Chinese revaluation

I ought to leave the topic to those who follow it more closely, such as Brad Setser, but here’s the Economist on Chinese revaluation:

[M]any mainstream American economists are now calling on China to revalue by 20% or more. Yet the standard arguments for a revaluation are based partly on a series of myths.

The first myth is that there is overwhelming evidence that the yuan is grossly undervalued. China’s large bilateral trade surplus with America proves nothing. It largely reflects Asia’s changing supply chain…

At one extreme is Morris Goldstein, of the Peterson Institute for International Economics, who argues that the yuan is undervalued by 40% or more against the dollar and should immediately be revalued by 10-15%. In the other corner many highly respected economists, including Robert Mundell, an economics Nobel prize-winner, and Ronald McKinnon, of Stanford University, strongly argue against a big appreciation of the yuan…

Myth number two is that the sharp increase in China’s trade surplus is due to an explosion in cheap exports… The entire increase in China’s trade surplus since 2004 has come from trade in heavy industrial materials and equipment. China used to import increasing amounts of steel, aluminium, chemicals and machinery, but import growth collapsed after 2004 when the government started to tighten policy, causing a sharp slowdown in construction, one of the biggest importers of machinery and materials. At the same time China continued to invest heavily in metals and equipment, creating substantial excess capacity, so import growth remained relatively weak last year. Mr Anderson argues that imports should recover as overcapacity is used up.

The third fallacy is that imports from China destroy jobs and harm the American economy… Trade with China may affect the composition of jobs in America, but it has little impact on total employment…

The biggest myth of all is that a revaluation of the yuan would greatly reduce America’s trade deficit. The real cause of the deficit is that Americans spend too much and save too little. This means that the country has to import surplus savings from abroad by running a current-account deficit. If a stronger yuan did not cause Americans to save more, it would do little by itself to reduce the trade deficit.

Another reason why even a big rise in the yuan would do little to reduce America’s deficit is that there is little overlap between American and Chinese production, so American goods cannot replace Chinese imports. Instead, other countries, such as Indonesia and Vietnam, would probably replace the Chinese. Shifting purchases to higher-cost producers amounts to imposing a tax on American consumers, says Stephen Roach, chief economist of Morgan Stanley…

America is right that China needs to revalue, but for the wrong reasons. And arguing that a revaluation helps America’s economy makes it less likely that Beijing will act.

Ag subsidies & obesity

So how can the supermarket possibly sell a pair of these synthetic cream-filled pseudocakes for less than a bunch of roots?

For the answer, you need look no farther than the farm bill. This resolutely unglamorous and head-hurtingly complicated piece of legislation, which comes around roughly every five years and is about to do so again, sets the rules for the American food system — indeed, to a considerable extent, for the world’s food system. Among other things, it determines which crops will be subsidized and which will not, and in the case of the carrot and the Twinkie, the farm bill as currently written offers a lot more support to the cake than to the root. Like most processed foods, the Twinkie is basically a clever arrangement of carbohydrates and fats teased out of corn, soybeans and wheat — three of the five commodity crops that the farm bill supports, to the tune of some $25 billion a year. (Rice and cotton are the others.) For the last several decades — indeed, for about as long as the American waistline has been ballooning — U.S. agricultural policy has been designed in such a way as to promote the overproduction of these five commodities, especially corn and soy.

That’s because the current farm bill helps commodity farmers by cutting them a check based on how many bushels they can grow, rather than, say, by supporting prices and limiting production, as farm bills once did. The result? A food system awash in added sugars (derived from corn) and added fats (derived mainly from soy), as well as dirt-cheap meat and milk (derived from both). By comparison, the farm bill does almost nothing to support farmers growing fresh produce. A result of these policy choices is on stark display in your supermarket, where the real price of fruits and vegetables between 1985 and 2000 increased by nearly 40 percent while the real price of soft drinks (a k a liquid corn) declined by 23 percent. The reason the least healthful calories in the supermarket are the cheapest is that those are the ones the farm bill encourages farmers to grow.

Full NYT story (from April 22, oops) here.

[HT: My friend Aaron.]

