September 2011, Week 4


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Mon, 26 Sep 2011 01:05:22 -0400
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Can China Save the World Economy?
By Dean Baker
The Guardian
September 22, 2011 

That is a question that people should be asking as the
other potential candidates withdraw from the race. At
the moment, the economies of the United States, Europe,
and Japan are all suffering from weak growth or worse.
The debt crisis of eurozone countries threatens another
financial crisis that could lead to another plunge in
output, not just in Europe but throughout the world.

Meanwhile the actors who could in principle take steps
to reverse this dismal course of events are largely
paralyzed. The eurozone countries are struggling with
efforts to form the necessary fiscal union to support
their currency. This requires creating a new legal
structure while also confronting intense political
opposition in Germany and other better-off countries who
will be asked to support the debt of Greece and other
struggling economies.

Meanwhile the European Central Bank (ECB) is finding it
difficult to break with its cult of 2.0 percent
inflation targeting even after the economic disaster
caused by this single-minded policy focus. It actually
raised its overnight rate by 0.5 percentage points in
the spring, slowing growth and increasing the cost of
borrowing for debt-burdened governments.

The United States does not face the same imminent
crisis, but it is likely to see slow growth and rising
unemployment as both fiscal and monetary policy are
largely checkmated by politics. Furthermore, a eurozone
financial freeze-up will almost certainly lead to a
double-dip recession in the U.S. as well.

And Japan has just seen another prime minister sent
packing after failing to deal effectively with the
aftermath of the earthquake and tsunami. The country now
has its fourth prime minister in four years.

With the key actors in the wealthy countries either
unwilling or unable to take the necessary steps to
support the world economy, it is reasonable to ask
whether China can fill the gap. Certainly China has the
ability to act as a backstop for the world economy, if
it chooses to play this role.

On a purchasing power parity basis China's economy is
already more than 75 percent as large as the U.S.
economy. It is projected to exceed the size of the U.S.
economy by 2016. China also has a vast amount of
reserves, holding almost $1.2 trillion in U.S. dollar
assets, [http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt]
and close to $2 trillion in total reserves.

It would need only a small fraction of this wealth to
have an enormous impact on the sovereign debt crisis in
Europe. In the case of Greece, it would need to set some
floor on the value of Greek debt as an orderly
restructuring is arranged. Greece has roughly $450
billion in debt outstanding. Much of this debt has
already been partially written down by its holders.
Certainly $100 billion in debt purchases would be more
than sufficient to arrange an orderly write-down and
restructuring of Greece's debt to a sustainable level.

The other troubled countries actually suffer primarily
from a crisis of confidence more than a serious debt
problem. For example, Spain has a debt-to-GDP ratio that
is just over 60 percent, well with within anyone's
conception of manageable. Italy has a more troubling
debt-to-GDP ratio of 120 percent, but has a near-
balanced budget. In both cases if interest rates could
be kept at reasonable levels, the debt burden could be
easily met.

Interest rates on both countries' bonds have soared in
recent months as the ECB has demanded harsh austerity
measures at a time when the downturn has sent budget
deficits soaring. The austerity measures threaten a
downward spiral where weak growth leads to rising
deficits, which in turn require further austerity
measures. With the ECB determined to tell investors that
sovereign debt can default, they have created a perfect
recipe for a self-imposed disaster.

China can reverse this picture by providing guarantees
to support the bonds of these governments. By setting a
floor on the price of their bonds (or a cap on interest
rates), it can ensure that they can borrow at interest
rates that make their debt sustainable. In addition, by
easing up on the austerity measures demanded by the ECB
(actually the IMF and European Union are also actors in
this story), China's intervention can help these
countries to return to normal levels of growth, reducing
the burden of the debt in the future. It is likely that
such guarantees would never cost China anything, since
the debt-burdened European governments would have little
problem meeting their debt service obligations once they
return to healthy growth path.

This sort of intervention by China would not require
altruism. Europe is a substantial market for China's
exports, as is the United States. If the eurozone
collapses, the resulting financial crisis and economic
fallout will send China's exports plummeting, just as
happened in the fall of 2008.

China already intervenes to support its exports -- that
is why it holds almost $1.1 trillion in U.S. government
debt -- so this idea of intervening to sustain export
markets is not new to the Chinese government. The only
thing that would be new would be the form of the

If China took this path it would provide enormous
benefits to the world economy. The wealthy countries
would have to acknowledge China's role as the leading
economic force in the world. They would also have to
acknowledge the boneheaded economic leadership that put
them in a situation where they could not rescue their
own economies.

