On the American side, either tariffs on Chinese goods are increased (thus increasing either domestic production or imports from elsewhere, albeit at higher prices), or else the US continues along on the Chinese credit card for a while longer. Neither of these are particularly problematic outcomes for the American economy
Except that for every quarter the US "goes along on the Chinese credit card" more of their already hamstrung industrial base will wither away.
On the Chinese side, without a revaluation of the currency, it will either face lower exports due to US tariffs (and counter-tariffs are no comparable threat to US interests because of the enormous trade imbalance between the two countries) or continued high inflation due to the need to keep the currency undervalued.
Why would you expect an activist currency policy to inflate a currency in the presence of reasonably effective capital controls?
And, more to the point, why should China be worried about inflation?
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
Note well, I don't say this means the US has power, this just seemed like a good place to introduce a really interesting bit of possible data:
ARGeezer:
China's Exporters Hanging by a Thread? Naked Capitalism Has the Chinese export sector become hostage to WalMartization, the ability of powerful retailers to squeeze vendor profit margins? Reader Michael Q called our attention to a key remark in a Wall Street Journal story: Vice Commerce Minister Zhong Shan, in an exclusive interview Thursday ahead of a visit to the U.S., said that the profit margin on many Chinese export goods was less than 2%. Most exporters absorbed the appreciation in the value of the yuan that followed its revaluation in 2005 by boosting innovation and cutting costs, but many were forced to close, he said. A further rise in the currency's value would endanger more exporters' survival, which China can't afford, he said. As Michael Q, who is an equity analyst, noted: 2% margins on export-oriented businesses is not representative of any sort of real competitive advantage. A real competitive advantage when it comes to exporting would show double-digits profit margins. This whole sector is hanging by a thread...nearly none of the activity China has engaged in since the downturn is secular or self-sustaining. Yves here. The implications for China are serious. First, this says that it perceives it has no room to revalue the RMB upwards. Not only are exporters politically powerful, but on a more mundane level, the regime has achieved social cohesion through a promise of rising prosperity. Too much unemployment would undermine the legitimacy of the governing classes. But second, it also implies China cannot even tolerate much inflation. Remember, inflation will push up the price of good in local currency terms, which in a fixed peg currency regime, translates directly into price increases. Price increases from a country whose selling proposition is cheap prices would lead importers to look for substitutes in other emerging economies. A 2% margin not only says manufacturers have no room to cut prices, it also says they cannot afford much in the way of lost revenue. This dynamic makes the idea floated on the blog earlier, that China might devalue the RMB , less radical than it might seem. If Vice Commerce Minister Zhong Shan's claim regarding 2% margins is more than a negotiating ploy....watch out below! One of WalMart's mottos is "Always lower prices!" Who could have foreseen that this might lead to world-wide deflation when relentlessly pursued by the world's largest and lowest cost retailer?
Has the Chinese export sector become hostage to WalMartization, the ability of powerful retailers to squeeze vendor profit margins? Reader Michael Q called our attention to a key remark in a Wall Street Journal story: Vice Commerce Minister Zhong Shan, in an exclusive interview Thursday ahead of a visit to the U.S., said that the profit margin on many Chinese export goods was less than 2%. Most exporters absorbed the appreciation in the value of the yuan that followed its revaluation in 2005 by boosting innovation and cutting costs, but many were forced to close, he said. A further rise in the currency's value would endanger more exporters' survival, which China can't afford, he said. As Michael Q, who is an equity analyst, noted: 2% margins on export-oriented businesses is not representative of any sort of real competitive advantage. A real competitive advantage when it comes to exporting would show double-digits profit margins. This whole sector is hanging by a thread...nearly none of the activity China has engaged in since the downturn is secular or self-sustaining. Yves here. The implications for China are serious. First, this says that it perceives it has no room to revalue the RMB upwards. Not only are exporters politically powerful, but on a more mundane level, the regime has achieved social cohesion through a promise of rising prosperity. Too much unemployment would undermine the legitimacy of the governing classes. But second, it also implies China cannot even tolerate much inflation. Remember, inflation will push up the price of good in local currency terms, which in a fixed peg currency regime, translates directly into price increases. Price increases from a country whose selling proposition is cheap prices would lead importers to look for substitutes in other emerging economies. A 2% margin not only says manufacturers have no room to cut prices, it also says they cannot afford much in the way of lost revenue. This dynamic makes the idea floated on the blog earlier, that China might devalue the RMB , less radical than it might seem.
