Monday, March 30, 2009
SCARY TACTICS
Growing up in the 1950s, I learned a lot about scare tactics. In those days, some people imagined a Commie under every bed, as the phrase went. Only in retrospect did I learn
of the many careers derailed and lives ruined from Hollywood to Foggy Bottom by such irresponsible hysteria. These days, it’s not Commies but protectionists – aka fair traders, trade skeptics, populists, nationalists, etc. – who are thought to be crowded into America’s sleeping quarters.
Almost daily, we get new warnings about the dangers of “protectionism.” The WTO, the World Bank, The Economist, The New York Times, The Washington Post, a host of ivory tower academics, and other apologists for the globalization model that helped bring us to the current ruinous conditions, all denounce protectionism wherever they see it – and they seem to see it everywhere.
The common, usually unstated, assumption in this hysteria is that anything that reduces import levels constitutes protectionism and therefore, especially in these troubled times, is to be shunned. In these tirades, illegal actions are indiscriminately lumped together with legal challenges to illegal measures. But, dumping is a beggar-thy-neighbor action; antidumping is by agreement the corrective measure. Subsidies can be trade distorting and injurious; when they are, countervailing duties are by agreement the corrective measure. Violation of any WTO rules surely is protectionist; seeking a remedy under established dispute settlement procedures just as surely is not. But the press and the experts they choose to cite, including the very guardians of the institutions charged with making the trading system work, use such a broad brush that it takes all of them to lift it.
Let’s slow down and think about this for a moment. Any thing that reduces imports is a danger to the trading system? A recession? A new and better product? Investment in expanded production capacity? Increased domestic savings? Obviously not.
Everyone knows that in the 1930s, when the law of the jungle prevailed in international trade, competitive protectionism deepened the depression. The system of trade laws and contractual obligations established since 1933 have reduced the scope for such ruinous behavior. Some, but only some, recognize that competitive currency devaluations were at least as significant an element in the beggar-thy-neighbor race among nations in the ‘30s. If you are opposed to trade-distorting practices – and I am -- you would work to end mercantilist currency policies, a particularly malicious form of protectionism. Persistently undervalued currencies not only create an artificial two-way trade advantage but leave the protectionist governments with a stash of hard currencies – free money, in effect – to use however they see fit. I don’t hear much talk from the average “free trader” about this practice. Yet, unlike trade protectionism, currency protectionism is beyond the reach of current rules and institutions.
So, as we head into the G-20 summit in London this week, let’s be impeccable with our word, clear in our reasoning, and discerning in our diagnoses. Let’s stop sowing distrust, killing dialog with name-calling, and diverting attention from real issues. This international economic system no longer works very well. It can only be remade by a concerted effort of statesmen of high intellect, uncommon inventiveness and profound good will. The constant drumbeat of fear based on false assumptions and hysterical misreading of events hinders, not enhances, their work.
Charles Blum
of the many careers derailed and lives ruined from Hollywood to Foggy Bottom by such irresponsible hysteria. These days, it’s not Commies but protectionists – aka fair traders, trade skeptics, populists, nationalists, etc. – who are thought to be crowded into America’s sleeping quarters.
Almost daily, we get new warnings about the dangers of “protectionism.” The WTO, the World Bank, The Economist, The New York Times, The Washington Post, a host of ivory tower academics, and other apologists for the globalization model that helped bring us to the current ruinous conditions, all denounce protectionism wherever they see it – and they seem to see it everywhere.
The common, usually unstated, assumption in this hysteria is that anything that reduces import levels constitutes protectionism and therefore, especially in these troubled times, is to be shunned. In these tirades, illegal actions are indiscriminately lumped together with legal challenges to illegal measures. But, dumping is a beggar-thy-neighbor action; antidumping is by agreement the corrective measure. Subsidies can be trade distorting and injurious; when they are, countervailing duties are by agreement the corrective measure. Violation of any WTO rules surely is protectionist; seeking a remedy under established dispute settlement procedures just as surely is not. But the press and the experts they choose to cite, including the very guardians of the institutions charged with making the trading system work, use such a broad brush that it takes all of them to lift it.
