I agree, but also that means there will be a very sizable population with money to spend. I wish more emphasis was on creating jobs here by opening up markets in these fast developing countries to products we still can comptete in.
You just had to stick a plug for the Cato institute in there, didn’t you? 
Actually, it’s the innovation part that’s key. If it can be done w/o educatoin, that’s great.
Cato does do some damn fine work.
Actually, markets are opening up. China has hit the sweet spot for enough of the population with a high enough gdp. China produced 2 million passenger cars in 2003 - for Volkswagen it is their second biggest market.
WTO has a phased approach to China market opening. It’s not wide open yet, but getting there. The speed and actual compliance of the WTO terms can be subject to debate, but there is widespread agreement that China is generally in line with the WTO agreements.
You can’t have free trade absent a universal agreement on how to handle currency rates.
Let me repeat that: You can’t have free trade absent a universal agreement on how to handle currency rates.
Currency exchange rates are the gears of international trade. But at this moment, every single Asian nation of any significance on the trading scene is throwing sand in the gears. To wit:
1 - As I’ve covered before, Japan has authorized itself to spend nearly a trillion dollars between now and the end of March for currency intervention. It has authorized itself to spend nearly 1.4 trillion dollars - that is not a typo, that’s trillion - starting on April 1, the start of their new fiscal year, on currency intervention.
2 - China, Malaysia, Korea, and probably some other countries I’m not remembering right now fix their currencies to the dollar.
3 - India appears to follow a managed float routine, as the rupee has managed a slight advance re the dollar, but it’s been a very slow and regular advance. See chart comparing the Euro/Dollar rate to the Rupee/Dollar rate:
http://finance.yahoo.com/q/bc?t=1y&s=USDINR%3DX&l=on&z=m&q=l&c=usdeur%3Dx
Also, recently they appear to have decided that 45.5 is as far as the dollar will be allowed to fall against the rupee.
All of this amounts to deliberately throwing sand in the gears of international trade.
Just to show the utter absurdity of this, today the jobs report in the US came out, and it was awful. The dollar dropped immediately against the euro, the Canadian dollar, and the British pound, among other freely floating currencies. It finished unchanged against the rupee, and of course the other fixed currencies. It actually rose, because of what market participants attributed to determined intervention by the Bank of Japan, against the yen.
Yes, free trade is failing. And the culprits are: Japan, India, China, Malaysia, Korea, and whatever other Asian nation is playing this corrupt currency game.
I suppose when the US is totally prostrate and is no longer a good market for any of these countries, they’ll decide to float their currencies against each other, and then make determined efforts to devalue faster than the next guy, since their mercantilist idiocy will still be in place.
And the free traders over here will still be intoning their stupid cliches, while stepping over and ignoring the street people and their children.
Of course, they do this already.
This is The Straight Dope, though. I expected better than the cliches I keep seeing repeated over and over and over and over around here, every time this subject comes up.
Some reading material, if any of you are actually interested in thinking an independent thought:
http://fistfulofeuros.net/archives/000240.php
The above doesn’t actually agree with a lot of what I said above. But I don’t expect agreement from thinking people. I do expect thought.
This is ridiculous. Let me repeat that: this statement is ridiculous.
If someone in the US is willing to agree to buy something from someone in Japan, or Mexico, or wherever then it is up to the two parties to decide what currency the buyer will use.
If the Japanese government decides to attempt to prop up the Japanese currency, then they can do that if they want. (Although that is probably a misguided policy–one of many that the Japanese government has embarked upon). Free trade refers to the absence of barriers imposed by governments, i.e. tarrifs, important restrictions, etc., not to the fiscal policy of a particular government.
Your statements betray an all too common and very unfortunate pernicious misconception–that international trade is a zero sum game. That Japan’s gain is the US’s loss. You criticize others for misguided “mercantilist” policies, but in fact, mercantilism foundered on exactly the same misconception that you have: that free trade is a zero sum game.
Is free trade failing?
I don’t know, is free speech failing?
Obviously you have a much higher opinion of the SDMB than I do. I fully expected to see the same misinformed xenophobic, protectionist and even communist/socialist rants I have seen in every other economics thread.
