Trade War

Trade negotiation is inevitable, while trade wars are rare. Will today’s actions lead to a trade war? Much of the discussion of a looming trade war comes from those who emphasize that the US has a trade deficit with many countries. This means that we buy more from those countries than they buy from us. Thus, they have much more to risk in a trade war. We buy a lot from them and if we stop buying it will harm those countries mortally. 

There is nothing wrong with that logic except that it is incomplete. It focuses only on the bilateral relations between us and them. The bigger picture examines the importance of trade to the USA and its main trading partners. 

Let’s begin with a review of the countries that purportedly take advantage of us in the USA. President Trump’s goal is to reduce bilateral trade deficits. Below I list the biggest bilateral US trade deficits in billions of dollars in 2017:

            China             $375

            Mexico              71

            Japan                 69

            Germany           64

            Vietnam             38

            Ireland               38

            Italy                   32

            Malaysia            25

            India                  23

            South Korea      23

(Also among the top 15 countries are Thailand, Canada, Taiwan, France, and Switzerland.)

According to President Trump those countries are the “bad actors.” Notice that China holds a special distinction because the US trade deficit with that one country roughly equals the trade deficit with the next nine. China and the others, according to the logic discussed above, ought to cave soon because they sell so much to the USA. If we tax all that inflow to the US, it could hurt them a lot.

Let’s widen the story. Think about the importance of trade to these countries. The next table shows the total trade deficit of each country – the trade deficit of each country with the rest of the world. That deficit is presented as a percentage of each country’s GDP. Note that the corresponding number for the USA in 2017 was 2.8%.

           

            China             Surplus

            Mexico             1.4

            Japan                3.9

            Germany       Surplus

            Vietnam            6.2

            Ireland              0.9

            Italy                  1.4

            Malaysia           3.0

            India                 6.4

            S. Korea        Surplus

The point? These countries, except China, Germany, and South Korea, have trade deficits too.  How willing do you think they will be to making their deficits larger so that the US can have a smaller one?

Next, let’s turn to imports. If President Trump had his way, we wouldn’t import anything, except for maybe Cognac and a cigar or two. But he wants the bad actors to buy more from us. He wants them to import more. Below I report each country’s imports as a percentage of its GDP. US imports were 15% of GDP in 2017.

 China               18%

            Mexico            40

            Japan               15

            Germany         40

            Vietnam          99

            Ireland            88

            Italy                28

            Malaysia        64

            India               22

            South Korea   38

The point? These countries love imports even more than we do. But how much more can a country import when it already has a trade deficit? How much more of US exports can they consume?

It is nice to think that we are being taken advantage of by the rest of the world. But the larger truth is that many countries have trade deficits and already import a lot of goods and services. This reality is surely going to stiffen their backs as the US tries to solve its own trade problems by limiting imports to the US and raising exports to the rest of the world.

           

Uncivil Behavior

I hear more and more discussions about uncivilized behavior. It seems very uncivil for people to be uncivil. It’s not very civil. The synonyms polite and courteous come to mind when we think about civil behavior. The uproar over our President’s uncivil behavior is both warranted and, I think, a bit overbearing.

Warranted? Of course. We want our presidents to act presidential. A president should be calm and wise and strong and a model of behavior for nine-year old boys and girls. He or she should wear lovely appropriate clothing with nice ties and grey business suits. When President Trump tweets and sometimes when he speaks at pep rallies, he seems more like a football linebacker’s coach than a president. His critics call him crazy but many of them have never been around some of my relatives. If you want to see crazy, that’s crazy.

So the hullabaloo over President Trump’s behavior is warranted. Only Roseanne Barr can create more of a stir. But is it all a bit overbearing? Are the critics a bit disingenuous?

My first point is that while we live in a very educated and civilized society, most of us do not always act civilly. My son is very civil. But when he feels that a driver needs a little education, he is quite colorful in how he provides the necessary education. Admit it, even your favorite philosophy professor has flipped off a driver who cut her off. Civilized? When you careen down a narrow hallway reading the latest exciting tweet from your mother on your iPhone and make everyone else jump out of the way, that’s not exactly civilized. And what about that stream of four-letter words that escape your once pristine mouth cavity when your cable goes out in the middle of penalty kicks? 