Let’s slow down and think about this for a moment. Any thing that reduces imports is a danger to the trading system? A recession? A new and better product? Investment in expanded production capacity? Increased domestic savings? Obviously not.
Everyone knows that in the 1930s, when the law of the jungle prevailed in international trade, competitive protectionism deepened the depression. The system of trade laws and contractual obligations established since 1933 have reduced the scope for such ruinous behavior. Some, but only some, recognize that competitive currency devaluations were at least as significant an element in the beggar-thy-neighbor race among nations in the ‘30s. If you are opposed to trade-distorting practices – and I am -- you would work to end mercantilist currency policies, a particularly malicious form of protectionism. Persistently undervalued currencies not only create an artificial two-way trade advantage but leave the protectionist governments with a stash of hard currencies – free money, in effect – to use however they see fit. I don’t hear much talk from the average “free trader” about this practice. Yet, unlike trade protectionism, currency protectionism is beyond the reach of current rules and institutions.
So, as we head into the G-20 summit in London this week, let’s be impeccable with our word, clear in our reasoning, and discerning in our diagnoses. Let’s stop sowing distrust, killing dialog with name-calling, and diverting attention from real issues. This international economic system no longer works very well. It can only be remade by a concerted effort of statesmen of high intellect, uncommon inventiveness and profound good will. The constant drumbeat of fear based on false assumptions and hysterical misreading of events hinders, not enhances, their work.
Charles Blum
Labels: Currency Manipulation, Free Trade, Protectionism, Trade
Wednesday, January 14, 2009
TOO MUCH OF A GOOD THING
In a remarkably off-kilter story in the January 14 Wall Street Journal (“China’s Capital Outflow Forces Country’s Officials to Try to Rebuild Confidence in Yuan”), Andrew Batson reports sympathetically on Chinese officials’ professed concerns over recent capital outflows and their consideration of a depreciation of its undervalued currency. The article is notable in several ways.
First, it lacks any sense of proportion. After noting that China’s official foreign exchange reserves fell by $25.9 billion in the month of October – a large drop to be sure – Batson writes that they recovered by “only” $5.02 billion in November and $61.31 billion in December. If a $25.9 billion decrease is a large number, then how should an increase of more than double that amount be characterized? Whatever the proper term, the December explosion in reserves was enough to bring the net increase for the quarter to a robust $40.45 billion.
China is hardly running short of reserves. In fact, China’s reserves – by far the largest in world history -- are more than ample to cover its import financing requirements and its modest external debt. China’s reserves are not inadequate, but grossly excessive.
Second, Batson himself notes the notorious opacity of official Chinese data. He might have taken a moment to explain that, even if they are entirely accurate, Beijing’s data on official reserves exclude its sovereign wealth fund (the $200 billion China Investment Corporation), China’s social security investment fund, and dollar holdings by Chinese commercial banks. The total size and composition of these holdings are unknown but probably amount to several hundreds of billions of dollars and other hard currencies.
Third and most important, Batson has apparently accepted the proposition that China needs and is entitled to a perpetual increase in its official reserves perpetually. Anyone with a serious interest in the health of the international monetary and financial system should study the language of International Monetary Fund Article IV. Citing as one objective the “continuing development of the underlying conditions that are necessary for financial and economic stability, ” Art. IV sets forth several obligations of all IMF members. China, of course, is a member, one that wants a bigger say in the governance of the world economy.
Specifically, Art. IV obligates members to “avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members ….” China has ignored this obligation for years, despite advice to the contrary from the IMF, sometimes strident demands from the US Treasury, and entreaties from other trading partners, developing as well as developed.
