Saturday, August 10, 2019

5 Lessons from China on How to Drive Sustainable Growth [feedly]

A Chinese view...

5 Lessons from China on How to Drive Sustainable Growth

https://www.globalpolicyjournal.com/blog/09/08/2019/5-lessons-china-how-drive-sustainable-growth

Journalists, politicians and regular citizens have spent much time in recent years discussing the 'Chinese dream'. It's our vision of China's journey into the future.

I believe the Chinese dream will see us break the link between growing incomes, rising production and degradation of the environment. Our businesses should continue to grow even as our cities, farmland and entire ecosystems become greener and more sustainable.

Long-term wealth creation should go hand-in-hand with sustainability. Earlier this year, Lyu Jun, Chairman of COFCO Corporation, described how the commercial case for sustainable production is lagging behind the moral one. Since his article was published as part of the World Economic Forum 2019 Annual Meeting, we have been actively demonstrating the commercial value of sustainability.

In July, my company partnered with a consortium of 21 banks to engineer a $2.3 billion loan. Under the terms of this loan, we pay a lower interest rate if we can meet a series of annual targets on sustainability. Any interest saved will be re-invested into initiatives that increase our sustainability performance even further. Sustainability earns us money.

This loan demonstrates some of the keys to sustainable growth. Here are five of them:

1) Finance is emerging as a major driver of sustainability.

Government policy and consumer preferences can certainly shift corporate behaviour, as tariffs on soy have shown. And most consumer-facing businesses are adapting to their customers' preferences for more sustainability.

But I see a more interesting role for the banks, whose influence is immense. The financial sector is shifting quickly towards sustainability as the links to reduced risk and better financial performance become clear. In the first half of this year, the issuance of sustainability-linked loans leapt 63% to $44 billion, as much as in all of 2018. Money talks.

2) Innovation will be part of any solution.

While the public sector has limited funding resources, private investment and capability could play an instrumental role in achieving sustainable agricultural development goals. But current levels are not enough to meet global food security challenges in the long term. Private investors remain reluctant to invest in sustainable agriculture because of the perceived uncertainties and high risks. Furthermore, conventional financing models have their limits, particularly in developing countries where most of the growth in food demand and production will come from.

We need more innovative financing in which public and private sectors can work together, to create the necessary policy and investment environment for private finance in sustainable farming.

We should look at the renewable energy sector for new ideas, where public-private partnerships (PPPs) have successfully delivered mechanisms for pooling public and private financing and risk mitigation.

People may not like change, but they like innovation. People don't like to give things up, but they like to have new options. Innovation is the answer. It is essential to change.

3) Success depends on collaboration. Bringing people on board is a must.

To identify a solution is much easier than to implement it. In theory, everybody wants a more sustainable food system. But not everybody wants or is able to pay the price. That's why sustainable change requires us to bring on board all those who are affected. In order to achieve a sustainable food chain, farmers and producers may need further incentives.

China's sizeable Grain for Green project offered grains, tax and other encouragements so that farmers would protect, instead of clear, their forested slopes.

And agribusinesses will be wise to adopt the same principle. Sustainable farming will only be possible if farmers are on board.

4) China is serious about sustainability.

President Xi has been consistent about the need for green policies "to protect the common home we live in". His position is also consistent with recent Chinese history, which teaches us that only sustainable agriculture can deliver meaningful food security.

Between 1978 and 2015, China invested a total of $378.5 billion in 16 major sustainability programmes, most of it in the latter 20 years. The investment involved more than 500 million people and far exceeds any other national sustainability programme. On the commercial side of sustainability, China is now at the cutting edge of solar technology, low-carbon transport, the circular economy, carbon trading, and more. We are serious about sustainability.

5) Success requires solutions at scale and China is well-placed to deliver them.

The urgency of our biodiversity and climate crises means that we need to have solutions in place right now. And these solutions need to be at scale.

The sustainability-linked loan mentioned above is not the first in the agricultural trading sector, but it is the largest so far. It demonstrates our intention to join hands with others in our industry and to contribute to sustainable growth in the global agriculture sector. That is part of the Chinese dream.

 

 

Johnny Chi Jingtao, Executive Vice-President, COFCO.