My first point is simple. We are very civil people who act civilly most of the time but when we think it is warranted, we act more like the Sharks at a Jets reunion party. So now the question is not if President Trump acts uncivilly, but under what conditions it might be okay for any president to on occasion act like a maniac. It might be to educate someone who proves hard to educate. We sometimes say it takes a two-by-four to get someone’s attention. Or it might be that it is simply hard to convince someone that he must change an old practice. You can’t teach an old dog a new trick. Maybe you can – but you must speak louder or carry a bigger dog biscuit.

That gets me to President Trump. While many of you romanticize the civility and beauty of our foreign friends, the truth is that managing relationships with foreign leaders is not much easier than planning a wedding. A country is defined as foreign because the people in that country have chosen not to have English as their national language and they insist on singing their own national anthems at sporting contests. They also seem to prefer employment for their own citizens, and if you ever decided to bottle your latest batch of brandy under the name of Armagnac, you would find your French friends are no longer so friendly. America first? Hmm. How about France first? How about Germany first? Is it not clear that China is first?

Point? Even with our closest foreign friends, the relationships are contentious. Just like you and your best friend Howie when you got into that fight over who is best, the Beatles or the Stones. Being best friends brings out both the best and the worst in us. Inasmuch, having a tough stance and using rough words with Canada does not mean we like Russia better than Canada. It just means there might be a lot at stake between close neighbors who each care very much about their own citizens.

Back to the two-by-four. The world in 2018 is not the world of 1946. Europe has more than overcome post-World War II rebuilding. Many Asian countries including China are not the poorest backward nations of the world. The economic relationships between the US and these countries are also not the same as they were 50 or more years ago. But it is very possible that there are remainders or vestiges of economic policies that do not treat the US equally in 2018. The world has changed, and the policies must mirror those changes. 

Changing those policies is not easy. Many Americans are frustrated that a patient, civil approach doesn’t change things fast enough. Somehow we have to get the attention of our friends so they fully understand that the most current relationships do not reflect the shrinking economic gap between the rich US and its trading partners. I don’t mind a little uncivil language and tough bargaining if it means that we move economic relationships to more appropriately parallel true economic disparities. The risk of tough talk and actions is more of the same. That's not what we want. We do not want a trade war or any kind of war. But knowing that our partners have their own domestic situations to protect, it won't be easy to get their attention. Continuing the same civil approaches we used in the past might not be enough.

Globalization and the Trumpaline

A trampoline is a thing you jump on. If you get really good at it you can do flips and all sorts of amazing gymnastic maneuvers. Right now everyone is jumping on Donald Trump so I thought I would jump on him too. Let’s call this a Larry Cannonball on the Trumpaline.

I will leave all the exciting stuff to other people and focus on the one thing that I think I know a little about – industrialization and globalization. Okay smarty pants – those are two things but in some ways they amount to the same thing because they are known to chew up jobs. Industrialization is a force that has been going on for centuries but it got a very hot reputation when it resulted in tractors replacing horses and plows. 

Ever since then we acknowledge that new technologies and innovations destroy jobs. Of course, we have also learned that while each significant industrialization phase creates its own destabilizing impacts the net result takes time and usually leads to not only more national employment but also higher wages and incomes.

Lauren’s great grandpa used to be the guy who blew out the candles in all the street lamps in Bloomington. Electricity knocked him out of work but that whole electricity thing also led to cool inventions like vacuum cleaners and blenders and pretty soon all sorts of people had great jobs as electrical engineers and bar tenders. If you take a big swig of JD, close your eyes, and think about your life you can easily think of all the labor-displacing inventions that caused similar disruptions but eventually came to be ho hum. I make light but these are no small things. When the textile industry abandoned the NE part of the US – it wasn’t very funny to those displaced by the invention of air conditioners that made work in the South more tolerable. Now we all say "yawl" and I "guarandamnteeit".

Most of us don’t fight industrialization very hard. We know it works. We like the fact that all those street lamps can be turned off with the push of one button and we like the fact that we can afford vacuum cleaners and bartenders. One of the reasons we have social programs is to try to make the transitions a little gentler. Helping those persons who become unemployed or otherwise disadvantaged by change is both good for the head and the heart. So we usually embrace change. Some of us love change but that is not necessary so long as society allows these transitions. The truth is in the pudding since not many of us are demanding a return to the horse and plow.

