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FM
Former Member

put a cuss pon he rass...hey hey hey...Mr RONAN put a cuss pon he too...hey hey hey...

President Trump and his ultra-rich government have crudely appropriated some old ideas from progressive development economists. Of course, they don’t realize the clumsiness of their protectionist approach or its provenance. Progressive economists are not against free trade, but they recognize when there is exchange between two unequal nations, the weak one needs some form of protection against the powerful nation. For example, let’s assume Guyana still produced those very durable GRL refrigerators and wonderful gas stoves, do you believe they could have competed against cheap inferior Turkish and Chinese ones without some form of protection?

That is why progressive development economists have always recognized the right of weak countries to protect certain strategic manufacturing industries. As a matter of fact, during my CAPORDE days (Cambridge Advanced Programme for Rethinking Development Economics), Ha-Joon Chang once told me it is better to have an inefficient manufacturing sector than none at all. Ha-Joon and others understand the importance of having certain essential spill-over effects from manufacturing that commodity extraction and service-based industries will not provide.

However, economists of all background are aware of the harmful effects of a trade war among the large and powerful countries. Everyone loses, but the workers and consumers – from weak and powerful nations alike – stand to lose the most. The Trump people are playing victim as they try to legitimize a trade hustle. Their approach also projects supposed demons, namely brown and black immigrants (for the record, I don’t support illegal immigration) as part of the brew. Indeed, the mobilization strategy of fascists has always included demonizing a group of vulnerable people. This time around the supposed demons are the Mexicans and those undesirables from “shithole” countries. After all, why can’t we get more Norwegians? The answer, of course, has to do with the fact that Norway has a higher living standard and more humane society than the average American society, whose safety net has been pummeled by the corporate lobby, Supreme Court and the profit-only business motive. The profit-only motive shows up in automation, but weak immigrants get the blame. Those workers who are still lucky to have work do not enjoy the wage increases from the higher productivity automation brings.

The strategy of victimhood is exposed when one considers that the United States has the second largest manufacturing sector just after China’s. As at the end of 2017, Chinese manufacturing output was US$2 trillion while that of the United States was US$1.9 trillion. Japan and Germany account for the third and fourth largest manufacturing output, respectively. Japan’s 2017 production was US$1.1 trillion and Germany’s was US$700 billion. In terms of sophistication, the American manufacturing sector is second to none, making the most complex goods in the world ranging from cars, heavy machinery, robots, aircrafts, military hardware (protected by government sourcing) and many others.

Multilateral trade agreements have been successful in negotiating lower tariffs on manufacturing across the world. However, China has been slow to reduce tariffs on manufacturing goods, thus much of the criticisms by the Trump people of Chinese trade practices is understandable. The bigger problem has been agriculture. Most countries insist on maintaining protection for farmers, although minor progress was made on rolling back some agricultural export subsidies during the 2015 WTO negotiations. Food security and cultural reasons are often invoked by most countries for agricultural protection. American farmers, for example, are subsidized heavily. The E10 ethanol mandate in the United States has benefitted and enriched already wealthy corn farmers, but the food stamp and healthcare of the weakest are undermined mostly by people who go to church on Sundays. Readers might remember that I have called on numerous occasions for a similar mandate in Guyana to secure a guaranteed market for sugar-based ethanol. Sugar, of course, is a superior feedstock in terms of energy balance and Guyana has a surplus of fresh water.

Furthermore, the United States currently imposes a 25% tariff on the importation of light trucks, while it places 2.5% tariff on imported cars. Europe imposes a 10% tariff on American cars. The tariff on light trucks has been in place since the early 1960s when the European Common Market denied American chicken producers access to their market. The United States responded with a 25% tariff on the Volkswagen Combi-Bus that was selling very well in America at the time. Since then the 25% has remained on light trucks and minivans, resulting in Toyota and Honda setting up plants inside the United States to produce these lines. These days, both producers make a lot of efficient sedans, light trucks and minivans inside the United States. American automakers, such as Ford and General Motors, make their highest profit margins on light trucks and minivans. 

A trade war among China, the United States, Canada, Europe and Mexico would have devastating effects for workers and consumers. For example, Toyota announced last week that the steel and other tariffs will cause a US$1800 price increase on the Camry, which itself is an interesting car. It is the best-selling car and made in Kentucky, United States. As a matter of fact, the Camry is often cited as one of the most American cars because it sources a large percentage of components from vendors inside America and is assembled there. This is a typical middle class car.