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Innovation Policy: Federal Support for R&D Falls as its Importance Rises [feedly]

Innovation Policy: Federal Support for R&D Falls as its Importance Rises
http://conversableeconomist.blogspot.com/2019/08/innovation-policy-federal-support-for-r.html

  One of those things that "everyone knows" is that continued technological progress is vital to the continued success of the US economy, not just in terms of GDP growth (although that matters) but also for major social issues like providing quality health care and education in a cost-effective manner, addressing environmental dangers including climate change, and in other ways. Another thing that "everyone knows" is that research and development spending is an important part of generating new technology. But total US spending on R&D as a share of GDP has been nearly flat for decades, and government spending on R&D as a share of GDP has declined over time.

Here's a figure on funding sources for US R&D from the Science and Engineering Indicators 2018.  The top line shows the rise in R&D spending in the 1960s (much of it associated with the space program and the military), a fall in the 1970s, and then how R&D spending has bobbed around 2.5%  of GDP since then. The dark blue line shows the rise in business-funded R&D, while the light blue line shows the fall in government funding for R&D.
One underlying issue is that business-funded R&D is more likely to be focused on, well, the reasonably short-term needs of the business, while government R&D can take a broader and longer-term perspective,

One signal of this dynamic is that the share of patents which rely on government government funding is on the rise. L. Fleming, H. Greene, G. Li, M. Marx, and D. Yao describe the pattern in "Research Funding: Government-funded research increasingly fuels innovation" (Science, June 21, 2019, pp. 11139-1141).



Of course, the relationship between R&D spending and broader technological progress is complicated. Translating research discoveries into goods and services isn't a simple or mechanical process. Other important elements include the economic and regulatory environment for entrepreneurs, the diffusion of new technologies across firms,  and the quantity of scientists and researchers. For an overview of the broader issues, Nicholas Bloom, John Van Reenen, and Heidi Williams offer "A Toolkit of Policies to Promote Innovation"in the Summer 2018 issue of the Journal of Economic Perspectives. They explain the case for government support of innovation:
Knowledge spillovers are the central market failure on which economists have focused when justifying government intervention in innovation. If one firm creates something truly innovative, this knowledge may spill over to other firms that either copy or learn from the original research—without having to pay the full research and development costs. Ideas are promiscuous; even with a well-designed intellectual property system, the benefits of new ideas are difficult to monetize in full. There is a long academic literature documenting the existence of these positive spillovers from innovations. ...
As a whole, this literature on spillovers has consistently estimated that social returns to R&D are much higher than private returns, which provides a justification for government- supported innovation policy. In the United States, for example, recent estimates in Lucking, Bloom, and Van Reenen (2018) used three decades of firm-level data and a production function–based approach to document evidence of substantial positive net knowledge spillovers. The authors estimate that social returns are about 60 percent, compared with private returns of around 15 percent, suggesting the case for a substantial increase in public research subsidies.
Along with  pointing out some advantages of government-funded R&D, Bloom, van Reenen, and Williams also point out that when it comes to tax subsidies for corporate R&D, the US lags well behind. They write: 
The OECD (2018) reports that 33 of the 42 countries it examined provide some material level of tax generosity toward research and development. The US federal T&D tax credit is in the bottom one- third of OECD nations in terms of generosity, reducing the cost of US R&D spending by about 5 percent. ...  In countries with the most generous provisions, such as France, Portugal, and Chile, the corresponding tax incentives reduce the cost of R&D by more than 30 percent. Do research and development tax credits actually work to raise R&D spending? The answer seems to be "yes."
Here's their toolkit of pro-innovation policies, with their own estimates of effectiveness along various dimensions. 


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The Return of the Right in Latin America [feedly]

The Return of the Right in Latin America
http://cepr.net/publications/op-eds-columns/the-right-has-power-in-latin-america-but-no-plan

Alexander Main
Jacobin, August 2019

Le Monde diplomatique, July 1, 2019

See article on original site

En français

Two days after the November 2016 elections that brought him to office, president-elect Donald Trump had a 90-minute meeting with President Barack Obama in the Oval Office of the White House. "We discussed a lot of different situations, some wonderful, some difficulties," Trump told the media afterward. He later revealed that the major "difficulty" discussed was the North Korean nuclear threat.
 
We know little else about the two men's conversation that day, but it is likely that one particularly "wonderful situation" they touched on was a part of the world where the US had gained enormous ground during Obama's presidency: Latin America.
 