EU-Asia Relations: Trading Places; or the Importance 
of Being Earnest
by Glyn Ford 
13 September 2011

Opportunities are ephemeral, vanishing as quickly as
they arise when not quickly seized. They are all the
more delicate when a number of disparate actors are
required to act in concert choreographing interlocking
moves across the global stage. Yet there is an emerging
opportunity that would improve political relations with
China, boost trade with Taiwan and create tens of
thousands of jobs across the EU. The question is: will
it be frittered away thus demonstrating the truth of
Nietzsche's dictum, `Madness is rare in individuals, but
common in parties, groups and organisations'? Or will
earnest and saner counsels prevail?

Currently the EU is having mixed success in its
bilateral trade negotiations with Asia. The Free Trade
Agreement (FTA) with the Republic of Korea came into
force in July, while a raft of negotiations with other
states continue. The present state of play suggests, on
the positive side, that an agreement could be concluded
this year with Singapore, and before next summer with
Malaysia, while Brunei could piggy back on the Singapore

However, progress with India is painfully slow and would
require significant concessions by Delhi on the
`sustainability' chapter of the trade negotiations,
which sets India sustainable development targets. If the
Indians shift their ground, optimists in the Commission
feel that an agreement with obviously huge economic
gains attached could be pushed through the European
Parliament despite political opposition - a necessary
step since the ratification of the Lisbon Treaty, as all
trade agreements must now be ratified by the EP. The
same may not be true for the Vietnam agreement where
Hanoi has lost its sense of urgency, and political
opposition in Brussels is more closely marshalled and
more ideological. Indonesia is now making all the right
noises but will share many, if not all, of India's
difficulties and less of the advantages. Negotiations
with Japan seem to be inevitable in the post-Fukushima
World, although with Tokyo's level of ambition they will
not be quick.

What is strange is the dog that doesn't bark - a
prospective EU-Taiwan FTA.

Of course, the barrier is fundamentally political. In
the current state of the international system, as
Beijing emerges as a global political power matching its
economic eminence, China has an effective veto over any
move by the EU in Taiwan's direction. Yet this very `de
facto' ability to block progress constitutes the
emerging opportunity. Were China to lift its veto, then
Brussels could put Taiwan back on the trade agenda.

The potential benefits are high and should be available
quickly to EU business. Taiwan's economy is bigger than
any other ASEAN country, and EU-Taiwan trade volume
already amounts to ?27.5 billion. The service sector
remains massively underrepresented, so tourism, telecom
and financial services stand to benefit, while in the
manufacturing sector there would be significant gains
for the automobile industry and the food and drink
sector. A 2008 study by Copenhagen Economics calculated
that should the Doha Round fail, gains from trade
enhancement measures alone (such as a reduction of
tariff barriers in combination with a significant
reduction of non-tariff barriers in both goods and
services) could boost EU GDP by over ?2 billion a year.

But what's in it for China? China faces two problems
with the EU: first, the ongoing arms embargo imposed
after Tiananmen Square, and second, a resistance to an
early granting of Market Economy Status (MES) to the
Chinese economy. The first embarrasses Beijing - lumping
it with Zimbabwe and Myanmar - and Europe's arms exports
regulations would continue to prevent China's military
from buying EU equipment even if the embargo were
lifted. The second problem is scheduled to go in any way
in 2016 when China gains MES, as agreed upon its WTO
accession in 2001. The current non-market economy status
allows other countries to impose additional duties on
China's products, and senior Chinese politicians have
repeatedly called on the EU to alter its position.

Taipei could put the final piece of the trade puzzle in
place by a "behind the scenes" removal of its objection
to lifting the EU arms embargo and by openly encouraging
Europe to proceed with an early granting of MES to
China. Furthermore, if the precedent of `duty-drawback'
in the EU-Korea FTA was followed, liberalising trade
between the mainland and Taiwan's economy might provide
a further boost to the mainland's economy.

Overall it is clear that it will take political
leadership from all sides to make progress to clinch a
deal which creates a win-win-win for China, Taiwan and

Millions of Jobs Left on the Table
by Robert E. Scott
Economic Policy Institute 
September 15, 2011

It was great to see President Obama challenge
congressional Republicans to do something real about
jobs. His jobs bill, submitted to Congress Monday, would
support 2.3 million new jobs and provide continuing
support for another 1.6 million jobs. But his plan
requires congressional approval, which is about as
likely as a World Series appearance for Washington's
sub-.500 Nationals this year.

