Category Archives: Trade

"The World Economy Goes East"


Bill Easterly:

The World Economy goes East: should the West get hysterical?, by William Easterly: Danny Quah of LSE has a new article “The Global Economy’s Shifting Center of Gravity“. Here’s the shift, where black dots denote the easterly shift that has already happened 1980-207, and red dots the projected shift 2010-2049:


The future shift extrapolates current trends. This is iffy given how individual country growth is mean-reverting, but I will leave that for another day.

If the Economy indeed continued East this way, is this really bad for the West? Professor Quah does not address this in the article, but … the … answer is: Of course not. Economic growth is not an elimination tournament like the current NCAA basketball madness, where one team wins and the other goes home. When a previously poor part of the world gets richer, everybody wins.

Temporarily and illegimately assuming the role of official spokesman for the West,… the richer are our trading partners, other things equal, the more demand for our products, the more and better jobs created thereby, the more gains from trade, the more innovation as the extent of the world market grows, and the more we can benefit from the additional human capital and innovation happening in the East.

And then temporarily and illegimately becoming development spokesman: higher growth in the poorer East means catching up to the richer West. Isn’t that what we always wanted?

In sum, what’s not to like?

"The World Economy Goes East"
Mark Thoma
Tue, 22 Mar 2011 04:27:00 GMT

Q&A: Eichengreen on the End of Dollar Dominance


Barry Eichengreen, an economist at the University of California, Berkeley, and author of “Exorbitant Privilege: The Rise and Fall of the Dollar and the International Monetary System,” fielded questions from The Wall Street Journal’s David Wessel earlier this week. An edited excerpt:

In your book ,you predict that we, our children and grandchildren will live in a world in which the dollar is not the predominant world economy. Why should I believe that either the euro or the Chinese renmimbi, of all things, will grow up in the next decade to rival the dollar?

Eichengreen: People have been predicting the demise of the dollar for half a century. I do think the world is changing now in a couple of fundamental ways.
First, our children and grandchildren will live in a world where the Chinese economy is larger than the U.S. economy. Demographics, if nothing else, dictate that. It will make no sense for the dollar to be the only true global currency in a world where the U.S. accounts for 15% or 20% at most of real economic activity.
Second, the technology of finance is changing. Once upon a time, you could make the argument that there was only room in the world for one true global currency. The arguments in favor of the dollar were stronger than the arguments favoring the alternatives. I think the technology of finance is becoming more open. In a world where you can compare currency values on your smartphone, it’s easier for several true international currencies to coexist. So the question is which ones?

What would the Chinese have to do over the next decade in order to make the renminbi a serious rival or competitor to the dollar as an international currency?

Eichengreen: Step number one would be to encourage their firms and foreign firms to do their cross-border settlements – to settle their trade in China’s own currency. And you’re beginning to see that now, from a year ago when there were virtually no firms that did that. There are upwards of 40,000 firms now that are doing cross-border settlements in China’s currency.
Secondly, you would have to give firms that acquire Chinese renminbi through that means a way of investing them. China would gradually have to open its financial markets to foreign investors. They experiment with that in Hong Kong… a petri dish for financial innovations that they bring onshore. Subsequently, they would have to gradually open financial markets in Shanghai to offshore investors.
And the caboose on the train, the final step, would be to encourage foreign central banks to hold deposits and bonds denominated in China’s currency.
So the first step is happening now – the trade settlements. The second one, bond issuance in China’s own currency, is happening in Hong Kong. And I think in a matter of a few years they’ll experiment with that onshore. Ten years from now I continue to think is a realistic horizon for thinking about their currency being widely used in all manner of international transactions.
Will it be used as widely as the dollar? Probably not. We have a head start and we have the advantage of those deep and liquid markets. There’s another side to that coin, if you will: that we in the United States have to do the right things in order to preserve that advantage.

Is this a good thing for the U.S. if the dollar’s role in the world economy shrinks relative to Europe and China?

