy industrial nations. In particular, U.S. jobs are increasingly perceived as being exported to China—an erroneous perception that has tempted politicians to flirt with dangerous protectionist "remedies."

China's currency peg—a fixed arrangement between the renminbi (RMB) and the dollar—has become a lightning rod in this debate. In the eyes of many, it underscores the unfair competitive advantage that China enjoys in an otherwise tough global marketplace. Pressure is being put on China to rework the peg. Federal Reserve chairman Alan Greenspan recently noted that such a chance is a "fairly reasonable expectation." A rumored 5% revaluation of the RMB is being hailed as a first step in taming the so-called China threat—as if that would actually temper the world's imbalances. Nothing could be further from the truth.

Lost in the hand wringing are the extraordinary benefits that a rapidly changing Chinese economy is bringing to the world—benefits that an ungrateful world should give thanks for. That's especially the case for the U.S. Yes, China accounted for the largest portion of America's record $540 billion trade deficit in 2003. But this deficit was not made in Beijing—it was made in Washington. That's right—courtesy of a runaway federal budget deficit, America has all but depleted its national savings. In order to fund the investment necessary for economic growth, that shortfall of domestic savings must be offset by surplus savings from abroad. The U.S. has no choice other than to run massive balance-of-payments and trade deficits in order to attract foreign capital.

For that reason alone, China plays an important role in plugging a hole in the American economy. Just as Japan filled the void created by the Reagan budget deficits of the 1980s, China is playing a similar role in an era of Bush budget deficits. Given our savings shortfall, we have to run trade deficits with someone. If it wasn't China, it could be Mexico, Canada, or even Europe. The result would be higher-cost imports that would represent a tax on the American consumer—a tax that would squeeze purchasing power and would undoubtedly constrain U.S. economic growth.

In fact, it's the consumer who benefits the most from America's trade with China. The U.S. purchased more than $150 billion of cheap, high-quality Chinese products last year. That helped hold down the inflation rate. U.S. import prices for items other than petroleum rose by only 1% in the 12 months ended in December—a minuscule increase for a now rapidly growing economy with a weakening dollar. Low inflation provides a windfall of purchasing power to job-short and income-constrained U.S. consumers. America has China to thank for it.

But that's not all. It turns out that China is plowing back a large portion of its export earnings into dollar-based financial assets. As of last November, China held $144 billion in Treasury securities; that's 9.6% of total foreign holdings of such government paper—triple China's share in 1994. Among foreign holders of U.S. Treasuries, China is now second only to Japan and well ahead of Britain, which is in third place.

This is hardly a trivial matter. Normally, outsized government borrowing would drive financing costs up. But eager Chinese buying of U.S. paper prevents that from happening. By helping keep interest rates low, China is lending even more support to U.S. economic growth.

It's not just America that should be grateful for China's dramatic emergence. Multinational corporations have moved rapidly to integrate China into the global supply chain. More than $50 billion in foreign direct investment went to China in each of the past two years, making it the world's largest recipient of such flows. Chinese subsidiaries of multinationals and joint venture partners from Japan, the U.S., and Europe have accounted for 65% of the cumulative increase in total Chinese export growth over the past decade. Outsourcing has become an increasingly important element of corporate efficiency strategies around the world, allowing high-cost operations in developed countries to be replaced by low-cost production in developing countries such as China. Ultimately, these benefits are also passed on to consumers around the world.

At the same time, China has become an important source of growth for its neighbors in Asia and other countries. You'd never know that from all the clamor over China's export prowess. But the big secret is surging Chinese import demand—up some 40% last year. As China erects the infrastructure of a modern economy, it does so with capital equipment and technologies it purchases from countries such as Japan, South Korea, Taiwan, and Germany. Inasmuch as these same nations suffer from deficiencies of internal demand, their China export businesses have become important sources of growth.

The bottom line is that the so-called China threat rings hollow in an era of globalization. China is not stealing jobs from rich, developed countries. Employment is growing in China's export sector because multinational corporations are expanding their Chinese subsidiaries. And China's demand for foreign-made goods is supporting employment elsewhere in the world.

Nor should China be accused of having an undervalued currency that gives it an unfair advantage in the battle for market share. Xenophobic American Congressmen believe that the country's bilateral trade surplus with the U.S. is the smoking gun of a manipulated currency. Never mind that the RMB peg to the dollar hasn't changed since 1994; the more important point is that China runs large deficits with most of its other trading partners. As a consequence, its overall trade position is only slightly in surplus—some plus-three-tenths of a percent of Chinese gross domestic product in 2003. If anything, this suggests that the Chinese currency may be fairly valued—at odds with those clamoring for a quick revaluation.

Most of all, the world owes a debt of gratitude to China for its commitment to dismantling its state-owned economy. For China, this is the only avenue to sustained prosperity. For other nations, it is an opportunity to tap an enormous market.

Nor do we in the West have to worry that China will play unfairly on the road to reform. China's willing accession to the World Trade Organization guarantees that it will be held accountable to a system based on Western rules.

By committing to such an extraordinary transformation, China has thrown down the gantlet to the rest of the world. Yes, China's success is also a challenge: It puts the rigid and outdated economies in Europe and Japan on notice that they must also change, or risk being left behind in an increasingly fast-moving time. Far from being a threat, China is an important example for others to emulate.

No one said globalization would be easy. But in the end, it sure beats the alternatives. Thank you, China, for showing the way.

Stephen S. Roach is chief economist at Morgan Stanley.

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