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November 09 2010

Only Britain can beg for scraps from China and tell them how to behave | Simon Jenkins

David Cameron says he will drum up trade in China, and tackle human rights. It is an exercise in bluff concealing hypocrisy

How do you beg the Chinese for money and yet hold your nose and tell them how awful they are? The Merchant of Venice dilemma is old as diplomacy. Today it clearly vexed the David Cameron on his much-hyped visit to Beijing. The British empire may be dead, but a nagging desire to rule the world, or at least tell it how to behave, is embedded in the genes of every British politician.

Cameron seems overwhelmed these days by the evils and injustices of other peoples. He deplores the Burmese for daring to hold a dud election. He finds it "unacceptable" that the Iranians should stone women to death. The Indians are lovely, but they really must try to be less corrupt. As for the Chinese, when will they stop arresting Nobel prize-winners and persecuting artists, especially when Britain has just asked one to fill Tate Modern with glass porcelain seeds, "to raise awareness" of communist cruelty?

The current British delegation to China is strangely reminiscent of Colonel Younghusband's 1904 expedition to Tibet. Cameron has taken with him a retinue of four cabinet ministers, dozens of celebrity businessmen whom he has made ambassadors during the trip, and a cartload of publicists and hacks. The intention is not just to drum up trade but clearly to cure the heathens of their sinful ways.

The prime minister is thus bombarded with advice on how to "dialogue but not lecture" – be critical but understanding, delicate but firm – when dealing with fiendish orientals. He must "explain where we differ" and inform his hosts that the British people strongly disapprove of their customs, such as jailing and hanging dissidents, suppressing free speech and putting leading artists under house arrest. This Cameron must do and yet not provoke the Chinese into showing him the door. Like Shakespeare's Antonio, he must not drive them to Shylock's sarcastic response: "You call'd me dog; and for these courtesies / I'll lend you thus much moneys?"

Diplomacy has long been an exercise in bluff concealing hypocrisy. The truth of the matter is that there is nothing we can do about China's internal affairs or how it treats its people. We have had no lien on the Chinese mainland since the Boxer rebellion. If we are offended by how communists behave we have a respectable option. We can have nothing to do with them. We need not trade with China. We can refuse visas to its citizens, and declare China a no-go country for British investment. At the very least we can treat China as a country with which we deal only when required to do so for the conduct of international relations.

Yet money has trumped moral outrage. For a decade Britain has been obsequious towards China. Its media gasp in wonder at the Chinese economy. Business people eulogise the great leap forward of "red capitalism", praising the industry, the work ethic, the rate of growth, the export drive, the size of China's marketplace.

In 2008 Gordon Brown grovelled to participate in an outrageous Chinese publicity stunt, welcoming a posse of stooges running an Olympic torch to Downing Street. The whole Olympics farrago involved Britain turning a blind eye, as hundreds of dissidents were locked up, thousands of Beijing's historic buildings were destroyed and hundreds of thousands of citizens were evicted from their homes, all to make way for the "one world, one dream" games. British ministers on Olympic partnership junkets had "to raise the question of human rights" at every meeting. It became a running bad joke, a diplomatic breaking of wind.

Now we are at it again. We lie panting on the floor, begging for scraps from China's table, yet somehow requiring them to be wrapped in a "win" of some dissident being released from detention. How does Cameron square this ethical circle? With 20 plastic smiles gazing at him across the table, does he preface a reference to car factories, hypermarkets and science partnerships with a nervous cough and a "Forgive me, prime minister, if I mention a certain freedom-loving peace-prize winner, Liu Xiaobo, whose incarceration at your pleasure is of deep concern to my Witney constituents"? Does he add his worry over Ai Weiwei, of porcelain bean fame? Artists can be difficult chaps, he might add, and Weiwei's beans have caused huge bother to Britain's health and safety authorities. Perhaps we could bring in the British Council to sort things out.

