US pressing China to buy tens of billions of dollars in US aircraft, auto parts, agricultural goods and beef “to build goodwill”
Posted by WARREN MOSLER on January 18th, 2011
I call it a completely misguided sense of public purpose as a direct consequence of not understanding monetary operations:
U.S. Presses China for Deals
By Bob Davis
January 15 (WSJ) — The U.S. is pressing China to buy tens of billions of dollars in U.S. aircraft, auto parts, agricultural goods and beef to build goodwill when the two countries’ leaders meet Wednesday.
In the run-up to the closely watched event between Chinese President Hu Jintao and President Barack Obama, the two countries are jockeying to set the agenda for the visit, as they haggle over deals. The White House expects the centerpiece of the package to be the sale of Boeing Co. jets.
Leaders of both nations say they want to show that the U.S.-China relationship, which was on the skids last year, is back on track and is mutually beneficial. But they also want to frame the meeting in a way that plays most favorably at home.
“Our relationship is marked by great promise and real achievement,” said Secretary of State Hillary Clinton in a speech on Friday. “And more than ever it will be judged on the outcomes it produces.”
Mr. Hu’s last state visit, in 2006, came before the global financial crisis when the U.S. was clearly a dominant economic power. Since then, China has become the world’s second-largest economy and its state-orchestrated style of development has become a rival to the U.S.’s more market-oriented approach.
Chinese deal-making is part of nearly all of their state visits abroad—it announced $16 billion in deals in India last month. And given a trade gap with China on track to pass $250 billion last year, the U.S. visit will likely be dismissed by China critics as insufficient.
But the White House considers the deals a way to show concrete benefits from the encounter, when many other issues being discussed—including Iran, North Korea and intellectual-property issues—aren’t easily resolved. The Obama administration also wants to show its ability to add jobs during a time of 9.4% U.S. unemployment.
Given tensions in past months between the two powers, China wants the meeting to go off smoothly and to underscore its new world stature. Since Mr. Hu’s last visit to the White House, “China has grown into this strong young man from a teenage boy,” said Zhuang Jianzhong, deputy director of the Center for National Strategic studies at Shanghai’s Jiao Tong University.
The U.S. goal is tangible progress on issues including trade, currency policy, North Korea and Iran.
In her speech, Mrs. Clinton singled out the need for China’s military “to overcome its reluctance at times to join us in building a stable and transparent military-to-military relationship.” She was referring to the Chinese military’s recent rebuff of Secretary of Defense Robert Gates’s bid to re-establish close, regular meetings at top levels.
Mrs. Clinton also said it was vital China join the U.S. “in sending North Korea an unequivocal signal that its recent provocations—including the announced uranium enrichment program—are unacceptable.” The U.S. recently credited Beijing for convincing North Korea to calm tensions after it shelled a South Korean island.
This past week, Undersecretary of State Robert Hormats, Commerce Undersecretary Francisco Sanchez and Deputy U.S. Trade Representative Demetrios Marantis spent three days in Beijing ironing out trade and investment issues. They focused on two Chinese buying trips, headed by senior officials of the Chinese Ministry of Commerce and the China Council for the Promotion of International Trade, that are set to begin Saturday and run through Jan. 21.
The two groups plan to visit half a dozen cities, including Boeing’s home base of Chicago, where Mr. Hu will meet with U.S. and Chinese business executives Friday.
The aircraft purchases are a priority because Boeing is a symbol of U.S. export strength, and it has facilities and subcontractors around the U.S. China also has great purchasing flexibility when it comes to aircraft because carriers’ deals aren’t final until they are approved by the government.A Boeing spokesman declined to comment.
China is also looking to highlight its role as an investor in the U.S. auto industry. SAIC Motor Corp., China’s largest auto maker, recently bought a $500 million stake in General Motors Co., just under 1% of the company. Chinese investors have bought stakes in auto suppliers.
The focus on purchases, said a senior U.S. official is “in part to reduce the trade imbalance, in part to demonstrate to the American public that there are real job benefits to the relationship with China and, in part, to improve the overall tone and to make the trip successful.”
On other commercial issues, the U.S. is pressing China to provide a specific plan for how government agencies and state-owned businesses will buy legitimate software, not knock-off versions. Beijing has already committed to such purchases.
The White House is also seeking commitments that U.S. firms in China won’t be shut out of government-backed projects for high-tech products. The U.S. official said it was unclear at this point how much progress would be made in those areas.
China is looking to use the state visit to compel changes in U.S. policy. Beijing blames the Federal Reserve’s low interest rates and bond purchases for worsening China’s inflation. A delegation of Chinese academics have been visiting Washington, urging the Fed take into account the problems of developing nations when setting policy.