When Obama first took office in January 2009, much of Latin America and the Caribbean was dominated by independent-minded left-leaning governments, despite the previous Republican administration's aggressive attempts to turn back the "pink tide" of progressive movements that had come to power in the early twenty-first century.
 
But by the end of Obama's two terms, Latin America had swung decisively back to the Right. Groundbreaking regional integration schemes spearheaded by left-wing governments, such as the Union of South American Nations (UNASUR) and the Community of Latin American and Caribbean States (CELAC), were paralyzed or floundering. Meanwhile, a US-backed bloc had emerged ― the Pacific Alliance, made up of Chile, Mexico, Colombia, and Peru, all signatories to "free trade" agreements with the US. Openly dismissive of UNASUR and the Venezuela- and Cuba-led Bolivarian Alliance for the Peoples of Our America (ALBA), the Pacific Alliance has embraced many of the neoliberal policies that led to two decades of economic stagnation and increased inequality in the region during the 1980s and '90s (and which subsequently fueled support for "pink tide" policy alternatives).
 
There are a number of factors that led to the return of the Right in Latin America, including economic downturns resulting in large part from the ripple effects of the global financial crisis, politicized corruption scandals, the political influence of powerful ultraconservative evangelical movements, and the expanding influence of financial capital. Undemocratic coups also brought down left governments: a military coup, in the case of Honduras in 2009; and the parliamentary coups that resulted in the unconstitutional removals of President Fernando Lugo of Paraguay in 2012 and President Dilma Rousseff of Brazil in 2016.
 
In nearly every case, the US provided a helping hand to right-wing forces. For instance, the Obama administration helped prevent the toppled left-wing leader of Honduras from returning to power and provided strong diplomatic support for the ousting of Lugo and Rousseff. It deepened a financial crisis under Argentina's left-wing government by blocking loans from US-dominated international financial institutions, and it blatantly intervened in Haiti's 2010–2011 elections in the interest of preventing a left-leaning party from remaining in office. Throughout the region, the US deployed various "soft power" tactics to support the electoral victories of right-wing movements.
 
And so, by the end of Obama's presidency, pliant pro-US governments abounded, eager to demonstrate their loyalty to Washington. The new right-wing governments of the biggest economies of South America — Brazil and Argentina — clamored for "free trade" agreements with the US. Only 11 years earlier, their left-wing predecessors had shattered Washington's dream of a Free Trade Area of the Americas.
 
President Trump has shown limited interest in nurturing relations with his many avid allies in Latin America. He has cancelled several trips to the region, including two to Colombia and one to the eighth Summit of the Americas, in Peru, even though the themes of the agenda ― focused on countering Venezuela's left-wing government and promoting anticorruption campaigns ― could have been designed by the US State Department. As of June 2019, his only presidential trip south of the border has been to Buenos Aires, for the December 2018 G20 summit.
 
When he has paid attention to the region, Trump has often antagonized friends and foes alike. He has hurled threats and insults at Central American and Mexican migrants; rolled back Obama's popular Cuba normalization policy; and sharply criticized Colombia's far-right president Iván Duque, saying that he had "done nothing" to stem the country's booming cocaine industry. His harsh words horrified the US foreign policy establishment, which considers Colombia to be a crucial political and military ally, regardless of the government's appalling human rights record.
 
For their part, Trump officials have sought to attenuate some of this friction by traveling frequently to Latin America. Vice President Mike Pence has made five Latin America trips. Mike Pompeo traveled to Colombia and Mexico as CIA director and then made six more trips during his first year as secretary of state. National Security Advisor John Bolton has also ventured to the region, most notably to Brazil where he heralded extreme-right president Jair Bolsonaro as a "like-minded partner."
 
Unsurprisingly, given Trump's protectionist tendencies, new trade agreements usually haven't been a topic of discussion during these high-level visits, with the exception of Mexico and its renegotiation of NAFTA, now billed as the US-Mexico-Canada Agreement (USMCA). Instead, State Department press releases indicate that Venezuela has been at the top of nearly every bilateral meeting agenda. China, which Pompeo and others have accused of "imperial" ambitions in the region, with no apparent intended irony, often appears next on these agendas.
 
