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Dr. Howard Richman (mailto:howard@idealtaxes.com) is one of three generations of a family of economists. Howard co-authors the Trade and Taxes blog (http://www.idealtaxes.com/) and co-authored the 2008 book, Trading Away Our Future, published by Ideal Taxes Association... More
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  • Speak Loudly but carry No Stick

    In my last posting, I discussed the choice facing the Obama administration after Geithner's letter to his fellow G-20 finance ministers, calling for balanced world trade, was applauded by UK, Canada and Australia but vetoed by the mercantilist countries. I wondered if the Obama administration would take action to achieve balance trade, or whether it would continue to think that it could talk the mercantilist countries into abandoning their successful strategy. I wrote:

    If this is more than just talk, the next step will be for the Obama administration and the other English speaking countries to threaten and, if necessary, institute an Import Certificates plan or a scaled tariff that would gradually force their trade toward balance over the next few years.

    Peter Morici sees the current situation through the same prism, but he doesn't expect any administration action that goes beyond diplomacy. He writes (QE2 Won't Make Big Waves as G20 Flops):

    At the G20 talks, Treasury Secretary Geithner failed to accomplish a grand bargain to wind down Asian trade surpluses and boost demand for what western economies make. Opposition from champion mercantilists Japan and Germany, who pioneered some of the very tactics China now exploits on a grander scale, caused the G20 to adopt only soft, modest goals and no remedies for deficit countries like the United States.

    Meanwhile China’s yuan policy and trade barriers make the Fed nearly irrelevant but for crisis management—bailing out big banks and European governments that make fatal mistakes.

    Worse, President Obama’s failure to take strong action against Chinese currency manipulation—for example, a tax on dollar-yuan conversion to make the price of Chinese products reflect their true underlying cost—cripple the jobs creation effectiveness of his $800 billion stimulus spending and broader efforts to resurrect the U.S. economy.

    President Obama’s exclusive reliance on diplomacy renders impotent U.S. monetary and fiscal policies, smothers jobs creation, and visits unconscionable hardships on American workers.

    The stakes couldn't be higher for the Democratic Party and for the American people. As I noted, if the administration takes effective action to balance trade:

    Other trade deficit countries would soon follow suit. The result would be balanced world trade. The world, led by the trade-deficit countries, would recover quickly from the Great Recession. Not only that, but the English speaking countries would continue to lead the world politically and economically, and the Obama administration would go into the 2012 elections presiding over an economic recovery.

    But I, like Morici, thought it likely that the administration will fail to act. I continued:

    On the other hand, Geithner's letter may just be another case in which the Obama administration substitutes words for action. The Chinese government will not give up its successful mercantilist strategy voluntarily. China's WTO-illegal cut-off of Rare Earth shipments to the United States this week may be its first rejection of Geithner's proposal. As in the past when China broke the U.S. embargo against shipping gasoline to Iran and supported North Korea's torpedoing of a South Korean ship, the Obama administration will once again wipe the Chinese spit from its face, look up at the sky, and pretend that it is raining.

    When the chapter on Teddy Roosevelt's successful foreign policy was written, it was entitled, "Speak Softly, but carry a Big Stick." When the chapter on Barack Obama's foreign policy is written, it may be entitled, "Speak Loudly, but carry No Stick."



    Disclosure: No positions
    Oct 25 5:08 PM | Link | Comment!
  • Geithner calls for balanced world trade

    In an October 20 letter to the finance ministers of the G-20 countries, Treasury Secretary Geithner called for balanced world trade with each country limiting its trade surplus or deficit to an unspecified percentage of its GDP. Only raw materials exporters with huge trade imbalances (e.g., Saudi Arabia and Russia) would be excluded from the requirement.

    According to a New York Times report, Geithner's proposal was supported by the UK, Canada and Australia but opposed by Germany. The Obama administration has finally identified America's economic problem and has gotten the other English speaking countries to stand with it!

    If this is more than just talk, the next step will be for the Obama administration and the other English speaking countries to threaten and, if necessary, institute an Import Certificates plan or a scaled tariff that would gradually force their trade toward balance over the next few years.

    Other trade deficit countries would soon follow suit. The result would be balanced world trade. The world, led by the trade-deficit countries, would recover quickly from the Great Recession. Not only that, but the English speaking countries would continue to lead the world politically and economically, and the Obama administration would go into the 2012 elections presiding over fiscal responsibility and an economic recovery.

    On the other hand, Geithner's letter may just be another case in which the Obama administration substitutes words for action. The Chinese government will not give up its successful mercantilist strategy voluntarily. China's WTO-illegal cut-off of Rare Earth shipments to the United States this week may be its first rejection of Geithner's proposal. As in the past when China broke the U.S. embargo against shipping gasoline to Iran and supported North Korea's torpedoing of a South Korean ship, the Obama administration will once again wipe the Chinese spit from its face, look up at the sky, and pretend that it is raining.

