Perhaps Canceling Purchases of the Financial Times Won’t Be Enough

On my flight back to Beijing last night I noticed an article in the Financial Times in which Miguel Sebastián, Spain’s industry minister and someone hotly tipped for finance minister, called on Spanish households to stop buying foreign goods and to buy more Spanish goods.

“Right now,” he said, “there is something that our citizens can do for their country: bet on Spain, bet on our products, our industry and our services – bet, in short, on ourselves.”

Mr Sebastián then did some simple calculations. Consumption was expected to fall by €7bn ($9bn, £6.6bn) this year, causing the loss of 120,000 jobs. If each Spaniard introduced the “Spain factor” into their shopping and purchased just €150 of Spanish-made suits or toys instead of foreign goods, then those jobs would be preserved.

Basically Sebastián is calling not for more Spanish consumption but rather for Spanish households to consume fewer foreign goods and replace them with Spanish goods. He gave as an example that Spanish businessmen could cancel their purchases of the Financial Times and the Wall Street Journal and buy instead the local Spanish business newspapers. The article also noted that Zapatero, Spain’s Prime Minister, “at a meeting with José Sócrates, his Portuguese counterpart – said he would personally promote Spanish and Portuguese products.”

I think this pretty clearly misses the point. The world needs more consumption, not a nationalistic switch in consumption, which anyway won’t really matter in resolving trade imbalances since it is pretty hard, if not impossible, to determine with precision the total local and foreign components of anything you buy (especially, I would guess, newspapers). When this fails, it is only a short step to proposing ways that ensure that Spanish consumers buy fewer foreign goods and more local goods.

Spanish politicians should know this, and perhaps they are merely playing to the galleys, but this kind of neighbor-beggaring talk is not part of solution to the global crisis and will only make things worse although, as I have said many times, we should not be at all surprised if trade civility continues to deteriorate. The fact that an increasing number of policymakers are making these kinds of statement suggests something about the general mood towards international trade.

And of course there is more. Three days ago I read that India has banned the import of Chinese toys for six months as a way of protecting domestic toy manufacturers. According to New Delhi’s PTI News Agency:

India Friday slapped a ban on import of toys from China after cheap supplies from the neighbouring country upset the applecart of the domestic manufacturers. The ban, notified by the Directorate General of Foreign Trade, will remain valid for six months. While the government notification did not cite the reason for the ban, sources said it was concerned over a rise in imports of toys. A concern had also been raised over the safety of children playing with the Chinese toys, which were found to be toxic. Most of the varieties, including wheeled toys, dolls, stuffed toys, toy guns, wooden and metal toys, musical instruments, electric trains and puzzles are covered under the ban.

The problems with India and China don’t end there. In today’s Xinhua there is an article about Chinese concerns over India’s anti-subsidy investigation on sodium nitrite and probe into the special safeguard measure of sodium carbonate. The article concludes with a statement by Yao Jian, spokesman of the Ministry of Commerce:

The current global financial crisis has serious impact on the economies worldwide and all nations need to boost cooperation in fighting the crisis, he said. China hoped that India could show prudence and restraint in using trade remedies, as trade protectionism could only add to the grim world trade situation.

Obviously no one needs to read my blog to come up with his own list of trade-related disputes. During the five days I was traveling every day I was able to pick up stories in local newspapers in Singapore, Hong Kong and Thailand bewailing trade behavior and criticizing one country or another of unfair trade practices. Of course the most important trade-related story was the statement by Tim Geithner, the new US Treasury secretary, during his Senate confirmation hearings that China was manipulating the RMB. This has caused the predictable outrage in China and the RMB actually depreciated following his testimony, which a lot of people here have interpreted as a direct challenge to the currency-manipulation statement (although not likely, it seems to me, to serve as much of a refutation).

I have no idea how to determine the intent of Geithner’s comments – whether they represent a real change in attitude towards China’s currency policy or whether they simply indicate a heightened level of annoyance towards China’s rising trade surpluses in the face of this global crisis. The main point I would make is that everyone seems to be following the rather pessimistic script I laid out nearly a year ago about how this was going to play out in terms of increasing trade friction and the exchange of criticisms and threats. If my reasoning is correct, this suggests that 2009 could turn out to be a lot worse for China and other trade surplus countries then most expect.

An article in yesterday’s Washington Post discusses the Chinese reaction to Geithner’s comments:

A top official at China’s central bank hit back Saturday at comments by U.S. Treasury Secretary-designate Timothy Geithner, who said the Obama administration believes that China is manipulating its currency.

Su Ning, vice governor of the People’s Bank of China, called Geithner’s remarks misleading and “out of keeping with the facts,” and said they could sidetrack efforts to manage the global financial crisis, the official New China News Agency reported.

“We should avoid any excuse that might lead to the revitalization of trade protectionism. Because it will do no good to the fight against the crisis, nor will it help the healthy and stable development of the global economy,” Su said during a visit to a Beijing business newspaper.

Towards the end the article lists the standard rejoinder among Chinese officials:

China says its price advantages are the result of the low cost of labor, land and other resources. With exports and imports plunging, China is worried about the impact of the global downturn on unemployment and instability and an aggressive U.S. trade policy will only worsen the situation.

“The currency rate has already appreciated in recent years. The recent depreciation is small and temporary,” said Song Hong, a research fellow at the Chinese Academy of Social Sciences. Song said the trade imbalance was caused not by manipulation but because China imports so many semi-manufactured goods from elsewhere in Asia, processes them and then exports them again.

With Vietnam, South Korea and other Asian countries hard hit by the downturn depreciating their currencies, it was unrealistic to expect China to do the opposite, Song added. “It’s possible a trade war will occur between the two countries. Even if the U.S. doesn’t go too far in terms of protectionism, the new government will pressure China, and this can trigger trade conflicts.”

Until Chinese officials recognize some of the problems that they themselves have created I think it is nearly impossible that this will come to a good end, and I think those last three paragraphs should worry us all. It may very well be true that China’s “price advantages are the result of the low cost of labor, land and other resources,” but if the level of the currency doesn’t matter to China’s trade competitiveness than why not simply appreciate and make everyone happy? Since a price advantage is by definition only relevant in comparative terms, and if the level of the currency affects comparative prices, then the claim that China’s trade surplus is based on a price advantage and not on a low currency is not terrible meaningful.

What worries me more is the last paragraph. Vietnam, South Korea and a number of countries have seen their exports fall far more than have China’s, and in many if not most cases they are depreciating precisely in an attempt to regain their competitive levels against China. If China sees their depreciation as a justification for their continued currency policy, I am afraid that there is no way for this process to end. It will descend in trade war. China, like the US in the 1920s seems unable to understand that as a major power it does not have the luxury of acting like just any other small country. It must take the lead in the adjustment among Asian exporters, and that almost certainly means that its exports and trade surpluses should fall faster that that of the other countries. Its actions, more than that of any of the smaller countries, must be consistent with the needs of other major economies or trade conflicts will grow.

I return to Spain today to spend the Spring Festival week at my family’s home there. I will be meeting with old friends of the family and I am curious to see what people are thinking there about China, international trade, and the effect of the US fiscal stimulus.

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About Michael Pettis 166 Articles

Affiliation: Peking University

Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business.

Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups.

Visit: China Financial Markets

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