Meanwhile, the Trump administration has had little success in persuading even its most stalwart allies to weaken their relations with China ― admittedly a difficult feat given that Chinese trade and investment has helped keep many of their economies afloat. Most have gone in the opposite direction: Chile's right-wing president Sebastián Piñera has said he wants to "transform Chile into a business center for Chinese companies"; Argentine president Mauricio Macri signed a multibillion-dollar five-year economic cooperation plan with China; even Jair Bolsonaro, who has parroted Trump's anti-China rhetoric, has recently engaged in a diplomatic charm offensive with Beijing.
 
Where Trump's foreign policy team has gotten a great deal of traction is on Venezuela, a country whose enduring left-wing leadership had previously been a regional obsession for both the George W. Bush and Obama administrations. Venezuela had apparently not initially been on Trump's radar. During his presidential campaign, he rarely mentioned the economically beleaguered South American nation. All of that changed after Trump and former election rival Marco Rubio (R-FL) met repeatedly and made peace in the spring of 2017. Soon after, the president announced his intention to reverse Obama's Cuba normalization policy. Then he turned his sights on the government of Nicolás Maduro, first announcing that there might be a "military option" for Venezuela, then imposing crippling financial sanctions in August of 2017.
 
It is clear that Rubio, who is beholden to right-wing Cuban-American and Venezuelan-American donors and voters in South Florida, has had an outsized role in determining Trump's Latin American policy. In fact, many believe that he convinced Trump that supporting a hard-line regime change strategy toward Venezuela could significantly improve Trump's odds of winning Florida in the 2020 presidential elections. Whatever the case, Trump officials have zealously rallied regional governments to support such a strategy. Their efforts have borne fruit.


Regional Right-Wing Alliances Emerge

In August 2017, representatives from a dozen right-wing Latin American governments and Canada established the Lima Group in Peru, signing a declaration that denounced the alleged "rupture of democratic order" and "violation of human rights" in Venezuela and committing to work together to regionally isolate the Maduro government. The Lima Group has met repeatedly since then, focusing exclusively on Venezuela and ignoring particularly troubling attacks on democracy and human rights in countries like Honduras and Colombia, both Lima Group members.
 
Though the US isn't officially part of the group, high-level US representatives have attended nearly all of its meetings. Much as the Obama administration cheered on the Pacific Alliance and downplayed its close coordination with the group, Trump officials have constantly cited Lima Group positions to create the impression that US strategy is rooted in a sort of regional multilateral consensus. Major international media outlets and think tanks have helped reinforce this impression by systematically ignoring the right-wing ideological bent of many of the signers of the group's resolutions.
 
When Venezuelan opposition leader Juan Guaidó proclaimed himself interim president of Venezuela in January 2019, the Lima Group, the US, and dozens of other countries around the world recognized him as president. The Lima Group took a harder line, actively supporting a strategy of regime change through a military coup against Maduro, who had been reelected in contested elections in May the previous year. Mexico, where a progressive government had just taken office, refused to sign the group's resolution, instead proposing, jointly with the left-leaning government of Uruguay, a "dialogue mechanism" to address Venezuela's political crisis.
 
However, soon afterward, the Lima Group's positions began to diverge from those of the Trump administration. In late February, when Guaidó began floating the idea of enlisting outside military support in his effort to oust Maduro, Lima Group members published a declaration saying that a solution to the crisis should come from Venezuelans themselves. Regardless of their ideological bent and affinity for Washington, these governments stopped short of supporting foreign military intervention.
 
As the political stalemate continued in Venezuela, the Lima Group began expressing support for a negotiated solution, a possibility that the US ― still focused on achieving regime change through a military coup ― strongly rejected. Then, after Guaidó staged a failed uprising on April 30, the group began to appeal to Cuba to help with negotiations. This idea was particularly abhorrent to Trump's Latin America team, which now included Elliott Abrams, a Cold War hawk who in the 1980s had defended Central American death squads and lied to Congress about the Iran-Contra scandal.
 
Abrams and other officials claimed, without evidence, that Cuba had thousands of troops and intelligence agents in Venezuela and was responsible for "propping up" Maduro. In fact, after Canadian prime minister Justin Trudeau reached out to Cuban authorities on behalf of the Lima Group to ask for their help in advancing negotiations, he received an irate call from Vice President Pence calling on him to instead help expose Cuba's "malign influence" in Venezuela.
 