Vice Commerce Minister Zhong Shan, in an exclusive interview Thursday ahead of a visit to the U.S., said that the profit margin on many Chinese export goods was less than 2%. Most exporters absorbed the appreciation in the value of the yuan that followed its revaluation in 2005 by boosting innovation and cutting costs, but many were forced to close, he said. A further rise in the currency's value would endanger more exporters' survival, which China can't afford, he said.
Most exporters absorbed the appreciation in the value of the yuan that followed its revaluation in 2005 by boosting innovation and cutting costs, but many were forced to close, he said. A further rise in the currency's value would endanger more exporters' survival, which China can't afford, he said.
As Michael Q, who is an equity analyst, noted:
2% margins on export-oriented businesses is not representative of any sort of real competitive advantage. A real competitive advantage when it comes to exporting would show double-digits profit margins. This whole sector is hanging by a thread...nearly none of the activity China has engaged in since the downturn is secular or self-sustaining.
Yves here. The implications for China are serious. First, this says that it perceives it has no room to revalue the RMB upwards. Not only are exporters politically powerful, but on a more mundane level, the regime has achieved social cohesion through a promise of rising prosperity. Too much unemployment would undermine the legitimacy of the governing classes.
But second, it also implies China cannot even tolerate much inflation. Remember, inflation will push up the price of good in local currency terms, which in a fixed peg currency regime, translates directly into price increases. Price increases from a country whose selling proposition is cheap prices would lead importers to look for substitutes in other emerging economies. A 2% margin not only says manufacturers have no room to cut prices, it also says they cannot afford much in the way of lost revenue.
This dynamic makes the idea floated on the blog earlier, that China might devalue the RMB , less radical than it might seem.
One of WalMart's mottos is "Always lower prices!" Who could have foreseen that this might lead to world-wide deflation when relentlessly pursued by the world's largest and lowest cost retailer?
Key bit:
Of course, the statement about 2% is bound to be in part a negotiating ploy. But...
My experience with Chinese industry is that it is very much on the Japanese model - you have some headline corporations who look very healthy, but they are built on a supply chain of smaller firms who have much lower margins.
Politically, this matters a lot in China, because a lot of the employment that is crucial to keeping the Chinese government in stable power is in those firms with low margins.
As such, I think we're headed for a real problem in both directions... if the US tries to force a reduction of Chinese mercantilism they'll run up against a brick wall, because the Chinese gov't has other priorities...
but if things carry on as they are, the US economy will stay slow and China's export led boom is going to hiccup (EU shows no sign of pickup up the import slack) - at which point there's big trouble from a lot of unemployed workers in China.
Feels like quick lose vs slow lose for the Chinese gov't at the moment.
For the US, it's true that the manufacturing base suffers due to import competition from China, but there are benefits from that too in the form of higher real national income because of lower prices for things. As far as the government is concerned, tax income is higher with lower prices and more trade, but at the political cost of more unequal income distribution as higher paying blue collar jobs become low paying Walmart jobs. If the Chinese would stop propping up the dollar or tariffs on Chinese imports were applied, total tax revenues might suffer a bit, but in the US that would likely be acceptable now because of the needed income distribution gains achieved by increasing domestic manufacturing employment -- something that the US has been unable to solve through policy.
China is going to remain in a dependency situation with the US until it's economy can transform itself from being an export-based one predicated on being a servant to largely American consumer interests into a domestically focused economy whose engine is geared instead to Chinese well-being. The worst that can happen to America out of it's relationship with China is that it loses its cheap servant and has to employ more of its own labor (or other foreign servants) AGAIN, and that's not really very painful for the economy or political system as a whole.
For Americans it's like, darn, we might have to wash our own dishes again, whereas for the Chinese it's like, holy crap, we might not ever get paid for all the work we've done! That's a poker hand that puts more pressure on China than it does on the US.
