Is China’s currency really responsible for US trade deficit?
America's trade deficit with China has hit a record $295bn. Many US politicians allege the imbalance is largely the fault of Beijing's manipulation of the renminbi currency, which makes China's exports artificially cheap.
However Yukon Huang of Bloomberg disagrees. According to Huang, €China's current- account surplus has declined steadily from 10 percent of GDP five years ago to less than 3 percent last year and is projected by some to decline even further. Moreover, officials in Beijing are perplexed that after they allowed the yuan to appreciate by almost 30 percent since 2005, critics still say the currency is undervalued, as if nothing had happened.€
According to Huang, the US trade deficit began in 1998 and peaked in 2005, while China's surpluses began in 2005 and peaked in 2008. Huang attributes China's surplus to €surging American consumption and fiscal deficits that fueled import demand; a maturing East Asian production network centered on China; and the ratcheting-up of China's savings rates.€
This would make the US-China trade balance €a regional, rather than a bilateral, issue€, because Chinese wages have risen as has productivity (but even faster). Exports with a high import content, facilitated by low import tariffs now constitute about half of China's trade volumes but make up all of its surplus.
Most of the value added for such components is sourced elsewhere. This is why South Korea, Japan and Taiwan all have surpluses. Added to China's surplus, they rose from US$30 billion in 2000 to over US$200 billion in 2010. According to Huang, €China's trade surplus with the U.S. originates largely from this North Asian trio.€
One should ask why America cannot produce much of what it needs, especially those high value and capital intensive components which are imported. Part of the surplus can be attributed to China's savings rate. The migration of 250 million migrants from China's rural interior to its urban coast is partly to explain.
Since these workers have been denied formal residency rights, they have saved more and consumed less. However over time, this is likely to change. Rural incomes are now rising fastest of all. With lower living costs and increased job opportunities (and residency rights), it is likely that the Chinese consumer will begin to spend more.
A stroll around Detroit in the US or the old cotton mills of the north of England make for a depressing site. Most of the developed world has shifted to post-industrial economies. There are exceptions. Germany still has a huge industrial base €" made up most visibly by cars and electronics, but also the Mittelstand companies which make smaller parts and components. Likewise Australia, Canada and to a lesser extent, Norway are incredibly mineral rich. Canada also has (for a developed country) an unusually large primary sector.
By and large however, the West relies on services, having off-shored and outsourced so much of its industry. For all the talk about reindustrialisation and making goods which the world wants, the developed world has not made significant strides in that direction. Only Germany with its cars seems to have seriously impacted the Chinese middle class. Even America's high-tech companies like Apple use the US as a design base not a production one.
For all talk of €jobs coming home€, so far those which have represent a huge minority. However the West has options. So far, it leads in the development of 3d printing €" especially the US and the UK. 3d printing could up-end the last two centuries of manufacturing, with the type of social, economic and political consequences which even the internet could not achieve.
For the last two centuries €" beginning with the Industrial Revolution €" goods have been produced by subtracting one piece of material from a larger piece, such as creating parts of an aircraft from a block of titanium.
While €subtractive manufacturing€ operates like a child cutting a shape out of a piece of paper, with €additive manufacturing€ a 3d design is turned into a computer file and sent to a printer which prints the design as a product, layer by layer €" often using polylactic acid €" which is derived from corn.
3d printing could bring manufacturing back to countries with stronger knowledge economies, where product design is superior. 3d printing could reduce production, packaging, distribution and transport costs. 3d printing could drive the transition from mass production to mass customisation, in which each product is customised at next to no additional cost. 3d printing could create new industries. Countries which master the production and maintenance of printers and cartridges would take the lead. Product designing would boom as software engineering did with the advent of mass computer production.
But just as with renewable energies, the current laissez-faire approach which works well in banking will not do for breakthrough technology. Indeed Britain and America became wealthy through a combination of small government and protectionism €" not the current one-size-fits-all model.
Instead of moaning about China and its intellectual property failings, the developed world should recover some of its old testicular fortitude and strive to become the world leaders in revolutionary technologies. If the developing world is hitting the bar which the West set, then the only way in which the countries of developed world can regain their position is to set a new bar. But all so long-term . . . can the short-termist developed world be bothered?