I have been at such ridiculous masquerades in the past, and know how the Chinese respond. They first ignore everything and wait for what they regard as a spasm of western rudeness to pass. If pressed, they go into conclave and agree to forgive the foreigners; the lack of manners is doubtless the result of an Eton education. As for the subject itself, what on earth has it to do with Britain, or with Anglo-Chinese trade? The last time Britain meddled in such matters it resulted in opium wars.

Europe has long imported food from the Americas, minerals from Africa and manufactures from the Far East. Only Britain demands that such trade be dressed up in feel-good meetings and ethical decontamination certificates. Only Britain goes into trade negotiations wearing the cross of St George amid choruses of Hail Mary.

Such grandstanding diplomacy may give Cameron a statesman-like buzz and win plaudits from leader writers and the Anglo-Chinese lobby back home. But it makes no difference to the plight of the persecuted Chinese, except possibly to exacerbate their persecution. Meanwhile, it risks undermining whatever benefit to trade might come from the visit.

One day perhaps China will have enough of this posturing and send a return delegation to London. Before discussing British lingerie exports, the Chinese will profess a "deep concern" at Britain's prison overcrowding, control orders, housing benefit reform and cap on student fees. They will "raise awareness" of Abu Hamza's detention, the persecution of asylum-seeking children and house flipping by MPs.

Finally the delegation might beg advice on democracy. How can they arrange for seats in the houses of parliament to be sold to wealthy businessmen, or handed down from father to son? How could an election be fixed so the party that comes third finds itself in power? And perhaps Cameron could lend Beijing his admirable Mr Gove, to advise on the dictatorial centralisation of the Tibetan education service.

That feels better, the Chinese might say. How about those lingerie contracts?


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December 11 2009

Rodrik: Making Room for China

Dani Rodrik says that if China wants to pursue industrial policy, as he believes it should, its membership in the WTO leaves it little choice but to keep its currency undervalued:

Making Room for China, by Dani Rodrik, Commentary, Project Syndicate: China’s undervalued currency and huge trade surplus pose great risks to the world economy. They threaten a major protectionist backlash in the United States and Europe; and they undermine the recovery in developing and emerging markets. Left unchecked, they will generate growing acrimony between China and other countries. But the solution is not nearly as simple as some pundits make it out to be.
Listen to what comes out of Washington and Brussels, or read the financial press, and you would think you were witnessing a straightforward morality play. It is in China’s own interests, these officials and commentators say, to let the renminbi appreciate. ...
This story casts China’s policymakers in the role of evil and misguided currency manipulators, who, inexplicably, choose to harm not only the rest of the world, but their own society as well. In fact, an appreciating renminbi would likely deal a serious blow to China’s growth, which essentially relies on a simple, time-tested recipe: encourage industrialization. Currency undervaluation is currently the Chinese government’s main instrument for subsidizing manufacturing and other tradable sectors...
Before it joined the World Trade Organization in 2001, China had a wider range of policy instruments for achieving this end. It could promote its industries through high tariffs, explicit subsidies, domestic content requirements on foreign firms, investment incentives, and many other forms of industrial policy. But WTO membership has made it difficult, if not impossible, to resort to these traditional forms of industrial support. ... Currency undervaluation has become a substitute. ...
The trouble with currency undervaluation is that, unlike conventional industrial policy, it spills over into the trade balance. ... Indeed, China’s current-account imbalance ... began its inexorable rise in 2001 – precisely when the country joined the WTO.
Given that WTO rules tie China’s hands on industrial policy, how much of a growth penalty would the Chinese economy suffer if the renminbi were to appreciate? My estimates, crude as they are, suggest a steep trade-off. An appreciation of 25% – roughly the extent by which the renminbi currently is undervalued – would reduce China’s growth by somewhat more than two percentage points. This is a significant effect... [I]t would be a tragedy if the most potent poverty-reduction engine the world has ever known were to experience a notable slowdown. ...
So we are left, it seems, with two equally unappetizing options. China can maintain its currency practices, but at the risk of large global macroeconomic imbalances and a major political backlash in the US and elsewhere. Or it can let its currency appreciate, at the risk of inducing a growth slowdown and political and social unrest at home. It is not clear that advocates of this option have fully comprehended its potentially severe adverse consequences.
There is, of course, a third path, but it would require re-writing the WTO’s rules. If China were allowed a free hand with industrial policies, it could promote manufactures directly while allowing the renminbi to appreciate. This way the increased demand for its industrial output would come from domestic rather than foreign consumers. It is not a pretty solution, but it is the only one. ...