Independent thought is fine but you should not discount proven economic theory.
That said, I am concerned about whether America can function with an economy that consists of high level service jobs (ie accountant, lawyer, etc) low level service jobs (McDonalds, Wallmart) and nothing in between. The days of graduating high school and supporting your family with a job from the local factory or mill have been over for awhile now.
My perception is a little skewed however since I live in NYC and am basically lower middle classs because I don’t earn $250,000 a year (yet…MUHAHAHAHAH!). Should I move to PA, I would be free to roll like P Diddy.
*Originally posted by constantine *
I’m not quite sure why you think pantom’s statement is ridiculous.
Then in what sense is this promoting free trade?
Why not? If I get rid of the barriers that allows me (and others) to freely exchange goods, but keep in place restrictions on how those exchanges can take place (currency/exchange rates), how do those restrictions on currency/exhange rates promote free trade? After all, currencies can be traded as well as goods/services. Ideally, currencies would be beholden to the same laws of supply and demand on the global market as other commodities. Governments propping up currencies (such as in the case of Japan) in my mind is no different than protective barriers (trade quotas, tarriffs, etc.).
I don’t quite understand where you think pantom’s statements emphasize this misconception. I can’t speak for him, but my impression is that he is criticizing those precisely because he knows that free trade is not a zero-sum game. Hence, if you have a universal standard on how currencies are exchanged, then you will in fact be able to engage in (truly) free trade; thus, everyone will benefit.
Considering how many people there are in India and China the point that there wages increase could be quite a ways off.
And even when they do, who’s to say how high that their wages will go? What may happen actually, is that our standard of living may need to drop before we (the US and probably other western nations) become competitive again.
What worries me is that while labor appears to be almost always in an abundance, many costs of living are based on global scarcity. The cost of oil and fuel used for manufacturing and transporting goods will not go down just because there are fewer jobs in the US. In fact it may go up as China and India become more affluent.
I think maybe that’s why pantom’s statement might seem ridiculous. As you said, propping up currency is essentially the same as errecting a tarriff. The only diference is that Japan is paying their own “tariff” to the tune of a trillion dollars. This may reap a benefit in the form of more imports, but a trillion dollars is not an insignificant % of Japans GDP.
I’m a little fuzzy on the topic, but I also recall reading something that China was having problems with their banking system from pegging the yen to the dollar. Liquidity problems or something. I may go read up on it.
far_born: I was actually talking about this last night with my mother-in-law. She’s rather interested in the direction of interest rates as she’s living off her investments, partially, and she thought rates should go up now that commodities like oil and gold are going up. I explained that this may not happen this time, at least not yet, as unemployment is still high so the Fed’s said they’re not going to do anything until that comes down. And that of course is partially due to the increasing abundance of labor as more and more Chinese and Indians and so on join the global workforce.
And thanks for replying to Constantine for me, that was about what I had in mind. Point is, as you can see from the above, on a purchasing power parity basis the earnings of the average American worker is declining relative to the average Chinese or Indian worker. Currency rates should reflect this, but they’re not being allowed to. Squelching this feedback will just result in making us poorer as they become richer, turning what shouldn’t be a zero sum game into one over time.
Whoops! That would be eponymous I need to thank.
Yen would be the currency of Japan. Yuan or RMB is the currency of China. Both countries have banking issues of different sorts. China will probably grow out of their banking problem given 8-10% gdp growth and FDI of over USD100 billion annually. Japan doesn’t have growth and thus far have not had real banking reform.
Phantom, not really sure on your statement. There is a lot more to free trade than currency regiemes. If Japan spends a trillion dollars buying back their currency, how is that conceptually different from Microsoft or any other company buying back their shares?
Personally, I believe the best a government can do on exchange rates is keep them from becomming a one way bet, smoothing out fluctuations and controlling the speed of change. However, if you go back to just 1997 and 1998, you will see that artifically pegging or adjusting a currency doesn’t work in the long term. Or go back futher and look at the bank of england. Hack just take a 10 year view of post bubble Japan, exchange rate of the dollar/yen has fluctuated in a range IIRC from 130 to 80. Markets are efficient over time regardless of what the governments do.