The Trump administration has also failed in its public efforts to lobby Lima Group members to implement broad economic sanctions against Venezuela. Some right-wing governments in the region implemented sanctions targeting individual Venezuelan officials, but none of them sought to replicate the US's devastating financial or oil sector sanctions against Venezuela.
 
It appears then that even the US's most compliant right-wing allies retain a basic aversion to the extreme forms of interventionism promoted by Trump's team. It has probably not helped that John Bolton and other officials have recently trumpeted the virtues of the Monroe Doctrine, the nearly 200-year-old imperial policy that has served to justify countless US interventions throughout the hemisphere. No Latin American leaders have shown support for a revived Monroe Doctrine, and few appear to agree with Bolton or Pompeo's claims that China or Russia represent a serious threat to the region that necessitates supporting the US in vigorously opposing their presence.
 
Nor is it likely that any government in Latin America was pleased to hear Bolton state on Fox Business that Venezuela's vast oil reserves were a key motivation for US intervention there as it would "make a big difference to the United States economically if we could have American oil companies invest in and produce the oil capabilities in Venezuela."
 
There is a certain irony in the fact that the Latin American geopolitical panorama hasn't been this favorable to US interests since at least the late '90s, yet the stridently imperialistic approach of the current administration risks alienating even those in the region most supportive of US hegemony.
 
But even if the Trump team's behavior grows more unacceptable to Latin America's right-wing governments, it appears unlikely that these governments will succeed in developing a coherent, collective project in defense of their vision for the region. This is because, for the most part, the main actors of the Latin American right have not promoted any alternative strategy in international relations that does not involve US leadership.
 
This is apparent in the strikingly meager record of the regional groupings that conservative governments have developed since the region's rightward shift. The Pacific Alliance, for its part, doesn't have much to show for the eight years it has existed. Its biggest "achievement" is the integration of its four member states' stock markets in a common trading platform, but there is little evidence that this has provided a significant boost to these countries' faltering economies. And the biggest right-wing regional bloc, the Lima Group, is a one-trick pony focused on Venezuela.
 
In contrast, the previous progressive decade's regional groupings had a real impact, with extensive cooperation mechanisms in infrastructure, defense, investment, trade, energy, social programs, and various other areas, and ― perhaps most importantly ― systematic diplomatic consultations and coordination around common challenges and crises as they emerged.
 
The most recent alliance to emerge is the eight-member Forum for the Progress and Development of South America ― or "Prosur" ― presented by its right-wing cofounders ― as essentially an anti-UNASUR (a body they deemed to be too pro-Venezuela). Officially founded in March of 2019, the group includes Argentina, Brazil, Chile, Colombia, Ecuador, Guyana, Paraguay, and Peru. So far, it appears to be a repeat performance encompassing the positions of both the Lima Group and the Pacific Alliance.

If the Left wins a few elections in the coming years, then a progressive generation of regional alliances could make a comeback. These groups ― UNASUR, CELAC, ALBA ― have structural flaws that should be addressed, but continue to offer a compelling vision for the region, one that puts the welfare of the peoples of Latin America first and maps out a path toward genuine political and economic independence, without the interference or tutelage of outside powers.


Alexander Main is Director for International Policy at the Center for Economic and Policy Research in Washington, DC.



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Tuesday, August 6, 2019

Tim Taylor: China and Currency Manipulation [feedly]

China and Currency Manipulation
Tim Taylor
http://conversableeconomist.blogspot.com/2019/08/china-and-currency-manipulation.html

Treasury Secretary Steve Mnuchin has "determined that China is a Currency Manipulator" (with capital letters in the press release) The overall claim is that one major reason for China large trade surpluses is that China is keeping is exchange rate too low. This low exchange rate makes China's exports cheaper to the rest of the world, while also making foreign products more expensive in China, thus creating China's trade surplus.

The claim is not particularly plausible.  Indeed, a cynic might point out that if currency manipulation was the main trade problem all along then, then Trump has been wasting time by playing around with tariffs since early 2018. For perspective on the exchange rate issue, let's start with the Chinese yuan/US dollar exchange rate in the last 30 years.
Up to about 1995, the exchange rate shown here is not an especially meaningful number, because during that time China had an "official" exchange rate set by the government and an "unofficial" exchange rate set in markets. The official rate had a much stronger yuan than the unofficial rate, so when the two rates were united in 1995,  there is a steep jump upward in the exchange rate graph, as the yuan gets weaker (that is, it takes more yuan to buy a US dollar).