Eichengreen: It’s a mixed blessing. On the one hand, it has always been a considerable advantage – convenience to U.S. businesses and banks and individuals travelling abroad, that they could do their business in dollars. …
The other side of the coin is that I think it will also be a safer financial place for, among others, Americans. We had a period in the middle of the last decade when foreigners lent to us very freely. We were prone to financial excess: We engaged in frenzied real-estate speculation and they gave us more rope because they had an appetite for our dollars in order to finance their transactions – in order to hold those dollars as a form of insurance.
So I think in the future, they will not lend to us so freely. Market discipline will be felt more intensely in the United States. And if we’re again inclined to climb out on some financial limb, foreign investors won’t permit us to do that so freely.

But we’ve just been through an enormous recession where we were able to do huge fiscal stimulus and borrow gobs of money, largely from Asia, at low interest rates. If something went wrong here, if we had a Japanese-style natural disaster, wouldn’t we be handicapped, less able to borrow cheaply?

Eichengreen: We would be less able to borrow cheaply. We still would be able to borrow in response to a disaster if we had our fiscal and financial house in order when we entered it — a big “if” and another argument for why putting our fiscal and financial house in order is important….
At the same time, I think you have a point. There was the irony in the financial crisis, after Lehman Brothers failed in the autumn of 2008, the dollar actually strengthened. So we had created, in the U.S., the mother of all financial crises and yet there was capital flight toward the dollar as a safe haven. The future is going to be one in which there will be alternatives to the dollar. And unfortunately, we’re not going to be able to count on that effect.

In your view of the world, if things go right – if the euro gets its act together, if the U.S. gets its fiscal house in order, if the Chinese learn how to run a modern, capitalist, internationally engaged economy – this could be a gradual transition to a new world order. But my reading of history – much of it comes from your work – is that things don’t tend to happen as neatly as we hope. So what could go wrong? What do you worry about?

Eichengreen: Well, in terms of a dollar crash, I worry first and foremost about our own economic policies in the U.S: that there will come a point several years from now – “several” is an imprecise phrase – where there could be a crisis of confidence in the dollar. And a rush out of U.S. Treasury bonds – a sharp fall in the dollar – could be seriously disruptive. We had something on a smaller scale that looked like that back in 1994. Take that and magnify it. That would not be good news.
While my best-case scenario, the one to which I attach the highest likelihood in Europe, is European leaders getting their act together, they could fail to do that. There could be a disorderly debt default, political recrimination and a crisis of confidence in the euro.
And finally, in China, I would worry about a sharp growth slowdown with unknown financial and social consequences.

What difference does it make to the yen and the Japanese economy that they’ve just had this horrible earthquake-tsunami-nuclear power disaster?

Eichengreen: Japan has a very sophisticated, interconnected economy that’s deep into global supply chains. So I think the kind of even localized supply disruptions that they’re likely to experience will be quite negative for their economy in the short run. The authorities also have limited room for maneuver. They are committed to fiscal consolidation. They come into their post-earthquake crisis with an awful lot of public debt. It is said that the repatriation of earnings by overseas Japanese individuals and corporations will be good for the yen, maybe in the very short run. But I think once the longer term consequences of the crisis sink in, they have to be yen-negative.

You’ve been both very supportive of the euro as a project and very critical of the way European leaders have handled the crisis. Do you think they’ve fixed what ails them or do they still have a lot more to do?

Eichengreen: They still have a lot more to do. A lot of the euro doom and gloom that we’ve been hearing is overdone: The euro area is not going to collapse Neither Greece nor Germany are going to reintroduce their national currencies. European leaders have not solved their problems. I, for one, continue to think that the Greeks are going to have to restructure their debts and the need for debt restructuring may not stop there. European leaders have not addressed that eventuality. Addressing that will mean fixing their banking systems, first and foremost. …. European leaders are being dragged, kicking and screaming, almost against their will, but inevitably, in the direction of deeper cooperation, euro-area governance and limited fiscal transfers from the strong to the weak countries.