However Yukon Huang of Bloomberg disagrees. According to Huang, €China's current- account surplus has declined steadily from 10 percent of GDP five years ago to less than 3 percent last year and is projected by some to decline even further. Moreover, officials in Beijing are perplexed that after they allowed the yuan to appreciate by almost 30 percent since 2005, critics still say the currency is undervalued, as if nothing had happened.€
According to Huang, the US trade deficit began in 1998 and peaked in 2005, while China's surpluses began in 2005 and peaked in 2008. Huang attributes China's surplus to €surging American consumption and fiscal deficits that fueled import demand; a maturing East Asian production network centered on China; and the ratcheting-up of China's savings rates.€
This would make the US-China trade balance €a regional, rather than a bilateral, issue€, because Chinese wages have risen as has productivity (but even faster). Exports with a high import content, facilitated by low import tariffs now constitute about half of China's trade volumes but make up all of its surplus.
Most of the value added for such components is sourced elsewhere. This is why South Korea, Japan and Taiwan all have surpluses. Added to China's surplus, they rose from US$30 billion in 2000 to over US$200 billion in 2010. According to Huang, €China's trade surplus with the U.S. originates largely from this North Asian trio.€
One should ask why America cannot produce much of what it needs, especially those high value and capital intensive components which are imported. Part of the surplus can be attributed to China's savings rate. The migration of 250 million migrants from China's rural interior to its urban coast is partly to explain.
Since these workers have been denied formal residency rights, they have saved more and consumed less. However over time, this is likely to change. Rural incomes are now rising fastest of all. With lower living costs and increased job opportunities (and residency rights), it is likely that the Chinese consumer will begin to spend more.
A stroll around Detroit in the US or the old cotton mills of the north of England make for a depressing site. Most of the developed world has shifted to post-industrial economies. There are exceptions. Germany still has a huge industrial base €" made up most visibly by cars and electronics, but also the Mittelstand companies which make smaller parts and components. Likewise Australia, Canada and to a lesser extent, Norway are incredibly mineral rich. Canada also has (for a developed country) an unusually large primary sector.
By and large however, the West relies on services, having off-shored and outsourced so much of its industry. For all the talk about reindustrialisation and making goods which the world wants, the developed world has not made significant strides in that direction. Only Germany with its cars seems to have seriously impacted the Chinese middle class. Even America's high-tech companies like Apple use the US as a design base not a production one.
For all talk of €jobs coming home€, so far those which have represent a huge minority. However the West has options. So far, it leads in the development of 3d printing €" especially the US and the UK. 3d printing could up-end the last two centuries of manufacturing, with the type of social, economic and political consequences which even the internet could not achieve.
For the last two centuries €" beginning with the Industrial Revolution €" goods have been produced by subtracting one piece of material from a larger piece, such as creating parts of an aircraft from a block of titanium.
While €subtractive manufacturing€ operates like a child cutting a shape out of a piece of paper, with €additive manufacturing€ a 3d design is turned into a computer file and sent to a printer which prints the design as a product, layer by layer €" often using polylactic acid €" which is derived from corn.
3d printing could bring manufacturing back to countries with stronger knowledge economies, where product design is superior. 3d printing could reduce production, packaging, distribution and transport costs. 3d printing could drive the transition from mass production to mass customisation, in which each product is customised at next to no additional cost. 3d printing could create new industries. Countries which master the production and maintenance of printers and cartridges would take the lead. Product designing would boom as software engineering did with the advent of mass computer production.
But just as with renewable energies, the current laissez-faire approach which works well in banking will not do for breakthrough technology. Indeed Britain and America became wealthy through a combination of small government and protectionism €" not the current one-size-fits-all model.
Instead of moaning about China and its intellectual property failings, the developed world should recover some of its old testicular fortitude and strive to become the world leaders in revolutionary technologies. If the developing world is hitting the bar which the West set, then the only way in which the countries of developed world can regain their position is to set a new bar. But all so long-term . . . can the short-termist developed world be bothered?
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