From about 1996-2005, the straight horizontal line on the graph is strong evidence that the Bank of China was keeping its exchange rate fixed.  Starting in mid-2005, China stopped holding its exchange rate fixed, and the yuan become stronger, moving from about 8.2 yuan/dollar in early 2005 to 6.8 yuan/dollar by mid-2008.  Since then, the yuan has shifted up and down, falling as low as about 6.1 yuan/dollar at times, but then often rising back up to about 6.8 yuan/dollar.

It's useful to compare the yuan exchange rate with China's balance of trade. Here's a figure based on World Bank data showing China's trade balance since 1990.  Back in the 1990s, China's trade surplus was usually positive, but also typically less than 2% of GDP. When China joins the WTO in 2001, its exports take off and so does its trade surplus, hitting 10% of GDP in 2007. It would be highly implausible to attribute this jump in China's trade surplus to currency manipulation, because the first figure shows that China's exchange rate is unchanged during this period. It is also highly implausible to attribute this rise to more Chinese protectionism, because China's giant trade surpluses resulted from higher exports, not lower imports.

But then China's extraordinary trade surplus soon went away. By 2011 China's trade surplus was under 2% of GDP; in 2018, it's under 1% of GDP. Thus the Trump administration complaint that China is using an extraordinarily weak exchange rate to power very large Chinese trade surpluses has not been plausible since 2011, and is even less plausible since 2018.

So how did the US Treasury decide in August 2019 that China was now manipulating its currency? Treasury is required by law to publish a semiannual report, "Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States."

At the time of the October 2018 report, exchange rate was about 6.9 yuan/dollar. The report did not find that China was acting like a currency manipulator at that time. As it points out, the IMF agreed with this view, as did other outside economists. For example, the Treasury wrote:
"Over the last decade, the RMB has generally appreciated on a real, trade-weighted basis. This appreciation has led the IMF to shift its assessment of the RMB in recent years and conclude that the RMB is broadly in line with economic fundamentals."
That report also offers a macroeconomically odd complaint. It acknowledges that China's overall trade surplus in 2018 was near-zero, but then complains that China's trade position is "unevenly spread"--that is, China has a trade surplus with some countries like the US, but a nearly offsetting trade deficit with other countries. Treasury wrote:
Since then, China's current account surplus has declined substantially, falling to 0.5 percent of GDP in the four quarters through June 2018. However, it remains unevenly spread among China's trading partners. In particular, China retains a very large and persistent trade surplus with the United States, at $390 billion over the four quarters through June 2018.
So China was on warning that even if its overall trade balance was near-zero, the US was only focused on the bilateral trade balance. The next Treasury report arrives in May 2019, when the exchange rate was still 6.9 yuan/dollar, as it had been at the time of the October 2019 report. Again, Treasury does not find that China is a currency manipulator. However, in the exchange rate graph above you can see a little dip in the yuan/dollar exchange rate in March 2018, as the yuan becomes a bit weaker for a short time. Treasury warns:
Notwithstanding that China does not trigger all three criteria under the 2015 legislation, Treasury will continue its enhanced bilateral engagement with China regarding exchange rate issues, given that the RMB has fallen against the dollar by 8 percent over the last year in the context of an extremely large and widening bilateral trade surplus. Treasury continues to urge China to take the necessary steps to avoid a persistently weak currency.
Again, the focus is on China's bilateral trade surplus with the US. There's another interesting hint here, which is that Treasure is urging "China to take the necessary steps to avoid a persistently weak currency." This phrasing is interesting, because it isn't a complaint that China is intervening to make its currency too weak; instead, it's a complaint that China should be intervening more to prevent its currency from being weak. It's a complaint that China is not being enough of a currency manipulator in the way the Trump administration would prefer.

Before the announcement from Mnuchin, the exchange rate in August 2019 was still about 6.9 yuan/dollar--that is, what it had been in May 2019 and October 2019. But now, this exchange rate was evidence that China was "Currency Manipulator." In fact, the recent Treasury press release links to the May 2019 report, which did not find that China was manipulating its currency, in support of the finding that China was manipulating its currency.