    Here is the text of Geithner's letter:

    October 20, 2010

    Dear G-20 Colleagues:

    I am writing to offer some suggestions for our meeting later this week. We are obviously at a moment when the world is looking to the G-20 to provide a stronger commitment to work together to address the major challenges to a sustainable global recovery. I know that some of you will want to reserve any substantive agreement until the November Leaders' Summit, but I think we should take advantage of the presence of the central bank governors to try to reach agreement on the broad elements this weekend, and put those in a report to our Leaders.

    Building on Pittsburgh's Framework for Strong, Sustainable, and Balanced Growth and Toronto's commitments to addressing sovereign debt sustainability, here are three specific suggestions designed to provide a stronger framework of cooperation on international financial issues:

    First, G-20 countries should commit to undertake policies consistent with reducing external imbalances below a specified share of GDP over the next few years, recognizing that some exceptions may be required for countries that are structurally large exporters of raw materials. This means that G-20 countries running persistent deficits should boost national savings by adopting credible medium-term fiscal targets consistent with sustainable debt levels and by strengthening export performance. Conversely, G-20 countries with persistent surpluses should undertake structural, fiscal, and exchange rate policies to boost domestic sources of growth and support global demand. Since our current account balances depend on our own policy choices as well as on the policies pursued by other G-20 countries, these commitments require a cooperative effort.

    Second, to facilitate the orderly rebalancing of global demand, G-20 countries should commit to refrain from exchange rate policies designed to achieve competitive advantage by either weakening their currency or preventing appreciation of an undervalued currency. G-20 emerging market countries with significantly undervalued currencies and adequate precautionary reserves need to allow their exchange rates to adjust fully over time to levels consistent with economic fundamentals. G-20 advanced countries will work to ensure against excessive volatility and disorderly movements in exchange rates. Together these actions should reduce the risk of excessive volatility in capital flows for emerging economies that have flexible exchange rates.

    Third, the G-20 should call on the IMF to assume a special role in monitoring progress on our commitments. The IMF should publish a semiannual report assessing G-20 countries' progress toward the agreed objectives on external sustainability and the consistency of countries' exchange rate, capital account, structural, and fiscal policies toward the agreed objectives on external sustainability and the consistency of countries' exchange rate, capital account, structural, and fiscal policies toward meeting those objectives.

    With progress on these fronts, we should reach final agreement on an ambitious package of reforms to strengthen the IMF's financial resources and its financial tools, and to reform the governance structure to increase the voice and representation of dynamic emerging economies.

    Sincerely,

    Timothy F. Geithner



    Disclosure: No positions
    Tags: Trade policy
    Oct 24 6:29 PM | Link | Comment!
  • Let's have an Honest Trade Debate

    The October 9-10 issue featured the most misleading commentary that I have yet read in the Wall Street Journal: Goodbye, Free Trade? by Dartmouth economics professor Douglas A. Irwin.

    The entire first page is spent trashing the Smoot Hawley tariff. Then the author subtly admits that the Smoot Hawley tariff, which didn't go into effect until 1932, was basically a justified reaction by the United States to several of our trading partners either going off the gold standard or devaluing their currencies in 1931. Essentially, the United States had to respond to other countries devaluing their currencies by either shipping away gold, devaluing the dollar, or limiting imports. We chose to limit imports. He is correct that we would have been better off devaluing the dollar.

    Irwin's primary economic recommendation in this piece can be proved nonsense by a simple thought experiment. He writes:

    If all major central banks were to intervene in foreign exchange markets to drive down the value of their own currencies, none would succeed in changing nominal exchange rates, but it would be equivalent to a world-wide easing of monetary policy.

    Here's a thought experiment that I devised which proves that his suggestion does not result in any new money being created, it just results in central banks swapping each others' bonds:

    Assume that the People’s Bank of China sells a 670 yuan Chinese Treasury bond and uses the proceeds to buy 100 dollars which it uses to buy a 100 dollar U.S. Treasury bond and that the Federal Reserve sells the same 100 dollar U.S. Treasury bond and uses the proceeds to buy 670 yuan which it uses to buy the same 670 yuan Chinese Treasury bond.

    Irwin's comparison of the current depression with the Great Depression completely ignores the fact that U.S. trade is out of balance now, not in balance as in the 1930s. As a result, a tariff program that would balance trade, such as the scaled tariff that we have proposed, would have a significantly positive effect upon our economic growth, not the slightly negative effect of the Smoot-Hawley tariff.



    Disclosure: I own Chinese yuan through CYB
    Tags: Trade Policy
    Oct 09 8:54 PM | Link | Comment!
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