One of the arguments for maintaining an undervalued currency given above is that "it would be a tragedy if the most potent poverty-reduction engine the world has ever known were to experience a notable slowdown." I don't find the poverty reduction argument very compelling. I am all for reducing poverty, but if China's policy reduces poverty within its borders at the expense of other developing countries with poverty problems that are just as bad or worse, how does that justify maintaining an undervalued currency? As Rodrik notes, China's currency policy serves to "undermine the recovery in developing and emerging markets." And it also takes jobs from those countries during normal times. Are China's poor somehow more deserving than the poor in other countries?

November 16 2009

Paul Krugman: World Out of Balance

Paul Krugman reiterates that China's currency policy must change:

World Out of Balance, by Paul Krugman, Commentary, NY Times: International travel by world leaders is mainly about making symbolic gestures. Nobody expects President Obama to come back from China with major new agreements, on economic policy or anything else.
But let’s hope that when the cameras aren’t rolling Mr. Obama and his hosts engage in some frank talk about currency policy. For the problem of international trade imbalances is about to get substantially worse. And there’s a potentially ugly confrontation looming unless China mends its ways. ...
Despite huge trade surpluses and the desire of many investors to buy into this fast-growing economy — forces that should have strengthened the renminbi, China’s currency — Chinese authorities have kept that currency persistently weak. They’ve done this mainly by trading renminbi for dollars, which they have accumulated in vast quantities.
And in recent months China has carried out what amounts to a beggar-thy-neighbor devaluation, keeping the yuan-dollar exchange rate fixed even as the dollar has fallen sharply against other major currencies. This has given Chinese exporters a growing competitive advantage over their rivals, especially producers in other developing countries.
What makes China’s currency policy especially problematic is the depressed state of the world economy. ... China’s weak-currency policy exacerbates the problem, in effect siphoning much-needed demand away from the rest of the world into the pockets of artificially competitive Chinese exporters.
But why do I say that this problem is about to get much worse? Because for the past year the true scale of the China problem has been masked by temporary factors. ...
That, at any rate, is the argument made in a new paper by Richard Baldwin and Daria Taglioni of the Graduate Institute, Geneva. As they note, trade imbalances, both China’s surplus and America’s deficit, have recently been much smaller than they were a few years ago. But, they argue, “these global imbalance improvements are mostly illusory — the transitory side effect of the greatest trade collapse the world has ever seen.”
Indeed, the 2008-9 plunge in world trade was one for the record books. What it mainly reflected was the fact that modern trade is dominated by sales of durable manufactured goods — and in the face of severe financial crisis and its attendant uncertainty, both consumers and corporations postponed purchases of anything that wasn’t needed immediately. How did this reduce the U.S. trade deficit? Imports of goods like automobiles collapsed; so did some U.S. exports; but because we came into the crisis importing much more than we exported, the net effect was a smaller trade gap.
But with the financial crisis abating, this process is going into reverse. Last week’s U.S. trade report showed a sharp increase in the trade deficit between August and September. And there will be many more reports along those lines.
So picture this: month after month of headlines juxtaposing soaring U.S. trade deficits and Chinese trade surpluses with the suffering of unemployed American workers. If I were the Chinese government, I’d be really worried about that prospect.
Unfortunately, the Chinese don’t seem to get it: rather than face up to the need to change their currency policy, they’ve taken to lecturing the United States, telling us to raise interest rates and curb fiscal deficits — that is, to make our unemployment problem even worse.
And I’m not sure the Obama administration gets it, either. The administration’s statements on Chinese currency policy seem pro forma, lacking any sense of urgency.
That needs to change. I don’t begrudge Mr. Obama the banquets and the photo ops; they’re part of his job. But behind the scenes he better be warning the Chinese that they’re playing a dangerous game.

