Sunday, December 04, 2011

WSJ: Notable and Quotable

WSJ Notable and Quotable: Economist Mark J. Perry on China's exchange rate and American prosperity at American.com, Dec. 2:

"Let me break from [the] consensus about China's currency policy and present an alternative position: In the best of all possible worlds for the United States, China would use its labor and capital to manufacture consumer products like clothing, footwear, furniture, electronics, and appliances and send $300 billion worth of these products to U.S. consumers for free every year as a gift or a form of foreign aid to the American people. In addition, the Chinese would produce and send to America another $100 billion worth of raw materials, parts, industrial supplies, inputs, and natural resources at no charge, as a gift to American manufacturers every year. (Note: That's roughly the amount of goods we will purchase from China this year.) . . .

Unfortunately, that extreme Chinese generosity is not realistic, so here's a possible second-best outcome: . . . [China] agrees to send us $500 billion worth of consumer and industrial goods every year, but agrees to sell us those manufactured goods at a substantial 20 percent discount for only $400 billion. In that case, the amount of foreign aid will be less than the $400 billion in the first example, but will still be significant—a $100 billion gift every year from the Chinese people to the American people.

How will China generate this $100 billion in annual foreign aid to the United States? One way is to keep its currency undervalued to bring about the 20 percent discount on its products coming to America.

Which then raises the question: If China is willing to undervalue its currency, and in the process provide approximately $100 billion of foreign aid annually to American consumers and businesses, what's the problem? Why should we complain?"

13 Comments:

At 12/05/2011 12:25 AM, Blogger kmg said...

Mark,

Thank you for making this point. I have been saying this for years, to no avail.

I should also add that if China were to upward-revise its currency, its nominal GDP will rise, which means America will start fretting about China's 'growing military budget'.

Someday China's currency will rise, and the US will simply trade the current problems for bigger problems later.

 
At 12/05/2011 12:30 AM, Blogger B-Daddy said...

Another way to frame the debate that I saw years ago, except with regards to tariffs. What if a Chinese company discovered a cure for leukemia and an American company discovered a cure for Alzheimer's. But the Chinese put up trade barriers that prevent the importation of the cure Alzheimer's, but America still allows the Chinese to sell the cure for leukemia. Which country's citizens are better off?

 
At 12/05/2011 12:32 AM, Blogger pkd said...

Conversely, should the U.S. stop giving material aid to other countries because it's unfair competition?

 
At 12/05/2011 8:25 AM, Blogger sethstorm said...

There wouldn't be a problem if not for the actual and visible harm it causes.

It isn't foreign aid, it is not a gift, it is takeover. They dump their goods with undervalued currency, and gain influence as a result.

 
At 12/05/2011 8:26 AM, Blogger sethstorm said...

This comment has been removed by the author.

 
At 12/05/2011 11:14 AM, Blogger Buddy R Pacifico said...

"How will China generate this $100 billion in annual foreign aid to the United States? One way is to keep its currency undervalued to bring about the 20 percent discount on its products coming to America."

Is China's currency undervalued or overvalued; or just the right value? Who knows without a market determination of value (Forex).

The lack of a market for the yuan, as promised by China many years ago, is only one of several major trade difficulties with China that are growing for productive U.S. citizens.

 
At 12/05/2011 11:42 AM, Blogger Marko said...

PKD, that is a good point. Some people in the countries we give aid to make the same point as Seth though - they feel that taking U.S. money is like a take over. Just goes to show you that the U.S. doesn't have a monopoly on people not thinking straight!

For the record, anyone that wants to send me money for free please email me so we can set that up. I hope it doesn't hurt you, and I realize that it may make me dependent or lazy eventually, but please don't let that stop you!

 
At 12/05/2011 12:33 PM, Blogger sethstorm said...

It might be easy to make that point in Aspen, Colorado where your primary audience (and town) is filled with pro-offshoring folks in business or faux-environmentalists. For the majority of US citizens, the ones that do not live on such a Mount Olympus, China is an enemy worth vanquishing - along with all that side with China.

That, and a gift doesnt make itself a hazard to the recipient.

 
At 12/05/2011 1:22 PM, Blogger arbitrage789 said...

If China is willing to ...provide approximately $100 billion of foreign aid annually to American consumers and businesses, what's the problem?
_____________________

I think most of us know the answer. The people hurt by it have political power well beyond their numbers.

Hell, even "red state" senator Lindsey Graham would like to see tariffs on goods imported from China

 
At 12/05/2011 2:07 PM, Blogger Buddy R Pacifico said...

"If China is willing to ...provide approximately $100 billion of foreign aid annually to American consumers and businesses, what's the problem?"

What about the cost to U.S. consumers, that are also intellectual property(IP) producers, from IP loss through theft, in China?

 
At 12/05/2011 4:32 PM, Blogger arbitrage789 said...

Buddy Pacifico,


You have a solution (regarding IP theft)...?

 
At 12/05/2011 4:55 PM, Blogger ws4whgfb said...

"If China is willing to undervalue its currency, and in the process provide approximately $100 billion of foreign aid annually to American consumers and businesses, what's the problem?"

http://online.wsj.com/article/SB123758895999200083.html


"Why Foreign Aid Is Hurting Africa
Money from rich countries has trapped many African nations in a cycle of corruption, slower economic growth and poverty. Cutting off the flow would be far more beneficial, says Dambisa Moyo.

...

Yet evidence overwhelmingly demonstrates that aid to Africa has made the poor poorer, and the growth slower. The insidious aid culture has left African countries more debt-laden, more inflation-prone, more vulnerable to the vagaries of the currency markets and more unattractive to higher-quality investment. It's increased the risk of civil conflict and unrest (the fact that over 60% of sub-Saharan Africa's population is under the age of 24 with few economic prospects is a cause for worry). Aid is an unmitigated political, economic and humanitarian disaster.

 
At 12/05/2011 5:14 PM, Blogger Buddy R Pacifico said...

arbitrage789 asks:

"You have a solution (regarding IP theft)...?"

Tough question arb.

The best strategy for the U.S. is a very aggressive push for Free Trade agreements (IP clauses), with as many countries as possible and as soon as possible. China would only be sought as a Free Trade partner if, it showed at least a two year history of respecting and enforcing foreign intellectual property rights.

 

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