Bush and the Bank

FT via HTWW:

The situation has been complicated by the fact that few people within the Bush administration understand what the World Bank does, says another official. This has meant that the administration’s shifting calculations have been mostly guided by day-to-day political deliberations rather than by an assessment of what would be in the longer-term interest of the US.

Good grief.

Obama's free trade instincts

Where do the Democratic frontrunners stand on trade?

To counter this establishment reputation, Mrs Clinton has reached out to the left. Dick Gephardt, a former majority leader of the House of Representatives and a well-known trade sceptic, is an adviser. Mrs Clinton’s trade rhetoric has been among the toughest of the candidates. She has talked of “a little timeout” before new trade deals are made—exactly what the party’s left has been asking for.

Mr Obama has carefully avoided any such rhetoric. His trade strategy, like much else, is still short on details. Like Mrs Clinton, he voted against the free-trade agreement with Central America. But judging by his latest book, Mr Obama is more concerned with helping people deal with globalisation than trying to slow it down. One trade wonk who knows both candidates says that Mr Obama is more of an instinctive free-trader than Mrs Clinton.

Economist story here.

Obama's free trade instincts

Where do the Democratic frontrunners stand on trade?

To counter this establishment reputation, Mrs Clinton has reached out to the left. Dick Gephardt, a former majority leader of the House of Representatives and a well-known trade sceptic, is an adviser. Mrs Clinton’s trade rhetoric has been among the toughest of the candidates. She has talked of “a little timeout” before new trade deals are made—exactly what the party’s left has been asking for.

Mr Obama has carefully avoided any such rhetoric. His trade strategy, like much else, is still short on details. Like Mrs Clinton, he voted against the free-trade agreement with Central America. But judging by his latest book, Mr Obama is more concerned with helping people deal with globalisation than trying to slow it down. One trade wonk who knows both candidates says that Mr Obama is more of an instinctive free-trader than Mrs Clinton.

Economist story here.

Obama’s free trade instincts

Where do the Democratic frontrunners stand on trade?

To counter this establishment reputation, Mrs Clinton has reached out to the left. Dick Gephardt, a former majority leader of the House of Representatives and a well-known trade sceptic, is an adviser. Mrs Clinton’s trade rhetoric has been among the toughest of the candidates. She has talked of “a little timeout” before new trade deals are made—exactly what the party’s left has been asking for.

Mr Obama has carefully avoided any such rhetoric. His trade strategy, like much else, is still short on details. Like Mrs Clinton, he voted against the free-trade agreement with Central America. But judging by his latest book, Mr Obama is more concerned with helping people deal with globalisation than trying to slow it down. One trade wonk who knows both candidates says that Mr Obama is more of an instinctive free-trader than Mrs Clinton.

Economist story here.

WB committee: Wolfowitz broke rules

LA Times:

World Bank President Paul D. Wolfowitz violated his contract, broke the bank’s code of conduct and trampled on numerous staff rules in arranging a promotion and a series of raises for his companion, a bank employee, according to a scathing report by an internal committee investigating the controversy.

Citing “the damage done to the reputation of the World Bank Group and to that of the president,” the seven-member committee recommended that the institution’s board “consider whether Mr. Wolfowitz will be able to provide the leadership needed to ensure that the bank continues to operate to the fullest extent possible” in its mission to fight world poverty.

The report, delivered to the board and released Monday evening, also skewered Wolfowitz for “questionable judgment and a preoccupation with self-interest over institutional best interest.”

37 country directors ask the Bank to resolve the issue quickly.

Galbraith on progressive trade policy

Echoing his February piece in The Nation, James K. Galbraith writes in The American Prospect:

Senators Byron Dorgan and Sherrod Brown articulated a trade policy that typifies the consensus view of the party’s labor-liberal wing. They criticize “free trade,” call for strong labor and environmental standards in future trade agreements, and argue for aggressive policies to open foreign markets to American goods. Their critique reflects a genuine anger, and the concerns their piece embodies deserve to be met. Their program is populist, nationalist, muscular, and in tune with the mood of the Democratic base.

But it is not reality-based.

Galbraith would like progressives to ditch the narrative that America needs to block manufactured imports (either through standards or tariffs) in order to protect jobs. Why?

Continue reading →