To be optimistic about the euro as a currency, what three things have to happen?

Eichengreen: Number one: Fix the banking system. Number two: Put in place a sensible emergency financing facility for countries that get into trouble down the road. And number three: Strengthen the surveillance, the oversight of national policies.
Part of that has to be done at the level of the union: Transfer more responsibility to the European Commission. Part of it needs to be done at home by strengthening fiscal arrangements, enhancing fiscal transparency, giving finance ministers and prime ministers more agenda-setting power over the budget.
Europe is a complicated place. And I think neither reform at the European level nor reform at the national level alone will be enough. ….It’s taken too long. I think there still is denial in some circles. But I am reassured that we’ve seen more evidence that when their backs are against the wall, European leaders understand that they have to deepen their union because the alternative is too dire to contemplate.

Q&A: Eichengreen on the End of Dollar Dominance
WSJ Staff
Wed, 16 Mar 2011 15:05:05 GMT

China Takes Giant Step Towards Making Yuan the World’s Reserve Currency

I think is probably correct, and it will reduce the flexibility we have for our own monetary policy.  But I think it’s being portrayed a little direly in many places as well.

The Big Picture

via China Takes Giant Step Towards Making Yuan the World’s Reserve Currency.

Open Letter to Rush Limbaugh

2 March 2011

Mr. Rush Limbaugh
EIB Network
New York, NY

Dear Mr. Limbaugh:

During your radio interview yesterday of Donald Trump, you missed several opportunities to ask probing questions – questions that would have exposed the sheer ignorance that underlies The Donald’s economic pronouncements.  For example:

– “Donald, you say that America ‘doesn’t make things any more.’  Are you unaware that, in 2009 (the latest year for which we have data), the value of U.S. manufacturing output was nearly 30 percent higher than that of China, the world’s second-ranking country in terms of manufactured output?”

– “Donald, did you know that the inflation-adjusted value of America’s manufacturing output in 2009 was 120 percent higher than it was in 1970?”

– “Donald, why do you ignore the fact that over the ten-year span 2000 through 2009, the total amount of foreign direct investment received by China was $686 billion, while the total amount of FDI received by America was 162 percent higher at $1,799 billion?  How, exactly, do you square these investments with your hysterical claims that the U.S. economy is being battered by foreign trade?”

– “Donald, you complain about America’s trade deficit.  Do you realize that another name for ‘trade deficit’ is capital-account surplus’?  Do you understand that every cent of the U.S. trade deficit is a cent of foreign savings invested in American assets – investments that increase the amount of productive capital at work in America?  Do these investments hurt Americans?”

– “Donald, you endlessly repeat that ‘no one respects America any more.’  What do you mean?  If you’re referring to our military, perhaps any decline in respect is a product of the fact that our troops and guns have too often been sent to accomplish goals that troops and guns are unfit to accomplish.  If you’re referring to the U.S. economy – while you’re right that Uncle Sam’s fiscal diarrhea certainly is a problem that must be fixed – the strength and resiliency of our economy is surely respected worldwide, else why are all of those foreigners investing their savings in America more so than in any other country?  …

Cafe Hayek

via Open Letter to Rush Limbaugh.

The US: The world’s manufacturing juggernaut

From the Boston Globe of all places:

Americans make more “stuff’’ than any other nation on earth, and by a wide margin. According to the United Nations’ comprehensive database of international economic data, America’s manufacturing output in 2009 (expressed in constant 2005 dollars) was $2.15 trillion. That surpassed China’s output of $1.48 trillion by nearly 46 percent. China’s industries may be booming, but the United States still accounted for 20 percent of the world’s manufacturing output in 2009 — only a hair below its 1990 share of 21 percent.