There is little chance the U.S. will agree, said Eswar Prasad, a China scholar at the Brookings Institution, who met with the academics, because of the Fed’s mandate to consider domestic economic concerns when setting policy. The Fed also believes boosting the economy helps the global economy because so many nations rely on the U.S. market.
Foreign-exchange policy is also bound to be a big issue at the Obama-Hu meeting. Since China announced in mid-June that it would lets its currency float somewhat, it has appreciated about 3.6%—with the yuan strengthening in recent days to new heights.
When accounting for the effects of higher inflation in China compared with the U.S., Treasury Secretary Timothy Geithner said the yuan is moving up at a pace of about 10% a year. That is getting closer to the level the U.S. would like to see.
Either China lets the currency rise to fight higher prices, Mr. Geithner argues, or higher prices will make Chinese exports more expensive anyway. In either case, “competitiveness is going is shifting now in our favor,” he said.
January 18th, 2011 at 11:50 am
Suppose there is a fisherman and a non-fisherman. The fisherman is quite expert at what he does, but has grown tired of all the work. The non-fisherman tells the fisherman that if the fisherman teaches him how to fish, the non-fisherman will agree turn over the fish that he catches to the fisherman in exchange for mere little green pieces of paper (or the electronic equivalent thereof), which the fisherman can create without any effort.
The fisherman thinks this sounds like a really great deal, since it saves him all the trouble and work of fishing. Who wouldn’t want actual, tasty fish in exchange for effortless little green pieces of paper?
So the fisherman duly teaches the non-fisherman how to fish, then sits back, relaxes, and starts creating more and more little green pieces of paper. True to his word, the non-fisherman who now knows how to fish duly turns over the fish to the fisherman in exchange for the little green pieces of paper, which the non-fisherman simply piles up since they are more or less useless.
In time, the former fisherman gets ever fatter and lazier and more dependent on the effortless fish he obtains from the former non-fisherman. Just as the former fisherman loses all his fishing skills and his fishing equipment goes to seed, the former non-fisherman becomes more and more proficient at fishing and builds up better and better fishing equipment.
Then one day, the former non-fisherman decides he has grown tired of all of the little green pieces of paper and has bigger fish to fry. Besides, he is hungry and is ready to eat all those fish that he has been denying himself over the years. So the (now expert) former non-fisherman terminates the deal with the (now useless) former fisherman, over the ineffectual protestations of the latter.
End result – the former non-fisherman is now an expert fisherman, with the best equipment, the greatest ability to catch fish, and a big pile of useless little green pieces of paper to boot. And the former fisherman is now fat, debilitated, has forgotten how to fish and has lost his means of earning a living.
So who got the better end of the bargain?
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WARREN MOSLER Reply:
January 18th, 2011 at 12:10 pm
Well, at least 3 generations of workers in Japan have been sending us 2 million cars a year and getting nothing in return, and all signs indicate they are fighting furiously to keep doing that while we fight to end it.
And, yes, if they, and everyone else, does stop sending us cars we would have to build our own.
And no, we don’t have to sit around and do nothing while they send us cars. We can have the right fiscal balance to keep ourselves fully employed and productive doing lots of other things.
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beowulf Reply:
January 18th, 2011 at 6:08 pm
And, yes, if they, and everyone else, does stop sending us cars we would have to build our own.
John Kenneth Galbraith made the point (in The Affluent Society, if I remember correctly) that in a developed nation, the public purpose of economic growth is not the output it produces but rather the employment security it offers. Having to build our own cars is a feature, not a bug because the jobs it creates.
Wynne Godley was quite correct, a policy of nondiscriminatory tariffs matched by a looser fiscal stance is the way to go. Or as the Levy Institute framed it, Tsy should auction off import certificates equivalent in dollar value to US exports (our trade deficit means they’d sell at a premium). Auction proceeds would be used to cut payroll taxes, in the 2008 Levy paper, 4.8 points cut from 15.3% payroll tax. This tax shift from payroll to imports would boost employment and aggregate demand (imports are a tremendous demand leakage) while reducing our deficits in trade balance and govt sector savings. Sure we could fill the demand leakage by adjusting the fiscal stance alone, but greater deficit spending isn’t in the cards anytime soon in a country plagued by deficit hysteria.
China will buy more US exports only when it becomes a necessary step if they wish to sell us more imports since quantity of US import certificates would be pegged to quantity of US exports. Thus, any retaliation that reduces our exports would automatically reduce our level of imports. Until we give China that Hobson’s choice, Obama and Geithner asking ‘pretty please buy more of our exports’ gains us nothing except China’s contempt.
