Showing posts with label exports. Show all posts
Showing posts with label exports. Show all posts

Friday, October 27, 2017

The Receding Chinese-American Economic Paradigm in 2011: Imbalances within Mutual Benefit

“For decades,” according to The Wall Street Journal, “plentiful Chinese labor kept down costs of a range of goods bought by Americans.” Then, roughly in 2010, the Chinese government began supporting higher wages to reduce labor unrest and boost domestic consumption while reducing reliance on exports. Partially as a result of this, the world saw higher prices for commodities in 2011; oil was another factor as protests in the Middle East increased political risk in the calculations of future supply (amid speculation). A shrinking workforce in China was also putting pressure on the labor cost. Even though relatively cheap labor was still in the interior of the country, higher transportation costs mitigated the cost advantage. The prevailing paradigm was showing cracks. To be sure, it certainly had them.

In that paradigm, inflation was “damped pretty dramatically in the U.S. because it exported work to China and other places at 20% or 30% of the cost,” Hal Sirkin of the Boston Consulting Group said. Imports into the U.S. from China had increased China’s foreign currency reserves to over $3 trillion in the first decade of the twenty-first century; two-thirds of the reserves were U.S. dollars. The Chinese government used some of those dollars to purchase U.S. Treasury bonds; those purchases in turn relieved pressure on U.S. interest rates to increase. The continued cheap credit made it more possible for American consumers to purchase Chinese imports. It was a marriage of Chinese workers and American consumers, with both governments happy to oversee the nuptials.

Although in some ways good for all parties, the positive feedback loop made it difficult for China and the U.S. to have balanced economies. China relied too much on exports—with a supportive yuan currency making them artificially cheap for Americans—while the U.S. was enabled to accumulate trillions in additional federal debt without much self-discipline.  Therefore, from the rising labor costs in China and the related emphasis on domestic consumption (and a slowing appreciating yuan), inflation in both China and U.S. could be expected. It is no coincidence that the price of gold was quite high as the paradigm began to shift.

As the paradigm began to shift, it could be expected that should the Chinese foreign currency reserves be reduced, less foreign demand of U.S. Treasury bonds could eventuate, which in turn would put pressure on U.S. interest rates to increase. The rates could increase anyway to thwart the import-led inflation even if there is not excessive money supply. In other words, it could be expected that the imbalances in the slipping paradigm would give rise to corresponding imbalances afterward.

It is perhaps all too easy for us to tolerate imbalances as long as there is an overall equilibrium. China’s increasing dollar reserves and the U.S. Government’s increasing debt could co-exist with a tacit agreement wherein both Chinese workers and American consumers would benefit. Mutual benefit is not, however, a sufficient justification for tolerating fundamental imbalances either within a country or in the global economy.  For a sustainable economic paradigm, mutual benefit is necessary but not sufficient; they system as well as its parts should be in balance. To insist on this amid mutual benefit requires self-discipline because part of the benefit is spent in the restoration and playing out of balance. It is thus perhaps not an accident that the paradigm of imbalances amid mutual benefit was dominant for decades; the system itself might tell us something about modernity and ourselves.


Source:

Shai Oster, “China’s Rising Wages Propel U.S. Prices,” Wall Street Journal, May 9, 2011, p. A2.



Sunday, July 30, 2017

The Spanish Recovery: On the Roles of Budget Constraints and Exports

In 2007, the E.U. state of Spain “was hopelessly addicted to a credit-fueled construction boom that produced a shattering bust, leaving banks collapsing in the face of bad loans.”[1] A decade later, the state’s economy was “expanding at around 3 percent” over the previous year, “producing goods for export, generating jobs,” and pointing to possible E.U.-wide economic recovery.[2] The Spanish economy had returned to its pre-crisis size, according to the state’s government, yet the economy had not yet solidified a firm foundation and unemployment was still stubbornly high.

Although the credit-based building boom was doubtlessly not sustainable and fraught with risk, the ensuing budget austerity mandated at the federal level inhibited the state’s government from spending more money “on infrastructure projects to generate jobs.”[3] Contracting government spending exacerbates rather than ameliorates an economic downturn, even if deficits go up. The federal law on state deficits being at or below 3.5% of a state’s GDP did not have enough flexibility for the Spanish government to be able to minimize the period of the downturn. 

Hence, The New York Times concluded at the time of the recovery, “Spain’s resurgence is less cause for celebration than a grim reminder of how long it took.”[4] That is to say, the steep unemployment level, which had reached 25 percent, need not have endured as long as it did. Even in 2017, the unemployment rate remained above 18 percent (near 39 percent for the state’s youth).[5] 

It is difficult, therefore, to see even a return to the size of the economy before the debt-crisis as a recovery. To be sure, exports had grown “to close to one-third from about one-fourth of the economy,” and such an economic engine is clearly more stable than an over-leveraged construction-led economy.[6] An economy fueled by consumption-buying from within would be more stable still, however, and the stubbornly high unemployment rate attests to why such a solid foundation had not yet materialized. Even though the large SEAT auto-factory put €3.3 billion (about $3.8 billion) of new machinery into the operations, relying on one company for the surge in exports is not as solid as a diversified export-base.

To be sure, the increasing tax revenue in the state, albeit very modestly, enabled more money to flow back into the economy. Work on the long-planned expansion of the Barcelona subway system, a €6.8 billion project, had resumed. Yet such an infusion was needed especially during the crisis and in the ensuing years of extremely high unemployment.  The inflexible federal strictures of budget discipline did not allow for such counter-cyclical measures even in a rather extreme cyclical downturn.

Related: See Essays on the E.U. Political Economy, available in print and as an ebook at Amazon.com.


[1] Peter S. Goodman, “Spain’s Long Economic Nightmare Is Finally Over,” The New York Times, July 28, 2017.
[2] Ibid.
[3] Ibid.
[4] Ibid.
[5] Ibid.
[6] Ibid.