That brings us to globalization. Globalization is pretty much the same thing as industrialization except it allows us one more angle – the good guys (us) versus the bad guys (foreigners). Globalization is the same as industrialization because it does the same things – it creates havoc for some people while opening up avenues for growth and change for the rest of us. If a company closed operations in Indianapolis and reopened in Guadalajara Mexico you could hear the labor union and Donald Trump screaming all the way to the South Pole. How dare those blankety blanks leave Indianapolis to go to Mexico? They must be national traitors and they should be hung in the public square or in the Hoosier Dome.  Trump has made it very clear that he will make America great again by pulling all those companies back to Indianapolis and Detroit. Hillary Clinton is saying similar things. 

It sounds great. Let’s save American jobs. How can one argue with that? For one thing, it amounts to asking us to return to horses and wooden plows. Industrial transitions do not just occur in America. Now that dozens of countries are freer to compete in global markets the marketplace for change is everywhere. New ideas and innovations that improve our lives are developed and sold everywhere. To think that all that stuff would always be made in America does not make any sense. China will be the best place to make some items but even China is outsourcing output to Vietnam. Mexico will be a place of manufacturing for other things and they will outsource some of their supply chain to Chile. To think that Donald Trump or anyone else can or should fight globalization is silly.

For another thing fighting globalization means voting against change and the transitions that actually make American workers worth what they want to earn – close to $50,000 per year. We talk about greedy US companies who want to go to Mexico to take advantage of lower labor costs in Mexico. Now they are greedy. Yesterday and for how many years were those same companies employing American workers? Unions might complain about this or that but the truth is that many people raised families for decades because of the jobs offered by these companies. Were they greedy then? I don’t know whether they are more or less greedy today. What they are doing is fighting to succeed and in some cases to survive.  Competition across the globe is intense. To not change is to die.

So long as the average income of educated and/or trained workers in many emerging markets is less than $10,000 per year it is pure folly to think that US workers hired at $50,000 will offer the best place to do business.  To save the company and American jobs, a US multinational will move some operations out of the US. Of course to save the remaining jobs they will continually have to improve productivity of the domestic workforce or even the higher skilled jobs will be threatened. Think of wave after wave of enemy combatants coming after your defensive position. Building a bigger wall might work for a while. But what you really need is an advantage.

Trump vilifies other countries for trying to come into the global economy and for daring to compete with the USA. The only real solution to this challenge is not to regulate US companies but to unleash them. Making America great means American companies winning in the global marketplace. It means change and growth. Don’t tell me that centuries of US growth are over. Tell me we have a plan to empower US companies so they can do what is necessary to continue producing good jobs and incomes in America.  The world is not always a fair place. Making it even less fair isn’t the solution. We have so many advantages over emerging market competitors they are impossible to list. We should use them and quit bellyaching!

Outsourcing Common Sense and US Jobs

President Obama quoted others in calling Romney and his past colleagues at Bain Capital “Pioneers at Outsourcing.” The President smiled and puffed out his chest as he proclaimed that in contrast he was the one who saved the auto industry.  Romney denied that either he or Bain Capital were responsible for outsourcing. But given the chance he did not take the opportunity to stand up for free trade. Thus they both want us to think that outsourcing is something evil that hurts US employment. As an aside, I think they used the wrong word – outsourcing instead offshoring. Their rhetoric works better for locating businesses abroad. But I suspect they like neither offshoring nor outsourcing.Both appear to hurt US employment. But keep reading please...

One quick thing to ask the President… he proudly bailed out the auto industry.  Is there any other industry that has done more offshoring of jobs? Does GM not have a plant in virtually every country of the world? Why is he so proud of saving the auto industry when he is so against offshoring? Has he vilified GM for all those jobs created abroad rather than at home? Why is it okay for GM to offshore but not okay for Bain to help other companies who want to offshore?

Those of you who are very worried about employment in the USA want your politicians to stand up for jobs in America. The disappointing labor department report last Friday underscored our concern for jobs.  But please, both these guys are agreeing on the wrong thing. Yammering against globalization is just wrong. It is very wrong.  Obama continues to take his eye off the ball. Employment suffers in the US because we have no fix for finance, housing, and a fiscal cliff. Yet he finds something new to talk about each week – he will talk about anything that diverts our national attention from what matters.  Romney does not do much better. I don’t care if he worked for Bain Capital or Micky D’s – I want a clear exposition of what he is going to do as President. Neither of these guys lived normal lives with paper routes and lemon-aid stands. I doubt either one would know the right end of a lawn mower.  Get over it. Both are running. What are they going to do once they get into office? This offshoring thing is a red herring.