US rates have to go up over the long term. Fed is keeping rates down so that refinancing will keep the economy in soft landing mode. As soon as there is some significant job creation, then one would expect to see inflation start to increase. Fed is an inflation hawk and will start to raise rates on a balancing act of not constraining job creation but keeping inflation under control. Also the US has a massive and increasing government debt, a fiscally irresponsible leader, falling tax receipts, which means that countries like China will keep financing the government debt – and that generally implies rising rates. Exchange rate parity theorem will also indicate rising rates.
Actually, Japan is selling yen and buying dollars, as is China. Point being, as I’m sure you know, that they want to keep the cost of their goods as low as possible vis-a-vis US goods, both so that they can continue to import into the US and so that they can compete better in China. I know of no economist who can justify spending a trillion dollars to keep what amounts to a nearly fixed rate against the dollar at this point.
I would certainly agree we have a fiscally irresponsible leader; you’ll get no argument from me on that. However, looking at China, there is a massive gap between what China’s nominal GDP is as expressed in the fixed exchange rate of the yuan, and the GDP expressed in purchasing power parity:
Official GDP: ~11 trillion yuan, or 1.3 trillion US dollars, in 2003, according to The People’s Daily
PPP GDP: 5.989 trillion dollars, in 2002, according to The CIA World Factbook
That expresses, in succinct and rather stark terms the difference between what China looks like in fixed exchange rate terms and what it looks like if you measure it according to what its people can buy with those yuan. Indeed, according to the CIA factbook, China is already the world’s second largest economy if you look at its GDP in this way. Seems to me a revaluation of some sort might be in order?
From one angle you could justify the fiscal recklessness of the US administration as a desperate response to the fact that so many export markets are being closed off in Asia to American goods and services by exchange rates that are being kept far lower than they should be versus the American dollar.
I don’t see how you can run a trade regime with currencies that are all allowed to willy-nilly be valued in whatever way the governments issuing those currencies decide. It’s like trying to build a house with the carpenter using inches for his measurements while the mason uses centimeters. That’s going to be one structurally unsound house.
China is not selling yuan and buying dollars. China has a non convertible currency.
PPP is based on rough guesstimates and wildly inaccurate. For a rough rule of thumb look at the big mac index. Basic Big Mac, medium fries and medium coke costs about $2.10. However, this might be applicable in the main cities but no way no how in the countryside where over a billion people live. One can make the arguement that China should appreciate it’s currency vis-a-vis the dollar.
Well, I didn’t figure PPP to be totally accurate in any way. Just that it illustrates a pretty huge disconnect between the reported GDP by way of the exchange rate and the actual, practical street value of the yuan.
As to what China’s doing re the dollar: I’d actually like to know. I know that they have large holdings of dollar denominated assets that they’ve been buying to keep the dollar at a fixed rate to the yuan, but given that the yuan isn’t convertible, what are they using to buy those assets anyway?
And in support of the idea that China’s large holding of reserves is a form of mercantilism:
China and India each have 1 billion population, most of them are still dirt poor. The real question is, if we allow the trend to continue to the point that it destroys the U.S. middle class, will the Indian and Chinese wages have risen sufficiently to substitute for that market. Or will we be stuck with a new market that consists of many millions of Chinese and Indians who consider an FM radio to be a big-ticket purchase? What will happen to everyone who doesn’t cater to that market?
And, a little more evidence from the same site, different article, that the fixed currency game is being played by most of Asia, and they want it to continue as long as possible:
from Why ASEAN doesn’t seek a stronger yuan
The reason I harp on this so much is that an artificially lower currency is far more powerful in its effect than anything else a nation can do to take a protectionist path. It affects every single transaction in the international arena, not just a subset related to some industry or product on which tariffs have been raised.
I also have no idea why the practice is countenanced by the WTO. It should be illegal.
Actually I believe that it will be the Chinese and Indians who are going to be the next big-ticket purchasers, and not just of FM radios… both countries are already the fastest growing markets for automobiles and cellphones. And if import duties on electronic products are reduced a bit in India, you’d have the fastest growing market for them too…