November 14 2009

"The Illusion of Improving Global Imbalances"

Richard Baldwin and Daria Taglioni warn that the recent improvement in trade balances brought about by the recession is likely to be temporary since the underlying forces generating global imbalances are still present, and " the recovery of trade flows – a recovery that seems to have started this summer – will almost surely return the US, Germany, China and others to their old paths."

Remember all the talk before the crisis about whether we'll have a hard landing or a soft landing when global imbalances unwind? That's still an important question, and the fact that we cannot rule out a hard landing (with the accompanying rise in interest rates, rise in inflation, fall of the dollar, and a recession) means we will need find a way to reduce these pressures without triggering another crisis A key factor will be how the US manages the budget deficit in the future (which is definitely not a call to begin balancing the budget now, that's a task for better times). If the recent increase in US savings rates persists, that will help as well:

The illusion of improving global imbalances, by Richard Baldwin and Daria Taglioni, Vox EU: They are blamed for the global crisis directly (Paulson 2008) or indirectly (Calvo 2009), G20 leaders are committed to ending them, and commentators have generated an ocean of html painting them as one of the world’s greatest banes. “They” are global imbalances – large trade surpluses and large trade deficits.
Good news then – global imbalances have been shrinking at a fabulous rate (Figure 1). The figure – which includes China, Germany, the US and all the other usual suspects in the global-imbalances saga – shows that trade gaps have closed remarkably quickly since late 2008. ...
This rapid improvement seems odd given how little reform has occurred. The renminbi has not appreciated against the dollar and Chinese consumption has not boomed; the dollar has depreciated modestly against European currencies and the US savings rate has risen gently, but neither seems large enough to account for the massive shifts already observed, to say nothing of the World Bank predictions for future improvements.
We argue here that these global imbalance improvements are mostly illusory – the transitory side effect of the greatest trade collapse the world has ever seen. Before making the argument, we lay out the basic facts.
The trade collapse
Since late 2008, global trade flows collapsed in a historically unprecedented manner (Figure 2...). As the figure shows, global trade has suffered large blows on three previous occasions in the post-war period but this one is substantially larger.
The old “Quad” (EU, US, Japan, and Canada) plus China account for over 60% of world trade. They all saw their exports and imports plummet dramatically, as did the other nations listed in Figure 3. (These 11 nations account for three-quarters of world trade.) Each of these trade flows dropped by more than 20% from 2008Q2 to 2009Q2.
Causes
With the recession at hand, a trade drop is unsurprising; what shocks is its magnitude. Freund (2009) averaged the world GDP and trade drops for four large recessions (1975, 1982, 1991, and 2001) and found that the trade drop was 4.8 times larger than the GDP drop. This time, global quarter-on-quarter GDP growth was negative in the fourth quarter of 2008 and first quarter of 2009, but over the period of the great trade collapse (2008Q2 to 2009 Q2) IMF data shows world GDP actually rising by 1.5% while global trade dropped about 15%.
Economists around the world have been working hard to understand the causes of this unusually large trade shut down. The findings of over 20 studies will be summarised by the researchers in a VoxEU.org e-book The Great Trade Collapse: Causes, consequences and prospects to be released 27 November 2009 (in time for the WTO Ministerial). The emerging consensus is that this is mostly a demand-side phenomenon with two distinct but mutually reinforcing channels of transmission:
  • Commodity prices collapsed with world demand sending the value and volume of commodities trade diving by double digits (food, fuels and raw materials make up a quarter of global trade).
The basic facts are clear from Figure 4; 2007 and 2008 saw a rapid rise in food and fuel prices that collapsed in the summer of 2008 – well before the Lehman’s debacle.
  • Supply-chain manufacturing collapsed as the Lehman’s-induced shock-and-awe caused consumers and firms to wait and see; private demand for all manner of ‘postpone-able’ consumption crashed.
The manufactures trade drop was amplified many times over by “compositional” and “synchronicity” effects. ...
Looking forward
Taking as read that the great trade collapse was primarily driven by a sudden, synchronised and severe drop in demand, it is clear that trade will recover as demand recovers. Indeed, trade is already bouncing back at a fairly spectacular rate. While the bounce is impressive, it is not unexpected. Indeed all the post-war trade collapses have been followed by very rapid recoveries in trade flows, as Figure 5 shows. The chart plots the three major trade collapses highlighted above. In the 1982 and 2001 episodes, trade returned to its pre-crisis level in two or three quarters after the nadir; the 1975 crisis took four quarters.
Using the mean of these historical adjustment paths, we can guess the future evolution of world trade in the next few quarters. If 2009Q2 turns out to be the nadir – as the monthly data suggests – world trade should be back to its 2008Q2 level by 2010Q1 or Q2. ...
Concluding remarks
Do global imbalances matter? Is their continued existence driving the world economy towards another global crisis? These are questions on which macroeconomists have not yet formed a consensus. The IMF and World Bank have calmed the waters by projecting reductions in the imbalances of the world’s largest trading nations – especially China and the US.
This column points out that these projections of improving imbalances are almost surely wrong. The rapid collapse of trade between the third quarter of 2008 and the first quarter of 2009 improved most balances of trade. It could not have done otherwise; if both imports and exports drop rapidly, the gap between them drops equally rapidly. In the same mechanistic manner, the recovery of trade flows – a recovery that seems to have started this summer – will almost surely return the US, Germany, China and others to their old paths. ...