Both these guys think they can score points with workers by pointing out that outsourcing/offshoring (o/o) hurts national employment. But stopping o/o is not going to save US jobs. It is important to see that o/o is not much different than importing goods and services from abroad. If we o/o or if we import we are buying things that are produced abroad rather than at home. On the surface it sounds pretty bad to import or to outsource. But luckily that is not the whole story.

We cheer for our good guys when export sales increase. When a firm on US soil sells more peanut butter to China, we acknowledge the extra jobs that are created in the US. Imports do just the opposite. Imports are goods that we buy and consume here that are produced abroad by workers in Brazil or Spain or Botswana. Clearly if those goods were produced at home this would create more job opportunities for Americans. But what has the president done about imports? During his watch US imports from the world increased from $2.54 trillion in 2008 to $2.66 trillion in 2011.  In 2011 US exports to the world were $2.1 trillion so we had a net deficit in goods and services of more than half a trillion dollars. That half a trillion dollars represents the difference between jobs gained through exports and jobs lost through imports. That’s a lot of jobs.  Why isn’t Mr. Obama traveling around in his fine bus ranting about all those imports? Clearly neither he nor previous presidents wanted to stop this trade deficit. It has gone on for decades. A Buy America program has done almost nothing to reverse all this.

Why is it okay to let imports replace US jobs but not to let o/o do the same? The answer is that it isn’t okay. Globalization is a two-way street. We all realize that you can’t have exports without imports. You can’t have in-sourcing without out-sourcing. A policy to reduce imports or o/o would surely hurt our exports and the desire of foreigners to invest here. Worse yet, it would be very inefficient and costly. Many imports reveal our own decisions to specialize. Importing things where we have no real business edge makes no sense. It would simply mean less choice and higher prices.  That is not what we are after.

Along similar lines, it makes sense to produce abroad rather than at home.  China and other parts of Asia are growing rapidly. They need a lot of goods to support the growth. Given the distance and cost of traversing it – it often makes sense to produce for those markets in Asia. Producing in the US would be more costly and we might lose in the competition with Asian, German, and other firms who also want to serve those markets. The reason the President doesn’t rail again GM plants abroad is that he knows that a global foot print makes GM a stronger company and more able to sustain its jobs at home as it spreads employment and production around the globe.

Why has Obama been so silent about the recent decision of Airbus to locate a production facility in Alabama? Obama does know that Alabama is one of the 57 US states, doesn’t he? I realize Alabama is a right-to-work state but even non-union workers count in the national employment statistics, don’t they?  Why did Airbus decide to locate in the US? Did they do it to irritate French workers? The Wall Street Journal says the location decision was made because Airbus wants to be able to produce for the US government. To be competitive in government procurement a company must have factories in the US. Is it not possible that many US companies locate abroad for similar reasons – whether they serve government or private purchasers? Isn’t Airbus made stronger by locating a plant for US buyers in the US? Are not jobs in France and other places in Europe made that much more secure because Airbus is stronger? So it makes sense for France and other countries to o/o.

Let’s take a look at offshoring in a comparative sense. You will see below that the US is just doing what everyone else is doing. We are clearly not alone.   In 1990, the US owned $732 billion in foreign capital (Foreign Direct Investment, FDI*. A more complete definition of FDI is given below.) That is, US cumulative purchases over many decades of foreign productive capital across the globe amounted to $732 billion. That amounted to 13% of our GDP in 1990. We have since experienced more than 20 years of rapid globalization and now own $4.8 trillion capital abroad. That amounts to an almost 7-fold increase. FDI was 32% of GDP in 2010. Offshoring is very evident for the US.

The below table compares the US to 10 other countries and the EU: (this data comes from the United Nations Web Table 8. FDI outward stock as a percentage of GDP, 1990 to 2011. Stock values are in trillions of dollars). http://archive.unctad.org/Templates/WebFlyer.asp?intItemID=6018&lang=1

The stock of FDI owned by the EU was almost twice as large as that for the US in 2010.  The listed countries own from $340 billion (Switzerland) to $1.7 trillion (UK) of FDI in other countries. What matters more, however, is how large the ownership compares to the size of the country.

For the Netherlands, FDI was 123% of the economy in 2010.  The US position was 32% which ranks it about 9^th in this list – at par with Australia. Only Japan and Italy have FDI lower as a percent of the economy than the US.

