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The current global imbalance, a fight between rich and poor

Despite the moral posturing and smearing campaign against China in the Western media on the currency valuation issue, the essence of the current rebalancing of our world economic system is a fight between the rich and the poor (and between the rich themselves).

The U.S. really doesn’t have this currency valuation issue all that together. Here, NYT reports “Currency Rift With China Exposes Shifting Clout” where Jame D. Wolfensohn, a former president of the World Bank, on what this boils down to:

“The Chinese have a legitimate case that they have to keep their economy going and that they’re not going to let us run their economy for them,” he said.

“On the other hand, we have a legitimate case that China ought to bear its share of the burden and show some leadership.”

On bearing “its share of burdern”, don’t forget, for 2009, China was responsible for 50% of the worlds growth, and that’s according to the IMF. We all know the current global financial crisis started with the house of (credit) cards in the U.S. with the mortgage sub-prime and exotic derivatives mess. For sure, China is gaining clout.

That NYT article also said:

Over seared scallops and beef tenderloin, Treasury Secretary Timothy F. Geithner urged his counterparts from Europe, Canada and Japan to help persuade China to let its currency, the renminbi, rise in value — a crucial element in redressing the trade imbalances that are threatening recovery around the world.

But the next afternoon, the annual meetings of the International Monetary Fund ended with a tepid statement that made only fleeting and indirect references to the simmering currency tensions.

Why didn’t the Europeans and the Japanese go along? They have a vested interest in China’s economy continuing to hum along. Japan enjoys a trade surplus with China. They may not necessarily be that interested in having their exports to China slashed. They certainly don’t want China to follow suit with protectionism. In order for the U.S. prescription to be agreeable by all, it will first have to make sense for all.

Japan was subject to much vilification in the West lately for intervening to devalue the Yen. According to this UK Telegraph article:

the US and Europe are upset because they don’t like the taste of their own medicine. Creditor countries like Japan argue – with some justification – that Western governments are implicitly allowing their currencies to slide over the long term, not only to stay competitive but also to lower the real value of the debts they owe Asian governments.

That brings us to China – the Western world’s biggest single source of sovereign credit and the major reason Japan’s currency tricks generated such anger, particularly in the States.

With the US mid-term elections now looming, the Beijing-bashing season is in full swing. The US grew by just 1.6pc during the second quarter of 2010, down from 3.7pc during the previous three months and 5pc the quarter before. This isn’t what a recovery looks like. The Obama administration needs scapegoats.

Consider the case of international trade with Apple’s iPad product. See Allen‘s recent article, “Fighting for Jobs in a Globalized World” on why simply raising the RMB’s value is not it. The U.S. needs to be competitive in the lucrative ingredients that make up the iPad, not the $6 that goes into assembling it.

This brings to the original point I want to make at the top of this post. Americans are super rich. They consume more than they can afford (both at an individual level and at a government level), and a hefty chunk of it via borrowing. The USD being a global currency backed by a stable government and an almighty military simply makes it attractive. That in turn enables the U.S. to borrow cheaply. In times of growth, this formula works without apparent problems. In times of decline, this does not work well.

Have a look at this TIME article written in 1975, “Special Report: Poor vs. Rich : A New Global Conflict.” Our world today is ultimately the same as it was 35 years ago:

A conflict between two worlds—one rich, one poor—is developing, and the battlefield is the globe itself.

There is a lot of Economic jargon thrown around. There’s a lot of voodoo politics thrown into this mix. Ultimately, it comes back to this poor vs. rich dichotomy.

The rich (developed) countries do all they can to maintain the wealth gap versus the rest of the world. The poor (developing) countries do all they can to narrow that gap. In times of growth, everyone hums along. In a decline, it is a shock to this arrangement. Who needs to sacrifice more to benefit the rest during such a shock?

(I won’t rant about the “freedom” and “democracy” loving media and so called “activists” – because if they are, they’d be interested in narrowing this gap, by the way.)

This fight on a global scale is always going to be with us humans. It is also always with us within national boundaries. In this sense, if the U.S. wants the poorer countries to go along; it’s more than just China. It’s primarily the BRIC’s on one side, and the U.S., Europeans and the Japanese on the other. Forcing China to raise the RMB would simply mean the production shifts to another poor country. Getting the Chinese government to spur domestic consumption will indirectly help the U.S. (as agreed in the last round of U.S.-China Strategic Economic Dialog). In this context, the U.S. needs to strike deals around the world to encourage domestic consumption. China is not going to be jerked within a short period of time to correct the mess in the U.S..