With unemployment at 9.1 percent, our economy
desperately needs at least 11 million new jobs now just
to get the unemployment rate down to pre-recession
levels. We cannot allow the political stalemate in
Washington to stand in the way of a full set of bold job
creation initiatives. The president should take
immediate, executive action that will directly support
the creation of up to 2.25 million export jobs by
eliminating unfair currency manipulation by China and
other countries.

The administration wants to stimulate exports, and
that's a good idea, but if and only if it improves the
trade balance. Growing exports support domestic
employment but growing imports displace domestic jobs;
meaning that we need policy changes to boost net
exports. The president included an oft-repeated promise
in his speech last week that he will soon send
legislation to Congress to implement Bush-negotiated
free trade agreements with South Korea, Colombia and
Panama. Passage of those FTAs would be a terrible idea
because all past evidence indicates that FTAs are not an
effective tool for improving the U.S. trade balance and
stimulating net job creation.

If the president was serious about boosting net exports
he would take significant action to stop the currency
management of our trading partners that has hamstrung
the competitiveness of U.S. producers. He has the
authority to do this without Congress - and swift and
independent action could help to create millions of new
jobs over the next 18 to 24 months.

The best estimates are that currency intervention by our
trading partners (i.e., buying U.S. dollar-denominated
assets to boost the value of the dollar and keep their
own currency artificially cheap) raises the cost of U.S.
exports - both to the intervening countries (China is
the most important one) as well as to  every country
where U.S. exports compete with goods coming from there.
China's currency intervention has also compelled Hong
Kong, Singapore, Malaysia and Taiwan to follow similar
policies in order to protect their relative
competitiveness and to promote their own exports.

In a recent report on the benefits of revaluation, I
showed that full revaluation (28.5%) of the yuan and
other undervalued Asian currencies would improve the
U.S. current account balance by up to $190.5 billion,
increasing U.S. gross domestic product by as much as
$285.7 billion, adding up to 2.25 million U.S. jobs, and
reducing the federal budget deficit by up to $857
billion over 10 years.

This revaluation done quickly would be a win-win - it
would help workers in China and other Asian countries by
reducing inflationary overheating and increasing
workers' purchasing power in those countries.

There are several different actions that can be taken by
the Obama administration to put pressure on China.
First, it can and should identify China and the other
countries listed above as currency manipulators when the
Treasury releases its Semiannual Report on International
Economic and Exchange Rate Policies in mid-October. This
would trigger mandatory negotiations which could result
in sanctions if the issues are not resolved. Secretary
Tim Geithner has consistently refused to name China or
any other country as a currency manipulator, despite all
available evidence to the contrary. The administration
could also file complaints with the World Trade
Organization (WTO) about China's currency manipulation
and request dispute resolution.

The administration could also endorse China currency
legislation that has been introduced in both the House
and the Senate. The Currency Reform for Fair Trade Act
(HR 639, S 328) was passed by an overwhelming majority
of both Democrats and Republicans in the House in 2010,
but the bill died in the Senate. The scope of the bill
is a bit limited - only 3 percent of Chinese imports
would be affected - making it something of a rifle shot;
larger artillery may be needed to persuade China that
it's in its own interests to revalue.

The mere threat of a large, across-the-board tariff on
imports from China may be sufficient to persuade China
that the time has come for a major revaluation that
would benefit both countries. In 2005, Senators Charles
Schumer and Lindsey Graham introduced legislation (S.
295) that would have imposed a 27.5 percent tari? on all
imports from China if it failed to revalue within 180
days. This legislation was approved by the Senate (by a
veto-proof margin of 67-33) but not by the House. Even
so, shortly after its passage, China allowed its
currency to rise for the first time in more than a
decade. The currency ultimately appreciated by 20
percent, until the onset of the great recession in late
2007, when it was again tied to the dollar. China will
respond to the threat of severe external pressure -
especially since their policy of intervention has clear
downsides for them as well.

The U.S. needs at least 11 million jobs to eliminate
excess unemployment. Fiscal policy, if it can be
enacted, is a good start, but the task before us is
huge. We need a job strategy that pulls every available
policy lever. The best place to start is with exchange
rates-a lever that can be pulled by President Obama even
if Congress refuses to help.


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