Since steel and aluminum are inputs into many manufactured goods like autos, building materials, fabricated goods, etc, we can expect higher prices for consumers. These businesses will also experience job losses as they seek to maintain profit margins. The exporting countries will also experience a decrease in demand for their exports. However, the protected industries in the United States will experience an expansion of production with a long lag if the protection remains. Consumers will have to pay higher prices for the goods coming from the protected sectors. World output will likely contract in the short and medium term, thereby increasing the chance of pushing the world into a global recession.

A global recession at this time would be very bad for Guyana and the Caribbean. This would result in a downturn of tourist arrivals, remittances and foreign direct investments. The oil price could fall, assuming no geopolitical shock, thus easing some of Guyana’s and the Region’s pain. Even when Guyana starts producing and exporting crude oil – for which the country will have to pay a marketing fee to ExxonMobil for selling Guyana’s share of profit oil – there will still have to be importation of gasoline and heavy fuel.

The net effect of a trade war would most likely be negative. The beneficiaries are a relatively small number of workers working in the protected sectors. Small economies like Guyana depend heavily on exports and imports of capital goods to drive economic growth. The steel and aluminum tariffs will increase the price of heavy machines used in the agriculture and mining sectors. There will ultimately be some slowdown in these sectors also, assuming this madness continues. The balance of payments position of both the Caribbean and United States could worsen.

 

Copyright © 2017 Stabroek News. All rights reserved.

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In the previous column on the topic of the “trade war,” I outlined some of the consensus views regarding the potential impact. In the short and medium terms, we can expect few winners but many more losers. I also presented a more nuanced view of free trade. The conventional wisdom often ignores the de-industrialization free trade caused in most of the developing world after the rise of China. The Caribbean, Africa and most Latin American countries cannot compete with Chinese manufacturing. The multinational corporations are these days integrating Vietnam and Bangladesh, but continue to largely ignore much of the developing world. American and Mexican sugar subsidies hurt small economies like Guyana. Therefore, I implied that small economies need some form of protection for shaping their policy space. Free trade works best among equals.

There has been much speculation about whether China or United States will win the trade war. The ephemeral stock market indexes are saying China is on the ropes. Some investors, like Mohamed El-Erian, think the United States is winning. I see it differently. I expect this trade spat will lead to major long-term realignments that would weaken the US dollar’s place as the main international reserve currency. Guyana and the Caribbean should keep a close eye on this development over the coming decade since the Region has exchange rates anchored against the US dollar.

A few notable economic historians, like Barry Eichengreen, have been predicting the relative decline of the US dollar as the main global reserve currency for some time. I never agreed for various reasons. For example, the euro possibly has already reached its upper limit of around 18% of foreign exchange reserves around the world. One limiting factor relates to the fact that there is not a combination of federal European level bonds and Treasury bills. This relates to the Chartalist idea that Europe needed a unified taxing and debt mechanism first before a unified central bank. As an aside, a few years ago, I applied this Chartalist principle in two Development Watch columns arguing that the Caribbean integration process has the cart in front of the donkey; first, there should have been a unified taxation and debt system before free labour movement, competition commission and such.

The country with the international reserve currency has to be willing to run more deficits than surpluses so that it can feed the rest of the world its debt papers as it buys goodies. Of course, there is an instance of a surplus country possessing the international reserve currency, but that was under mercantilist colonialism and not under the modern fiat money standard. Possession of the international reserve currency is a great privilege in the sense that the powerful nation can print its fiat papers and buy things from the rest of the world. This is essentially the privilege the United States enjoys today. China wants this privilege as well. The ability to print one’s fiat papers and get the rest of the world to demand it has major implications for military spending and power.

In addition to the points made above with respect to the euro’s upper limit, I would tell my students in International Economics the Chinese yuan is still very far away because China faces a major information problem, which its government has to solve before the rest of the world believes yuan debt is credible enough to put vast amounts of pension savings into it. State-owned Chinese corporations have not been entirely forthcoming with data and as a result several were delisted on Western bourses, namely London and New York.

However, I have had to revise my views in light of the Trump administration. Since the disagreements over trade, several important changes are afoot. European countries, also facing the Trump-Navarro-Ross tariffs, are moving towards China for trade deals. China’s efficient government bureaucracy is mobilizing farmers to meet local demand for soybeans and other staple crops and also renting vast unused lands in neighbouring Russia. Once China invests money in these new capacities, they are unlikely to go back to American farmers.

Last week, China cancelled a large oil import deal from American sellers and will replace these with Iranian oil. Most of the payments will be with yuan and not dollars. In addition, China is setting up an exchange in Shanghai that will allow for pricing and trading oil in yuan, as well as arrangements with a few African countries and Russia to accept yuan for oil. What are these countries going to do with the yuan they accumulate? They will buy military hardware and other goods and services from Russia and China. In other words, as China imports more it can increase the world supply of yuan, which eventually becomes part of a diversified portfolio of foreign exchange reserves around the world.