Consider the increases in dollar value since 1990. The US FDI increased 7 times. That sounds like a lot but over these 20 years only Japan had slower growth in FDI at 4 times. Spain’s FDI increased 41 times! The median country’s FDI increased 8 times. Spain, France, Switzerland and the EU all found FDI increasing in double digits.

Globalization means investing at home and abroad. Countries that don’t do it will lose out on opportunities and will not compete well. Between 1990 and 2011 US non-farm employment increased by 23 million jobs. Private sector jobs increased by 19 million. The New Age of Globalization saw American jobs at home increase by more than 20%.

                   Stock      FDI        Fold increase

                    FDI         %GDP       Since 1990

                    2010      2010

EU            $8.93tr      57%               11times

US              4.84        32                    7

UK             1.69        72                    7

France        1.52         62                  14

Germany     1.42         44                    9

Netherl         .89        123                   8

Japan           .82         15                    4

Spain            .66        46                  41

Canada        .62         41                    7

Italy              .48        24                    8

Austral         .40         32                  11

Switzerl        .34         80                   8

  

*FDI is meant to capture the value of purchases of companies abroad for the intent of management control. It does not include purchases of foreign stock that are made for the purposes of only financial investment. That is, most international bodies distinguish between FDI and portfolio investment. FDI involves the purchase of companies through merger, acquisition, or simply enough shares to lead to some managerial control. It also includes greenfield sites which would include building a new plant or business firm in a foreign country.

Currency Manipulation and the Wrong Super Hero

This week our US Senate is taking up the issue of China’s currency manipulation. It appears that we have an almost bi-partisan attempt to create even dumber international trade policy. The stock market hasn’t fallen enough – so our Senate has decided it can do even more to impoverish Americans. Way to go Reid! The Republicans who normally wouldn’t go along with this kind of stupidity (since they have their own kind of stupidity) seem to be worried that they need to play this populist card too.  Let’s blame everything on China. China– you bad. US Congress – we good.  So much for intelligent representation and policy!

What do these guys want to do? While the exact legislation is changing each day, the basic idea is that China depreciates its currency to create a competitive advantage for its exports. So we have legislation that would ask someone to calculate the degree of advantage China gets from currency manipulation and that would be fed into a Robot that would spit out the size of a tariff to apply to some or all of China’s imports into America. Sounds easy, right? Sounds fair, right? Sounds like it will save American jobs, right? Sounds like it will make 65 year old men more potent and attractive, right?

This reminds me of that cold day back in the 1970s when a car-full of Indiana University economists slid off a snowy highway between Terre Haute and Indianapolis and found themselves in a ditch wishing that a truck driver would stop and help them. We had a lot of PhDs in that car but no one who actually could figure out which end of the car to push. Luckily a truck driver did stop and offered some advice. He suggested that we push the car down further into the ditch and then floor it enough to drive out of the ditch. We concluded that this particular truck driver must have gotten his license from Purdue University and that there was no way in H___ that we were going to push the car down further into the ditch.  That was really stupid advice and even a bunch of professors knew it. We convinced the brawny driver to help us push the car upward and we were soon out of the ditch and on our way to Indianapolis. 

The point is that sometimes you really want to be rescued but sometimes you get a super-hero who just isn’t up for the task. In the case of China we in America feel threatened. We worry about China taking away our jobs and companies. So it is not wrong that we worry about how to better compete with China.  But this idea to tie US import tariffs to an estimate of Chinese currency manipulation is impossible to implement, will not increase US jobs and competitiveness, and will more than likely than not be counter-productive.

First, it is impossible to do. While we may have lots of theoretical models that might tell us how much China’s currency is under-valued, there are so many different ways to calculate this number that even a robot named Curly-Larry & Moe might sputter around in endless loops of break dancing. Then there is the small issue that implementing increased tariffs based on this number is not only novel but is illegal within the rules of the WTO. There is no precedent for this. While it sounds like a desirable thing to treat currency manipulation as a trade barrier worthy of reacting against, the WTO has not sanctioned this kind of retaliation. 

Then there is the question of other countries that routinely depreciate against the dollar to gain competitive advantage. Would it be proper and fair to only single out the Chinese? So are we really going to work Curly, Larry & Moe overtime on Brazil, and the others too? Do we really want to risk a global trade war right now?  In short it is really hard to find any way to actually implement this policy. It’s like making it illegal for Martians to own homes in Nevada. It sounds good to try to keep them out of Nevada – but I am not sure we have a good way to do this.