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roger erickson Reply:
January 18th, 2011 at 11:20 pm
With all due respect to JK Galbraith, there’s plenty of historic evidence that he’s simply wrong. The “public purpose of economic growth” is to help a nation survive selective pressures, which always comes down to building capability. That can mean either output magnitude, distribution of outputs, labor skills & inventiveness, or some function of all (most likely).
If you look at any period of total war or other total application, you’ll always have some unique distribution of application, training & edu, or R&R. There’s no concept of unemployment in most social species, only full employment defined as something less than 24 hours per day.
WARREN MOSLER Reply:
January 19th, 2011 at 6:47 am
Seems Galbraith might have offered that thought more as a criticism than something he supported? Can’t recall.
I’ll keep fighting the deficit hysteria.
beowulf Reply:
January 20th, 2011 at 5:53 am
“In chapter 8, we saw how deeply we were committed to production for reasons of economic security. Not the goods but the employment provided by their production was the thing by which we set ultimate store”. (p. 130)
http://books.google.com/books?id=IfH010hvIqcC&pg=PT142&lpg=PT142
I take your point, the royal “we” in the quote may not be Galbraith but rather “conventional wisdom”, after all this was the book where he coined the term. At any rate, Galbraith lived a long life and changed his mind often enough that perhaps he agreed with both us (just not at the same time). :o)
WARREN MOSLER Reply:
January 20th, 2011 at 8:26 am
we were pretty much in agreement about all the fundamentals, including that one.
i met him briefly when he was 96 and very hard of hearing so there was no chance for a serious conversation.
the part he missed was that the currency is a simple public monopoly, and therefore the price level is necessarily a function of prices paid by govt, etc.
which is ironic as he was in charge of price controls during WWII and instrumental in controloing inflation by exactly that method.
then in the 70′s he came out for price and wage controls for the private sector, not seemingly realizing that it was public sector pricing that was the culprit.
scarmani Reply:
January 20th, 2011 at 7:55 pm
I like your story, I want to believe that the real world is not sticky and skills and infrastructure can materialize as needed.
If people with your understanding of economics were in charge, perhaps the 3 generations of cars from Japan would not have resulted in the decimation of Detroit. Alas, people with your understanding of economics are not in charge, and after 3 generations of cars from Japan methinks Detroit don’t look too great.
The last two big examples I can think of where massive government directed demand overcame a giant shortfall in aggregate demand and created full employment were pre-WWII Germany under Hitler and China in 2008. The former didn’t end well, and I have an uncomfortable feeling the latter may not either…
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strawberry picker Reply:
January 20th, 2011 at 8:15 pm
“understanding of economics”
Again I see this meme repeated over and over, that people are “ignorant innocents” because they don’t get it. I just can’t agree with that, they get it, but they are corrupted and greedy. I saw this movie TUCKER the man and his dream and he said all that political corruption would destroy our car manufacturers here in the USA and we would all be buying cars from asia – he was right. It isn’t that we couldn’t build cars or understand economics though, it is pure GREED, there is no need to attribute to human stupidity and ignorant innocence when simple lust for money will suffice. Remember, the root of ALL EVIL is the love of money, ALL EVIL.
Tom Hickey Reply:
January 20th, 2011 at 8:51 pm
Scarmani, you have to realize that Detroit destroyed itself intentionally to escape the clutches of the UAW, first by shipping factories abroad and now by building robotic plants to replace the old factories in the US. But they are not building them in Detroit, or Michigan either. Now that US union workers’ wages have been halved and benefits cut, they are marginally competitive. But even low paid US workers won’t be able to compete with robots.
http://www.visualphotos.com/image/2×3433335/robotic_assembly_line_–_welding_car_bodies
Henry Ford figured he had to pay his workers enough to buy his cars. I wonder what the present captains of industry are thinking about this thing economists call effective demand.
WARREN MOSLER Reply:
January 20th, 2011 at 10:51 pm
how about wwII US?
January 18th, 2011 at 1:55 pm
Warren: “I call it a completely misguided sense of public purpose as a direct consequence of not understanding monetary operations”
I call it shilling for your corporations. :)
The US ruling elite are also apparently OK with a buffer stock of unemployed approaching 10% — the “new normal.” Gets the US wage down to Chinese levels much faster. That way when the price of bunker fuel oil increases significantly, canceling the labor advantage, they can just move the factories back here with comparable wages in place.
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Tom Hickey Reply:
January 18th, 2011 at 2:16 pm
Of course, some people are not happy with the status quo.
Youth more radically opposed to present government than tea parties, poll finds
It’s not only the poll numbers, but also the trend. Those number just spiked up.