There is also another fight that’s even more important – between the rich countries.

Americans are loosing grounds to the Japanese, the Koreans, and the Europeans (relatively speaking) in a number of industries in the last few decades. Look at auto, airlines, mobile processors, appliances, and so forth. Think the ascendancy of Toyota, Airbus, Samsung, and ARM (mobile processor).

This is where America needs to compete hard. Competing against China on labor cost is a sure way to lowered standards of living.

This is the reason why I think Allen‘s recent article, “Fighting for Jobs in a Globalized World” is particularly important to understand. The American public needs to wake up and make their politicians accountable for the current mess.

It is also easier for U.S. politicians to scapegoating, and that’s why we see, “China Emerges as a Scapegoat in Campaign Ads.”

China, brace yourself.

  1. October 12th, 2010 at 10:49 | #1

    Has anyone noticed the outsourcing attack ads from the democrats recently? Here are a couple:

    Do democracies run on fear or just Democrats?

    We may chalk this up to routine election politiking, but if mud slinging is what drives democracies, what does that say about democracies – democratic decision making – in general?

    OK – that’s just an aside. Hopefully people do wise up about trade soon. As article shows, trade is too important an issue to be decided by mud slinging. Here is an excerpt:

    China is back as the bogeyman in Michigan’s race for governor.

    Democrat Virg Bernero has tried to pin the jobs-to-China label on Republican Rick Snyder for his tenure with computer-maker Gateway and his investment in an electronics parts maker that opened a small sales office in China.

    The Michigan Democratic Party has spent $2.4 million on ads accusing Snyder of shipping jobs to China when he was with Gateway — a charge Snyder denies.

    But — unlike four years ago when polls showed Granholm’s China spin working — Bernero’s attacks haven’t.

    Bill Rustem, president of Public Sector Consultants of Lansing, said Michigan’s view of China has changed: “People are beginning to understand that we’re in a different place. We’ve got to compete globally.”

    China Attacks Nothing New, Experts Say

    In his latest attempt to paint Republican gubernatorial candidate Snyder as “chief executive outsourcer,” Democrat Bernero uncorked a new allegation in Sunday’s debate — that Snyder invested in a company, Discera, that has begun shipping U.S. technology to China.

    Actually, Sweden and Thailand are where Discera manufactures its tiny semiconductors for cell phones, cameras, DVRs and other consumer products, said company President and CEO Bruce Diamond.
    He said the company, with main offices in Ann Arbor and San Jose, Calif., opened a five-person sales office in Shenzhen, China, to better sell the electronic parts.

    Diamond called Bernero’s charge “ridiculous,” and noted that Discera developed its products at the University of Michigan.

    “We sell mainly in Asia because that’s where most of our consumer electronics are built,” Diamond said. “You buy a Sony Blu-Ray player or a Samsung TV, that’s built in Asia,” Diamond said.

    Help for automakers

    Oakland County Executive L. Brooks Patterson, who has led a trade mission to China, said China is too big for businesses to ignore. He said General Motors and Chrysler operations in China helped keep the carmakers afloat.

    “By 2030, the Chinese economy will overtake the American economy as the world’s largest,” Patterson said. “A lot of businesses have told me they want to get a toehold in China.”

    He called Bernero’s attacks on Snyder conventional election-year play, and pointed out that Wayne County has two trade offices in China.

    Greg Theokas, whose Mt. Clemens company OE Push Rods makes automotive engine parts, has found a lucrative market in Asia.

    Attacking trade between the U.S. and China is counterproductive, he said, even in political campaigns where the truth is often obscured.

    “We have to educate ourselves on trade. That’s where the focus should be,” Theokas said.

  2. October 12th, 2010 at 17:22 | #2

    Here is a recent take down of a stupid Washington Post editorial:

    Washington Post Wins ‘Stupid China Editorial of the Year’ Award

  3. colin
    October 12th, 2010 at 17:26 | #3

    “The American public needs to wake up and make their politicians accountable”

    Ha ha, good luck with that.

  4. Charles Liu
    October 12th, 2010 at 22:32 | #4

    Yes, in a way just like China, America’s permanent underclass is also powerless.

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