November 03 2009

"Death by Renminbi"

Thomas Palley says China's currency policy must change:

Death by Renminbi, by Thomas I. Palley, Commentary, Project Syndicate: Over the last several weeks, the dollar's depreciation against the euro and yen has grabbed global attention. In a normal world, the dollar's weakening would be welcome, as it would help the United States come to grips with its unsustainable trade deficit.

But, in a world where China links its currency to the dollar at an undervalued parity, the dollar's depreciation risks major global economic damage that will further complicate recovery from the current worldwide recession.

A realignment of the dollar is long overdue. Its overvaluation began with the Mexican peso crisis of 1994, and was officially enshrined by the "strong dollar" policy... That policy produced short-term consumption gains for America,... but it has inflicted major long-term damage ... and contributed to the current crisis.

The overvalued dollar caused the U.S. economy to hemorrhage spending on imports, jobs via off-shoring, and investment to countries with undervalued currencies.

In today's era of globalization, marked by flexible and mobile production networks, exchange rates affect more than exports and imports. They also affect the location of production and investment.

China has been a major beneficiary of America's strong-dollar policy, to which it wedded its own "weak renminbi" policy. As a result, China's trade surplus with the U.S. rose... The undervalued renminbi has also made China a major recipient of foreign direct investment, even leading the world in 2002 ― a staggering achievement for a developing country.

The scale of recent U.S. trade deficits was always unsustainable...
But China retains its undervalued exchange rate policy... When combined with China's rapid growth in manufacturing capacity, this pattern promises to create a new round of global imbalances.

China's policy creates adversarial currency competition with the rest of the world. ... Furthermore, the problem is not only America's. China's currency policy gives it a competitive advantage relative to other countries, allowing it to displace their exports to the U.S. ... Yet a mix of political factors has led to stunning refusal by policymakers to confront China.

On the U.S. side, a lingering Cold War mentality, combined with the presumption of U.S. economic superiority, has meant that economic issues are still deemed subservient to geo-political concerns. That explains the neglect of U.S.-China economic relations, a neglect that is now dangerous to the U.S., given its weakened economic condition.

With regard to the rest of the world, many find it easy to blame the U.S., often owing to resentment at its perceived arrogance. Moreover, there is an old mentality among Southern countries that they can do no wrong in their relationships with the North...

Finally, all countries likely have been shortsighted, imagining that silence will gain them commercial favors from China. But that silence merely allows China to exploit the community of nations.

The world economy has paid dearly for complicity with and silence about the economic policies of the last 15 years... It will pay still more if policymakers remain passive about China's destructive currency policy.

Our problems are not China's fault.

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