Bloomberg’s Tom Keene interviews Barry Eichengreen (mp3) about his recent article “A Blueprint for IMF Reform” (pdf), which appeared in International Finance, as well as China’s possible future revaluation of the renminbi, the post-Bretton Woods era, and “strong dollar” rhetoric.

Keene also interviewed Robert Mundell last week (mp3), discussing the origins of the Mundell-Fleming model, China’s domestic macroeconomic reasons for pegging the renminbi to the dollar, Chinese portfolio choices with regard to US assets, and other topics.

Greg Mankiw reports on a proposed alternative to traditional foreign assistance: tax credits to encourage FDI in developing countries.

Lee Branstetter & C. Fritz Foley on “Facts and Fallacies about U.S. FDI in China“:

Fallacy Number 1. U.S. FDI in China is large

FIE investment in fixed assets accounts for only about 10% of total fixed asset investment in China… American investment in China accounts for a relatively small portion of total U.S. multinational activity around the world…[Gravity model] results point out that levels of U.S. MNE activity in China are lower than would be predicted by a simple model in which levels of MNE activity vary with distance and country size…

Fallacy Number 2. U.S. FDI in China is Export-Oriented

The data illustrate that in 2004, about $39.7 billion of local affiliate sales were directed to the local market and only $3.7 billion were directed to the U.S. market. In that year, U.S. exports to affiliates and U.S. imports from affiliates comprised less than 5% of affiliate sales. These patterns are not consistent with the hypothesis that U.S. affiliates operating in China are contributing to the large U.S. trade deficit by producing there and selling back to the U.S… Wal-Mart and other large-scale U.S. retailers typically procure their goods from China-based export-oriented manufacturing plants that are not U.S.-owned to any significant degree…

Fallacy Number 3. U.S. multinational investment in China displaces investment elsewhere.

[F]irms that expand in China are almost as likely to expand employment domestically as they are to cut it. This evidence is not what one would expect if growth in China were strictly displacing activity in the U.S…

Fallacy Number 4: U.S. multinationals are aggressively exploiting China’s growing technological prowess

In the U.S., China is often perceived as being an emerging technological superpower. Industrialists, economists, and policy makers believe that China is becoming an attractive location to perform innovative activity… Several considerations suggest these views are overblown… Only $622 million was spent by U.S. MNEs on R&D in China, an amount that is about 3 tenths of one percent of the total R&D undertaken globally by U.S. MNEs… From the beginning of 2000 to the end of 2006, the U.S. PTO granted 3,447 patents to inventors based in China or teams of inventors that included at least one member with a Chinese address. Over the same period, inventors with ties to Japan received nearly 241,000 patents… Interestingly, the leading patent-generating firm in China, with more than four times Microsoft’s cumulated patent stock and a commanding lead over any indigenous mainland Chinese firm, is the Taiwanese contract manufacturing firm, Hon Hai, also known by its English trade name, Foxconn… it appears the Taiwanese firms are more aggressively exploiting the opportunities to conduct research in China, such as they are, than are their U.S. counterparts… Despite impressive progress and spectacular growth in human capital, China’s transition to status as a significant net exporter of innovative goods and services almost certainly lies many years in the future.

I’m an American studying in the United Kingdom, so it’s bad news that very smart economists think the dollar is due for a plunge.

A recent NBER working paper argues that China is not receiving exceptional levels of foreign direct investment:

Abstract: Weak institutions ought to deter foreign direction investment (FDI), and mass media stories highlight China’s institutional deficiencies, yet China is now one of the world’s largest FDI destinations. This incongruity characterizes China’s paradoxical growth. Cross-country regressions show that China’s FDI inflow is not exceptionally large, given the quality of its institutions and its economic track record. Institutions clearly determine a country’s allure as an FDI destination, but standard measures of institutional quality can be problematic for countries undergoing rapid institutional development, and can usefully be augmented by economic track record measures. Deng Xiaoping’s 1993 “southern tour” heralded sweeping reforms, and this regime shift is insufficiently reflected in commonly used measures of institutional quality. China’s FDI inflow surge after these reforms resembles similar post-regime shift surges in the East Bloc, and so is also unexceptional. Recent arguments that China’s FDI inflow is inefficiently large because weak institutions deter domestic investment while special initiatives attract FDI are thus either unsupported or not unique to China.

If you’re not familiar with the phenomena, here are good introductions to investment promotion agencies and inshoring.

[HT: Thoma]

Marvin Goodfriend and Eswar Prasad rethink the renminbi debate at VoxEU:

[U]ntil recently, the rise in the US trade deficit with China was matched by the decline in the deficit with the rest of Asia, leaving the US deficit with all of Asia unchanged. China’s accession to the WTO in 2001 opened up US markets to Chinese imports and more Asian trade is now routed through China in order to take advantage of cheaper labour there to process and package goods in their final stages of production. So the bilateral US (or EU) trade deficit with China is not in itself very meaningful.

Moreover, the renminbi has been maintained at a stable rate relative to the US dollar for over a decade now, even during the Asian crisis when the Chinese were under pressure to devalue the renminbi. So to argue that the fixed exchange rate reflects a new and deliberate policy of undervaluation is disingenuous.

Nevertheless, economic fundamentals — such as the rapid productivity growth in China — clearly point to strong pressures for the renminbi to appreciate in value…

This debate has so far been framed in a way that largely misses the key point. What is essential for China is to have an independent monetary policy oriented to domestic objectives. China’s monetary policy has hitherto been hamstrung by the tightly managed exchange rate regime. This regime prevents the People’s Bank of China (PBC) from raising interest rates to manage domestic demand since such a move could spur further capital inflows and increase pressure on the exchange rate. Giving the PBC room to raise interest rates by freeing it from having to target a particular exchange rate would help rein in credit growth and deter reckless investment, reducing the risk of boom-bust cycles. A key point here is that an independent monetary policy requires a flexible exchange rate, not a one-off revaluation.

Read the full piece to learn about their (daring?) policy prescription: inflation targetting.

“U.S. investors earn a significantly higher rate of return on their foreign investments than foreigners earn in the United States… about one-third of the excess return earned by U.S. corporations abroad can be explained by firms reporting “extra” income in low tax jurisdictions of their affiliates.” – Barry Bosworth, Susan M. Collins & Gabriel Chodorow-Reich

“U.S. investors earn a significantly higher rate of return on their foreign investments than foreigners earn in the United States… about one-third of the excess return earned by U.S. corporations abroad can be explained by firms reporting “extra” income in low tax jurisdictions of their affiliates.” – Barry Bosworth, Susan M. Collins & Gabriel Chodorow-Reich

“U.S. investors earn a significantly higher rate of return on their foreign investments than foreigners earn in the United States… about one-third of the excess return earned by U.S. corporations abroad can be explained by firms reporting “extra” income in low tax jurisdictions of their affiliates.” – Barry Bosworth, Susan M. Collins & Gabriel Chodorow-Reich