Second, this policy is not going to work. Notice that over the last years the Chinese currency has appreciated against the dollar. While it might have appreciated somewhat more, it is not the case that Chinese policy has been to reduce the value of yuan.  Other developing countries have done more.  Note also that these increases in the value of the yuan have not worked to reduce the US-China trade imbalance. So why would more work?

The answer is that it won’t work and it is because there are more fundamental factors at work causing the US to have a large trade deficit with China. Simply put, we in the USA make Miss Piggy look anorexic. We don’t save. We consume. The trade deficit is an expression of this imbalance. We buy from China and what we don’t buy from China we buy from other countries to meet our ever growing appetite for goods. If somehow we reduced our trade deficit with China, the spending would show up as a deficit with another country or countries. Of course China has a similar but opposite imbalance – they consume less and save more. This is perfect for us. We want to buy and they want to sell. Currency manipulation has very little to do with this. The problem is saving/spending and not currency values.  Altering fundamental attitudes and habits with respect to saving and spending is not something that can be done easily or quickly. Thus, our politicians would rather grasp at populist policies that do not work instead of doing the hard work of focusing on the real problems and solutions.

Finally is the recognition that it is counterproductive to focus our policy so strongly on currency manipulation and trade protection. Rome is burning and we throw gasoline on the fire. If this legislation were actually to be passed and signed by president Obama, we would not only be not addressing the real problems but we would be inflaming China and other countries. They know about our imbalances and they fully recognize protectionism when they see it. Other countries will not sit around and wait for us to focus on them next. Other countries are experiencing the continuing painful global slowdown and there is much populist demand for more protectionism in countries all over the world. 

Of course China has plenty of weapons beyond a simple trade war. How will we have served our own interests when China reacts by buying fewer US government bonds as the US government is trying to sell another $1.5 trillion of them? Or what happens if China aggressively sells the government bonds it already holds. W should not stir up trouble if there is nothing to gain. We should not stir up trouble if there is so much to lose! Instead, we should be the leader. We should be the leader for the right policies. We should not be the leader of a downward spiral of devastating protectionism.  If there are any real leaders in Congress we can only hope they will quickly step forward and put a quick end to this very harmful legislation.  

China is #2. China is #99. What should I think?

Today Bloomberg.com published a small article announcing – ta da – that China has overtaken Japan with the second largest GDP in the world, second only to the -  ta da – the USA. We’re number 1, we’re #1. Do the wave now.

Anyway, in the case of China, the numbers are very interesting. For example, the comparison reported today has both China and Japan at about $5 trillion in Gross Domestic Product.

Note that when you compare the GDP across countries, you have to put all country amounts into one currency. This currency is usually the dollar. So the $5 trillion is the result of taking the country’s GDP in its own currency (yen or yuan) and using current exchange rates to convert to dollars. That sounds straightforward enough were it not for the fact that today’s exchange rate might be a little weird. That is, today’s exchange rate might not truly represent the  fundamental market forces that “ought to move it in one direction or another.” Or one might say the exchange rate is out of long-term equilibrium. So being weird they don’t trust it and then put it in jail. Economist’s jail, that is.

With the current exchange rate in jail, experts create a substitute that better reflects fundamental market forces – or at least it better represents changes in relative country prices. If China has a cost advantage and that makes its traded goods prices more competitive than other countries, this leads to a Chinese trade surplus. 

Theory suggests that the value of the yuan should rise to clear that surplus. Thus, an economist would say that the equilibrium value of the yuan is really higher than today’s market value. They call this the PPP (purchasing power parity) exchange rate. I hate to say PPP because every time I type PPP I have to run upstairs to the bathroom. But that’s an old man thing so don’t get off track here.

When we use the PPP estimate of GDP to compare countries, China has been #2 for quite a while.  Go to Wikipedia to see that China’s GDP at PPP is double that of Japan’s. http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)  So while PPP does not change the ranking for Japan and China – it does give a very different picture – in one case the GDPs are the same – in the other case China’s is double that of Japan.

Okay – so one more statistic. Wikipedia also has a table with GDP at PPP per capita. We know China has a lot more people than Japan – so let’s see what happens when we ask how well the average person is doing. In that table, the US comes in 6^th, Japan is 23^rd, and China is 99^th. Yes, China was right behind economic super powers Guyana and Nimibia. Hmmm. http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)_per_capita

So what does all this mean? I don’t really know. Notice how I made this post really short. It would take a very long post to discuss all the economic, political, and astro-physical implications of all this. So I will leave it to my wacko friends to say more.