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strawberry picker Reply:
January 18th, 2011 at 10:13 pm
“Gets the US wage down to Chinese levels much faster.”
Larger Unemployed Buffer Stocks – LOL! You always make me smile Hickey!
Hickey I talked to colonel sanders personally a few times when I was younger and KFC was expanding into asia. Now the colonel loved people, but his direct underlings told me that human beings were the real “problem” in the whole supply chain of getting chicken out the door. The future was gonna be automated robots who didn’t want pay raises or have health issues, etc etc.
It is going to be interesting what the warren’s of the world are gonna do when we have a 20% unemployments across the board (like the blacks and browns are already feeling in the USA) as our machines take over. Already at my local home depot they only have 1 checkout girl running 10 self checkout terminals – when the RFID chips get into all the stuff for sale, won’t even need her.
Maybe you should follow warren’s lead, he is really a very smart guy, when the unemployed masses start killing and revolting, he is safe on his pirate island with an oil refinery not exposed to the madding crowd, I hope you are somewhere safe too Tom. Remember that movie mad max 2, they were fighting over that last oil well.
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WARREN MOSLER Reply:
January 19th, 2011 at 6:51 am
unemployment is evidence the deficit is too small. it has nothing to do with machines/productivity. see ‘mandatory readings’
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pebird Reply:
January 19th, 2011 at 11:05 am
Yes, there is either something of value that is needed, or the amount of time dedicated to work can be reduced.
But if people have free time, they might be consider that the bums need to be tossed out. So, it is important to have “value-added” activities to fill one’s time.
Tom Hickey Reply:
January 19th, 2011 at 12:51 pm
Both Gordon Brown and Gerald Celente are warning of an emerging global rebellion of youth in reaction to high unemployment and grim future prospects. Leakage has real consequences, socially, politically and economically. Deficits address the leakage that results in lagging NADS and economic under-performance resulting in unemployment and underemployment. Deficit errorism and austerity are not have the desired effect and producing unintended consequences that are beginning to bite the deficit hawks.
WARREN MOSLER Reply:
January 19th, 2011 at 5:12 pm
and most everyone thinks there is no choice. we’re paying for past sins. we’ll become the next greece if we don’t do something about it, etc
jaymaster Reply:
January 19th, 2011 at 5:03 pm
OK, I know this is going to sound like a joke, but I’m being totally serious here.
What does the acronym “NADS” stand for?
Based on common US slang usage, and the most common definition I found googling, “lagging NADS” is certainly not an affliction I would like to suffer!
I’m pretty sure your definition is different, but I can’t figure it out….
Thanks.
Tom Hickey Reply:
January 19th, 2011 at 6:04 pm
Jaymaster, NAD = nominal aggregate demand. Somehow that extra S crept in. Sorry. I was probably thinking of NAD lagging in multiple countries.
This isn’t affecting just the US or even primarily the US, although youth unemployment in the US is huge, especially black youth (~33%). The riots in Tunisia that toppled the government were a direct result of high youth unemployment. Young people everywhere are getting worked up over it not only unemployment but austerity (cut back in education, for example) because they see no future for themselves.
Celente is predicting the youth unemployment and blowback resulting from it is going to be major 2011 trend.
January 18th, 2011 at 7:40 pm
This is from last November, it went unnoticed but it is a much better proposition.
China wealth fund urges US to spend on infrastructure
China’s sovereign wealth fund has urged the Obama administration to spend $1tn (£624bn) on infrastructure over the next five years, to create jobs and improve American competitiveness.
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January 19th, 2011 at 6:07 pm
During the press conference held today the issue of human rights seemed to be No. 1 since the journalists asked both presidents how it influences the mutual relationship between the two countries. And I liked the answer of the Chinese president who said that China has done a lot of progress as far as this issue is concerned.
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January 19th, 2011 at 6:30 pm
Tom,
That makes perfect sense to me now.
Thanks!
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January 20th, 2011 at 6:42 am
Read Robert Reich’s latest article about the deal our President is making with China. What obumer is proposing only helps US corporations and China. Don’t look for any new US jobs out of this deal.
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strawberry picker Reply:
January 20th, 2011 at 7:54 pm
http://www.businessinsider.com/boeing-layoffs-orange-county-2011-1
One Day After Securing A Huge Deal With China, Boeing Lays Off 1000 American Workers
LOL! Dr. Malveaux did say China is calling the shots in washington now, and we better get on the ball educating our black and brown brothers and sisters or our global role is going to be even more reduced than is already coming. My last girlfriend (with 2 kids) is already such a shot out heroin addict that even in my usual joking nature, I take no joy in what is coming for the USA :( Warren you started your holy mission too late, you needed to start it about 20 years prior to when you did.
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