The May 2019 report sets out three standards that Treasury will supposedly be looking at when thinking about currency manipulation. First is whether the country has a bilateral trade surplus with the US of more than $20 billion, which China does. Second is whether the country has an overall trade surplus of more than 2% of GDP, which China doesn't.  IMF statistics find that China's trade surplus in 2018 was 0,4% of GDP; moreover, the IMF finds that China is headed for a trade surplus in the next few years. Third is whether the country is intervening regularly in foreign exchange markets. As the Treasury report points out, Bank of China foreign exchange operations are shrouded in secrecy, but the evidence suggests that China's foreign exchange reserves haven't moved much since early 2018, or are perhaps a bit down overall, which is not consistent with the theory that the Bank of China has been buying lots of US dollars to keep the yuan exchange rate weak.

For those with eyes to see, it should be apparent that trade deficits and surpluses rise and fall as a a result of large-scale macroeconomic factors, including national levels of consumption, savings, and investment.  I won't belabor this point here, because I've tried to explain it a few times: for example, see "Misconceptions about Trade Deficits" (March 30, 2018), "Some Facts about Current Global Account Balances" (August 7, 2018), and "US Not the Source of China's Growth; China Not the Source of America's Problems"(December 4, 2018).

Understanding the actual drivers of trade balances explains why raising tariffs for a year and watching the US trade deficit got larger, rather than smaller. China's yuan/dollar exchange rate is at a level where its overall trade balance is near-zero, and according to the IMF, headed for a modest trade deficit in the next few years. Thus, the IMF is unlikely to back the Trump administration argument that the Bank of China is manipulating its exchange rate. But if the Trump administration bludgeons China into having a substantially stronger exchange rate, what happens next?

A strong exchange rate for one currency necessarily means a weaker exchange rate for other currencies: for example, if it takes fewer yuan to buy a dollar, it necessarily takes more dollars to buy a yuan. By arguing for a stronger yuan exchange rate, the Trump administration is apparently trying to devalue its way to prosperity by arguing for a weaker US dollar exchange rate,  This makes it easier to sell US exports abroad, but the lower buying power for the US dollar also means that, in effect, everything which is imported by consumers and firms will cost more.  Economies with floating exchange rates, like the US, are built to absorb short- and even medium-term fluctuations in exchange rates without too much stress. But in effect, the current Treasury policy is to advocate that China take steps to produce a permanently weaker US dollar--and thus benefit exporters at the cost of higher prices for importers--until the bilateral US trade deficit with China is eliminated.  

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Desperate Britain Has No Leverage for U.S. Deal, Summers Says - Bloomberg

Desperate Britain Has No Leverage for U.S. Deal, Summers Says

by Eddie Spence



https://www.bloomberg.com/news/articles/2019-08-06/desperate-britain-has-no-leverage-for-u-s-deal-summers-says

Trump’s China Shock [feedly]

Trump's China Shock
https://www.nytimes.com/2019/08/05/opinion/trumps-china-shock.html

I didn't know that the Dow was going to drop 750 points, so my latest column is El Paso-related. Probably the right choice anyway, because US-China is moving so fast that anything in the print paper would be out of date.

But it does look as if I should try to explain (a) what I think is happening (b) why the markets are going so nuts. By the way, given Mnuchin's declaration just a few minutes ago that China is a currency manipulator, tomorrow's market action should be … interesting.

So here's the thing: neither Trump's tariff announcement last week nor, especially, the depreciation of China's currency today should objectively be that big a deal. Trump slapped 10 percent tariffs on $200 billion of Chinese exports, which is a tax hike of 0.1 percent of US GDP and 0.15 percent of Chinese GDP.

In response, China let its currency drop by about 2 percent. For comparison, the British pound has dropped around 9 percent since May, when it became clear that a no-deal Brexit was likely.


So why are these smallish numbers such a big deal? Mostly because we've learned things about the protagonists in this trade conflict, things that make a bigger, longer trade war seem a lot more likely than it did even a few days ago.

First, Trump really is a Tariff Man. Some naïve souls may still have been hoping that he would learn something from the failure of his trade policy so far. More sensible people hoped that he might do what he did with NAFTA: reach a new deal basically the same as the old deal, proclaim that it was totally different, and claim a great victory.

