Transcript Lifelong Learnings

Temple Beth El
September 16, 2015
To Obtain a copy of slides
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Go to www.faculty.Fairfield.edu/mleclair
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Look for link that says Temple Beth El
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Must have PowerPoint on your computer
The Rise of China, and why 7% Growth is
“Bad” News
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History
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Post-1949, China largely isolated from world trading system
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Particularly after 1957 and the Great Leap Forward
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Isolation continues until trip by President Nixon (1972) and eventual rise of Deng
Xiaoping
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Disastrous attempt at complete self-sufficiency that killed millions
Pursuit of full open trade goes back to 1994, when China approved for entry into the
World Trade Organization (WTO)
China establishes 7 export-processing zones as centers of capitalism and trade
Advantages of Chinese Economy
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Abundant low-cost labor – most estimates suggest several hundred million
peasants migrated to the export-processing zones
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Little or no regulation – free to pollute, misuse labor, etc.
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Currency manipulation (Yuan/remnibi kept very low, 40% below market value)
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Innovative workforce and management that quickly duplicates western
products that are successful
Transitions
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From low-cost manufacturing (textiles) to high-end (electronics)
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No pursuit (yet) of very high-end products such as jet aircraft and industrial
machinery, at least not in export markets
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Car production now exceeds 16 million per year
Automobile Production, 1980-2010
Very Common Model at work here
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Much of production either is either joint manufacturing with foreign firms, or
cars that are direct derivatives of western-made autos
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Lawsuits galore
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Western manufacturers argue that their products are being illegally copied
Funny Aside
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Roads are not up to task of handling millions of new drivers – one result was a 5day traffic jam outside Beijing (August 2010)
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55 mile-long backup that required food vendors to service cars
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Rapid development has overwhelmed infrastructure
China’s output compared to the rest of
the world
GDP
GDP/CAPITA (000)
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U.S.
$17.4 Trillion
54.6
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China
$10.4 T
12.9 (ranked 89th in 2014)
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Japan
$ 4.6 T
37.4
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Germany $ 3.9 T
45.9
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France
$ 2.8 T
40.4
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UK
$ 2.9 T
39.5
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Brazil
$ 2.4 T
16.1
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Source: IMF
Exports tell a different story
Rank (top 7 nations)
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1
China
$2,252,000,000,000
2014 est.
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—
European Union $2,173,000,000,000
2012 est.
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2
United States
$1,610,000,000,000
2014 est.
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3
Germany
$1,547,000,000,000
2014 est.
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4
Japan
$710,500,000,000
2014 est.
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5
South Korea
$628,000,000,000
2014 est.
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6
France
$578,300,000,000
2014 est.
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7
Netherlands
$552,800,000,000
2014 est.
Is the rise of China Overdone?
• In 1980s, long list of books published at that time that laid out
how the U.S. could emulate Japan’s successes
• By 1992, the “miracle” was over and Japan entered a period of
long-term economic malaise
• China has problems that Japan never faced
• Pollution of water and air
• Mass migration and the political and demographic dislocation
that results
• One-child policy and the impossibility of paying for those in
retirement in the future
• Creation of empty infrastructure – Trains to nowhere and
buildings no one lives in
“In China There's Not One City Without Terrifying Stretches Of
Empty Houses” Forbes (10/28/2013)
• Housing is one asset the middle class could invest in, so building
went on long after housing was needed
•
Massive over-building suggests a real estate market
collapse
• No doubt China will be a major world economic power, but its
resources are likely to be focused more inwardly in the future
Uninhabited City – Picture from Daily
Mail
Export-driven model nearing the end
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Will need to develop a domestic consumer market to sustain growth
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Unit labor costs, inclusive of transportation costs have already risen until they
are par with those of the U.S. (the Economist)
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Nations are unlikely to tolerate China’s export-promotion policies much
longer (particularly the manipulation of its currency)
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A more realistic value for the Yuan/Remnibi will likely cause a shift away from
China to other nations (India) that also have inexpensive labor
Currency Issue Likely to be a Source of
Continual Conflict with Trading Partners
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An unexpected new (and effective) trade barrier that the World Trade
