Too much travel and a longish writing commitment have kept me from posting on my blog recently, but I plan to return to it over the weekend. I did want to mention a couple of things quickly today however.
The first is that the unemployment situation here has gotten grim enough that the government is trying to mediate labor and pay disputes and to make it harder for companies to lay off workers. They are especially worried about the implications for social unrest. According to a Bloomberg piece today:
A survey of 84 cities showed demand for workers fell 5.5 percent in the third quarter, the first decline in years, Vice Minister for human resources Zhang Xiaojian said at the press conference today. The ministry should be able to keep the urban unemployment rate within the government’s target of 4.5 percent this year, although the rate will “worsen” next year, Zhang said. That figure does not include an estimated 200 million migrant workers who have left their home town in the countryside to work in cities. Even before the current global crisis, the country faced a huge gap between 24 million new job seekers and the 12 million jobs created annually, according to the ministry.
Most people believe that the official urban employment rate significantly understates real urban unemployment, and although I have hear that real unemployment is as high as 10-11%, I have seen nothing very credible on the issue. I assume unemployment is higher but I don’t really know what it is.
If unemployment is rising, however, it does mean that there will be serious pressure to do whatever it takes to support employment growth. One thing that I am worried about (and this was the subject of the “longish writing commitment” I mentioned above) is that it puts pressure on the government to engineer measures to expand export growth. For example I suspect that the fight over whether or not to continue appreciating, and even depreciate, the RMB is intense. Two days ago Bloomberg had a piece that said the following:
The yuan fell as policy makers focus on supporting exporters amid signs the world’s fourth-largest economy is slowing because of global financial turmoil…”We expect the dollar to move higher versus the yuan as the focus shifts decisively to growth,” said Thomas Harr, a senior foreign exchange strategist with Standard Chartered Plc in Singapore. “But not a massive move though, probably up to close to 7 in the first half” of next year, he said. The currency traded at 6.8270 per dollar in Shanghai as of 9:45 a.m., compared with 6.8269 yesterday, according to the China Foreign Exchange Trade System.
Perhaps more importantly, Xinhua said in an article on Monday that:
China’s Ministry of Finance announced on Monday a list of 3,770 items involved in the third export tax rebate increase this year. The items include labor-intensive, mechanical and electrical products. New export tax rebate rates on these items were also announced. The change take effect Dec. 1.
The announcement came four days after the State Council, or cabinet, said it would raise export tax rebates for the third time this year as part of the government’s 4-trillion-yuan (571.4 billion U.S. dollars) economic stimulus package. Rises in tax rebate rates varied among different items. For example, the rate on tires was raised from 5 to 9 percent while glassware was up 5 to 11 percent. Rates on labor-intensive products such as luggage, shoes and umbrellas were elevated from 11 to 13 percent.
The 3,770 items accounted for 27.9 percent of the country’s total exports, according to a statement posted on the government’s website. The statement said the government would also eliminate export duties on certain types of steel, chemical and grain products and reduce export duties on some fertilizer products, also effective Dec. 1. China raised export tax rebates in Aug. and at the beginning of this month on a range of goods to shore up flagging exports.
Export subsidies, depreciating RMB – all of this might seem to make sense if you look at China as divorced from the global balance of payments system. These measures to boost exports are, after all, pretty standard ways of increasing production.
But if you think of China’s role within the global balance of payments, it seems to me that this is little more that a form of Smoot-Hawley-with-Chinese-characteristics. Global demand is slowing, just as it did in the 1930s, and China as the leading source of global overcapacity is trying to address its global demand problem by shifting the burden abroad.
In that light I should mention a recent exchange I had with some friends. Reference was made to a recent Washington Post OpEd piece by the British historian Niall Ferguson in which I think he got absolutely correct the importance of the China-US link in the global balance of payments, but he was wrong when called for a significant fiscal boost from the US. My response to his piece was:
Ferguson is probably right to compare the 2008 G20 with the failed 1933 London conference, but the problems with this account, I think, is that he has the US playing the same role in the 1930s as today. But the positions are very different.
In the 1930 it was the US who had huge overcapacity which it exported abroad (via huge trade surpluses) and it was Europeans who were over-consuming, financed by capital exports from the US. When the credit crunch came it was unreasonable, as Keynes argued bitterly, to expect the rest of the world to continue demanding US goods, especially since the financing of their consumption had been interrupted. Since US production significantly exceeded US consumption (with the balance consisting of course of the trade surplus), the need for demand creation most logically rested in the US.
As we all know, in spite of FDR’s Keynesian reputation (he wasn’t) the US not only failed to expand fiscally as much as it needed to but it actually tried to use trade restrictions to protect its overcapacity problem and “export” its lack of demand to the rest of the world. That didn’t work, and when world trade collapsed the US had to bear the full adjustment cost of the gap between production and consumption, and it did so in the most difficult possible way, by contracting production.