“The decline, demise, and death of America’s manufacturing sector has been greatly exaggerated,’’ says economist Mark Perry, a visiting scholar at the American Enterprise Institute in Washington. “America still makes a ton of stuff, and we make more of it now than ever before in history.’’ In fact, Americans manufactured more goods in 2009 than the Japanese, Germans, British, and Italians — combined.

American manufacturing output hits a new high almost every year. US industries are powerhouses of production: Measured in constant dollars, America’s manufacturing output today is more than double what it was in the early 1970s.

HT:  Greg Mankiw

PS.  The four countries mentioned in paragraph two have a combined population greater than the US.

The world’s manufacturing juggernaut
Sun, 06 Feb 2011 17:30:40 GMT

No Made in the USA Really?

This is I think a good explanation of why not to panic that we don’t make anything in the USA.

"having found them all labeled as being made outside of the USA – concluded that Americans no longer produce enough output.

Mr. Hoch is a victim of misleading labeling.  The U.S. economy is overwhelmingly a service economy, specializing in producing ideas and in performing high-skilled operations.  Yes, Mr. Hoch’s socks say “Made in Swaziland,” but who developed the computer software to operate the loom that wove the cloth used to make his socks?  Who designed the loom itself?  Who figured out how to transform crude oil into the elastic in the socks?  Who devised the method for pooling risks so that the Swaziland factory is profitably insured against fire and that the cargo ship carrying his socks to America is profitably insured against sinking?  Who supplies the banking services for the factory to receive and make necessary payments?  Who’s the architect that designed the department store where Mr. Hoch bought his socks?  The list of such questions can be greatly extended.

Most of these services were undoubtedly supplied by non-Swazis, including Americans.  Without them Mr. Hoch’s socks would be a darn sight more pricey.  But services, by their nature, don’t come with labels attached.  In fact, Mr. Hoch’s socks – and nearly everything else that he consumes – should be labeled “Made on earth,” for they truly are global phenomena."


Cafe Hayek

via No Labels.

EconoSpeak is: Embarrassed by the Left

I haven’t read the critique referred to and won’t comment on this now.  But I thought it had some interesting points.  Suggesting they are as bad as the tea party is pretty harsh.

That’s all I can say after reading this dreadful critique of Krugman’s writings on Japan that appeared on Common Dreams, along with almost 100 responses, the vast majority utterly clueless.

The original article said, in a nutshell, that Krugman shows his economist’s blinders by criticizing Japan’s fiscal and monetary policies when they enjoy low unemployment, universal health care and other good things. Japan and Germany show us the way: economic growth is unimportant, what counts is having a healthy society. Growth is a chimera in the age of sustainability, anyway. We should listen to Germany’s criticism of profligate American borrowing, rather than lecturing other countries to become dissolute in our image.

The responses, except for just a few, praised this argument to the skies.

Allow one more indoctrinated economist to make these points:

1. Japanese and German living standards depend on the debt-financed consumption of the US and other net importing countries. That doesn’t mean their social achievements are worthless—far from it—but it indicates that the sustainability problem is not all ours.

2. The Japanese have kept going through the accumulation of a massive public debt. This has been possible only because they are a surplus country, so the debt can be domestically financed without cutting into finance for private investment. In other words, the economic policies Krugman criticized have not led to a Japanese meltdown only because of global imbalances, from which they benefit.

3. Economic growth is essential. If you divide up the world’s output equally among the world’s people, it falls well short of how we want to live. We need redistribution and growth. Greening the economy will also entail tons of investment, which we will have to afford somehow. On top of this, enviro-austerians confuse the growth of value (economic growth) with the growth of stuff (physical throughput). In the economy, better is more, but not necessarily the other way around (if the costs of stuff exceed their benefits).

I hate to say this, but reading the broad swath of opinion on websites like Common Dreams convinces me that the US left is nowhere near ready for prime time. There is a flippancy and anti-intellectualism that is as immature as anything you’ll find among the Tea Partiers. Did I mention that they have a conception of economics (slash the GDP!) that will relegate them to fringe political status in perpetuity?



via Embarrassed by the Left.