The treasury secretary-designate, Timothy Geithner, warned in a speech in June 2007 that the buildup of official reserves in Asia might have gone too far. Asian mercantilism (my word) was resulting in “too much of a good thing” when it came to export-led growth and the amassing of hard-currency reserves. Note that when Geithner made this statement, China’s official reserves were “only” 1.2 trillion dollars. Since that summer, they have exploded by an additional $700 billion.
Why then is the Wall Street Journal continuing to make excuses for illegal behavior by China and other mercantilists? Why does the Journal turn a blind eye to one of the root causes of the global financial instability that now threatens the livelihood and retirement funding of millions of Americans and others around the globe?
Charles Blum
First, it lacks any sense of proportion. After noting that China’s official foreign exchange reserves fell by $25.9 billion in the month of October – a large drop to be sure – Batson writes that they recovered by “only” $5.02 billion in November and $61.31 billion in December. If a $25.9 billion decrease is a large number, then how should an increase of more than double that amount be characterized? Whatever the proper term, the December explosion in reserves was enough to bring the net increase for the quarter to a robust $40.45 billion.
China is hardly running short of reserves. In fact, China’s reserves – by far the largest in world history -- are more than ample to cover its import financing requirements and its modest external debt. China’s reserves are not inadequate, but grossly excessive.
Second, Batson himself notes the notorious opacity of official Chinese data. He might have taken a moment to explain that, even if they are entirely accurate, Beijing’s data on official reserves exclude its sovereign wealth fund (the $200 billion China Investment Corporation), China’s social security investment fund, and dollar holdings by Chinese commercial banks. The total size and composition of these holdings are unknown but probably amount to several hundreds of billions of dollars and other hard currencies.
Third and most important, Batson has apparently accepted the proposition that China needs and is entitled to a perpetual increase in its official reserves perpetually. Anyone with a serious interest in the health of the international monetary and financial system should study the language of International Monetary Fund Article IV. Citing as one objective the “continuing development of the underlying conditions that are necessary for financial and economic stability, ” Art. IV sets forth several obligations of all IMF members. China, of course, is a member, one that wants a bigger say in the governance of the world economy.
Specifically, Art. IV obligates members to “avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members ….” China has ignored this obligation for years, despite advice to the contrary from the IMF, sometimes strident demands from the US Treasury, and entreaties from other trading partners, developing as well as developed.
The treasury secretary-designate, Timothy Geithner, warned in a speech in June 2007 that the buildup of official reserves in Asia might have gone too far. Asian mercantilism (my word) was resulting in “too much of a good thing” when it came to export-led growth and the amassing of hard-currency reserves. Note that when Geithner made this statement, China’s official reserves were “only” 1.2 trillion dollars. Since that summer, they have exploded by an additional $700 billion.
Why then is the Wall Street Journal continuing to make excuses for illegal behavior by China and other mercantilists? Why does the Journal turn a blind eye to one of the root causes of the global financial instability that now threatens the livelihood and retirement funding of millions of Americans and others around the globe?
Charles Blum
Labels: China, Currency, Currency Manipulation, mercantilism
Thursday, December 11, 2008
SECOND KICK OF THE MULE
The outgoing treasury secretary, Henry Paulson, came back from Beijing last week empty handed on the currency problem. Again. He’s tried everything – charm, logic, a magnificent scholarly discourse by Ben Bernanke on currency misalignment as an export subsidy, protests and pressure from Congressional leaders – to convince China to “accelerate the pace” of the appreciation of the renminbi against` the dollar. Nothing’s worked. In fact, the RMB has actually weakened since the opening of the Olympic Games, and some Beijing officials talk about a 6-7 percent further depreciation next year.
To make matters worse, the Treasury this week closed the book on eight years of missed opportunities by once again – for the sixteenth time – issuing a semiannual report to the Congress that failed to cite a single country for mercantilist currency practices. To be fair, the Clinton administration record after 1994 was no better. We might know obscenity when we see it, but some people just can’t detect currency manipulation anywhere by anybody despite a mountain of factual and statistical evidence.