Today it is China who is exporting overcapacity and it is the US who is consuming too much, fed by Chinese financing. With the collapse of bank intermediation US households and businesses are cutting consumption and raising savings. This is a necessary adjustment. Calling on the US government to engage in massive fiscal expansion to replace lost private demand is crazy. It means that we should continue the current game that has led us into so much trouble, but instead of having US over-consumption and rising debt at the private level we must have it at the public level.
If Keynes were around today he would probably make the same point he did over 60 years ago. Demand must be created by the current account surplus countries, which have, to date, relied on net exports to protect themselves from the consequence of their overcapacity. They must force demand up quickly in order to close the gap, and since expecting private consumption to rise quickly enough is unrealistic, it has to be public consumption – a large fiscal deficit.
Just as the US stupidly tried to increase its ability to dump capacity abroad by creating import restrictions (which has the effect of further expanding domestic production), China seems to be hoping for the same thing by increasing export rebates and slowing the currency appreciation (there is even increasing talk of depreciation).
This can’t work for long. The world has excess production and there is a need for the US to reduce its demand and increase its savings. The only proper place for new demand to originate is, once again as in the 1930s, from current account surplus countries. They should be engaged in demand creation, not supply creation. If they continue trying to export their way out of a slowdown, there will almost certainly be a trade war, as in the 1930s, and the full force of the adjustment will be borne by the current account surplus countries, again as in the 1930s. Remember that back then the current account deficit countries, like Germany after 1932, found it relatively easy to limit the impact of the crisis by forcing balanced trade — which has the effect of increasing demand (domestic) and reducing supply (foreign).
It is amazing to me that people like Ferguson, who have been arguing correctly for years that US consumed too much and saved too little, are now terrified of the necessary adjustment, and are arguing that it should be stopped and even reversed. The process cannot be stopped – US savings are too low and will rise one way or the other. The global imbalance between production and consumption must grow because US and European consumption must decline, and if we cannot find a new source of demand, there will have to be a contraction in production. In an open world, the contraction will be paid for by everybody more or less equally, with those aggressively pursuing export growth getting off relatively lightly and the rest doing worse. In a closed world most of the cost will be borne by the countries with overcapacity.
If Asian countries continue to try to boost exports it is not hard to see why this could easily lead to trade barriers.
China needs to resolve this problem by expanding fiscally, not by stimulating exports. The US in the same position sixty years ago tried to do the same thing China is doing (half-hearted fiscal stimulus and more interfering with trade in order to alter the terms in its favor), with disastrous consequences mainly for itself. Instead of looking for and dreading Smoot-Hawley in US or European policy-making, we really need to worry about an Asian Smoot-Hawley.
Remember that there is no difference in this case between restricting imports and subsidizing exports and, by the way, currency depreciation does both.
Tags: Niall Ferguson
12 Responses to “Rising unemployment increases the pressure for misguided trade policies”
Michael,I agree with your big picture view here and that Current acct. surplus countries need to help bear the brunt of rebalancing by generating extra domestic demand. On the other hand, it is to be expected that all governments, Chinese or otherise, will pursue the path of least resistance and usually think of their own interests first. So while it is not the best policy for everyone to continue to promote export growth, it is what I expect from the Chinese. However, this raises a very curious question. Why have the Chinese not been aggresively buying Euros and selling USD? The Yuan has appreciated 20% against the Euro in the past six months. For the Chinese to sell USD reserves and buy Euros seems to be a no brainer. They would kill two birds with one stone and cause no controversy. They already announced to the world several years ago that they desired to diversify their huge holdings of USD. they have been big buyers of Euros all thought 2006 and 2007, so continuing to buy Euros at these levels would shock no-one. Weakening the USD vs. the Euro would depreciate the CNY vs. the EUR rate and help out Chinese exporters while not affecting the politically sensitive USDCNY rate. Furthermore, the Eurozone is a bigger customer than the US and it is a customer base that is arguably better able to respond to the a price change as they are not borrowed to the eyeballs like Americans and they have higher savings rates. I would be curious to hear your views on why the Chinese are not aggressively using this window of opportunity to diversify USD risk and buy Euros to help their Export sector?
Max, good question. I hadn’t really thought about that but it seems this may be a good time for the Chinese to diversify out of the dollar without causing shocks. Perhaps they are worried that if Europeans, who are already pretty upset at China, got wind of the trade they might get even angrier. A more simple explanation might be just that policy-makers are so frightened about the extent and consequences of the domestic slowdown that they aren’t really focusing on what seems like a minor issue.
China’s leadership has been officially talking about domestic consumption since Zhu Rongji. Guys, get with the program…it’s like the West is (once again) telling China something it doesn’t know.