Organization is poorly equipped to handle
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Usual trade barriers – tariffs, quotas, industrial standards, sanitary standards,
are all part of WTO negotiations
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Currency manipulation has not been addressed
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Reason: Small, developing nations use devaluation (undervaluation) frequently as
a growth tool
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When a large, export-aggressive economy like China uses it, it is problematic
Yuan/Remnibi per Dollar
Value of Yuan/Remnibi Maintained Through
Aggressive Purchases of U.S. Debt (“cleansing
of trade surplus”)
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Actual value of currency should be about 40% higher
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China supposedly abandoned its dollar peg in 2012 and started pegging to a
basket of currencies
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Suspicion is that the basket is mostly dollars, so little was accomplished
Japan has aggressively pursued this strategy also: Yen has gone from 88/$ to
120/$
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System will not work if everyone is pursuing competitive devaluations
Current Panic Over Falling Growth Rates
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Amusing that 10% became the expected growth rate in China – a fall to 6-7%
has resulted in panic selling in the financial markets
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Fully expected by anyone that has watched this before in Japan, Latin
America, Pacific Rim
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10% growth was a nice anomaly
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Pessimism is partly a result of the emphasis on emerging markets over past decade
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Particularly the BRICs.
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Brazil is in the middle of a debt crisis, the Russian economy is in deep recession, India has
failed to take off as expected, and China is now slowing
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In the long-run, the focus on the BRICs is 0 for 4.
The Transpacific Partnership (TPP)
TPP is a Counter-balance to the rise of
China
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Details
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Very large scale free-trade agreement between the U.S. and (potentially) 11 nations in
the Pacific Rim
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Includes: Japan, Singapore, Vietnam, Australia, Peru, Malaysia, New Zealand, Chile,
Canada, Mexico, Brunei, U.S.
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Note absence of some traditional trading partners such as S. Korea, Philippines and Thailand
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Negotiations have been conducted largely in secret – presumed reason is to prevent
posturing and over-reaction during talking phase
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Know for sure (through leaks) that intellectual property protections are in agreement, as
well as major cuts in tariffs and trade barriers
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Missing are the usual non-trade issues, although we just may not know this yet (environmental
concerns)
Market liberalization is a major component
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Largely viewed as an economic counter-balance to the rise of China, although many believe
China will ultimately be drawn into the agreement
Historic Basis of Agreement
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The Asian Pacific Economic Conference (APEC) provided a basis for
negotiations
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Extensive regional integration movements in the pacific rim might have also played
a role, except many of the major players are missing (Thailand, Indonesia, etc.)
Threat to U.S. labor markets overdone
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U.S. already has extraordinarily low tariff rates, and ALL nations with Most Favored
Nation status receive those rates
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Our tariff cuts will be small, except in a few areas (textiles) where we still maintain
“significant” tariffs
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U.S. will gain new controls over intellectual property
Importance of deal is a reflection of the moribund state of global trade
negotiations under the WTO (last agreement was in 1994)
Is this the appropriate path for providing an
offset to China’s rising economics power?
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Perhaps:
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Nations will be given preferential access to U.S. markets, which may offset some
of the cost advantages enjoyed by China
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May cause some “trade diversion” from Chinese sources to other nations in the
region
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While neither APEC or TPP have ever been presented as security agreements, the
increasing belligerency of China (making land claims in the South China Sea) has
nations in the region worried
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TPP could easily adopt a security framework in the future
So, what does the world look like in
2050?
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China may well be the world’s largest economy in total
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Probably still much smaller on a per capita basis
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China will rely much more heavily on internal demand as it matures – a
necessary step to avoid destructive trade conflicts
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The Chinese economy will be growing much more slowly – probably in the 34% range – as it exhausts the benefits of cheap labor and matures
economically
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Substantially counter-balancing trade agreements (TPP, EU, etc.) will prevent
dominance of world trade
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Internal issues – pollution, demographics, migration will consume more
attention than they do now.
Questions