But I will say this. There are many dimensions to a country’s economic size or might. Naturally a country with the world’s largest population should have a large GDP. But how strong can a country be if its average citizen is extremely poor? And in the case of China, a lot of the goods produced and measured in GDP go elsewhere – so what the average citizen living in China gets is even lower than the reported GDP figures. Clearly it makes sense that the Chinese government would want to improve per capita GDP.  With so many people, this will only push China farther up the ranks in terms of its total GDP produced. To think that a country with roughly four times the population of the US would forever be behind in terms of GDP simply makes no sense. So you go girl!

Finally one more point – I know there are many, many errors in cross country measurement. You can’t really compare the price of oxen in China to those in the US. There are also many problems in determining the value of the PPP exchange rate. But don’t let those measurement problems deter you from my main message in this post. China is a large, poor country with designs to be richer. As they get richer per capita, they will gradually approach and then exceed the GDP of the US.  But they have an even longer way to go before the average person in China will enjoy the income, wealth, and economic freedoms that we have in the US. 

St. Patty and the Chinese Dragon, Yuan

Betty is in the kitchen pouring two very nice bottles of Guinness Stout over a perfectly innocent corned beef roast. While most of us in the USA have no idea why we drink Guinness, wear Green, and try to speak with an Irish accent every March 17, we gladly partake in the annual festival of St. Patty. Even if we are Jewish. Anyway, I digress. St. Patty had nothing to do with China or a dragon and I just said that to get your attention so I could spout off a little bit about the Yuan.

No the yuan is not a Chinese Dragon or an Irish Whiskey. Rather it is the official name of the Chinese Currency. We have a a dollar -- they have a yuan (also referred to as a renminbi, reminbi, or mean and ugly culprit leading to the demise of all red-blooded Americans.) The markets say that 1 yuan will get you about 14 cents. Or put the other way -- $1 will get you about 6.83 yuan.

For the last year and a half China returned to the practice of pegging the value of the yuan at 6.83 to the dollar. Previous to that, China was, more or less, letting the yuan/dollar exchange rate float. Market forces pushed the value of the yuan up -- meaning one could get more dollars with a yuan. The US government thought that was really cool since it meant that US goods and services would be cheaper to buy in China and all our problems would disappear, including teenage acne. But those fun days are gone and the Chinese have gone back to "pegging" at a value of 6.83.

That makes some of our people livid (imagine responsible government officials foaming at the mouth). So lately we see lots of stupid statements from both US and Chinese officials. "You guys are protecting your economy illegally." Other side retorts "No we are not. Na na na na na." "We are going to beat you up if you don't let your currency float." Retort -- "My mother's bigger than your mother."

This gets us back to my theme about spouting. Where is the cause and effect? Where is the rational approach to policy and international relations? Will letting the currency float again really make a big difference? Are we really getting anywhere?

Let me finish this rant with some questions....

If China lets its currency float, will its value rise against the dollar? Enough to make a major difference?

If it rises against the dollar, how big an effect will that have on US exports to China?

Speaking of exports to China, what does China usually buy from the US? Do they need/want more?

If China is not buying enough goods and services from the US, do we know why?

The last time China let the yuan float, what happened to US exports to China? To the trade deficit between US and China?

What do we buy from China? Why do we buy so much?

If the yuan rises against the dollar -- will US importers be filled with joy? How will that impact US households? How will that affect US business decisions with respect to prices they charge at home?

If the Chinese government stops buying dollar assets as their way to let the yuan appreciate, what will that do to US bond markets? US interest rates? Other US financial markets?

How do these changes in financial markets help/hurt our avowed US monetary policy to keep interest rates near zero for the foreseeable future so as to stimulate domestic spending?

China seems to be a fast growing but risky place -- if they bet the farm on trade surpluses then how will smaller trade surpluses help their national stability?

Is an unstable China a good thing for the USA?

As a developing country -- can China easily replace the foreign demand for goods and services with local consumer spending?

Who put the bop in the bopshebop who put the ram in the ramaramadingdong?

Looks like I ran out of questions and the smell of corned beef is wafting down into my basement office. This spout is all about approaching policies sensibly and without extremism. Is the exchange rate issue with China really as simple as some of our talking heads make out? I think not! Let's tell them to shut up until they have something useful and constructive to say.