Mr. Pettis,I agree with your thesis overall. However, you have some of your historical facts wrong. The U.S. never ran a large trade surplus from 1929 onwards. I check the BEA data. The U.S. trade balance for 1929 was 0.29% of GDP, 1930 0.33%, 1931, 0.0%, 1932 0.17%, 1933 0.18%, 1934 0.61%. We had trade deficits in 1935 and 1936. Only from 1938 onwards did supluses become material (at around 1% of GDP).Thank youPeter Schaeffer
Peter, thanks for the data, but it supports the thesis. My argument is that the US ran large trade surpluses during the 1920s as it was able to export overcapacity to Europe and elsewhere. After the 1929 crisis, however, those surpluses shrank, and it was this shrinking surplus that forced the adjustment onto the US, since it meant that US overcapacity was no longer exportable. The data should show a sharp decrease in the US trade surplus after 1929 and 1930.Anonymous, like many China watchers you don’t seem to distinguish between what the government says and what actually happens. For all the talk about expanding domestic consumption since the late 1990s (and pretty much everyone has agreed), not only have domestic savings risen as a share of income, but the excess of production over consumption has surged, and much of government actions recently have been aimed at boosting the export sector and investment. In the early 1930s the Hoover government too said many times that the economy should improve by an increase in domestic demand, but that doesn’t mean it did.
Mr. Pettis,Sadly, it is much harder (for me at least) to find consistent trade balance data, pre-1929. However, one source does give trade (goods and services) data from 1920 to 1930. See http://eh.net/encyclopedia/article/Smiley.1920s.final. This source indicates that the U.S. ran small (1% of GDP) surpluses in the 1920s (see figure 28). However, the eh.net data is apparently based on the Census data from the period.The Census data can be found at http://www2.census.gov/prod2/statcomp/documents/1930-11.pdf. The Census data shows smaller surpluses and is clearly goods only. Given that the U.S. ran a substantial services deficit (apparently tourism) in this period, the net goods and services balance would be even smaller and possibily negative.For example, the BEA data gives a goods surplus of $0.8 billion for 1929 (the first year for which the BEA provides data). The Census lists a $841 million goods surplus for the same year. The BEA shows a services deficit of $500 million for the same year. That gives a net goods and services surplus of roughly $300 million.Applying the same adjustment (an estimated $500 million services deficit) to the rest of the 1920s Census trade data, provides a somewhat reasonable estimate of the overall goods and services trade balance for the period.
Mr. Pettis,Continued…Overall, it appears that the U.S. ran a quite small (under 0.5% of GDP) goods and services surplus in the 1920s. Indeed, we may have run a deficit in some years.
Peter, my data comes from BR Mitchell’s International Historical Statistics, The Americas 1750-1993. It shows the US current account surplus ranging from 2.5% of GDP in the early 1920s declining to just under 1% of GDP in 1929. There are no deficit years. These are fairly large numbers. Since the 1950s with the exception of a 3-year period in the 1980s, and the past decade or so, the US deficit or surplus has always been within 1% of GDP.
Mr. Pettis,I find your comment that in”the past decade or so, the US deficit or surplus has always been within 1% of GDP.”quite surprising. The U.S. trade deficit in 1999 was 2.8% of GDP and reached almost 6% of GDP in 2006. Sources include “The U.S. Consumption Boom and Trade Deficit” (http://research.stlouisfed.org/publications/net/20071001/cover.pdf) and “Trade Deficit Exceed Six Percent of GDP” (http://www.rhsmith.umd.edu/opinion/morici/2006/morici_1.12.06.aspx).I have found, what I believe to be, a consistent set of balance of payments and GNP data going back to 1790. See Series U 1-25 (http://www2.census.gov/prod2/statcomp/documents/CT1970p2-08.pdf) and Series F 1-5 (http://www2.census.gov/prod2/statcomp/documents/CT1970p1-07.pdf).The data shows a tiny goods and services surplus (0.29%) in 1914 and very large surpluses from 1915 (4.21%) to 1921 (2.8%) including 6.15% in 1916 and 6.10% in 1919. The large surpluses were clearly a consequence of WWI.Thereafter U.S. surplues are small (1922 0.69%, 1923 0.21%, 1924 0.93%, 1925 0.41%, 1926 0.12%, 1927 0.42%, 1928 0.70%, 1929 0.41%). Overall, I do not see any evidence that the U.S. exported its surplus capacity in the 1920s. We did run vast surpluses to support the allied war effort and post-WWI reconstruction. However, that was a quite separate effort.Notably, the U.S. ran trade deficits in WWII and large surpluses after WWII, once again supporting reconstruction.I have posted the data online at http://spreadsheets.google.com/ccc?key=p7e9Hz_aTowj7SWkMzAj_cQ. Checkout Sheet for the 1914 – 1931 data.
Sorry Peter, of course you are correct. I meant to say “except for the past decade or so.” I discuss this more in my “Can China Adjust to the US Adjustment?” entry, where I note the main exceptions (mid 198os and mid-1990s). My trade data, which I cite, suggest that US trade surpluses were higher than your data suggest, and is consistent with much of the literature.
Peter, I just checked your data. Thanks a lot. It has some great info. I think I understand the problem now. We were both using the phrases “trade account” and “current account” a little loosely. The relevant measure of US export of overcapacity is not, of course, the current account, which includes services, but the trade in merchandise. Those surpluses are anywhere from two to four times the goods and services account, and for the ten years to 1930 they average 1.1% of GDP.
Mr. Pettis,Thank youPeter Schaeffer