But no: it's pretty clear now that he refuses to give up on his belief that trade wars are good, and easy to win; his plan is to continue the beatings until morale improves. What may have looked like temporary tariffs designed to win concessions now look like permanent features of the world economy, with the level of tariffs and the range of countries facing them likely to expand over time.

Second, China is clearly signaling that it's not Canada or Mexico: it's too big and too proud to submit to what it considers bullying. That slide in the renminbi wasn't a concrete policy measure as much as a way of saying to Trump, "talk to the hand" (no doubt there's a good Chinese expression along these lines.)

Incidentally — or maybe it's not so incidental — while there are many valid reasons to criticize Chinese policy, currency manipulation isn't one of them. China was a major currency manipulator 7 or 8 years ago, but these days if anything it's supporting its currency above the level it would be at if it were freely floating.



And think for a minute about what would happen to a country with an unmanipulated currency, if one of its major export markets suddenly slapped major tariffs on many of its goods. You'd surely expect to see that country's currency depreciate, just as Britain's has with the prospect of lost market access due to Brexit.

In other words, the Trump administration in its wisdom has managed to accuse the Chinese of the one economic crime of which they happen to be innocent. Oh, and what are we going to do to punish them for this crime? Put tariffs on their exports? Um, we've already done that.

So how does this all end? I have no idea. More important, neither does anyone else. It looks to me as if both Trump and Xi have now staked their reputations on hanging tough. And the thing is, it's hard to see what would make either side give in (or even to know what giving in might mean.)

At this rate, we may have to wait for a new president to clean up this mess, if she can.
 -- via my feedly newsfeed

PK: S, a yuan currency war...

So, A Yuan Currency War
Paul Krugman

On Monday night the U.S. Treasury designated China a currency manipulator. This was deeply ironic to those of us who follow such things.

After all, Treasury shied away from calling China on its currency policy back in 2010, when the accusation was actually true, and the deliberate undervaluation of the renminbi, China's currency, was doing real harm at a time of mass unemployment. As best I could tell — and I was talking to people with some inside information at the time — the Obama administration decided that accusing China of currency foul play, although it would have been accurate, would be counterproductive.

For while currency manipulation is illegal under international agreements, there isn't any clear remedy. The Obama administration therefore feared that it would face a nasty choice: look ineffective by accusing China of sin, then doing nothing about it, or respond with tariffs that might set off a destructive trade war.

Things are very different today. At this point, China's currency policy is actually fairly benign; if anything, its policies are keeping the renminbi stronger than it would be otherwise. Meanwhile, U.S. unemployment is low. There are plenty of things to criticize about China, but currency policy isn't one of them. With unerring aim, the Trump administration has decided to accuse China of the one crime of which it's innocent. Of course, this administration doesn't have to fear setting off a trade war, since it has already done that.

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Let's back up for a minute. What does currency manipulation even mean? Currencies aren't commodities like soybeans or natural gas, which have "natural" prices determined by supply and demand. Instead, we live in a world of "fiat" currencies created by governments; the supply of dollars is whatever the Federal Reserve says it should be. If a government decides for whatever reason to change the supply of money, the price of that money will change, but that's not manipulation in any meaningful sense of the word.

So what we mean when talking about currency manipulation is fairly subtle: it refers to actions governments take to keep their currencies weak so as to achieve a competitive advantage. And China was doing that back in 2010: it was buying dollars to keep its own currency weak, and imposing controls to keep foreigners from investing a lot of money in China, which would have pushed the renminbi up.

Since 2013, however, China has been doing more or less the opposite: generally selling dollars, while imposing controls on the ability of its own residents to take money out of the country. To the extent that it is manipulating its currency, it's doing so to keep the renminbi up, not down.

What China did Monday was to slightly relax its support for the currency, allowing it to fall through the symbolically important level of 7 to the dollar. So the U.S. is calling China a currency manipulator because it has, um, stopped intervening to keep its currency up. Orwellian much?

Of course, economic logic has very little to do with any of this. Trump wants China to make splashy concessions in the face of his tariffs; China let its currency slide a bit to signal that it won't be bullied. Basically, it's "Sanction me? No, sanction you!"

This isn't likely to end well.

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