In the meantime, Beijing seems paralyzed by internal dissensus on monetary policy. There is open talk from the top of the government about the need to stimulate domestic growth, to reduce the dependence on export-led growth, to keep inflation in check, and to meet the rising expectations of average Chinese for a viable social safety net, affordable homes, and more. The government constantly fiddles with tax rebates, export taxes, price controls, and credit restrictions; it loosens and tightens these crude policy tools in a frantic effort to keep Chinese economic growth on a stable path. Yet it constantly refuses to make use of the one sensible and available macroeconomic tool -- the rate of exchange for the renminbi.
There are many things about the Chinese I may not understand all that well, but I do know they respect strength. Not brute force, but a clear sense of national purpose and a willingness to stand up for legitimate rights and interests. Lacking that, diplomacy is just an empty exercise in rhetoric. Until and unless the US is ready and willing to back its often strong words with some meaningful leverage, “negotiations” over currency matters will produce no meaningful and lasting result.
As I’ve tried to express in earlier postings, five years of diplomatic dithering has produced no real progress toward rebalancing a dangerously out of kilter world economy. Rather, it has allowed a problem that in 2003 was essentially a bilateral trade problem to mushroom into a mammoth mercantilist threat to the world economy.
Thanks to a beloved former client, I have on my desk a small momento quoting Abraham Lincoln: “There is no lesson in the second kick of a mule.” I’ve been pondering this small bit of wisdom from our sixteenth president, wishing that somehow our forty-fourth president, an open admirer and close student of Lincoln, will benefit from the abject failure of his immediate predecessor to confront the currency problem. Let’s hope we don’t have to relive the past before we can escape it.
Charles Blum
To make matters worse, the Treasury this week closed the book on eight years of missed opportunities by once again – for the sixteenth time – issuing a semiannual report to the Congress that failed to cite a single country for mercantilist currency practices. To be fair, the Clinton administration record after 1994 was no better. We might know obscenity when we see it, but some people just can’t detect currency manipulation anywhere by anybody despite a mountain of factual and statistical evidence.
In the meantime, Beijing seems paralyzed by internal dissensus on monetary policy. There is open talk from the top of the government about the need to stimulate domestic growth, to reduce the dependence on export-led growth, to keep inflation in check, and to meet the rising expectations of average Chinese for a viable social safety net, affordable homes, and more. The government constantly fiddles with tax rebates, export taxes, price controls, and credit restrictions; it loosens and tightens these crude policy tools in a frantic effort to keep Chinese economic growth on a stable path. Yet it constantly refuses to make use of the one sensible and available macroeconomic tool -- the rate of exchange for the renminbi.
There are many things about the Chinese I may not understand all that well, but I do know they respect strength. Not brute force, but a clear sense of national purpose and a willingness to stand up for legitimate rights and interests. Lacking that, diplomacy is just an empty exercise in rhetoric. Until and unless the US is ready and willing to back its often strong words with some meaningful leverage, “negotiations” over currency matters will produce no meaningful and lasting result.
As I’ve tried to express in earlier postings, five years of diplomatic dithering has produced no real progress toward rebalancing a dangerously out of kilter world economy. Rather, it has allowed a problem that in 2003 was essentially a bilateral trade problem to mushroom into a mammoth mercantilist threat to the world economy.
Thanks to a beloved former client, I have on my desk a small momento quoting Abraham Lincoln: “There is no lesson in the second kick of a mule.” I’ve been pondering this small bit of wisdom from our sixteenth president, wishing that somehow our forty-fourth president, an open admirer and close student of Lincoln, will benefit from the abject failure of his immediate predecessor to confront the currency problem. Let’s hope we don’t have to relive the past before we can escape it.
Charles Blum
Labels: China, Currency Manipulation, Henry Paulson, mercantilism
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