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Thursday, 18 October 2012


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Don't be fretting the little stuff David - the ways've been cleared and now the coast is clear for President Romney!

I'm not sure I agree entirely. Why? Well, because I'm not sure anyone has told the Chinese that "trade will be treated as war" is a bad idea (look at their actions on rare earths, in Africa, ostensibly 'companies' but in reality funded by Beijing buying ports etc.). I suspect China views trade as a means of both economic growth, entirely understandable and laudable, but also as a means to power - hopefully not as a precursor to anything.

The theory of open trade is certainly more 'morally' and economically correct, however it presupposes open markets on both sides. I can't think of any country that doesn't act in some way to protect its domestic producers/manufacturers (consider the EU, Japan, etc.). China with legislative, economic and monetary means, if I remember correctly - how much trade, as opposed to technology/job transfers actually occurs in that direction?.

Also consider the consequences, ie. our now none existent auto and manufacturing industries. Yes, people can buy cheap products, but only those who can actually find a job. A balance would have been 'nice'.

Part of the problem is 'projection', whilst we view trade in such a way, it doesn't necessarily mean other countries/cultures do (Japan, China, the entire Middle-East). Many can, and do, use our sense of fair-play against us.

(Just because I'm paranoid, It doesn't mean they really aren't all out to get me!)

Romney is right on one issue; the artificially low pegging of China's currency to the US$ must end. That isn't free trade, and it is hurting the US. It's long past time to end it.

Prof Boudreaux is being a bit economical with the argument here. The simplisitic idea is that cheap imports will simply encourage domestic workers into newer more profitable industries. However if you were setting up a new factory making Ipad Mark 99 would you be employing Jo from Hoboken? - no way.

So what new industries will employ Jo? Well, now that transport is cheap and any new market entrant can buy the best machine tools etc and set up anywhere Jo from Hoboken has to be cheaper than Ping from Peking. OK, so we move into smart stuff, satellites, rocket engines, computer chips. Snag, Jo is too dumb to sit at a CAD terminal and the market is satisfied by a small factory in Seattle - with plans to move to India next week. Similarly with lawyering or insurance. Finance? we screwed that up!

Growth is good, but tends to leave the Jos behind as a cost (ie tax) to all the smarty-pants folks still in a job. No good blaming Jo (many will try), Prof Boudreaux and his pals need to do some mighty serious thinking - the rules have changed - not easy finding a new job for Jo that pays a tax dollar.

The threat of war that worries me is that if O really wants to keep his job he might launch an attack on Iran.

There's no such thing as a free lunch ineconomics. What you gain here, you lose there. Thus it is with currency valuations. Emerging nations need a low currency (and the subsequent help for their exports) in order to break into markets. This can be painful for the people already in the field but, as a consumer, it helps me because either the imports are cheaper or the home producer has to become more efficient - either way I win! We went through all of this with Japan after the war. Their car industry destroyed the British car industry (more or less) and good riddance to Leyland and all their rubbish. Now, for various reasons including a reasonably priced pound, the Japs run a very successful motoring industry in Britain.

Today, China is following the same path but has NOW reached a turning point. They held their currency low in order to gain entry to export markets but that meant imports for them were very expensive. Today they have a burgeoning middle-class and their economy is hopelessly one-sided. They need to switch to a higher consumer economy inorder to balance matters. As the WSJ reports:

"That boom has reached the end of the road. As exports have grown, they have consumed more labor, commodities and capital at the expense of the domestic economy. Those inputs were plentiful enough to sustain a decade of spectacular growth, but they are now becoming scarce, forcing up prices.

The next phase of growth will require greater emphasis on total factor productivity, meaning creating more with the same amount of inputs. And that requires better allocation of capital, through a larger bond market and a commercial banking system based on market signals."

Yes, American politicians (and European ones, come to that) might feel the need to huff 'n' puff because their dumb & dumber audience wants to hear nonsense but they need to watch their tone. Raising temperatures is easy, cooling them very much harder. That is not to say that one has to be overly soft towards China but too much aggressiveness could be dangerous.

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