These are likely long-term outcomes. In the shorter term, we can expect a penalty on the foreign car brands that established factories in the United States for serving that market and exporting to Asia. Last week, BMW said it would have to shift some of its production from South Carolina to China. This is one way of circumventing some of the tariffs the Chinese will set as retaliation. Tesla is going to make electric cars in China as the government there dramatically boosts implementation of electric vehicles.

Another factor often ignored during this discussion of the fate of the dollar is the capacity of the American administrative state (the civil service) to do work efficiently for domestic and foreign purposes. As social liberals fight over abortion rights, the new nominee to the Supreme Court is much more likely to vote for weakening the American federal civil service than against abortion rights. He is a lot more likely to vote against the State and its capacity to implement economic policies. For poorer folks, it also means that measures, such as affordable healthcare and labour rights, will be undermined in the name of free markets and liberty. His ideological world view does not allow for scientific principles, such as adverse selection and moral hazard, which are endemic in health insurance (and financial) markets and the primary reason why about 20 million Americans don’t have health insurance.  Moral hazard and adverse selection are liberty busters as much as an authoritarian government.

Meanwhile, the Chinese developmental state is only going to get more skilful, nimble and meritocratic. It will have even greater capacity to implement major policies like those promoting renewable energy, strategic foreign policy, infrastructure and electric cars relatively quickly as the American one wanes and becomes bogged down by the lobbyists’ influence. The point is, a great power needs a great state bureaucracy and not just markets.

At this point, the flaws in American democracy are becoming more apparent. One aspect is to throw grass-fed steak to the base and get them to forget or ignore their economic problems, brought about largely by blind faith in free markets and profit-only corporate governance. If the Communist Party of China can solve the information problem of transparency I alluded to above and is willing to run deficits to expand the pool of sovereign yuan securities, the Chinese currency will assert a greater space as a global reserve (and vehicle and invoice) currency and the dollar’s share will decline. The rise of the yuan will see the ascendency of Chinese military power relative to that of the United States.

Trump will be out of power by then. And who knows? The next leaders might still find scapegoats for their base. After all, by then, much money would have been frittered in Iraq and tax cuts for the rich. It will be time to cut social spending for the middle-class and poor. Therefore, some political leaders and special interests will still need scapegoats for their susceptible base.

 

Copyright © 2017 Stabroek News. All rights reserved.

FM
Sunil posted:

I don't see TK addressing the $300-$500 trade deficit with China or the $150B with the EU.

Me is a augus month dunce and de article seh deficit na matta when yuh gat de big gun dem...hey hey hey...

FM
Leonora posted:

Labba, you're doing a great job showcasing TK. 

Me tinks Labba and TK ah de same person. Looks like TK has too much time on his hands. Nobody taking summer classes TK?

FM
skeldon_man posted:
Leonora posted:

Labba, you're doing a great job showcasing TK. 

Me tinks Labba and TK ah de same person. Looks like TK has too much time on his hands. Nobody taking summer classes TK?

Mr TK is meh family. But de bai does play briga pon abie side of de family...hey hey hey

FM
Labba posted:
skeldon_man posted:
Leonora posted:

Labba, you're doing a great job showcasing TK. 

Me tinks Labba and TK ah de same person. Looks like TK has too much time on his hands. Nobody taking summer classes TK?

Mr TK is meh family. But de bai does play briga pon abie side of de family...hey hey hey

Labba_man, Ah like you style. You like dem tiefman, they tief and den call de police and report somebady rab dem.

FM
skeldon_man posted:
Labba posted:
skeldon_man posted:
Leonora posted:

Labba, you're doing a great job showcasing TK. 

Me tinks Labba and TK ah de same person. Looks like TK has too much time on his hands. Nobody taking summer classes TK?

Mr TK is meh family. But de bai does play briga pon abie side of de family...hey hey hey

Labba_man, Ah like you style. You like dem tiefman, they tief and den call de police and report somebady rab dem.

Bai labba wuk hard. Labba doan need he race or political link foh mek living. no need foh tief like dem political leada ayoo worship...hey hey hey...

FM
Labba posted:
Mr.T posted:

The US doesn't make the most complex or best cars in the world. That honour goes to the EU.

Hey hey hey...dem mek am in Merika too. 

The Amerian cars are quite simple. Not advanced at all. The only possible exception are some of the more expensive Tesla cars.

Mr.T

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